As the issue at hand is not purely health care systems, an emphasis will be laid on health care financing and redistribution in health care. The following will also further a comprehensive understanding of the redistributive mechanisms in health care through the dualism of the public and the private.
Böhm et al. (2013) provide a deductive classification of OECD health care systems on the basis of the dimensions regulation, financing, and service provision. Their classification yields five, what they call plausible types: National Health Service, National Health Insurance, Social Health Insurance, Private System and Etatist Social Health Insurance.
I will now go into detail about health care financing. First, public-sector health care financing centrally deals with health insurance types: Public and private. Essentially both of these rely on the mechanism known as ‘risk-pooling’, i.e. pooling of individual risks in a group or community. While such risk-pooling can in principle be achieved through markets, i.e. through private health insurance (PHI), this can be micro-economically inefficient and inequitable. These two aspects can explain the global prevalence of public financing of health care (Blomqvist 2011) and of statutory health insurance (SHI).
Redistributive Effects of Public Health Care Financing
Honekamp and Possenriede (2008), consider income-related, health-related, and unrelated types of public health care financing.
Income-related financing rests on two fairness principles of taxation: the benefit and the ability principle. The first states that a person, who derives more benefits from a government programme, should also pay more for that programme’s utilisation. The second principle commands that a person should pay as much for the utilisation of a government programme, as they have the ability to do, where ability is usually understood as economic capability, i.e. income or pay. In the reality of public health care financing the ability principle is the dominant one when it comes to direct taxation. Some countries however also rely on indirect taxation to fund public health care. By contrast direct taxes, indirect taxes tend to be very regressive because the relatively poor spend proportionately more of their income on taxable goods. A second distinction in income-related financing is between payroll and personal income tax. The former are often social insurance contributions and the latter direct taxes. Both are progressive in nature, but personal income taxation through direct taxes is more redistributive than payroll taxation. This is because the tax-base of income taxation is all income, while payroll taxation only taxes wages and salaries (Honekamp and Possenriede 2008).
Many public health care systems aim to prevent moral hazard behaviour of citizens by employing devices such as co-payments, deductibles or other measures of risk sharing. Co-payment means a share of a certain treatment or health service cost is carried by the public insurer and the other share by the patient. When a patient pays their own health care costs up to a certain threshold and is then covered by the public insurance, we have a case of deductibles. A no-claim scheme means in “… the occurrence of an insured event, the insured can decide either to claim the benefit and possibly face a higher premium next year or to claim nothing during the present year and receive a deduction of premium or a repayment in the following year” (Honekamp and Possenriede 2008, p. 414). These three health-related measures all potentially reduce redistribution from the rich to the poor in public health care financing.
Last, a government could finance its public health care by means of flat fees, which are neither health-nor income-related. Flat fees redistribute solely from healthy citizens to sick ones. However, flat fees can be supported by government subsidies, i.e. the government helps relatively poor citizens to pay their insurance fees. The exact redistributive effects are then dependent on the financing of the subsidies (Honekamp and Possenriede 2008).
Thus, different modes of public health care financing have highly differential redistributive effects. This means the way a welfare regime finances its public health care system situates socioeconomic status (SES) with regard to redistribution preferences in health care. In other words: The way individual SES affects a person’s redistribution preferences is partially dependent on the context of public health care financing.
Evans (2002) enquires about the nature of redistribution in health care by dividing the issue into three questions:
1) Who pays – and what share?
In many countries people finance the public health care system via taxes, which are usually proportional to income and (mildly) progressive. By contrast out-of-pocket-payments, commonly co-payments or user charges, are unproportional to income. As middle ground social insurance systems can be regressive or progressive, also depending on eventual ceilings on contributions.
2) Who gets – what and when?
“In principle, tax-financed and social insurance systems both answer the first question: people who need care get it – what they need when they need it. Ability to pay is the basis for determining individual contributions to financing health care but not the right to receive it” (Evans 2002, p. 40). A conflict of the interests between the healthy and wealthy versus the unhealthy and unhealthy persists, so that especially the attitudes and preferences of the middle-class matters.
3) Who gets paid – and how much?
Evans (2002) attests an asymmetry between the ‘political theatre of tax financing’ and the private health care sector. Therein, people in the public health care sector, whose income depends on taxes, aim to negotiate more public funding, while those relying on private finance will emphasise the efficiency and quality of their services through lobbying and advertising. So, public providers tend to focus on the shortcomings in the public sector and private providers highlight their alleged excellence. This tension in combination with actual spending cuts has resulted in “… a precipitous reduction in public satisfaction with the health care system and an almost universal sense of crisis among the general public” (Evans 2002, p. 43). By contrast, in the private health care sector actors exhibit concentrated, clear, well-organised and well-financed interests. This generally also applies to consumers in the private health care markets because such consumers tend to belong to the business and political elites, who command above-average wealth and political influence. The political and societal discourse and the interests over health care and its financing is contingent on the specificity of any system, i.e. on the precise financing mechanisms and the expenditure control. Tax-based systems tend to attract most public criticism in times of fiscal and economic crisis because taxes and their constant expansion can rarely be framed in a positive light. Overall, one can see a shift of public priorities since the mid-1970s to implement more stringent cost-control in public health care across OECD countries. In addition, some governments foster the growth of public health care by making PHI-premiums tax deductible or by crediting them as liability against taxes for citizens, as well as by subsidising PHI-purchases by employers. This can be called ‘covert’ tax financing of the private health care sector (or sometimes of out-of-pocket payments) and usually is very regressive in its redistributive effects. For such covert financing Evans (2002) remarks to the point that the ‘wealthy and healthy’ instrumentalise the fiscal authority of the state to offset the grave shortcomings in private for-profit health care markets with regards to PHI, thus making the whole system even more regressive and undermining public efforts of cost-containment.
