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The “Finance” Control Knob

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1 The “Finance” Control Knob
Marc J. Roberts Professor of Political Economy and Health Policy Harvard School of Public Health Africa Flagship Kigali, June 23, 2010

2 Why Financing Matters A country’s financing method determines:
The distribution of the cost burden: Between sick and well Between employed and unemployed Between the formal sector and the informal sector Who has access to what services Who has what degree of risk protection Who makes coverage and provider payment decisions

3 Financing Options If we think of the “ideal type” for each financing option we can distinguish six sources: General revenue Social insurance Private insurance Out-of-pocket payment Community financing International aid Many real arrangements depart from the “ideal type” Most nations use a mix of financing options Flagship Course: Washington DC, October 18, 2006, Session 4

4 Thinking About Distribution
Economists think about the impact of taxes in terms of the percentage of income as a burden Proportional taxes take equal percentages from all Progressive taxes take a higher percentage from higher income individuals Regressive taxes take a lower percentage (but perhaps a larger amount) from those with higher incomes

5 Balancing the Burden of Costs and Benefits
The distribution of the financing burden has to be balanced against the distribution of benefits Even a “regressive” system can involve higher payments from upper income groups Then if benefits are similar for rich and poor—the poor can gain from such a system In reality, upper income groups often derive greater benefits from public systems since they are closer to facilities and better able to negotiate non-price barriers

6 Attitudes Towards Distribution Vary Philosophically
Egalitarian liberals favor redistributive financing to provide for positive rights Libertarians say health as not “special”—just sell health care or insurance in the market place Many utilitarians favor some redistribution-- arguing that the rich loose less utility from paying taxes than the poor gain from getting care Some communitarians argue for charity based systems as an expression of good character

7 The Choice Among Financing Options Always Involves Trade-offs
Some tap a wider array of funding sources (general revenue) Some options are easier administratively (out of pocket payment) Some do a better job on risk protection (social insurance) Some appeal to powerful interest groups (private insurance) Some decentralize authority (community financing) Some shift the burden to others (donor aid)

8 The Appeal of Various Options Will Vary From Country to Country
Some will have more reliable general revenue sources than others Some will have larger or smaller formal economic sectors Some will have stronger or weaker regional or local governments Some will have greater or less administrative capability Some will have more or less of a commitment to equity

9 General Revenue Financing
Supporters argue this method subjects health sector financing to political control and the need to compete against other spending priorities Critics argue such arrangements lead to unstable and unreliable funding Distributive effects depend on how a nation raises general revenue Income or payroll taxes Consumption taxes Tariffs Business taxes Typically used to finance large public systems

10 The Distributional Effects of Income And Payroll Taxes
Only comprehensive income taxes—including taxes on non-labor income– are potentially progressive In advanced economies, where most work in the formal sector, payroll taxes are modestly regressive. They omit non-labor income which is more important to upper income groups They often have contribution caps In low income economies, payroll taxes can be progressive They are often only paid by formal sector earners Those individuals are typically relatively well off

11 The Distributional Effects of Consumption Taxes
Sales and value added taxes generally result in higher prices These taxes are modestly regressive The poor spend a higher proportion of their income than the rich Exempting some necessities (e.g. bread) counteracts this effect They can capture informal and illegal income Collection problems depend on the structure of the retail sector

12 Tariffs Are Often Used in Low Income Countries
Tariffs have the same distributive effect as consumption taxes--via price increases These prices effects are not visible to consumers Distributional impact can be modified by different rates on luxuries versus necessities With fewer ports of entry than retail outlets, easier to collect than general consumption taxes Can help protect local industry Tariff policy is constrained by international trade agreements (e.g. WTO rules)

13 Business Taxes Are Attractive if You Have the Industry
Countries with minerals, tourism or agricultural exports typically rely heavily on taxing these Politically attractive since most citizens don’t “see” these taxes Revenues depend on fluctuating world demand, prices and international competition Can become a source of internal political conflict as well as hindering more diversified development

