EQUITY IN HEALTH CARE FINANCE AND DELIVERY

by

Adam Wagstaff a and Eddy van Doorslaer b

a
School of Social Sciences, University of Sussex, Brighton BN1 9QN, United Kingdom.
Tel. +44 1273 877072. Fax +44 1273 673563. Email: [email protected]

b
Department of Health Policy and Management, Erasmus University, 3000 DR Rotterdam, The Netherlands.
Tel. +31 10 4088538. Fax. +31 10 4522511. Email: [email protected]

Second Draft: October 1998

Word Count: 24951

Prepared for Chapter 40, North Holland Handbook of Health Economics,

(eds.) AJ Culyer and JP Newhouse

Acknowledgements

We are grateful to Xander Koolman and Alessandro Marini for assistance with literature searching and
compiling the bibliography, and to Joe Newhouse and Carol Propper for comments on an earlier draft.
 2

1. INTRODUCTION ..............................................................................................................4

2. WHAT IS EQUITY? .........................................................................................................5

2.1. What is equity? A first pass..............................................................................................................................5

2.1.1. Equity versus altruism................................................................................................................................... 5
2.1.2. Equity, social justice and ideology ............................................................................................................. 7
2.1.3. Equity, ideology and health care systems .................................................................................................. 7
2.1.4. Ideology and the empirical literature on equity in health care ............................................................... 9
2.1.5. Some interim conclusions............................................................................................................................ 9

2.2. What is equity? A closer look .........................................................................................................................10

2.2.1. Sorting out definitions................................................................................................................................. 10
2.2.2. Conflicts between equity principles.......................................................................................................... 11
2.2.3. Justifying equity principles in the delivery of health care .................................................................... 12
2.2.4. Justifying the ability to pay principle ....................................................................................................... 14
2.2.5. Where does this leave equity?................................................................................................................... 15

3. EQUITY IN HEALTH CARE FINANCE......................................................................16

3.1. Health care financing typologies.....................................................................................................................17

3.2. Vertical equity and progressivity of health care finance .........................................................................18

3.2.1. Kakwani’s progressivity index.................................................................................................................. 18
3.2.2. Empirical work on progressivity and health care finance..................................................................... 19

3.3. Horizontal equity and income redistribution..............................................................................................22

3.3.1. Measuring horizontal equity ...................................................................................................................... 22
3.3.2. Empirical work on horizontal equity........................................................................................................ 25

4. EQUITY IN HEALTH CARE UTILIZATION ...............................................................26

4.1. Regression-based tests of inequity in health care utilization..................................................................26

4.1.1. Testing for inequity ..................................................................................................................................... 26
4.1.2. Empirical tests of inequity.......................................................................................................................... 30

4.2. Measuring inequity ............................................................................................................................................32

4.2.1. A direct standardization-based index ....................................................................................................... 32
4.2.2. Empirical work using the direct-standardization-based index............................................................. 33
4.2.3. An indirect standardization-based index.................................................................................................. 34
4.2.4. Empirical work using the indirect standardization-based index.......................................................... 35

5. EQUALITY OF HEALTH ..............................................................................................35

5.1. Pure inequalities in health ................................................................................................................................36

5.1.1. Measurement of pure health inequality.................................................................................................... 36
5.1.2. Empirical work on pure health inequalities............................................................................................. 37

5.2. Socio-economic inequalities in health............................................................................................................37

5.2.1. Measuring socio-economic inequalities in health .................................................................................. 38
5.2.2. Empirical work on socioeconomic inequalities in health ..................................................................... 40
 3

6. CONCLUSIONS.............................................................................................................42
 4

1. Introduction
Equity is usually recognized by economists to be an important policy objective in the
health care field. Indeed, some go so far as to suggest that amongst the population at large,
equity takes precedence over other objectives, even efficiency. 1 The interest shown by
economists in the equity issue seems to vary from one country to the next and over time
within countries. These variations and changes no doubt reflect in part the variations and
changes in the attitudes of policy- makers. The relatively low level of interest amongst
economists in the US in equity issues, at least on a per capita basis, probably reflects the fact
that policy- makers in the US have, on the whole, attached less importance to equity than their
counterparts have in most other OECD countries. The recent growth of studies on equity in
the US probably also reflects the commitment — at least in its early days — of the Clinton
administration to improving equity in health care in the US. The views of policy-makers are
probably only one factor that accounts for the cross-country and temporal variation in the
quantity of work by economists on equity. Another is the variation in views amongst
economists about the status of research on equity. There was until fairly recently, and in
some countries there still is, a perception amongst many economists that research on equity
must necessarily be normative in character. Many seemed to shy away from the area because
of this. Fortunately, it is increasingly being recognized that while the question of what equity
is all about is indeed a normative question, the questions of whether equity, defined in a
specific sense, has been achieved, or has increased, or tends to be higher in one type of health
care system than other, lie firmly within the realm of positive economics. This, along with
the changing political climate, may well have accounted for the upswing in research on
equity. 2

Whatever the reason, there is now a good deal of interest, amongst both policy-
makers and economists, in equity in health care financing and delivery, as well as a good deal
of literature. This chapter provides a review of this literature. The review is not
comprehensive in a number of respects. First, it excludes work by non-economists on — and
only on — the grounds that this is a chapter in a Handbook of Health Economics. This
decision inevitably results in a partial coverage of the field and we have almost certainly lost
more material through this decision than we would have done had we been writing a chapter
on, say, the health insurance market. Non-economists have written on almost all the areas we
touch on in our review: political and medical philosophers have written extensively about the
question of what equity is in the health field; medical sociologists and epidemiologists have
written extensively about equity in access to and the receipt of health care, as well as about
health inequalities. The “market share” of economists varies from sector to sector within the
equity “industry”, as does the degree of differentiation between the products of economists
and of non-economists. 3 The partial nature of our review should be kept in mind. The

1
See e.g. MacLachlan and Maynard (1982) and Mooney (1986).

2
Another factor undoubtedly is the revolution in computer hardware and software over the last 15 years. This
has made distributional analyses of large household surveys far easier than was hitherto the case.

3
The economists’ market share is probably largest in the area of equity in health care finance, and probably
smallest in the area of inequalities in health. The product differentiation is probably least in the area of equity in
access to and the delivery of health care, but even here is sizeable (not least because of the different quantitative
 5

second respect in which our review is partial is that it is heavily oriented towards empirical
work, and comparative empirical work to boot. We do offer a discussion of the nature of
equity, but this is not a comprehensive overview of the field and is intended simply to
provide something of a philosophical backdrop to the empirical material. Our focus on
comparative empirical work stems from a belief that studies examining a system in isolation
are less helpful for policy purposes than comparative studies, unless a study of a single
system manages to unpack the factors contributing to any observed inequity, which is
typically not the case. The third respect in which our review is partial is that its focus is on
industrialized countries. 4 The fourth respect in which our review is partial is that we ignore
completely the issue of geographical equity. This is a large literature to which economists
have contributed, though often in conjunction with non-economists. Finally, we have tended
to restrict our attention to published studies or forthcoming articles or books in English. 5

We start in Section 2 with a discussion of the nature of equity. As indicated above,

this is not a comprehensive overview and aims simply to provide a philosophical backdrop to
the empirical material in the following sections. Our discussion is different from and
complements that of Williams and Cookson in their chapter in this volume. Sections 3, 4 and
5 concern empirical material on equity in the financing of health care, the delivery of health
care and health inequalities. Section 6 offers some conclusions.

2. What is equity?

2.1. What is equity? A first pass

On the face of it, there would appear to be a good deal of agreement as to what equity
in health care entails. Of the various theories of social justice that might be brought to bear
on the issue of equity in health care, it has been argued by one emine nt medical ethicist
Gillon (1986) that some have a greater applicability and acceptability than others. Moreover,
examining the policy statements on equity in several OECD countries suggests that policy-
makers are in broad agreement over what they mean by equity (OECD 1992; Wagstaff and
Van Doorslaer 1993). Finally, in empirical work, researchers from countries with such
different health care systems as Britain and the United States have adopted much the same
notions of equity in their analysis.

