Strengths and weaknesses of social health insurance financing in western Europe

Properly discussing the strengths and weaknesses of social health insurance financing requires clarity on the objectives of health policy. The policy objectives considered here are financial sustainability, equity, efficiency, responsiveness and satisfaction.

Although the models of social health insurance and general taxation are similar, they differ systematically in practice. First, the separate structures for collecting and managing funds tend to result in greater transparency.

However, the organizational autonomy of social health insurance funds also requires adequate systems of accountability. Second, that access to care depends on contributions to the fund gives the patient the status of a customer.

The relationship between insurer and member is therefore more contractual, and thus the benefits to which the contributors are entitled have tended to be more explicitly defined.

Third, revenue is determined by contributions and not by political preferences; social health insurance is thus less politicized.

Since there is no simple answer to the question of how much should be spent on health care, adequacy is best judged in the context of a country’s total resources and other development priorities (Cichon et al. 1999).

There are several reasons and some evidence to suggest that separating health care spending from other government-mandated spending can increase funding for health services.

Most importantly, perhaps, greater social willingness to pay for health care seems to be associated with the hypothecation of funds inherent in a transparent arrangement for funding social health insurance.

This also appears to translate into greater population satisfaction with social health insurance systems than with systems funded by general revenue or voluntary insurance (Ferrera 1993; Mossialos 1998).

Separating health care financing from government financing allows people to consider separately the desirability of higher contributions for better services, secure in the knowledge that any additional contributions will not be diverted to other government programmes they may consider to be of lower priority.

Most systems of social health insurance use current employment income as the contribution base, in part because they originated as employer-sponsored systems.

Since income from employment has historically been a good proxy for ability to pay, this has generally been fair. However, this narrow base is becoming less satisfactory for several reasons. First, the trend towards self-employment is increasing at the expense of employment.

Second, more people have more than one job. Third, wealth affects ability to pay but is not taken into account. Fourth, capital income is an increasing proportion of income.

The introduction of social health insurance in the countries of central and eastern Europe has shown that there are problems with this narrow contribution base, and ways may be needed to take into account wealth and non-employment income in assessing contributions to increase revenue and improve equity.

The issue of who actually pays for social health insurance systems is not straightforward, despite the visible division between insurees and employers. Much depends on the amount of competition in product and labour markets.

If markets are very competitive, then firms will only survive if they contain the total cost of employment, so that the total amount spent on wages and insurance contributions is likely to be constant. If insurance contributions rise, then wages over time are likely to fall.

Thus, in economic terms, the employers may shift their share of the payroll contribution to employees in the form of reduced wage growth. The tax treatment of insurance contributions is also important. If contributions are exempt from tax, then contributions cost the same for employers to pay as increasing wages and for employees to pay and in principle it makes no difference who pays.

A tax is progressive if the proportion of income paid in tax rises as income rises. In a regressive system, the proportion falls as income rises. Health care financing can be analysed similarly – funding is progressive if the proportion of income paid for health care rises as income rises.

The findings of the ECuity Project (van Doorslaer et al. 1993; Wagstaff et al. 1999) suggest that social health insurance is, on average, slightly less progressive than tax financing but much more progressive than private financing arrangements.

Although The World Health Report 2000 (WHO 2000) confirms the results regarding private financing, social health insurance and tax financing do not differ systematically in financial equity according to that calculation.

While differences within tax-financed systems depend on the mix between (progressive) income taxes and (regressive) indirect taxes as well as how completely they are collected, equity differences among social health insurance countries depend on several factors:

the extent to which contributions are based on income (rather than percapita premiums);
whether richer and/or healthier people are paying relatively less (through income ceilings or no-claim bonuses) or are allowed to stay out of the system altogether;
the extent to which the contributions to different funds are pooled, i.e. adjusted for differing risks; and
the extent to which benefits are fully covered or require cost-sharing.

All these points have to be considered with special attention to including or excluding dependants: equity decreases further if per-capita premiums are charged for members and dependants.

Including dependants might lead to greater inequity if a ceiling exists: an affluent couple with one nonemployed spouse pays once, whereas a middle-class double-income couple pays twice. Historically, many countries, most notably Germany, have had multiple funds but not competing funds.

This is changing as the right to choose insurer has been introduced. Equity is not related to the existence or lack of competition, but rather to the existence or lack of functioning pooling mechanisms; in other words, regional monopoly funds can be inequitable if resources are not pooled and competing sickness funds can be equitable if resources are effectively pooled.

If a perfect system of risk adjustment is introduced and full allowance is made for differences in incomes, then full choice and competition between funds and full solidarity are theoretically possible.

However, such mechanisms are complex and expensive, and increased diversity and choice can also increase inequality in access to care.

For a more detailed discussion of riskadjustment mechanisms between competing insurance funds, see Chapter 11 and Busse (2001) for Germany, Chinitz and Shmueli (2001) for Israel and Okma and Poelert (2001) for the Netherlands.

International comparisons show that social health insurance systems have higher expenditure than tax-funded systems. The important question is whether this higher spending reflects a higher volume of services or simply higher costs of producing care, because of higher transaction costs and/or higher provider income.

The available evidence is limited and allows no clear conclusions. Again a combination of a priori reasoning and evidence is helpful. Efficiency in the production of care requires structures, skills, motivation and incentives.

Structures affect efficiency both through the market power of buyers and sellers and by affecting transaction costs. A serious issue in assessing the efficiency of different financing systems is how to minimize management and transaction costs.

Evidence on the relationship between management costs and performance is still poor (Street et al. 1999).

Although much of the transaction costs in social health insurance systems are related to contracting and purchasing services (and whether funds do this individually or collectively is a major determining factor), only the transaction costs of collecting, pooling and allocating contributions are relevant here.

Unfortunately, the management costs of sickness funds are not broken down into collecting and pooling versus contracting and purchasing, and we do not have comparative data from tax-based systems on the transaction costs of collecting taxes and allocating them to, for example, health authorities.

If, however, sickness funds are small and have differing contribution rates and different ways of collecting contributions, the danger of inefficiency is great – but there is no reason why social health insurance should necessarily involve higher transaction costs than tax financing.

However, as the desire for diversity and choice increases, the tendency to incur high costs and to reduce the downward pressure on costs is a major risk (Normand and Weber 1994).

The choice of simple contracting arrangements in Germany is in part a response to the need to contain costs, although it will be interesting to see the effects of the current trend towards increasing competition between funds.

Between 1995 and 1999 (since the introduction of competition), the visible administration costs of the funds as a percentage of all expenditure have increased from 5.24 to 5.76 per cent (Bundesministerium für Gesundheit 2000).

To a certain extent, this results from employers shifting costs to the funds in company-based funds. Because resources are never sufficient to satisfy all demands, some form of rationing or priority-setting is inevitable. A shift from tax financing to social health insurance does not change this.

However, it may change who is responsible for choosing which services are provided and may shift blame for constraints (at least in part) away from governments. Social health insurance systems tend to be associated with high levels of satisfaction in the population.

The sources of this satisfaction are interesting, including a combination of solidarity (although less than with general revenue funding) and transparency (a clear advantage of social health insurance systems). To some extent, social health insurance may make every patient a private patient.

Social health insurance systems have certainly been associated with attitudes to patients that treat them as valued customers and not simply a nuisance, as suggested by the high responsiveness ratings in The World Health Report 2000 (WHO 2000).

Location: Indonesia