Keeping an Eye on IRIS: Risk and Income Solidarity in OECD Healthcare Systems

Achim Schmid, Pascal Siemsen, and Ralf Gotze

The core arena for the redistribution of wealth and income is the tax system. At the same time, the welfare state corrects market inequalities through earnings replacements for the main risks in life such as unemployment, illness, accidents and old age. Healthcare differs since it mainly provides for goods and services. However, distinct coverage levels and financing schemes involve redistributive effects. In most wealthy democracies such as those represented by long-term OECD members, healthcare systems have been established that guarantee access to a broad package of health services. The sole major exception is the United States

A. Schmid (*)

Socium, University of Bremen, Bremen, Germany e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it

P. Siemsen

University of Bremen, Bremen, Germany R. Gotze

National Association of Statutory Health Insurance Funds, German Liaison Agency Health Insurance — International, Bonn, Germany

© The Author(s) 2016

M. Wulfgramm et al. (eds.), Welfare State Transformations and Inequality in OECD Countries, Transformations of the State,

DOI 10.1057/978-1-137-51184-3_6

(US), where still a considerable part of the population remains uninsured and for whom access is only guaranteed for emergency care. While crossnational differences in basic coverage declined early on, countries still use distinct financing mixes for healthcare (Barros 2007). The main financing schemes include taxes, social insurance contributions, private insurance premiums and out-of-pocket spending. Consequently, the financing schemes and, correspondingly, the resulting financing mix vary with respect to concepts of solidarity and the implied distributive effects. While acknowledging lasting inequalities of healthcare utilization, this contribution focuses on the development of inequality and corresponding inequity in health financing from a cross-national perspective.

During the post-World War II era and well into the 1970s, OECD countries expanded their public healthcare schemes. An indicator of this expansion was the increase in the share of public financing in health until roughly 1980 (Oxley 1995). However, the economic turmoil triggered by the oil crises of the 1970s left its mark on welfare states’ health systems. Cost containment strategies began to dominate health policy as a response to tax cuts and general efforts to downsize government spending (Marmor et al. 2005). Insurance contributions were increasingly perceived as a burden to the economy in times of growing international competition. In many countries, co-payments rose in order to control expenditure growth due to consumer moral hazard, thereby hoping to increase the efficiency of healthcare provision (Abel-Smith and Mossialos 1994; Mossialos and Le Grand 1999). Until the late 1990s, the privatization of healthcare financing could be observed in many OECD countries. Since about 2000, however, this trend has reversed, and on average the share of public financing has increased again (Rothgang et al. 2008; OECD 2014a). At the same time, over the whole observation period, convergence in terms of a declining variance in the share of public financing can be measured (Rothgang et al. 2010). These trends affect equity in health financing and redistributive efforts through health financing.

Health economists have examined equity issues in healthcare financing, measuring the progressivity of funding sources with survey data. Most notably, the ECuity project published progressivity indices for some European countries and the US for the late 1980s and early 1990s (Wagstaff et al. 1992, 1999). Not least due to the rather complex procedure involved in the evaluation of income and expenditure surveys, since that time such indices have rarely been calculated (De Graeve and Van Ourti 2003). To date, only snapshots of the redistributive effects of health financing are available. Thus, there is a dearth of comparative time series which would provide insights into the ways in which the restructuring of welfare states have translated into the financing dimension of the healthcare system.

In this chapter we argue that the different modes of healthcare financing can be distinguished according to the way the health risk is born collectively or individually. Further, health financing differs with respect to the way income groups are burdened, that is, the income redistribution implied by health financing schemes. Thus, conceptually, we look at risk solidarity, that is, the way the healthy stand in for the sick across different risk groups, and income solidarity, that is, the way the wealthy stand in for the poor. We use aggregate spending data from the OECD as well as national sources in order to determine the share of the financing sources that are related to distinct effects in terms of risk redistribution and income redistribution. This is the basis for constructing an Index of Risk and Income Solidarity (IRIS). While risk redistribution supports equal access to health services, income redistribution additionally brings the health-related financial burden for households in line with their income.

The structure of healthcare financing in terms of risk and income solidarity may be interpreted as a result of political struggle and the institutional conditions shaping the power of relevant actors in the healthcare field. Shifts in risk and income solidarity are issues of constant debate. However, long-term socioeconomic developments in the OECD world have changed the conditions under which risk and income solidarity are defined.

First of all, the end of welfare state expansion has intensified conflicts about who should pay for healthcare and who will be affected by benefit cuts. The turn towards austerity policy coincides with a growing demand for health services along with cost increases in the health sector. Medical- technological progress in particular, but also demographic ageing and cost inflation in the service industries, implicate a sustained urge for higher health expenditures (Smith et al. 2009). Cost increases also create a necessity to share health risks. However, under conditions of permanent austerity, individual responsibility for one’s own health and well-being has been emphasized, while secular trends of individualization may further compromise solidarity in favour of private healthcare for those who can afford it (Houtepen and Ter Meulen 2000).

Moreover, globalization may affect the way public healthcare financing is organized as well as its redistributive capacities. Besides shifts from public to private spending as a response to globalization, theoretical considerations suggest that due to tax competition, governments tend to strengthen less mobile financing sources such as indirect taxes (see Seelkopf and Lierse in this volume). The raising of tobacco and/or alcohol taxes can be easily legitimized if the taxes are earmarked for healthcare financing. Social security contributions are also vulnerable to global competition. In order to reduce labour costs, OECD countries substitute social security contributions with flat-rate premiums or other taxes.

The imbalance between cost increases in the health sector and austerity policies implies a decline of risk solidarity if increasingly more health services have to be borne privately. At the same time, there is sustained public support for government responsibility in healthcare (Kikuzawa et al. 2008; Wendt et al. 2010). The political hazards of blunt privatization policies contribute to the resilience of large welfare programmes (Pierson 1996, 2001). Furthermore, hopes to increase efficiency of healthcare provision through forms of private co-payments have been disappointed more recently (Marmor and Wendt 2011). In addition, while globalization may imply cuts in public spending, it sets incentives to promote less redistributive financing sources. On balance these developments may continue to support risk solidarity but not necessarily income solidarity.

The chapter is structured as follows: in the next section we apply the concept of solidarity to health financing. For this purpose we distinguish risk solidarity from income solidarity and explain the general idea of our Index of Risk and Income Solidarity. The subsequent section sets out the methods and data used to construct IRIS in greater detail. Next, we present the results for eleven OECD countries: Australia, Belgium, Canada, Denmark, Germany, Japan, France, the Netherlands, Switzerland, the United Kingdom (UK) and the United States (US). The observation period starts at the eve of the first oil crisis in the 1970s and ends at the onset of the financial crisis in 2009. This sample is a result of data availability; however, the countries reflect a broad spectrum of healthcare system types in the OECD world. The final section concludes with a discussion of the results.

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