2.1.1. Equity versus altruism

Before going into each of these areas, however, it is important to be clear that
distributional objectives in health care, and in social policy generally, can arise from two
sources: equity or social justice, on the one hand, and altruism or caring, on the other. The

techniques used). In the area of the nature of equity, there is an appreciable degree of product differentiation,
partly in analytical techniques (philosophers are prone to use the case approach whilst economists are keener on
developing the general story), as there is in the area of health inequalities (economists are more likely to rank
people by income, whilst non-economists prefer to rank by occupation and education).

4
The study by economists of equity in health in developing countries is still in its infancy though a good deal
of work is currently underway. Studies in books or journal articles include those of Baker and Van der Gaag
(1993) and Pannarunothai and Mills (1997).

5
Literature searches for the empirical material were undertaken in Econlit and BIDS (based on the Social
Science Index). Not all the material unearthed in these searches was included in the survey.
 6

concepts of equity and altruism are often confused. However, they are as Culyer (1980) and
Goodin and Le Grand (1987) emphasize, quite distinct and have quite different implications
for health policy.

Caring and altruism are matters of preference. In the context of health care a caring
individual might be one who derives utility — i.e. an external benefit — from seeing another
person receiving health care Culyer (1980). In this case, the caring individual prefers that the
person in question receives health care and is prepared to sacrifice resources to ensure that
the person actually obtains treatment. Quite how much he is prepared to sacrifice will depend
on how much he cares (which will depend on, inter alia, his income) and on the cost of
providing health care. Alternatively a caring individual might be one that derives utility from
the act of providing health care for others (Mooney 1986). Quite how much of his income
the individual will be prepared to sacrifice to provide health care for others will depend on
the utility he derives from the act of providing medical care (which again will depend on his
income) and on the cost of providing health care. With caring preferences of either type,
therefore, "costs and benefits are balanced at the margin and ... the level of provision is ...
determined by the wealth of the community" (Culyer 1980 p.70). The language of caring is
thus, as Culyer (1989) notes, the language of efficiency. Hence the term “Pareto optimal
redistribution” (Hochman and Rodgers 1969).

Social justice (or equity), on the other hand, is not a matter of preference. As Culyer
(1980) puts it: “... the source of value for making judgements about equity lies outside, or is
extrinsic to, preferences. ... The whole point of making a judgement about justice is so to
frame it that it is (and can be seen to be) a judgement made independently of the interests of
the individual making it.” (p.60). Social justice thus derives from a set of principles
concerning what a person ought to have as of right. The difficulty, of course, is how to
obtain views about social justice in a way that ensures that they are not contaminated by the
interests of the individuals concerned. A straightforward survey, for example, whilst
sometimes proposed, seems unlikely to elicit responses that pass this test. One ingenious
device that has been used to ensure that principles of justice are genuinely impartial is the
“veil of ignorance” (Rawls 1971). This puts self- interested individuals in an “original
position” where they are ignorant about the positions they will occupy in society. The rules
of justice agreed upon by individuals in these circumstances are argued to be genuinely
impartial. The “veil of ignorance” is not, however, the only means of arriving at a set of just
rules. 6 Barry (1989) has argued that justice can more simply be construed as the set of rules
that can be justified on an impartial basis.

The different motivations behind equity and caring have at least three important
implications for health care policy. First, distributional decisions regarding health care
provision prompted by considerations of social justice ought not to be influenced by cost:
justice requires that an equitable pattern of provision be ensured, irrespective of the sacrifice
to the rest of society (Culyer 1980 pp.69-70). Second, there is scope for conflict between
efficiency and equity: an efficient redistributional programme prompted by caring
preferences need not be equitable, and vice versa (Culyer 1980 p.98). Third, the
distributional “rules” derived from the two approaches are likely to be different. Indeed,
differences emerge even within the two approaches, depending on the precise stance adopted.
For example, different rules emerge in the caring approach, depending on whether caring is

6
Indeed, there is some debate about precisely what would be agreed behind such a veil and how far strategic
behaviour might limit the usfulness of the approach.
 7

postulated to relate to a person's absolute level of medical care consumption (Culyer 1971), to
the deviation of their consumption from the mean (Lindsay 1969), or to health itself (Culyer
1980).

2.1.2. Equity, social justice and ideology

The upshot of the foregoing is that, when studying equity, one would like to analyse
equity objectives independently of any distributional objectives that are motivated by
altruism. The philosophy literature contains, at least on the face of it, some useful pointers in
this respect.

Gillon (1986) provides a helpful summary of the various theories of social justice and
discusses their applicability to health care. 7 Libertarians, he notes, emphasize a respect for
natural rights, focusing in particular on two of Locke’s natural rights — the rights to life (i.e.
not to be unjustly killed) and to possessions. Providing people acquire and transfer their
“holdings” witho ut violating others’ rights, their holdings are regarded by libertarians as just.
Hence Nozick's (1974) claim that taxation is warranted only to maintain a “minimal state”.
Utilitarians, by contrast, aim at maximizing the sum of individual utilities or welfare, though
some utilitarian writers have incorporated a concern for individual autonomy into this
maximand. Marxists emphasize “needs”. Hence the principle of “distribution according to
need”. In Marxist writings, this principle is often coupled with the principle of “from each
according to his ability”, which, in the present context, can be interpreted as “from each
according to his ability to pay”. Rawls (1971) proposes two principles of social justice,
namely tha t individuals should have the maximal liberty compatible with the same degree of
liberty for everyone and that deliberate inequalities are unjust unless they work to the
advantage of the least well off. Yet another view of social justice is that justice should
reward merit.

Which of these theories of justice appear to command the greatest support in the
context of medical care? Gillon suggests that “allocation of medical resources on the basis of
non- medical merits is widely regarded as repugnant” (p.97), but argues that the principle of
“distribution according to need” commands widespread support amongst physicians and
others working in the medical field. He challenges the extreme libertarian position, pointing
out that if Locke’s right to health were to be included in the libertarian list of natural rights,
writers like Nozick would be forced to accept the legitimacy of taxation to benefit the poor
and sick. Gillon also notes that utilitarianism, with its emphasis on maximizing the sum of
welfare, has much in common with the notion of efficiency as allocating resources according
to the likelihood of medical success.

2.1.3. Equity, ideology and health care systems

The two theories of justice most frequently encountered in the philosophy literature in
the context of medical care are, in fact, the libertarian and the Marxist approaches
(Donabedian 1971). As Gillon notes, however, the principle of “distribution according to
need” is not exclusively Marxist. Indeed, it is a key component of 20th century
egalitarianism (cf. Sugden 1983). Williams (1993) compares and contrasts the libertarian and
egalitarian positions. 8 He notes that in the egalitarian view, “access to health care is every

7
See also the annexe to Williams and Cookson’s paper in this volume.

8
Cf. Culyer et al. (1981), Maynard and Williams (1984), Williams (1988).
 8

citizen's right (like access to the ballot box or to courts of justice), and this ought not to be
influenced by income and wealth.” In the libertarian view, by contrast, access to health care is
viewed as “part of society's reward system”. As Williams puts it, “at the margin at least,
people should be able to use their income and wealth to get more or better health care than
their fellow citizens if they so wish”.

The egalitarian and libertarian viewpoints point, as Williams (op. cit.) notes, towards
quite different health care systems. The egalitarian viewpoint suggests that a state sector of a
similar type to the British National Health Service (NHS) should predominate, with health
care being distributed according to “need” and financed according to “ability to pay”. The
libertarian viewpoint, by contrast, points towards a mainly private health care sector, with
health care being rationed primarily according to willingness (and ability) to pay. State
involvement should be minimal and limited to providing a minimum standard of care for the
poor. In practice, in most countries health care is financed and delivered by a mixture of
systems and there are traces of both ideologies in policy- making, with the emphasis often
changing with changes of government.

