Key points
- Health financing has three jobs: raising money, pooling it so risk is shared, and purchasing services with it.
- Cross-subsidisation is the point of pooling: the healthy and better-off subsidise the sick and worse-off, through taxes or contributions.
- About 2.1 billion people faced financial hardship from out-of-pocket health spending in 2022, and 1.6 billion were pushed into poverty or deeper into it (WHO and World Bank, UHC Global Monitoring Report 2025).
- Financial hardship means spending more than 40% of a household's discretionary budget on health — and medicines are its largest driver, at least 55% of out-of-pocket spending in nearly three quarters of countries.
- OECD countries spent about 9.3% of GDP on health on average in 2024; only about 3% of spending goes to prevention and 14% to primary care.
- “User fees” here means patient charges at the point of care — not US FDA user fees, which are charges on drug and device makers.
Direct answer: Healthcare is funded in three steps: raising money, pooling it so risk is shared, and purchasing services with it. Countries raise it through taxes, payroll contributions and premiums; they pool it through governments or sickness funds; and they spend it on hospitals, clinics, medicines and staff. No system is free — “free at the point of use” means no payment when care is received, not that nobody pays. This article explains each step in plain words — and the test that judges whether the funding works: financial protection, whether using care leaves people worse off.
The three jobs of health financing
Every health system, whatever its model, has to do three things with money. First, raise it: collect revenue from households, employers or the state. Second, pool it: gather the revenue into funds large enough that the cost of one person’s illness is spread across many people. Third, purchase with it: pay providers — hospitals, clinics, doctors, pharmacies — for the services people use.
The three jobs are distinct, and a system can do one well and another badly. A country can raise plenty of money and still leave people exposed, if the pooling is thin. Or it can pool well and still buy the wrong mix of services — too much hospital care, too little prevention.
How the money is raised
There are four main sources. General taxation: the government collects tax and allocates a share to health, as in the United Kingdom. Payroll contributions: workers and employers pay a share of wages into sickness funds, as in Germany and France. Premiums: households pay an insurer, as in the United States’ private market and in the Netherlands’ mandatory private insurance. And out-of-pocket payments: people pay directly when they receive care, which is the main source where no universal system exists.
Most real systems mix these. The United States, for example, funds Medicare and Medicaid from taxes and payroll taxes, funds employer insurance from premiums, and still leaves a large share to out-of-pocket payments. The mix is the system. What that mix costs Americans, at population level — the average premiums workers pay and why marketplace premiums are rising for 2027 — is in US health-insurance costs, explained. In low-income countries a further source matters: donor funds — external aid that pays for a large share of health spending.
How money is raised matters for fairness. Taxes and payroll contributions are collected before anyone falls ill, so the cost is spread. Out-of-pocket payment — money paid directly by patients when they use services or buy medicines — is collected at the worst moment: when a person is already ill. A system that relies heavily on out-of-pocket payment is a system where the sick pay the most.
Pooling and cross-subsidisation
Pooling is what turns a pile of contributions into insurance. When money is pooled, the healthy subsidise the sick and the better-off subsidise the worse-off — because the healthy pay in and use little, while the sick draw out far more than they paid. That sharing of risk across the pool is called cross-subsidisation, and it is the point of pooling.
A pool works when it is large and broad. A small pool — one employer, one village, one scheme for the healthy only — cannot spread risk, and a single expensive illness can break it. That is why universal systems pool nationally: the bigger the pool, the steadier the sharing. Fragmented pools are one reason out-of-pocket spending stays high in many countries. When a country has many small pools — one for civil servants, one for formal workers, one for the poor, none for informal workers — the healthy and wealthy end up in the generous pools and the sick and poor in the thin ones. The same total money then buys unequal protection. Pooling is also why “free at the point of use” is not the same as free: somebody pays, through the tax and contribution system, before the patient arrives.
Purchasing: what the pool buys
Purchasing is the decision about what to pay for, from whom, and how. Governments and funds pay hospitals by the case, doctors by the visit or by capitation (a fixed sum per person per year), and pharmacies for medicines. The payment method shapes behaviour: paying per procedure rewards doing more procedures; paying per person rewards keeping people well.
