Health Economics Series: Provider Payment in the UHC era

The country is considering several options for provider payment reform that will help achieve universal health care. Population-based interventions will be primarily offered by the government. As such, provider payment mechanism for these interventions will include salary and capitation. Philhealth considers primary health care capitation to promote integrated care through the service delivery network; thus, ensuring efficiency resulting to better health outcomes and financial protection. Moreover, funds in provincial and city-wide service networks for both population- and individual-based interventions will be pooled into a special health fund intended for health services. Sources for this fund include grants and subsidies from the national government, income from Philhealth payments, and other financial grants or donations.

For individual-based interventions, several payers are likely to use various payment mechanisms. The country’s social health insurance (SHI) will continue to use case rate payment system and capitation while transitioning to diagnosis related groups (DRG) for contracted networks and apex hospitals. Private companies, such as HMOs and PHIs, will likely continue to offer case rate payment and/or fee for service payment for their customers.

HPS 252 Provider Payment

The diagram sends us a message that various provider payment mechanisms will continue to exist in the country’s health care system. Emphasis is placed, however, on the current movement towards using performance-driven, prospective payments based on DRGs. At the end of it all, “mixing” of provider payment mechanisms can be complementary or compensatory. It is promising how incentives will come into play when these mechanisms align themselves during the implementation of the UHC law.

Free-rider Problem in the Philippine Health Care System

From an economic perspective, the production of public goods can lead to a market failure. A market fails when the free market economy does not achieve efficient results. Such failure can be attributed to the free-rider problem. A public good has a classic free-rider problem because of its two characteristics: non-excludability and non-rivalry. A good or service is non-excludable when it is impossible to stop anyone from consuming it. It is non-rivalrous when the consumption of an individual does not reduce the amount available to others. Therefore, public goods such as national defense may not be provided in a free market.

In some contexts, health is not considered a public good. Non-paying individuals (e.g. uninsured individuals) are not allowed to consume a good or avail a service. The introduction of the universal health coverage, however, moves health care closer to being a public good. Social health insurance, such as Philhealth, makes it possible for citizens to become insured and therefore utilize health care goods and services regardless of whether they can afford it or not. Social health insurance makes health care goods and services non-excludable and non-rivalrous; thus, making health care more like a public good.

People generally tend to behave according to the perceived benefits and consequences of their actions. In the case of health, incomplete (and even complete) information does not necessarily lead people to behave in a manner expected of sufficiently informed health care consumers. Moreover, there is usually a long period between the development of risk factors and the onset of illness, especially for non-communicable diseases. Such delay obscures the link between unhealthy behaviors and diseases unlike other risky behaviors where costs and benefits are usually immediately appreciated.

Thus, people often underestimate the benefit of health care or their future health needs. Because sickness and health emergencies strike at any time, people do not have an incentive to whether participate or not in the health care market. Because of these reasons, many people often do not purchase health insurance even if they have the resources to do so. Eventually, these uninsured people obtain free medical care when the need arises.

Philhealth intends to decrease out-of-pocket expenses by transitioning as the “single payer” in the health care market, where the government buys the health care and chooses the quantity to supply. However, latest data from Philhealth shows that its support value stands only at 42%, which means that the majority of health expenses are still out-of-pocket. Hence, some of the quantity demanded for health care is dependent on the quantity demanded by patients at the out-of-pocket price. This is observed in the private sector where health care providers supply the quantity demanded by patients which often exceeds the efficient quantity (creating a deadweight loss).

In 2014, Philhealth introduced the Point-of-Care (POC) Enrollment program where qualified patients and their qualified dependents are provided with insurance coverage under the Sponsored Program. Their premium contributions are borne by the government facility, provided that they are certified poor by the social worker at the time of admission. It seeks to change traditional health-seeking behavior especially of the poor who opts to defer treatment because of financial constraints. The program aims to change such behavior to one that voluntarily seeks treatment by indicating that help is waiting at the point of care. Since these patients are supposedly accessing health care at zero or lower price, the quantity demanded almost always exceeds the quantity supplied. In this scenario, patients wait for treatment as seen in most of the government hospitals.

Given that only Sponsored or indigent members qualify for “free” health services, there may be questions regarding the extent of the free rider problem if it actually exists. Someone always has to pay for the health care that must be provided. We see that in the Philippines, the government pays the cost that is not borne by uninsured individuals, including the Sponsored and indigents. In 2018, 31% of covered members were either Sponsored or indigents suggesting that about a third of Philhealth-insured members are entitled to free health care. More than 40 million pesos (or 34% of total benefit payment) were paid by Philhealth for benefit claims of these indigent and Sponsored members in 2018.

This is not to say that the uninsured (and Sponsored or indigent) members of Philhealth are “parasites” who choose to pass on their health care expenditures to the rest of society by receiving health care without paying for it. In reality, many people who cannot afford health insurance also cannot afford to pay for even the most basic health care. Some of these people who cannot afford insurance or health care do not really choose to be in this predicament.With the government pushing for 100% social insurance coverage, the free-rider problem becomes more significant and apparent. Take a patient diagnosed with alcohol withdrawal as an example. He/she usually comes from the indigent sector of the society. Dire situations in the community, among other factors, compel binge drinking leading to alcohol addiction/intoxication. Since this patient receives care for free, there is little incentive for him/her to seek further management (i.e. rehabilitation) after the symptoms of alcohol withdrawal are addressed even when adequately referred to a rehabilitation facility by a medical professional. Therefore, there is quite a chance that the problem becomes cyclic – patient returning to the hospital for the same medical problem.

In a way, the case above presents a problem similar to that of a free-rider problem. Since health care in the Philippines is considered a public good, people try to avoid paying for it because the payment will likely have no perceptible effect on the amount of health care a person consumes. Because insurance coverage is ensured at point-of-care, people do not have the incentive to pay for premiums that are usually perceived to be in excess of the actuarial cost of the coverage – meaning, they pay more than the value they receive – even when they have enough resources to do so.

Unfortunately, the free-rider problem takes a toll in the health care system as the present service delivery model somehow pushes some people to further underestimate their health needs. This affects the healthcare system by (1) incurring additional health costs, and (2) allotting scarce resources to treat the same people with the same preventable medical problems rather than allotting these resources to other patients in the waiting line.

The government’s intention to expand Philhealth coverage, most especially to the poor, probably rests on purposes including the achievement of universal health care and the efficient redistribution of wealth. Since universal health care cannot be achieved unless there is an efficient redistribution of wealth, the government will continue to provide insurance coverage for Sponsored and indigent members at point-of-care. The resulting free-rider problem begs the government to look at ways on how to help these people internalize the value of health care. Investing in one’s health doesn’t only include purchasing health insurance. It also points to the strong need for investment in public health and primary care where mindset and health-seeking behavior are primarily shaped.


Dayrit, M., Lagrada, L., Picazo, O., Pons, M., Villaverde, M. (2018) The Philippines healthsystem review. World Health Organization Regional Office for South-East Asia. Retrieved from

Gemeniano-Aragones, P. (2014). Point-of-Care Enrolment: Providing Coverage RightWhere It Matters. Philhealth. Retrieved from

Parkin, M. (2014). Microeconomics 11th edition. Pearson Education, Inc. USA

Philippine Statistics Authority. (2018). Philippines in Figures 2018. Retrieved from (2018). Stas & Charts. Retrieved from