Broadly-speaking, however, policy- makers in Europe give the impression of being

much more inclined towards the egalitarian viewpoint in health care matters than the
libertarian. This is apparent from table 2.1 in Wagstaff and Van Doorslaer (1993). There
appears to be less agreement amongst American policy- makers about equity objectives in the
health care field. There appears to be broad agreement amongst policy- makers in several
European countries that payments towards health care should be related to ability to pay
rather than to use of medical facilities. 9 The commitment to linking health care payments to
ability to pay is much less in evidence in the United States, though as is apparent from Davis
(1993), much of the debate prior to the ill- fated Clinton reforms in the 1990s focused on the
link or lack of it. The bipartisan Pepper Commission, for example, in its Blueprint for Health
Care Reform (Rockefeller 1991), urged that progressive taxation be used to raise new
revenues to finance the Commission's proposed reforms. It is also evident that policy-makers
in the European countries are committed to the notion that all citizens should have access to
health care. 10 In many countries this is taken further, it being made clear that access to and
receipt of health care should depend on need, rather than on ability to pay. The commitment
to the notion of universal and equal access is less evident in the United States. Despite this, it
is apparent from Davis (1993) that much of the debate about reform in the US in the early
1990s was motivated by a concern about growing inequalities in access. Hence the Pepper
Commission’s desire to “guarantee all Americans, no matter what their income, employment
status, or place of residence, access to affordable insurance protection” (Rockefeller 1991
p.2509). A number of countries have also shown a concern to reduce inequalities in health
status. In Britain, governments have set up two working groups to examine health
inequalities in the last twenty years. 11 In the Scandinavian countries too, health inequalities
have been widely discussed in policy documents, as has also been the case in the
Netherlands. 12

9
The OECD (1992) concludes the same in its comparison of the health care systems of Belgium, France,
Germany, the Netherlands, Ireland, Spain and the United Kingdom.

10
Again, the same conclusion has been reached by the OECD (1992) in its comparative study.

11
Cf. the groups chaired by Sir Douglas Black (Townsend and Davidson 1982) and Sir Donald Acheson.

12
Wetenschappelijke Raad voor het Regeringsbeleid (1987)
 9

2.1.4. Ideology and the empirical literature on equity in health care

The empirical work to date on equity in health care reflects the apparently pro-
egalitarian bias amongst policy-makers.

Many studies of equity in the delivery of health care — in both Europe and the United
States — start from the premise tha t health care ought to be distributed according to need
rather than willingness and ability to pay. Andersen (1975) (an American) suggests that an
equitable distribution of health care is one in which the amount of health care received
correlates highly with indicators of need and is independent of variables such as income,
which are irrelevant to need. This definition is adopted by Benham and Benham (1975) in
their study of equity in the delivery of health care in the US before and after the introduction
of Medicare and Medicaid. Rosenzweig and Schultz (1991), in their analysis of the
distribution of medical care to pregnant women in the US, test various hypotheses including
the hypothesis that these services are allocated solely on the basis of medical need. Le Grand
(1978) (a Briton) also starts from the premise that receipt of health care should depend on
need and not on socioeconomic status. In addition to these studies, a large number of studies
have explored the issue of inequalities in health, many of which comes from non-economists.
The concern here is how far health is distributed unequally, especially across socioeconomic
groups such as income groups.

Studies of equity in the finance of health care, by contrast, have tended to take as their
starting point the premise that health care ought to be financed according to ability to pay. 13
An exception to this is a group of studies seeking to establish the extent of net income
redistribution associated with a particular mode of financing health care — i.e. examining the
combined redistributive effect of financing and utilization of public health care. Such studies
have been undertaken in Finland, France, Germany, Italy, the Netherlands, Portugal,
Switzerland and the United Kingdom. 14 It appears that these studies start from a variant of
the egalitarian viewpoint, where reducing inequality in “final” incomes is regarded as the
equity goal. The usefulness of these studies is somewhat unclear, as there is little evidence
that equity objectives in the health field are couched in terms of net income redistribution. 15

2.1.5. Some interim conclusions

On the face of it, then, there appears to be a reasonably clear picture emerging on the
issue of what equity entails in the context of health care. There are the libertarians whose
concern, if they have one, is with ensuring that minimum standards are achieved. And there
are the egalitarians who are concerned to ensure that health care is financed according to
ability to pay and that the delivery of health care is organized in such a way that everyone
enjoys the same access to care and that the care is allocated on the basis of need with a view
to promoting equality of health.

13
Early studies include those of Hurst (1985), who compares the American, British and Canadian financing
systems, and Gottschalk et al. (1989), who compare the American, British and Dutch systems. A number of
recent studies reviewed below have taken this as their starting point.

14
For a thorough study, in English, see Leu and Frey (1985).

15
Insofar as the poor also tend to be the sick, such redistribution is, of course, implied by a commitment to
financing health care according to ability to pay. But it is not income redistribution that is the equity goal being
pursued.
 10

2.2. What is equity? A closer look

Appearances can, however, be deceptive. The conclusions reached in the last

subsection, while useful, leave a number of key questions unanswered. Over the last few
years, economists have helped to answer them. One set of questions relates to definitions.
What exactly is meant by “access” to health care? Is it different from receipt of health care?
If so, how? What is meant by “need”? Another set of questions concerns the compatibility
of the various interpretations of equity. For example, is equalizing access consistent with
seeking to equalize health? A final set of questions concerns justification. What is the
justification for financing health care according to ability to pay? Or equalizing access? Or
allocating care according to need? Or equalizing health? If the last three objectives are
mutually incompatible, what cases can be made for pursuing one rather than the others?

2.2.1. Sorting out definitions

When the term “access” is used in policy statements and in much of the academic
literature (including much of the literature written by economists), it is clear that what is often
meant — indeed perhaps what is usually meant — is “receipt of treatment”. This is well
illustrated by Tobin's (1970) remarks, where, after noting Americans’ apparent concern with
equality of access, suggests that equality in health care might be taken to mean that “the
treatment of an individual depends on his medical condition and symptoms, not on his ability
or willingness to pay” (emphasis added). 16 In a similar vein, although the so-called RAWP
formula used to allocate resources to NHS regions 17 claims to attempt to equalize access, in
practice the focus is firmly on expenditures, or — more precisely — resources (cf. Mooney
and McGuire 1987). Finally, several American and British empirical studies of equity18
claim to examine the extent to which access to health care is linked to need, but actually
interpret access in terms of treatment received.

Le Grand (1982) and Mooney (1983, 1994) argue that access to treatment and receipt
of treatment are not the same thing. The former refers to the opportunities open to people,
while the latter concerns both whether these opportunities exist and if so whether a person
has availed himself of them. But how can access, so conceived, best be defined? One
possibility, suggested by Le Grand (1982) and strongly endorsed by Mooney (1983), is that
access be thought of in terms of the money and time costs that people incur in obtaining
health care. There is an implication of defining access in this way that some find
unsatisfactory, including Le Grand (1991), namely that if two people face the same time and
money costs, they are said to have the same access irrespective of their income. It is, indeed,
far from obvious whether it makes sense to say that someone with virtually no income at all
has the same access to health care as a millionaire simply because they both face the same
time and money prices. An alternative approach, that does not have this implication, is that
suggested by Olson and Rodgers (1991). They suggest defining access as the maximum
attainable level of consumption of medical care, given the individual’s income, and the time
and money prices associated with consuming medical care. In this approach whether
someone has access to a service, and if so how much access they have, depends not only on
the time and money prices they face, but also on their income.