What the pool buys is a policy choice, and it shows in the numbers. Across OECD countries only about 3% of health spending goes to prevention, and about 14% to primary care — the rest goes mostly to hospitals, specialists and medicines. Those shares come from OECD Health at a Glance 2025, and they are a reminder that “how much” is only half the question; “on what” is the other half.
Strategic purchasing means buying deliberately: paying for prevention as well as treatment, contracting with providers who meet quality standards, and using the system’s buying power to hold down medicine prices. Passive purchasing — paying whatever bills arrive — is the default in many systems, and it is one reason costs rise without outcomes improving.
What patients pay at the point of care
Where coverage is thin, patients pay at the point of care. Those charges are called user fees in health-financing language — fees a patient pays when they use a service, such as a consultation fee, a prescription charge or a hospital co-payment. The phrase needs a warning: searching for “user fees” mostly returns US Food and Drug Administration user fees, which are charges on drug and device makers, not on patients. This article means patient charges at the point of care, and nothing else.
User fees are the most regressive way to raise money for health: they fall hardest on the sick and the poor, because those are the people who need care most and can pay least. That is why universal-health-coverage monitoring treats financial protection as a goal in its own right, alongside service coverage.
Financial protection: the test of whether funding works
Financial protection means being able to use health services without suffering financial hardship. The WHO and World Bank’s UHC Global Monitoring Report 2025, published in December 2025, uses a revised measure: hardship means a household spending more than 40% of its discretionary budget — what is left after basic needs — on health care paid out of pocket. Impoverishing spending means health costs that push a household below a poverty line, or further below it. Catastrophic and impoverishing spending are different harms, and the report tracks them separately: catastrophic spending is large relative to a household’s budget, forcing cuts to food, housing or schooling; impoverishing spending pushes a household into poverty.
The report’s headline figures, for 2022, are stark. About 2.1 billion people experienced financial hardship from out-of-pocket health spending, and 1.6 billion were pushed into poverty or deeper into it by health costs. An estimated 4.6 billion people still lacked access to essential health services in 2023. The share facing hardship fell from 34% in 2000 to 26% in 2022 — but the report is explicit that global poverty reduction, rather than better health financing, was the main driver of the fall. Health financing itself has not improved enough to hold the line on its own. The service coverage index rose from 54 to 71 between 2000 and 2023, and is projected to reach only 74 out of 100 by 2030.
Out-of-pocket payments are the largest single source of financial hardship, and medicines are their largest driver. In nearly three quarters of countries with data, medicines make up at least 55% of out-of-pocket spending; among people living in poverty, the median share is 60%. That is why covering medicines — through a benefits package that includes them, or a safety net that caps what a household pays — is one of the fastest ways to cut hardship. Across OECD countries, just under one-fifth of all health spending comes directly from patients through out-of-pocket payments, and pharmaceuticals account for 41% of that out-of-pocket spending on average (OECD Health at a Glance 2025). In Europe, up to 1 in 5 households experiences catastrophic health spending, driven mainly by out-of-pocket payments for medicines, according to WHO’s UHC Watch platform.
How much countries spend
OECD countries allocated about 9.3% of their GDP to health on average in 2024, according to Health at a Glance 2025. The range is wide: the United States spent 17.2% of GDP, Germany 12.3%, France 11.5%, Canada 11.3%, the United Kingdom 11.1% and Japan 10.6%. The United States spends the most and, as the life-expectancy guide shows, does not get the longest lives for it — spending volume alone does not determine outcomes.
Frequently asked questions
Is healthcare ever actually free?
No. Free at the point of use is not the same as free. Somebody pays — through taxes, payroll contributions or premiums — and no system covers everything.
What is cross-subsidisation?
When money is pooled, the healthy subsidise the sick and the better-off subsidise the worse-off. That sharing of risk across the pool is cross-subsidisation, and it is the point of pooling.
What is the difference between catastrophic and impoverishing spending?
Catastrophic spending is health spending that is large relative to a household's budget — in the 2025 WHO and World Bank monitoring report, hardship means spending more than 40% of a household's discretionary budget on health. Impoverishing spending is spending that pushes a household below the poverty line. They are distinct concepts in the WHO/World Bank monitoring report.
Why do medicines dominate out-of-pocket spending?
In nearly three quarters of countries with data, medicines make up at least 55% of out-of-pocket spending. Among people living in poverty, the median share is 60%. Covering medicines is therefore one of the fastest ways to cut financial hardship.