The Impact of Financing Health Services on Income Inequality in an Unequal Society: The Case of South Africa

Applied Health Economics and Health Policy https://doi.org/10.1007/s40258-021-00643-7 ORIGINAL RESEARCH ARTICLE The Impact of Financing Health Services on Income Inequality in an Unequal Society: The Case of South Africa John E. Ataguba1,2 Accepted: 23 January 2021 © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2021 Abstract Background Equitable health financing is crucial to attaining universal health coverage (UHC). Health financing, a major focus of the National Health Insurance in South Africa, can potentially affect income distribution. Objective This paper assesses the impact of financing health services on income inequality (i.e. the income redistributive effect [RE]) in South Africa. Methods Data come from the nationally representative Income and Expenditure Survey (2010/2011). A standard approach is used to estimate and decompose RE for the major health financing mechanisms (taxes, insurance and out-of-pocket health spending) into the sum of the vertical effect (i.e. the extent of progressivity or regressivity), horizontal inequity (i.e. the extent to which ‘equals’ are not treated equally) and reranking effect (i.e. the extent to which individuals or households change ranks after paying for health services). Results Financing health services through direct taxes (RE = 0.0072, P < 0.01) and private health insurance (RE = 0.0103, P < 0.01) significantly reduce income inequality, while indirect taxes (RE = −0.0025, P < 0.01) and out-of-pocket health spending (RE = −0.0009, P < 0.01) lead to significant increases in income inequality. Although private health insurance contributions may reduce income inequality, enrolees are only a small minority, mainly the rich. Also, total taxes (RE = 0.0048, P < 0.01) and total health financing (RE = 0.0152, P < 0.01) contribute to significant reductions in income inequality, with the vertical effect dominating. Conclusion Taxes that contribute to reducing income inequality hold promise for equitable health financing in South Africa. The results are relevant for and support the current National Health Insurance policy in South Africa and the global move towards UHC. 1 Introduction Equitable health financing is central to the universal health coverage (UHC) debate. UHC is about ensuring that all people have access to needed health services that are of sufficient quality to be effective, without incurring any financial hardship as a result of the use or the need to use these services [1–3]. Health financing is equitable * John E. Ataguba 1 Health Economics Unit, School of Public Health and Family Medicine, Health Sciences Faculty, University of Cape Town, Cape Town, South Africa 2 Partnership for Economic Policy, Duduville Campus, Kasarani, Nairobi, Kenya Key Points for Decision Makers The high income inequality in South Africa can be reduced by health financing reform. Direct taxes and private health insurance reduce income inequality in South Africa. Income redistribution via private health insurance is limited as only the rich insure. Indirect taxes and out-of-pocket health spending increase income inequality in South Africa. Progressive general taxes are useful for reducing income inequality in South Africa. Vol.:(0123456789) J. E. Ataguba when contributions to health services are based on households’ ability to pay [4]. Apart from affecting equity in how health services are financed, financing health services also affects income inequality because these services are financed (whether through taxes, insurance premiums or out-of-pocket payments) from household income. In many countries in Africa, government taxes form a substantial share of health financing. Another large share is direct outof-pocket payments [5]. Health financing via indirect taxes is likely to be more regressive than direct taxes because direct taxes are structured with progressive rates in most cases. Indirect taxes, especially in developed as opposed to developing economies, are more likely to be regressive because their rates are not very sensitive to the distribution of income, even when some commodities and services are exempted or zero-rated [5, 6]. In South Africa, health services are financed through a combination of taxes (direct and indirect), private health insurance contributions (called medical schemes) and direct out-of-pocket payments, with taxes accounting for less than half of the total health financing. In 2010/2011, tax revenue accounted for over 98% of South Africa’s national revenue. Tax on income and profits constituted over 56% of total tax revenue, while value-added tax, fuel levy and excise tax accounted for 27.2%, 5.1% and 3.6% of total tax revenue, respectively [7]. Together, these taxes account for over 92% of tax revenue. Other components include taxes on international trade and transactions, including customs duties (4.0%), taxes on payroll and workforce (1.3%) and taxes on property (1.4%). Overall, direct and indirect taxes account for about 59% and 41% of total tax revenue, respectively. This ratio of direct and indirect taxes in total tax revenue has remained very similar over the past decade. The contributions of the various tax components to health financing are provided in the data section below. The country has both the public and private health sectors, serving different socioeconomic groups—the public sector serves the majority of the population and is funded mainly through allocations from general tax revenue [8, 9], while the private sector serves a minority of the population, primarily those who can afford private health insurance. South Africa remains one of the most unequal societies in the world, with a Gini index of income inequality that is close to 0.70 [10]. The Gini index of income inequality declined marginally from 0.68 in 1993 (i.e. shortly before transition to a democratic government in 1994) to 0.66 in 2014/2015 [10]. Labour income (~ 90%) followed by investment income (~ 9%) is the major contributor to income inequality in South Africa [10]. Although inequality in earnings has decreased since 1994, the gaps in earning between race groups are still high “with black Africans (comprising more than 75% of the population) on average earning less than half of what whites earn” ([11], p.6; emphasis added based on census data). The labour market, which is the primary target for income taxes, is therefore a major driver of income inequality in South Africa. Therefore, efforts to reduce income inequality in South Africa cannot ignore labour and investment incomes. The country’s National Development Plan’s target is to reduce the Gini index to 0.6 by 2030 [12], coinciding with the Sustainable Development Goals end date. Given the importance of the labour market for income inequality, if the country’s health financing system, to be financed predominantly through taxes, is very well designed, among other things, it may contribute to substantial reductions in the level of i (...truncated)