14 Economists Often Argue for Some Out-of-Pocket Payment
Taps into citizens willingness to pay for health care Generates funds outside of over-burdened tax systems Modest co-pays are said to discourage over use Can provide needed funds at the periphery and give incentives to improve quality Impact on the poor in theory can be softened by exempting them from co-pay requirements

15 Out-of Pocket Disadvantages
Very regressive since burden does not vary at all with income Provides no risk protection This is especially serious for the private sector care and drug purchases Leads to lower or altered utilization among lower income groups (e.g. less use of preventive care, greater drug purchases from informal sellers) Public facilities with user fees, limited drugs, or informal payments often require significant de-facto out-of-pocket payments

16 Objections to the Alternatives Have Fostered Interest in Social Insurance
High reliance on out of pocket financing has lead to access barriers, inequitable use, and a lack of risk protection General revenue financed public delivery systems have been plagued by poor quality, unstable funding and public dissatisfaction Broad shifts in ideology have lead away from commitments to centralized state financing and provision

17 The Design of an “Ideal” Social Insurance System
Social insurance systems are often designed to include at least some of the following A dedicated payroll tax source Mandatory participation from eligible enrollees Coverage limited to contributors and/or their families Operated by a single independent agency that has to meet its fiscal obligations That agency acts as an informed purchaser of services from various sellers

18 Rationale for the “Ideal” System
Keeping revenue separate and excluding non-contributors encourages tax compliance Governments cannot “steal” to money for other purposes Contributors’ money goes to “their” care Mandatory participation fosters risk-spreading Payroll tax financing fosters some redistribution since benefits are “pro-poor” Purchaser-provider separation fosters efficiency Providers have reason to produce efficiently Purchaser can limit buying to efficient seller Agency autonomy facilitates expertise Accountable managers will not be corrupt Executives will be chosen for professional competence not patronage

19 Actual Social Insurance Systems Vary Greatly
Many funds operate their own delivery systems (Mexico, Turkey, Thailand) Many cover significant numbers of non-contributors and rely on general government tax support to finance these (Hungary, Egypt) Countries may have multiple funds (Germany) Individuals may be able to “opt-out” into alternative or private coverage (Argentina, Check Republic) Agency may not have fiscal or managerial autonomy (U.S. Medicare program)

20 Social Insurance System Problems
Hard to collect enough revenue where small farmers and the informal sector are economically important Financing can be strained if many non-contributors are covered: unemployed, children, pensioners etc. Governments can have a difficult time limiting benefits and controlling costs There are many opportunities for corruption—especially in claims processing and payment Upper income earners typically want to opt out and into private insurance instead

21 The Long Run Sustainability of Social Insurance
Cost pressures (from rising incomes, growing expectations, aging and new technology) are pushing up spending world-wide Revenue growth is often less than cost growth To be fiscally sustainable, social insurance systems need to be designed to constrain costs The key is giving incentives to providers to lower costs— avoiding fee-for-service payment

22 Private Insurance Premium-based financing is very regressive
Companies have every incentive to deny coverage, or charge high prices, to those with chronic conditions Only provides limited risk pooling unless rates do not vary with individual health status—through group purchases or rate regulation Typically results in a lower fraction of revenue devoted to actual care compared to social insurance—the rest going to administrative costs and profits

23 Community Financing Some argue that the “ideal” system should have:
Local control over funding and delivery Mandatory participation Inter-regional cross-subsidy Limited benefits Variation of contributions with income This can be a way to cover rural areas and those left out of social insurance Allowing voluntary participation can undermine risk sharing and foster “adverse selection” Poorer regions are unlikely to be able to finance equitable service levels on their own Effectiveness depends on political and administrative capacities at the local level

24 Donor Assistance The only option that “relaxes” the constraints imposed by a country’s level of development The downside is the modern Golden Rule: “Whoever has the gold makes the rules” Reporting requirements and constraints on local policies and priorities can be significant Variations in political and economic conditions in donor countries can make funding uncertain

25 Financing Summary No one funding option fits all situations—e.g. varying levels of development Most countries rely on a mix of options The “within policy” variation is substantial—the details of a funding scheme matter greatly to its results Implementation is critical—choose an approach within your nation’s administrative and legal capabilities

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