In Support of a Tax-funded Financing Model for Universal Healthcare

Posted on November 26, 2008


In an earlier entry, I had made out the case for India to choose the tax funded financing model over a mandatory social health insurance (SHI) funded model for its universal healthcare initiative. In this article I am detailing some additional reasons that I believe support the choice of the tax-funded financing model.

Anne Mills has authored an excellent literature review that provides a great introduction to the experiences and learning from the universal healthcare initiatives of a number of middle income countries.  The report provides some interesting evidence of how the choice of the model a country makes has implications on the equity of coverage and financing its citizens enjoy. Quoting from the report:

The table below summarises the overall incidence of health financing for Asian countries with or approaching universal coverage (data from O’Donnell, van Doorslaer, Rannan Eliya et al 2005a).

Countries where general tax funding makes up a higher share (e.g. Thailand, Sri Lanka, Hong Kong) appear to have more progressive pattern of health financing than those dependent more on mandatory social health insurance financing (e.g. Korea, Taiwan). This pattern of a less progressive financing system in countries relying on social health insurance is accentuated by the substantial copayments required from the insured in countries such as Korea.


% of total health financing

Concentration Index*

General Tax


Direct Payments

Hong Kong (199-2000)





Indonesia (2001)





Japan (1998 )





Korea Rep (2000)





Philippines (1999)





Sri Lanka (1996-97)





Taiwan (2000)





Thailand (2002)





* Range is -1 to 1; positive (negative) value means rich (poor) contribute a large share of income than the poor (rich); zero means everyone pays the same share.

Adam Wagstaff in his paper Social Health Insurance Reexamined, provides strong arguments and data to challenge the assumed superiority of a SHI funded system over tax funded system. I have cited two key arguments below:

<I> A tax-funded scheme (usually) managed by government suffers from the “least common denominator” problem. In trying to meet the needs of diverse sections of the society, the government delivers a quality and composition of service and benefits that satisfies nobody’s requirement. A SHI on the other hand is far more responsive to the needs of its members and is able to tailor and deliver required service and benefits to them.

  • Wagstaff cites the example of survival rates of cancer patients in Europe to question this assertion of SHI funded systems of necessarily delivering better quality of service. He finds that the rate of survival in Denmark and England (tax funded) are worse than France, the Netherlands and Germany (SHI funded). However he finds Ireland and Sweden (tax funded) have a better rate of survival than the three SHI funded countries. Further, Wagstaff asserts that since governments have to win elections, it is the tax-funded scheme managers rather than the SHI funded scheme managers that are more accountable to their members. Such accountability also fosters an open dialogue and discussion on key policies and directions that the healthcare initiative should follow. On the other hand, the SHI funded scheme managers, insulated from the feedback and displeasure of its members as they rarely face any referendum on their performance, can shut out any objections to or disagreements with their decisions.

<II> A tax-funded scheme suffers from the volatility as government tries to prioritise across multiple demands for its funds. SHI funded schemes, on the other hand, are able to depend on predictable funding and thus can negotiate better terms of services and benefits for its members.

  • Wagstaff argues that the SHI funding is not as predictable as it seems. Firstly SHI’s funding is dependent on the size of the organised employment sector which is not immune to cyclical economic downturns. A downturn is usually accompanied by higher unemployment rate which in turn affects the funding of SHI schemes. Secondly, Wagstaff cites the example of Germany to highlight how an ageing society puts an increasing financing burden on a reducing number of employees and fuelling resentment against the system. Thirdly, Wagstaff points to the perverse incentive SHI provides to informalisation of the economy where both employees (for saving on health tax on their payroll) and employers (for saving on matching contribution) prefer informal terms of engagement, even accepting part of the compensation in kind rather than cash.

It is not my case that the tax funded system does not have drawbacks, but these are not insuperable. What makes the tax funded system more desirable are its advantages: possibility of providing true universal coverage, avoiding both the dependence on the size and introduction of distortions to the organised employment sector and a financing model that can promote equitable participation  of all sections of the society.