16
Cf. also Andersen (1975).

17
RAWP is the abbreviation of 'Resource Allocation Working Party'.

18
Cf. Aday et al. (1980), Collins and Klein (1980) and Puffer (1986).
 11

Another term whose meaning is far from self-evident is “need”. Often it is equated
with ill- health — people who are relatively ill are held to have a relatively high need for
medical care. This, as several writers have suggested (cf. e.g. Culyer and Wagstaff 1993), is
over-simplistic. Someone can be said to need medical care when ill only if there is medical
care available that can improve their health. Need is an inherently instrumental concept and
one that ought to permit the non- ill to be said to be in need of medical care, in the sense that
their health in the future could be better than it would otherwise be if they received
(preventive) care now. Defining need in terms of one’s current health state is thus
unattractive. An alternative, suggested by Culyer (1976) and Williams (1974, 1978), is to
define need in terms of one’s capacity to benefit from health care. This tackles the
instrumentality of need head on, but is unsatisfactory in that it measures need in terms of the
entity the care will affect (health) rather than in terms of the entity that is needed (health
care). A technological breakthrough, such as keyhole surgery, that leaves a person’s capacity
to benefit (i.e. potential health improvement) the same, but requires far fewer resources
leaves need unchanged according to the capacity-to-benefit definition. Culyer and Wagstaff
(1993) therefore suggest an alternative definition of need as the amount of resources required
to exhaust capacity to benefit. If capacity to benefit is, at the margin, zero, so too is need.
Where marginal capacity to benefit is positive, assessment of need requires an assessment of
the amount of expenditure required to reduce capacity to benefit to zero.

2.2.2. Conflicts between equity principles

Policy- makers in particular talk as if the three most frequently encountered
interpretations of equity in health care delivery — equality of access, allocation according to
need, and equality of health — are all compatible with one another. But are they?

Consider first the compatibility between equality of access and the other two
definitions. As Mooney (1983) emphasizes, access is but one of the factors influencing
receipt of medical care. Other factors include the individual’s perception of the benefits
associated with the treatment and the incentives facing the physician — in short, anything
affecting the demand for health care as opposed to its cost. Two people may thus enjoy the
same access to health care and be in the same degree of “need”, and yet the treatment they
receive may differ. A poorly educated person may, for example, perceive the health benefits
to be lower than his well educated peer, with the result that the poorly educated person does
not contact a physician whilst the well educated person does. Conversely, access may differ
across individuals and yet the amount of medical care received may be the same. It follows
immediately (cf. Culyer and Wagstaff 1993) that equality of access will not necessarily result
in health care being allocated according to need, or in the attainment of — or even promotion
of — equality of health.

The remaining potential conflict to be considered is that between allocation according

to need and equality of health. It is, in fact, often claimed by Marxists and some egalitarians
that allocating medical care according to need will promote equality of health, if not result in
equality of health. Indeed, this is the principal justification offered for adoption of the
principle of allocation according to need (cf. e.g. Miller 1976). Culyer and Wagstaff (1993)
investigate the va lidity of this claim using the three definitions of need discussed in section
2.2.1. They show that allocating medical care according to need will result in differing
degrees of inequality in final health, depending on which of the definitions one adopts, but
that, in general, it will not be the case that allocating health care expenditures according to
need will result in equality of health, or that such an allocation rule will even promote
equality of health.
 12

2.2.3. Justifying equity principles in the delivery of health care

Contrary to what appears to be believed in many policy- making circles, then, one
cannot logically espouse simultaneously equality of access, allocation according to need, and
equality of health. A choice has to be made. Given what we have just said, we can already, it
would seem, dispose of one of the contenders: allocation according to need. The justification
for this — that its adoption will promote equality of health — has already found to be
wanting. This leaves two contenders: equality of access and equality of health.

Mooney et al. (1991, 1992), and Mooney (1994) argue strongly for the adoption of
equality of access. They argue that allocating care according to need or seeking to attain
equality of health would imply a willingness to override consumer preferences and hence to
depart from the premises underlying Paretian welfare economics. 19 It would require, for
example, that individuals’ preferences concerning the consumption of medical care be
ignored. Such a departure from Paretian welfare economics would, in their view, be ethically
unjustified. According to Mooney et al., one should equalize access and then accept
whatever distribution of utilization and health the market throws up.

Let us put on one side for a moment the question of whether equalizing access is
compatible with an acceptance of the value judgements underlying Paretian welfare
economics. A difficulty with the argument of Mooney et al. is that it seems to take it for
granted that departing from the Paretian value judgements is ethically unacceptable —
something that economists and policy- makers would find anathema. This is surprising, since
there is widespread evidence that policy- makers in the health field and the public at large do
not accept the Paretian value judgements in the context of health and medical care. 20 Thus
even if it were the case that a concern with equalizing access to medical care is consistent
with the Paretian value judgements, this wo uld not necessarily be a point in its favour. 21

As it is, it is far from obvious why someone who is wedded to the value judgements
underlying Paretian welfare economics would want to ensure equal access to medical care. If
these value judgements appeal to anyone in this context, they are likely to appeal to someone
of a libertarian disposition. But, as we have noted in section 2.1, part and parcel of such a
viewpoint is a view that access to medical care ought to be seen as part of society’s reward
system with people being able, at the margin at least, to use their income and wealth to get
more or better health care than their fellow citizens if they want. 22 A libertarian might, as we
have noted, be willing to use taxation to ensure some minimum standards are put in place, but
it seems unlikely they would feel compelled to equalize access. On the Le Grand-Mooney
interpretation, that would mean equalizing money and time prices; the latter would probably
entail providing more facilities in low- income areas to ensure that waiting times and
accessibility are similar. Equalizing access in the Olsen-Rodgers sense would require even

19
Cf. Mooney et al. (1991), 1992).

20
The writings of several economists reflect this viewpoint. Williams has been one of the staunchest critics of
the Paretian value judgements in the health context — see e.g. Williams (1976, 1981). These ideas have also
been developed by Culyer — see e.g. Culyer (1976), Williams (1981), Culyer (1989, 1990). See also Rice
(1997, 1998).

21
Cf. Culyer et al. (1992a,1992b).

22
Cf. Donabedian (1971), Maynard and Williams (1984), Williams (1988, 1993).
 13

higher taxes and a substantial narrowing of the income distribution — if not complete
equality of income. This is likely to appeal even less to a libertarian. In short, acceptance of
the Paretian value judgements seems to be inconsistent with a desire to equalize access to
medical care. Or, to put it the other way round, a desire to equalize access suggests a
rejection of the Paretian value judgements. 23

The argument in favour of equalizing access also begs the question: Why medical
care? Why not equalize access to skiing holidays, or swimming pools? To our minds it is
hard to defend according to access and utilization special ethical status without
acknowledging the role of medical care in promoting good health. 24 What makes access to
medical care special is that it influences the utilization of medical care, and this, in turn,
influences health. It is hard to justify being concerned about the distribution of access to
medical care, or about the distribution of medical care, without having a more fundamental
concern about the distribution of the ultimate upstream variable — health. The distributions
of access and utilization matter, but not in their own right; they are merely instruments to
achieving a desired distribution of health in whose distribution our interest ultimately lies.

What is it, then, that makes health special? And why is it that the favoured
distribution of it is an equal distribution? Moral philosophers in the Aristotelian tradition25
suggest that what makes entities such as health special is that they are necessary for an
individual to “flourish” as a human being. Insofar as medical care is necessary to good
health, this provides a strong ethical justification for being concerned with the distribution of
medical care and not with the distribution of, say, skiing holidays. It also provides a
justification for using the word “need” in the context of medical care and in the context of,
say, skiing holidays (Culyer and Wagstaff 1993). But this argument also adds a new angle to
“need”: the extent to which medical care is needed is to be judged not so much in terms of its
impact on health, as reflected in, say, freedom from pain and mobility, but rather more
generally in terms of its ability to enable individuals to flourish. A hip replacement, for
example, aids mobility and enables a person to flourish. But some items of care, such as IVF,
might do little to improve a person’s health narrowly defined and yet might make a big
impact on their ability to flourish as a human being.

