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Session: Public vs. Private Insurance
Room: Meeting Room 21
Time: Fri 16:00-17:15

Presenter: Mathias Kifmann (University of Augsburg. Economics)

Abstract

Private health insurance markets discriminate according to risk of illness. An insured pays a premium which – given the amount of coverage – reflects the expected value of future health care costs. Those with a higher risk of illness thus have to pay higher premiums than those with a lower risk. In many countries, this price discrimination is regarded as unjust, violating equity principles such as ‘equal access’ or ‘solidarity’. A common solution are social health insurance schemes which establish transfers from low risks to high risks by forcing all citizens into one health insurance contract with a uniform premium.

In a recent paper, Peter Zweifel and Michael Breuer [Health Econ., Policy and Law 1 (2006) 171] fundamentally question this equity argument in favor of social insurance. They maintain that being a high risk does not necessarily imply that a person should receive transfers since high risks can still have a high income. Nevertheless, they benefit from social insurance. For this reason, Zweifel and Breuer (ZB) propose to focus transfers on high-risk, low-income individuals and to abandon social insurance. They claim that risk-based premiums combined with targeted transfers are superior on equity grounds. Concretely, they propose to limit the expenditure for health insurance to a given share of income, the remainder being covered by public transfers. This effectively leads to a premium subsidy for individuals with low income and high health insurance premiums.

This paper assesses the ZB proposal in more detail using a theoretical framework. We provide a formal analysis to clarify under which circumstances risk-based premiums combined with premium subsidies are superior to social insurance. Our framework allows for heterogeneity in productivity and risk types. The government uses a linear income tax to redistribute between high- and low-productivity individuals. The premium subsidy scheme by ZB is captured by transfers which are paid if expenditure for health insurance exceeds a given share of pre-tax income. Following Zweifel and Breuer's postulate that government policy should be targeted to high-risk, low-income individuals, we assumed that social preferences are represented by a maximin social welfare function.

For the ZB proposal as well as for social insurance, we characterize the optimal solution. We demonstrate that the correlation of health and productivity is crucial. The ZB proposal is more likely to be superior, the more negative this correlation. It is also possible that the ZB solution fares better if health and productivity are positively correlated. However, a considerable part of the welfare advantage is due to the fact that the premium subsidy introduces an element of non-linear taxation. Comparing the ZB proposal with a social insurance scheme that also contains a premium subsidy changed the results strongly in favor of social insurance.

Key Terms

social insurance, health insurance, redistributive taxation, equity

Authors:

Mathias Kifmann (University of Augsburg. Economics) and Kerstin Roeder (University of Augsburg. Economics)

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