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![Page 1: The Finance Control Knob Marc J. Roberts Professor of Political Economy and Health Policy Harvard School of Public Health Africa Flagship Kigali, June.](https://reader035.fdocuments.us/reader035/viewer/2022062511/5516855f550346a2698b5fa7/html5/thumbnails/1.jpg)
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The “Finance” Control Knob
Marc J. RobertsProfessor of Political Economy and Health Policy
Harvard School of Public HealthAfrica Flagship Kigali, June 23, 2010
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Why Financing MattersA 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
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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
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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
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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
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Attitudes Towards Distribution VaryPhilosophically
• 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
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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)
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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