Whatever its implications for the interpretation of “need”, the flourishing argument
seems to points towards the pursuit of health equality, or at least as close to it as one can get,
since giving some a better chance to flourish as human beings than others would seem hard to
defend. The work of Sen (1992) lends support to this view. It also adds a twist to the tale.
Sen draws a distinction between functionings and capabilities to function. Functionings
concern what people do or are and are seen as constitutive of person's well-being. Together
they determine the extent to which a person flourishes. Sen offers being in good health —
via, for example, avoiding premature mortality or avoiding morbidity — as an example of a
functioning. Other examples include being well nourished, having self-respect and taking
part in the life of the community. Capabilities to function are the various combinations of
functionings from which a person can choose. For example, a person may have the

23
Cf. Rice (1997 pp.396-397) on this point.

24
Cf. e.g. Daniels (1985).

25
Miller (1976), Daniels (1985), Gillon (1986), Braybrooke (1987), Wiggins (1987), Lockwood (1988)
 14

opportunity to be in good health or to participate in the life of the community. Sen argues for
equality of capabilities.

Sen’s argument raises a couple of issues. His argument, like the flourishing
argument, provides a rationale for talking of medical care “needs”. But is not obvious that
the set of medical care services that might be deemed necessary in order to enable a person to
flourish as a human being would always coincide with the set deemed necessary to provide
the person with whatever set of capabilities is considered appropriate. If functionings are
interpreted narrowly, the two former set might well be considerably larger than the latter, and
the set of medical care services deemed to be “needed” from a functionings perspective might
well end up as a fairly narrow set of basic services. Whether or not this is the case will
depend crucially on how large the set of capabilities is that one wants to define equality on.
The other issue relates to the distinction between functionings and capabilities. Two people
may have the same capabilities — i.e. the same set of functionings from which to choose —
and yet end up with different functionings. One of them may choose not to participate in the
life of the community at all even though she had the opportunity to do so. The other may
choose to eat junk food and be under-nourished even though she had the opportunity to be
well nourished. This has an important implication — one cannot infer that because the level
of one particular functioning is low, the person necessarily had a low level of capability
relative to that functioning. This prompts the question: Is it functionings which should be
distributed equally (the conclusion we were leaning towards above following the discussion
of flourishing) or capabilities? Sen, in fact, comes down firmly in favour of the latter, on the
grounds that people may, quite legitimately, have different objectives and they should be free
to choose whichever they want.

This has an important implication in the present context — we may accept that being
in good health is an important element of a person’s functioning or flourishing, but if people
have the opportunity to achieve this functioning and yet choose not to do so, we cannot infer
automatically that all inequalities in health are inequitable. What is important is not that
everyone achieves the same level of health but rather that everyone has the opportunity to
achieve the same level. This distinction is fine in theory, but working out in practice whether
a person is in poor health or seems set to die at a young age because he had the necessary
capabilities but chose not to avail himself of them, or because he didn’t have them in the first
place, will be hard work. It is no surprise, then, that in the applied work that Sen and others
have undertaken using the capabilities approach, the focus has been firmly on what people
achieve in terms of life expectancy, literacy, and so on, rather than on what they might have
achieved (cf. e.g. UNDP 1993 p.100 ff.).

2.2.4. Justifying the ability to pay principle

The widespread commitment amongst policy- makers in the OECD countries to
financing health care according to ability to pay raises the question: What underlies this
commitment? One motivation that is sometimes advanced for financing health care according
to ability to pay is a desire to promote equity in the delivery of medical care (Culyer 1993).
For example, linking payments for medical care to utilization in the spirit of the benefit
principle would go against the principle of equality of access, if we interpret access along any
of the lines indicated in section 2.2.1 above. Or alternatively, one might believe that linking
payments to the utilization of medical care would deter people from using medical care
facilities and that this would therefore reduce one’s chances of seeing medical care
distributed equitably. Whichever of these justifications for decoupling payments from
utilization one offers, it is important to realize that one is only providing a justification for
 15

doing just that. These arguments provide a justification for rejecting the benefit principle, not
for accepting the ability- to-pay principle. One could, for example, decouple payments from
utilization by financing health care through a poll tax. This would ensure equal access to
health care and would not generate any deterrence effects. But it would not result in health
care being financed according to people’s ability to pay. 26

A justification of the ability-to-pay principle — i.e. a justification for relating

payments for protection against out-of-pocket payments to ability to pay — must, therefore,
come from elsewhere. Another possibility is that it may stem from a concern about the
distribution of income after health care payments have been netted out (Culyer 1993). For
example, a reason for wanting to decouple payments from utilization might stem from a
desire to protect patients from health care payments that would threaten their ability to
purchase other goods and services that have a special ethical status, or that are used to
produce household commodities that have a special ethical status. Housing and education are
examples that spring to mind. Given that utilization of medical care is frequently
concentrated amongst the lowest income groups, a failure to decouple payments from
utilization would result in households at the bottom end of the income distribution suffering
the largest reductions in their disposable income as a result of health care utilization. But this
argument too provides a justification only for decoupling payments from utilization.
Financing health care via a poll tax, or via an insurance scheme with flat-rate premiums,
would ensure that the users of health services would not face a disproportionately high
reduction in their incomes as a result of falling ill. But neither would result in payments for
health care being linked to ability to pay. Rationalizing the widespread commitment to the
ability-to-pay principle in health care financing appears, therefore, to be harder than might at
first be imagined. 27

2.2.5. Where does this leave equity?

The recent debate amongst economists on the nature of equity in the health field has
raised but not resolved a number of questions left unanswered by the earlier discussions in
the literature. Some useful things have been written about the problems involved in defining
terms such as “access” and “need”, though it is not obvious that any of the definitions
proposed commands widespread — let alone universal — support amongst economists. For
example, as Le Grand (1991) notes, the general thrust of the argument of Olsen and Rodgers
leads one to wonder whether equalizing access to health care should not logically lead to
equalizing entire budget sets. Yet this makes a mockery of the idea that one can equalize
access to some commodities but not to others. The recent debate has also explored the
compatibility of the various interpretations of equity, though here too it is most unlikely that
the final word has been said. For example, even if it is the case that allocating care according
to need does not necessarily result in equality of health, it may well be that, given that
patients present themselves for treatment sequentially, allocating care on the basis of need
(suitably defined) might be the best that providers of health care can do to reduce health
inequalities. The recent debate has generated a somewhat heated discussion about which

26
Of course, if linking utilization to payments does not deter use, the case for the ability-to-pay principle
becomes even weaker. However, empirical evidence — e.g. from the RAND Health Insurance Experiment in
the US — suggests that cost-sharing does deter usage (cf. e.g. Newhouse et al. 1993 pp.338-40).

27
Another issue that merits discussion is: Why do policy-makers make such a point about wanting payments
for health care to be linked to ability to pay rather than looking more broadly on the impact on the income
distribution of the financing of a range of services?
 16

interpretation of equity in health care delivery has the greatest appeal. The debate has helped
to clarify the issues but has certainly not led to any meeting of minds. There are those who
firmly believe in equality of access, and those who champion equality of health. The
allocation-according-to- need rule has rather fewer supporters, but if it is true that allocating
care according to need might give providers the best chance of helping reducing health
inequalities, then in practice it might not be such a poor rule of thumb to adopt in the
allocation of health care. There has been less discussion of the ethics of the ability-to-pay
principle, which is somewhat surprising: one can easily mount a case for divorcing payments
from utilization, but it does not logically follow that payments ought to be related to ability to
pay.

Overall, then, despite the recent literature, there are still a number of issues relating to
the meaning of “equity” that are unresolved. Moreover, although in some respects the recent
literature has helped to place the empirical work on firmer conceptual and theoretical
foundations, this is not true of all the recent literature, some of which has left the conceptual
foundations of some of the empirical work looking somewhat shaky. It is to the empirical
work that we now turn.

