Paying for Health Care: Quantifying Fairness, Catastrophe, and Impoverishment, with Applications

This paper compares egalitarian concepts of fairness in health care payments (requiring that payments be linked to ability to pay or ATP) and minimum standards approaches (requiring that payments do not exceed a pre-specified proportion of pre-payment income, or do not drive households into poverty). We develop indices for both sets of approaches. In the first, we compare the “agnostic” approach (which does not pre-specify exactly how payments should be linked to ATP) with a recently proposed approach that requires payments to be proportional to ATP). We link the two using results from the income redistribution literature on taxes and deductions, arguing that ATP can be thought of as pre-payment income less deductions deemed necessary to ensure a household reaches a minimum standard of living or of food consumption. We show how both approaches can be enriched by distinguishing between vertical equity (or redistribution) and horizontal equity, and show how these can be quantified. We develop indices for “catastrophe” that capture the intensity of catastrophe as well as its incidence, and also allow the analyst to capture the degree to which catastrophic payments occur disproportionately among poor households. Our measures of poverty impact also capture intensity as well as incidence. Throughout we illustrate the arguments and methods with data on out-of-pocket payments from Vietnam in 1993 and 1998. This is a not uninteresting application given that 80% of health spending in that country was paid out-of-pocket in 1998. We find that out-of-pocket payments had a smaller disequalizing effect on the income distribution, whether income is measured as pre-payment income or ATP (i.e., pre-payment income less deductions). The latter is true irrespective of how the deductions are defined. The underlying cause of the smaller disequalizing effect of out-of-pocket payments is different depending on whether the benchmark distribution is pre-payment income or ATP. We also find that the incidence and intensity of “catastrophic” payments—both in terms of pre-payment income as well as ATP—were reduced between 1993 and 1998, and that both incidence and intensity of “catastrophe” became less concentrated among the poor. We also find that the incidence and intensity of the poverty impact of out-ofpocket payments diminished over the period in question. Finally, we find that the poverty impact of out-of-pocket payments is primarily due to poor people becoming even poorer rather than the non-poor being made poor, and that in Vietnam in 1998 it was not expenses associated with inpatient care that increased poverty but rather non-hospital expenditures.