“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Analyzing Health Equity Using Household Survey Data Lecture 17 Redistributive Effect of Health Finance

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Contributions to health finance may redistribute disposable income Can occur when payments compulsory and independent of utilisation Societal (/policy) interest may stem from concern for distribution of income Redistribution can be vertical – payments disproportionately related to ability to pay (ATP) (e.g. progressive) But can also derive from horizontal inequity – unequal payments at equal ATP

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Measurement of redistributive effect (RE) Compare inequality in pre-payment incomes with inequality in post-payment incomes Measure inequality by the Gini coefficient (G) Then –where G X is gross of contributions to health finance and G X-P is net of contributions

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Decomposition of redistributive effect RE can be decomposed into: –Vertical redistribution (V) –Horizontal inequity (H) –Reranking (R) Reranking refers to changes in individuals’ positions in the income distribution due to differential contributions to health finance RE = V-H-R (Aronson et al, 1994) Vertical redistribution (progressivity) contributes positively to redistribution and is offset by horizontal inequity and reranking To make the decomposition, one must define individuals within certain intervals of pre-payment income as ‘equals’ and subsequently group them accordingly

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Vertical redistribution (V) V is the redistribution that would arise if there were no horizontal inequity V = G X -G 0, where G 0 is the between groups (of equals) Gini for post-payment incomes Then V = [g/(1-g)]K E –where g is average tax rate and –K E is the Kakwani index of payments that would arise if there were horizontal equity ; K E = C 0 – G X, where C 0 is the between-groups concentration index for payments Redistribution generated by a given degree of progressivity (K E ) is ‘scaled’ by the size of the tax burden (g)

Progressive tax & differential treatment Concavity indicates progressivity Progressivity implies redistribution But differential treatment increases post-tax inequality and reduces RE RE = [g/(1-g)]K E - D = V - D D is the offsetting effect due to differential treatment

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Progressive tax with horizontal inequity (H) & reranking Fans arise because of differential treatment (H) Fan overlap results in reranking H can occur without reranking — but not vice versa Both H and reranking reduce the RE (increase post-payment inequality)

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Measurement of Horizontal Inequity (H) H is weighted sum of group (j) specific post- payment Gini coefficients –where weights are the product of the group’s population share and its post-payment income share H must be non-negative – it increases post- payment inequality and reduces redistributive effect (see previous dgms.)

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Measurement of reranking R = G X-P -C X-P, –where C X-P is a concentration index for post-payment incomes obtained by ranking first by pre-payment income and then, within each group of pre-payment ‘equals’, by post-payment income R cannot be negative since the Lorenz curve for post-payment income cannot lie below the concentration curve R is zero if the rankings by pre and post payment incomes coincide – there is no reranking So, reranking increases inequality and reduces redistributive effect

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Feasibility of the decomposition Decomposition of RE into V, H and R requires defining intervals of pre-payment income as ‘equals’ The relative magnitudes of H and R depend on the intervals chosen, which are somewhat arbitrary So magnitude of V relative to RE (H+R) is most interesting aspect of decomposition

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, Redistributive Effect of Public Finance of Health Care in the Netherlands, UK & US

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, RE from all taxes going into health care

“Analyzing Health Equity Using Household Survey Data” Owen O’Donnell, Eddy van Doorslaer, Adam Wagstaff and Magnus Lindelow, The World Bank, Washington DC, 2008, RE of all social health insurance