Now I briefly want to explore health care systems with social health insurance a little more in detail. In Europe these typically are Bismarckian welfare regimes, such as Austria or Germany, who rely on ‘sickness funds’ organised by trade unions and employee initiatives for reciprocal assistance. These sickness funds are financed by income-based contribution payments rather than direct or indirect taxation. Social health insurance is a type of SHI, i.e. it is mandatory to have for the vast majority of the population. Further, sickness funds are generally tied to geographic areas, (former) employer and/or type of occupation. It is important to note that the social contributions are paid for in part by the employers and in part by the employees (Normand and Busse 2002).
The allocation of contributions is mostly either a joint enterprise or done by individual sickness funds. In the former case contributions are collected on a national level and are redistributed afterwards to the sickness funds in accordance with their expenditures. In the latter case some funds fare economically better than others and hence are not inclined to share their revenue through contributions made. Sharing the revenues of various sickness funds also becomes difficult because they exhibit differential ‘need factors’, which determine health care utilisation and funds’ expenditures, and because there is not the same contribution-base across funds. Solutions for these issues in redistribution between sickness funds differ between countries. While social insurance systems rely on social contributions rather than taxes per se, taxes do not play a negligible role in public health care financing there. Again there are major differences between nations with respect to tax-based financing (Normand and Busse 2002).
Redistributive Effects of Private Health Care Financing
Mossialos and Thomson (2002) put their analytical emphasis on voluntary PHI in the EU. Within their account I will now elaborate on the taxation-insurance relationship, the setting of premiums, the demand side of PHI, and how prices and costs are managed.
First, governments can provide incentives or disincentives for PHI via taxation. Incentivisation is done by making insurance premiums deductible from corporate taxes, whereas disincentives are set by putting a tax on income through premiums. The former is in essence a government subsidy to PHI-holders and is therefore regressive in terms of finance. This is because PHI-holders earn above-average incomes and the ‘subsidy’ is greater for people who have a higher marginal tax rate. Moreover, such governmental support for PHI creates added transaction costs, can distort price signals for consumers, and enable tax evasion and fraud (Mossialos and Thomson 2002). By contrast, additional taxation on insurance premiums of PHI could increase public revenue, which could be used for the public health care system. Also, such an added tax would potentially have a progressive effect in terms of financing.
Second, setting insurance premiums for PHI is conducted on the basis of individual risk ratings of community-or group-ratings. Complementary and supplementary PHI-providers can mostly determine insurance premiums on any basis they choose, while insurers offering substitutive PHI are for the most part subjected to government regulations concerning the policy conditions and the prices of their insurance premiums. Related to grouping or individualising premiums are the two issues known as ‘cream-skimming’ and ‘financial equalisation’. Cream-skimming refers to risk selection by insurers, as a practice wherein insurance companies attract below-average risk individuals and reject persons with an above-average risk profile. Financial equalisation of insurers is a policy approach that can diminish cream-skimming by mandating risk redistribution between insurers and by implementing other policy measures (Mossialos and Thomson 2002).
Third, demand for PHI is determined by risk-aversion of some people, by insurers’ ability to supply PHI-plans at demand-conform prices, and by technical feasibility of PHI. In most EU countries the holding of PHI-policies is heavily skewed favouring persons with high incomes. In addition, PHI-distribution tends to discriminate across social determinants of health, such as gender, age, and occupational status (Mossialos and Thomson 2002).
Fourth, across the EU insurance premiums for individuals holding PHI are much higher than for risk-rated groups. Prices used to increase annually above inflation levels, whereas costs did not necessarily grow at the same rates. When PHI-patients can be charged more than SHI-patients then PHI seems to cause much higher health care costs compared to SHI. Additionally, private insurers are likely to levy administrative and marketing costs on private consumers.
Maynard and Dixon (2002) focus on PHI outside the EU. First, I want to emphasise the redistributive efficiency of PHI, which can be attributed to macroeconomic, allocative, technical, and administrative efficiency. Concerns in macroeconomic efficiency are that PHI might inflate wage-and salary-costs and/or may decrease a nation’s international competitiveness. However, there is little evidence for these two issues. Nevertheless, PHI that is tied to a particular employer can reduce free labour market movement and flexibility. Allocative efficiency raises the following question regarding PHI: For what are consumers willing and able to pay precisely? Assuming SHI covers what is cost-effective, private insurers can primarily offer medical goods and services that are inefficient, costly or in a way that is qualitatively superior to the public sector. In the domain of technical efficiency private insurers have been price-takers rather than price makers until the 1990s. But increasing ‘managed care’ strengthened insurers bargaining powers. Still antitrust law is a major obstacle for insurers to consolidate their power to make prices. As for administrative efficiency, private insurers have lower economies-of-scale and higher transaction costs than the state (Maynard and Dixon 2002). Overall, one can argue that private insurers only have limited power to redistribute market revenue in their favour. At the same time this does not imply that consumers are price-makers. Instead prices are mostly driven by government laws and regulations, as well as by health care providers.