3. Equity in health care finance

The empirical literature to date on equity in health care financing has focused on the
issue of how far health care is financed according to ability to pay. This can be interpreted in
terms of both vertical equity (in this case, persons or families of unequal ability to pay
making appropriately dissimilar payments for health care) and horizontal equity (persons or
families of the same ability to pay making the same contribution). 28 Most of the empirical
work to date has focused on the former; more specifically, it has focused on the issue of
progressivity. 29 This work, which aims to measure the progressivity of the various financing
sources in different countries, is surveyed in section 3.2. Recently, some work has been done
on horizontal equity in health care finance in the context of a broader study of the income
redistribution associated with health care financing arrangements. This work is reviewed in
section 3.3. This section starts, however, with a discussion of health care financing
arrangements and their variation across countries.

28
The work reviewed here interprets this in terms of the link between payments in a specific year and
payments in the same year. It might be argued that taking a lifetime perspective is more appropriate. For some
purposes this may be true, but it is not at all obvious that this is always true. One study that takes a lifetime
perspective is that of Propper (1995). To anticipate the conclusions of the empirical work reviewed later in the
paper, she concludes: “Results from LIFEMOD indicate that the shift from cross-sectional to a lifetime analysis
results in more equal distributions of income and morbidity, but the distributions of health care finance relative
to income, and of health care receipt relative to need, are relatively unchanged by this move in perspective. The
reason is these latter distributions are functions of two distributions, both of which are flatter across the lifetime
than in the cross-section.” (p.202).

29
The progressivity of a health care financing system refers to the extent to which payments for health care rise
or fall as a proportion of a person's income as his or her income rises. A progressive system is one in which
health care payments rise as a proportion of income as income rises, whilst a regressive system is one in which
payments fall as a proportion of income as income rises. A proportional system is one in which health care
payments account for the same proportion of income for everyone, irrespective of their income.
 17

3.1. Health care financing typologies

Health care is typically financed from a mixture of four sources — taxes30 , social
insurance, private insurance and out-of-pocket payments. Social insurance is like income tax
in that it is compulsory; it is therefore unlike private insurance, which is usually voluntary.
Social insurance is levied on earnings; this distinguishes it from income tax, which is
assessed on the basis of taxable income, and from private insurance, which in some countries
is sometimes assessed on the basis of risk factors, such as age, smoking behaviour, etc.

The roles that each of the four financing sources plays varies across countries. In the
context of taxation, the principal source of variation is in the degree of earmarking involved.
In some countries, such as the UK, the taxes that go towards funding health care are simply
general tax revenues. In others, such as the Scandinavian countries, the taxes that finance
health care are largely local income taxes whose purpose is almost entirely to raise revenues
for health care. The degree of earmarking involved in social insurance also varies from
country to country. In some countries, the social insurance contributions that go to fund
health care are general contributions. In many countries, however, social insurance is
earmarked. This is true of the countries with sickness funds, such as Germany and the
Netherlands, but also countries such as Italy, which used to have a system of sickness funds,
and countries like Ireland, which did not. It is also true of the US in respect of Medicare Part
A. The role of private insurance also varies from one country to the next. In some cases (e.g.
Ireland, Switzerland and the US) it provides cover for sections of the population without any
public cover. 31 In the case of Germany, it provides cover to persons who have chosen not to
have public cover — i.e. who have opted out of the public sickness fund scheme. In
countries, such as the Netherlands, it provides cover to sections of the population with less-
than-comprehensive public cover. In some countries (e.g. Denmark, France, and again
Ireland) it provides cover against copayments levied by the public sector. In some countries,
such as Ireland (once again), Italy, Portugal, Spain and the UK, private insurance provides
double cover to those who have comprehensive public cover. As is clear from the examples
given, the private insurance industry sometimes fulfills more than one of these functions at a
time. Finally, the role of out-of-pocket payments varies across countries, sometimes taking
the form of copayments (e.g. Denmark and the UK), there being large differences across
countries in the relative importance of copayments, extra billing and direct payments for
services.

Table 1 shows the financing mixes in thirteen OECD countries for a recent year. The
clustering of countries is best seen via the ‘health care financing triangle’ (Fig. 1). At the
bottom right corner are the social insurance countries: France, Germany and the Netherlands.
Countries such as Denmark, Finland and Sweden belong to the tax- financed cluster of
countries in the top left corner, while countries such as Switzerland and the US lie in the
predominantly private cluster at the bottom left corner. Some countries, such as Italy, are a
half- way house between a social insurance system and a tax- financed system. Fig. 1 does
not, of course, show the mix between private insurance and out-of-pocket payments. In most
countries, the majority of private health expenditures are out-of-pocket, this being especially
true of the Nordic countries and the southern European countries, where private insurance is

30
It is useful to further distinguish the mix of direct and indirect taxes used in taxation policy. Direct taxes are
basically taxes levied on income , whereas indirect taxes are taxes levied on the purchase of goods and services
(e.g. value-added tax in Europe, sales taxes or excise taxes).

31
In the Swiss case, this is almost the entire population.
 18

still relatively uncommon. The Netherlands, Switzerland and the US stand out as the three
countries where the majority of private expenditures are on private insurance premiums rather
than on out-of-pocket payments. Germany, Ireland and the UK come close behind in terms of
the relative importance of private insurance vis-à-vis out-of-pocket payments.

3.2. Vertical equity and progressivity of health care finance

Early work on progressivity in the finance of health care was based on tabulations of
health care payments by income group. In his comparison of Britain, Canada and the United
States, Hurst (1985), for example, presents tables indicating average payments for health care
by income group for each country. Payments are, however, presented in absolute terms
rather than as a proportion of income, so that it is impossible to assess from the tables the
degree of progressivity of each country's financing system. 32 Cantor's (1988) results for the
United States — reported in fig 18.13 of Davis (1993) — are easier to interpret. They show
that the proportion of income spent on health care in the United States falls continuously as
one moves up the income distribution, implying that the American financing system is
regressive. An implication of a progressive financing system is that the share of the total
financing burden borne by the lower income groups is less than their share of society’s
income, whilst the share borne by the top income groups exceeds their share of society’s
income. Comparing the share of income received by each income decile with its share of
health care payments thus provides an alternative way of assessing progressivity. This is the
approach adopted by Gottschalk et al. (1989) in their comparison of the health care financing
systems of the Netherlands, the UK and the US. Their results for the US show that the
American system is regressive: thus, for example, the bottom income decile in 1981 received
1.4% of (post-tax) income but made 3.9% of health care payments.

Tabulations of the proportion of income spent on health care and of the shares of
income and health care payments received and borne by different income groups do not
enable one to answer the question of how much more (or less) progressive one system (or
source of finance) is than another. At best they can indicate whether a system is progressive,
regressive or proportional. A more illuminating approach to assessing the progressivity of
health care financing systems is to employ progressivity indices (Wagstaff et al. 1989). A
variety of such indices have been proposed in the literature on tax progressivity (Lambert
1993). The work to date seeking to measure the progressivity of health care financing has
tended to employ just one of these, namely that of Kakwani (1977). 33

3.2.1. Kakwani’s progressivity index

Kakwani’s index is based on the extent to which a tax — or, more generally, source of
finance — departs from proportionality. It can be illustrated using Fig. 2. The curve labelled
Lpre(p) is the Lorenz curve for pre-payment income. The second curve — labelled Lpay(p) —
is the payment concentration curve, which plots the cumulative proportion of the population
(ranked according to pre-payment income as with Lpre(p)) against the cumulative proportion
of health care payments. If payments are levied strictly in proportion to income, Lpay(p) and
Lpre(p) coincide. If payments as a proportion of income rise with income (so that the source

32
In the text Hurst does remark that in Britain "household income rises about 4½ times between the second and
ninth deciles whereas household tax contributions rose about seven-fold over this range" (Hurst 1985 p.117).

