Private finance such as private health insurance, medical savings accounts and user charges are not the only source of funding in health care. There can be public funding as well. Two of the major types of public funding are "taxation" and "social health insurance".
Tax
- There are many types of taxes, but the main difference comes from their sources (direct or indirect), levels (national or local) and types (general or hypothecated)
- General vs hypothecated
- General tax
- Advantages: the tax revenue can be drawn from a diversity of sources. It also allows trade-offs between health care and other areas of public expenditure.
- Disadvantages: the allocation to health care is subject to annual public spending negotiations
- Hypothecated tax
- Advantages: it may reduce resistance to taxation because it is more visible. It can also make people feel more connected to the tax system, which in turn, may increase the pressure on providers to improve quality. It may be less susceptible to political manipulation.
- Disadvantages: not all taxes named hypothecated are strictly earmarked in practice, which can possibly undermine the trust of the population. It can also introduce rigidity into the budgetary process, in which expenditure is determined by the revenue generated and not by policy decisions.
- General tax
- National vs local
- National tax
- Advantages: allows trade-offs to be made between health and other public policies, and has an advantage of economies of scale in administration.
- Disadvantages: the allocation of tax will reflect the relative negotiating power between ministries (usually health is weak in negotiating power).
- Local tax
- Advantages: they are often more transparent, accountable, responsive to local preference and separated from competing national interests.
- Disadvantages: the domination of health care spending in local budgets may generate inertia. It may also lead to horizontal inequity if tax rates differ between regions. It is limited in scope of progressiveness or regressiveness.
- National tax
- Direct vs indirect
- Direct tax
- Tax levied on individuals, households or firms. (e.g. personal income tax, corporate profit tax, property tax)
- Advantages: often progressive in structure. Administratively simple when formal records of income are kept.
- Disadvantages: it might create horizontal inequity if tax rates vary geographically, some forms of income are exempt from income tax etc. If the informal economy is large, strong institutional capacity is required to reduce tax evasion.
- Indirect tax
- Taxes on transactions and commodities. (e.g. sales tax, value-added tax, excise tax)
- Advantages: the structure is highly visible and therefore an easily identifiable source, especially when there is a large informal economy.
- Disadvantages: it can be regressive (e.g. people with higher income save more. People with lower incomes spend proportionately more on heavily taxed goods etc)
- Direct tax
- General vs hypothecated
Social health insurance
Social health insurance contributions are not related to risk, are levied on earned income and collected by a body at arm's length from government-otherwise it amounts to an earmarked payroll tax. Therefore, it has several advantages similar to hypothecated tax. It is more transparent and more acceptable to the public. In theory, social health insurance revenue is better protected from political interference. Compared to private risk-rated health, its advantage is that it creates a larger pool. Also, coverage is continuous and independent from individual risk.
On the other hand, social health insurance has its disadvantages. Since employers are usually required to contribute part of the cost, it can result in higher labour costs and reduce international competitiveness. Also, because the link between benefit and contribution is strong, it might limit the access of unemployed and elderly, and often tend to focus on curative care rather than preventive care. Its reliance on a narrow revenue base may lead to some disadvantages. If the participation in the formal labour force is low, it might not generate sufficient revenue. Also, if the total income from capital income to earned income rises, a wage-related contribution may become less equitable.
Certain advantages may be associated with specific organisational arrangements, such as single vs multiple funds and occupational vs regional funds.
- Single fund: may produce low administrative costs, ease regulation and make the risk pool universal. On the other hand, subscribers have no choice, and some might fear inefficiency and a lack of consumer responsiveness.
- Multiple funds:
- Occupational funds; can tailor services to meet the needs of workforce. However, contribution rates may be higher for high risk occupations, and difference in contribution rates may also restrict labour market mobility. Moreover, serving overlapping geographical areas may cause inefficiency in administration costs.
- Regional funds; can allow for larger pools and spreading administrative functions over a large base. It can also tailor the need for local populations. However, they display some of the problems similar to local taxation in terms of regional inequity.
Recent trend
Mainly considering to the risk from relying on the labour market to finance health care, countries that rely heavily on the labour market have been trying to broaden the revenue base. They have been worried about shrinking revenue from rising unemployment, growing informal economy and the aging population.
Reference
Mossialos, E. (2002). Funding health care : options for Europe. Open University Press.
Wagstaff, A. (2010, May). Social health insurance reexamined. Health Economics.