The distributional consequences of healthcare financing systems

 In Healthcare, Healthcare Financing

How a healthcare system is financed determines how the costs of healthcare and the access to it are distributed among members of society – it determines “Who pays?” and “Who gets what and when”. In a nutshell, the financing mechanism of a healthcare system is also an income redistribution system, transferring incomes from some members of society to others. Any proposal for a change from one financing mechanism to another or to a mix of others, thus, necessitates a redistribution of healthcare burdens and benefits and hence incomes from someone to others. It will benefit some and hurt others. The direction of such redistribution process is in fact quite predicable, and who gains and who loses in the process can more or less be accurately traced out. Robert Evans, a renowned economist at the University of British Colombia in Canada, for example, argues that any shift from tax financing to private financing such as user charges or private insurance or any out-of-pocket payments, will benefit the healthy and wealthy at the expense of the unhealthy and non-wealthy, and vise versa.


In a tax financing healthcare system, since tax liability is at least mildly progressive in most developed countries, the wealthy contribute a larger share of their incomes to healthcare costs relative to the less wealthy. The healthy (with taxable incomes) similarly contribute more to the total healthcare costs, relative to the less healthy, as they consume less health care. In such a system, access to healthcare is determined mainly by healthcare needs and is unrelated to income or the ability to pay. In short, in such systems, incomes are transferred from the wealthy to the less wealthy and from the healthy to the less healthy.


If user charges are introduced, non-taxpayers become definite losers as they are now required to bear some of the healthcare costs, unless one is healthy enough to use no healthcare at all. A portion of their incomes will be transferred to the taxpayers in the form of tax reduction for the latter. Conversely, taxpayers as a group will be the definite gainer, although depending on one’s income level or health status, some will gain more, some will gain less, and some may lose. The wealthier one is, the more one will gain since the more one earns, the less the proportion of income going to user charges. Relative to the less healthy, the healthier will also gain more because they use less health care and therefore spend less on user charges. The less healthy taxpayers at lower income levels stand to lose as concomitant tax reductions may be unable to offset the healthcare costs borne by them. Since user charges link healthcare access to ability to pay, in addition to inflicting financial loss on the less wealthy, charges will also render their access to healthcare more difficult.


So long as premiums are out-of-pocket payments, the introduction of any scheme of mandatory basic coverage private insurance will have similar redistributive results for the poor and the rich. Non-taxpayers will lose because they need to pay insurance premiums, taxpayers will gain because their tax burden will be lessened, high income taxpayers will gain even more because insurance premiums will make a smaller share of their incomes relative to that of lower income taxpayers. If co-payments by users of healthcare are charged by private insurers, the less healthy taxpayers will gain less or even lose relative to the healthy taxpayers since co-payments are user charges in another form.


In the two scenarios above, where user charges and private insurance are introduced, it is likely that those with very low incomes and large healthcare needs will be subsidized to alleviate the negative impact of such expenses on them. When this is the case, however, the next in line to lose most, both financially and in terms of accessibility to healthcare, will be the lower-middle income group who will not qualify for the subsidy. On the other hand, for the wealthy, in addition to gaining financially, they will also gain in terms of access to healthcare because they will now have more private resources to spend on the healthcare they prefer.


While the above analysis is necessarily brief and cursory, it should suffice to serve our purpose here – to argue and illustrate that different financing mechanisms entail different distributions of burdens and benefits among members of society, that such distributions should be recognized and made explicit, and that advocates of different financing mechanisms should be prepared to admit such fact and to defend the relative deservingness of the wealthy and the less wealthy, and the healthy and the less healthy under their proposal – why the less wealthy and the less healthy deserve the advantages a tax financing system confers, or why the wealthy and the healthy deserve the benefits of a system based on more private funding.



George Cautherley (高德禮)

Convenor, Healthcare Policy Forum (醫療政策論壇召集人)

18 August 2006



An abridged version of this article entitled “Health-care winners and losers” was published in South China Morning Post on 18 August 2006.

A Chinese version of this article entitled “醫療融資對財富分配的影響” was published in Ming Pao on 17 August 2006.





Facebook Comments
Recent Posts
The Professional Commons’s response on Healthcare Reform Second Stage Consultation 
Developing country park – from absurdity to reality
Taking stock of the local agricultural industry is more than a matter of market values (Chinese version only)
Our dignified autonomy: farmers for the umbrella movement (Chinese version only)
China survival tip: where in the world are Guangdong’s hazardous chemical wastes? (Chinese version only)
Political expectations of the new China-HK model in post-political reform Hong Kong (Chinese version only)

Start typing and press Enter to search