33
Wagstaff et al. (1992) also use Suits' (1977) index.
 19

of finance is progressive), Lpay(p) lies below Lpre(p). The opposite is true if payments are
regressive. The degree of progressivity can therefore be assessed by looking at the size of the
area between Lpre(p) and Lpay(p). If Gpre is the Gini coefficient for pre-payment income, and
Cpay is the concentration index for payments 34 , Kakwani’s index of progressivity, π K, is
defined as

(1) π K = Cpay - Gpre,

which is twice the area between Lpre(p) and Lpay(p). If the system is progressive, as in Fig. 2,
π K is positive. If, by contrast, the system is regressive, so that Lpay(p) lies above Lpre(p), π K is
negative. The value of π K ranges from -(1+Gpre) (the entire tax burden is concentrated in the
hands on the poorest person and hence Cpay=-1) to 1-Gpre (the tax burden is concentrated in
the hands of the richest person and hence Cpay=1) (Lambert 1993 p.178).

A useful property of Kakwani’s index is that the overall index for a financing system
consisting of two or more sources of finance is a weighted average of the indices for the
individual sources, where the weights are the proportions of each source in total revenue (cf.
e.g. Suits 1977). Thus the progressivity characteristics of a health care financing system
depend on the proportion of total revenues raised from each source and the degree of
progressivity of each of these sources. Another feature of the index is worth mentioning. It is
perfectly possible for a source of finance (or a tax) to be progressive (or regressive) at low
income levels but regressive (or progressive) at high income levels. Suppose, for example,
that pensioners are exempt from social insurance contributions and tend to be located in the
lower income groups. Suppose too that contributions are proportional (assume for simplicity
to income) but only up to a ceiling. The exemption of pensioners makes the system
progressive at low income levels (the bottom income groups will tend to pay a relatively
small fraction of their income towards health care) but regressive at high income levels (as a
person’s income rises above the ceiling, the proportion of their income they pay towards
health will fall). The result is that Lpay(p)will cross Lpre(p) from below. Calculating the
Kakwani index as the difference between Cpay and Gpre in such cases implies that the
regressivity at high incomes offsets — at least partially — the progressivity at low incomes.
The result could, of course, be a zero value for the progressivity index.

3.2.2. Empirical work on progressivity and health care finance

Two recent papers (Wagstaff et al. 1992, 1998) present estimates of progressivity by
source of finance for a number of OECD countries. 35 Both aim to apply a common
methodology and common definitions of income and health care payments to micro- level
data to attribute payments at the household level. The second paper is more successful than
the first in achieving comparable definitions and the summary here is of these results. The
progressivity indices for all financing sources are shown in Table 2 for all countries for
selected years. Indices for total and subtotal payments were calculated using the revenue
shares in Table 1 as weights. 36

34
The Gini coefficient is twice the area between the Lorenz curve and the line of equality (the diagonal), whilst
the concentration index is analogously defined but with reference to the concentration curve.

35
See the country reports in Van Doorslaer et al. (1993), for detailed results for specific countries.

36
Inevitably incidence assumptions have to be made in this analysis. In both of the aforementioned papers, the
same incidence assumptions have been employed in all countries. There are arguments for and against doing
 20

The direct taxes used to finance health care are progressive in all countries. They are
especially progressive in the UK, Ireland and Germany, but far less progressive in the two
Scandinavian countries (Denmark and Sweden), reflecting the reliance in health care
financing there on the local income tax which is close to proportional. Indirect taxes are
regressive in all thirteen countries, but especially regressive in Spain and the UK. General
taxation, computed as a weighted average of direct and indirect, is progressive in all
countries. Interestingly, the general taxes used to finance health care appear to be especially
progressive in the two private financing countries, Switzerland and the US, and also, albeit to
a lesser extent, in Germany.

Social insurance emerges as progressive in all countries except the Netherlands and
Germany, two countries which exclude the higher in come groups from the compulsory
sickness fund insurance. In contrast to Dutch and German social insurance schemes, the
French scheme (the Régime Générale) is almost universal and does not exclude high earners;
furthermore, pensioners and the unemployed, who are more likely to be in the bottom income
groups, pay much lower contribution rates. Also in countries such as Ireland, Italy, Spain, and
the UK, where it raises a not insignificant proportion of revenues, social insurance emerges as
a progressive source of revenue. This is probably due to exemptions amongst the lower
income groups and the fact that contributions are assessed on the individual’s own earnings
rather than on his or her household’s equivalent income.

For the interpretation of the progressivity indices for private health insurance it is
important to bear in mind the cover that private insurance buys in each country. Broadly-
speaking, countries belong to one of three groups, the exception being Ireland, and to a lesser
extent Switzerland and the US. The first comprises countries where private insurance buys
cover against public sector copayments and includes Denmark and France. It is progressive in
Denmark but regressive in France. This reflects the fact that private insurance against public
sector copayments is more widespread among the lower income groups in France than it is in
Denmark, which, in turn, probably reflects in part the higher copayments in France. The
second group of countries comprises those where private insurance is mostly taken out as
supplementary cover (mostly ‘double’ cover) to that provided by the state and includes Italy,
Portugal, Spain and the UK. Private insurance of this type emerges as progressive here,
except in Spain, suggesting that in Italy, Portugal and the UK, this insurance is a ‘luxury’
good. The third group comprises countries where, for the individuals concerned, private
insurance — albeit often subsidized — is (or is nearly) the sole source of cover. This group
includes Germany, the Netherlands, Switzerland and the US. Switzerland is unusual in this
group in that private insurance is bought by almost everyone. In the other countries, only
persons with restricted or non-existent public cover generally take out private insurance. 37 In
the US, persons purchasing private insurance as their sole source of cover make up the bulk
of the population, whilst in the Netherlands they comprised (in 1992) 36% of the population.
Where it is relied upon by the majority of the population for cover, as in Switzerland and the
US, private insurance is highly regressive. The positive Dutch and German indices stem
from the fact that private insurance in these countries is almost exclusively bought by the

this, of course, Wherever possible, personal income tax and property taxes have been assumed to be borne by
the taxpayers concerned, corporate income taxes by shareholders, sales and excise taxes by consumers, and
employee and employer social insurance contributions by employees. Private insurance premiums, whether
individual or group, have been assumed to be borne by the individual concerned. There are arguments for and
against these assumptions individually and collectively.

37
In the US a small proportion of expenditures on private insurance is accounted for by persons with public
cover purchasing supplementary insurance.
 21

higher income groups. Ireland, and to some degree Switzerland and the US, span two or more
of these groupings. In these three countries, private insurance emerges as regressive. In
Ireland this reflects the fact that private insurance premium payments are computed net of tax
relief, which benefits the better-off households most. The surprisingly small value — in
absolute terms — of the Kakwani index for private insurance for the US is attributable to
coverage gaps and under- insurance amongst the lower income groups (cf. Rasell and Tang
1994).

Out-of-pocket payments are a regressive means of raising revenue. They are not
particularly regressive in Ireland and the Netherlands, reflecting the incomplete cover of the
better-off privately insured in these countries. The very high regressiveness of out-of-pocket
payments in Switzerland and the US reflects the fact that persons on low incomes in these
countries are liable in full for any out-of-pocket payments, whereas their counterparts in
many European countries would be exempt from charges, either because of their low income
or because of other factors (e.g. chronic ill- health, pensioner status, etc.) that are often
correlated with income.

The broad conclusions from this study concerning the overall progressivity of health
care financing systems confirm the earlier findings of Wagstaff et al. (1992). Health care
finance in two of the three social insurance countries (Germany and the Netherlands) is
regressive, whilst it is progressive in the third (France). In the tax- financed systems, by
contrast, health care finance typically emerges as proportional or mildly progressive. The
exception to this is Portugal, where the system overall emerges as regressive — this reflects
the high share of out-of-pocket payments in that country in 1990. Finally, in the two
predominantly privately financed systems (Switzerland and the US), health care finance
emerges as regressive.

In addition to the cross-country comparisons and cross-source comparisons reported

above, work has also been undertaken on the progressivity consequences of country-specific
trends or simulated proposed health reforms. Several studies 38 have analysed the
progressivity of the US health care financing system and some of these have considered the
progressivity consequences of alternative reform packages. These studies all confirm that the
US health care financing system is highly regressive 39 and that out-of-pocket payments are
especially regressive. Rasell and Tang (1994) consider several proposals for reform that aim
at universal coverage. They find that all the proposals would make the system less regressive,
but that those relying more on taxes would do so to a greater extent than those relying mainly
on employer-paid insurance premiums. Similar findings are reported by Holahan and
Zedlewski (1992).

