Danger, Danger: The Government’s Health Insurance Model

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There are many issues to be sorted with the introduction of the Universal Health Insurance:  will it be a competitive private insurance market (a la Netherlands with its rapidly rising health costs) or will it adopt a single-payer model; what services will it include; will it contain truly free GP care and will it include considerable subsidies for  prescription medicine?  And then there is the issue of whether an NHS-style system (most EU-15 countries finance their health systems out of general taxation) would be more cost-effective – that is hardly featuring in the debate.

Here I want to look at how it will be financed based on the Government’s current proposals.  It seems clear that people will be required to purchase a basic health insurance package (contents unknown) from one of a number of competing health insurance companies.

But there is a real danger that the Government is intending to introduce a finance model that will be regressive (i.e. impact on low-average incomes more than higher incomes) and contain no obligations from employers to make any contributions.  Both these elements fly in the face of social health insurance models that exist in Europe.

Regressive

First, the method of financing will be regressive.  We don’t yet know the cost though the Department of Public Expenditure and Reform is reportedly claiming that it could be €1,700.  In the Netherlands, which is supposed to be the Government’s template, the cost is €1,478 for each insured adult with reliefs for low-income earners.

Let’s assume, for this argument, that the package is €1,500.  The Government is committed to exempting low-income groups (unemployed, etc.) and subsidies for the low-paid, though we don’t yet know the threshold.  This helps, of course.  The problem lies with income groups above the threshold – in other words, those that don’t receive a subsidy.

We can see immediately that a flat-rate payment will be more expensive – as a proportion of gross income – for those at the lower end.   For instance, if you are on an average income of €36,000, the health insurance will be approximately 4 percent.  If you are on €100,000, the health insurance will be 1.5 percent.  That doesn’t seem very equitable – because it isn’t.

How do other European social health insurance systems treat this cost?  They do it on the basis of ability-to-pay – or income-related.

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In all systems, payment is not flat-rated as the Irish Government is proposing – it is based on income.  People pay based on a percentage of their income.  That’s a lot fairer.

In Germany, Luxembourg and Austria there are income ceilings (there is no contribution above €47,250, €52,280 and €112,450 respectively – though there is continued contributions paid on bonuses in some countries).  In France there is no ceiling.

Belgium also operates a social insurance system in health, but the contribution is included in the universal social insurance contribution of 13.1 percent with no ceiling.

The ceilings result in a slightly regressive impact on incomes (though see below for employers contributions).   But all these systems – including Belgium – are more progressive when comparing average incomes to those on high incomes.

The reason that Germany has such a high contribution rate is because healthcare there is largely funded by the social insurance system, rather than the Exchequer.

If the Irish Government were keen on creating a more progressive system they would move from a flat-rate payment to one that is based on income – just like our current PRSI system.

Employers’ Contribution

It appears that employers’ will make no contribution to funding health insurance.  This goes against the model of health insurance in all the other countries.

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As seen, there is a contribution from employers in all cases.  In the Belgian case, this represents the total social insurance contribution (and includes unemployment payments, etc.).  In Germany, Austria and Luxembourg the employers’ contribution is equal or almost equal to the employees’ contribution.  In France, employers pay for almost all the total social insurance contributions.

This makes these systems far more progressive than what is currently being debated in Ireland.

An Income-Related System

In terms of financing the health insurance, equity and economic efficiency requires two things:

  • that the cost of health insurance is funded through an income-related PRSI contribution
  • that employers make at least an equal contribution to that of employees

Let’s play a little game.  Let’s assume that the universal health insurance costs €1,500 for each adult.  Let’s further assume that the State picks up 30 percent of the bill (for pensioners, unemployed, etc.).  The cost would be €3.5 billion or about 5.5 percent of total gross wages in 2014.

What would the impact be of a more equitable financing system?

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Assuming that the Government’s health insurance package would come to €1,500, a more equitable system would be far more beneficial to those on low-average incomes.   Only on incomes above €55,000 would contributions be higher than the Government’s proposals.

This equitable model of financing can be used for a NHS-style system, a single-payer system or even the Government’s private insurance model.  While all this is based on numbers that the Government has not produced, the trajectory would be the same.

But there’s one big elephant that no one has discussed.  The impact of universal health insurance – whether it’s through the Government proposals or a more equitable model – will be minimal for those who already have health insurance.   For these people, it would just mean substituting one payment for another.

The impact will be very high on those who don’t have health insurance – about 53 percent of the population.   They will be required to purchase health insurance, unless they are covered by a state subsidy.  This would mean many low and average income earners who can’t afford health insurance would be hit.  What would the social and economic impact of this be?

Moving to an income-related insurance package, with an employer contribution, would be far less onerous.  If this were phased in over a number of years while at the same time supporting the low-paid (through higher minimum wages) we could minimise any negative impact further.

But the starting point is a health insurance based on the ability to pay.  If Labour wants to pick a fight with Fine Gael, this could be the battleground: a more equitable system for financing health insurance.

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