Janssen et al. (1994) assess the progressivity implications of the ill- fated Dekker
health insurance reform. The net effects of this scheme are unclear a priori. On the one
hand, the extension of the compulsory basic insurance with income-related payments might
be expected to increase the relative contribution of the higher income groups. But, on the
other hand, the introduction of flat-rate premiums (these were to cover the gap between the
cost of insurance and the value of the voucher received from the State) is clearly likely to
work in the opposite direction. In the event, Janssen et al. find that the overall regressiveness

38
See, for example, Rasell et al. (1994), Rasell and Tang (1994) and Holahan and Zedlewski (1992).

39
Rasell and Tang (1994) report a Kakwani index of -0.114 for 1992.
 22

of the Dutch financing system would have been reduced by the implementation of the Dekker
Plan, but the system overall would still have been regressive.

Lairson et al. (1995) analyse changes in the progressivity of the Australian health
insurance system. This provides an interesting mix of public and private finance. After the
inception of the universal public-coverage Medicare system in 1984, the overall financing
burden was found to be strongly progressive (π K=0.10), mainly as a result of progressive
taxation and Medicare levies. Due to the expansion of private insurance and direct payments
over the 1980s, progressivity was reduced and the overall financing was roughly proportional
in 1989.

3.3. Horizontal equity and income redistribution

The issue of horizontal equity in the finance of health care has received relatively
little attention. Horizontal equity can be defined in terms of the extent to which those of equal
ability to pay actually end up making equal payments, regardless of, for example, gender,
marital status, trade union membership, place of residence, etc. Horizontal inequity might
arise for a number of reasons. In private insurance, high-risk groups (e.g. the elderly, those
with pre-existing conditions, smokers, etc.) often pay higher premiums than lower-risk
persons of the same ability to pay. In the direct taxation part of the system, horizontal
inequity can arise through anomalies in the personal income tax system (e.g. tax reliefs on
mortgage interest payments, or on private health insurance premiums). In a social insurance
system, different groups may be eligible for different health insurance schemes and hence
may face different contribution schedules. In some cases the groups may be defined in terms
of earnings or income, but it may be that this measure does not properly reflect the
individual’s or household’s ability to pay, in which case households with similar abilities to
pay may end up paying quite different amounts for similar levels of cover. Rutten and
Janssen (1987), for example, find that in the Netherlands, because of the diversity of
arrangements for different categories of person, single persons on an income of Dfl 17000 in
1981 could have ended up paying as little as 2% of their income towards health care if they
were over 65 but as much as 13% if they were under 65 but self-employed. 40 Horizontal
differences of this kind, especially between the privately and publicly insured, have been a
major factor underlying the pressure to reform health care financing arrangements in
countries such as Germany and the Netherlands.

3.3.1. Measuring horizontal equity

A number of measures of horizontal inequity have been developed in the literature on
public finance and income distribution, but with the exception of that proposed by Aronson et
al. (1994), none is entirely satisfactory. The most popular is the measure proposed by
Atkinson (1980), Plotnick (1981) and King (1983), which involves assessing the number of
rerankings in the move from the pre-tax income distribution to the post-tax distribution. As
Aronson et al. emphasize, however, horizontal inequity refers to the (unequal) treatment of
equals, whilst reranking refers to the treatment of unequals.

The approach suggested by Aronson et al. enables — at least in principle — a clear

distinction to be made between reranking and horizontal inequity. The latter is measured in

40
See Von der Schulenburg (1994) for variations in contribution rates between and within the sickness funds in
Germany.
 23

terms of the variation in tax (or health care payments) amongst groups of pre-tax (or pre-
payment) equals. If there is no variation, there is no horizontal inequity. The variation in
each group of pre-tax equals is measured using the Gini coefficient and the n an overall index
of horizontal inequity is constructed by taking a weighted sum of the Gini coefficients for
each group of pre-tax equals. The weights chosen are the products of the square of the
population share of the group of pre-tax equals and the post-tax income share of these
households. The reason for choosing these weights is that the degree of horizontal inequity
can then be measured in terms of its impact on the distribution of income. This effect can
then be compared to the impact on the dis tribution of income attributable to the progressivity
of and the reranking associated with the tax in question.

More formally, the redistributive impact associated with a tax can be measured by the
reduction in the Gini coefficient caused by the tax. Thus

(2) RE ≡ GX − G X − T ,

where GX and GX-T are the pre-tax and post-tax Gini coefficients respectively. In a world
where everyone faces the same tax schedule, irrespective of their non- income characteristics
(e.g. whether or not they are married, whe ther or not they own a home, etc.), we have

 g 
(3) RE =   K T ,
1− g 

where g is the share of income taken in tax and KT is Kakwani (1977) index of tax
progressivity. Eqn (3) clarifies the role of progressivity in the redistribution of income: a
progressive health care finance system will result in there being less inequality in income
after payments for health care have been made, and in this sense the payments will have a
pro-poor redistributive effect. As is clear from eqn (3), however, the extent of redistributive
effect depends not only the degree of progressivity of the tax, but also on its importance, in
terms of the average share of income taken up by the tax. So, countries’ health care systems
may have similar degrees of progressivity and yet be associated with quite different levels of
income redistribution, simply because in one country health care payments absorb a larger
share of income. The analysis in this section, in addition to shedding light on the issue of
horizontal equity, sheds light on this important issue too.

Suppose, in contrast to what was assumed above, that people do not face the same tax
schedule and that the tax liability of household h is equal to

(4) T h = T ( x) + εh ( x) ,

where T(x) is the common amount of tax paid by all households with income x and ε h (x) is
household h's deviation from this amount. It is assumed that these deviations average to zero
across all households — as Aronson et al. put it, “on average, at each x, the tax system gets it
right”. The presence of ε h (x) in eqn (4) means that households with the same income x can
end up paying different amounts of tax. This is the classical notion of horizontal inequity.
Only if ε h (x) is zero for all h and x, is the tax system horizontally equitable. Furthermore, the
presence of ε h (x) in eqn (4) may result in households moving up or down the income
distribution after they have paid their taxes. There may, in other words, be reranking as one
moves from the pre-tax income distribution to the post-tax distribution.
 24

These two possibilities are illustrated in Figure 3, which shows the relationship
between post-tax income, x-Th , and pre-tax income, x, for a progressive tax. The 'fans' show
the effect of differential tax treatment — for example, households starting off with pre-tax
income x 3 will, on average, end up paying x 3 -T(x 3 ) in tax, but there will be variation about this
amount reflecting the presence of ε h (x) in eqn (4). The existence of fans thus indicates the
presence of horizontal inequity. If the fans overlap (as they do in the case of households
starting out with pre-tax incomes of x 1 and x 2 ), then reranking occurs — the shaded region of
the fans indicate that the household that was richer before tax has become the poorer after
tax.

The presence of differential tax treatment means that eqn (3) is no longer valid.
Aronson et al. show41 that it can be replaced by

 g 
(5) RE =   K T − ∑ α x GF ( x ) − [G X − T − C X −T ] ,
1− g 

where KT is the Kakwani index computed on the assumption that everyone faces the same tax
schedule, α X is the product of the population share squared and the post-tax income share of
households with income x, GF(x) is the Gini coefficient for post-tax income for households
with pre-tax income x and CX-T is the post-tax concentration index obtained by ranking
households first according to their pre-tax income and then within each group of pre-tax
equals by their post-tax income. The first term, which Aronson et al. call V, measures the
inequality reduction that would have obtained if there had been no differential tax treatment.
The second term, which they call H, measures the extent of classical horizontal inequity —
i.e. the unequal treatment of equals — by taking a weighted sum of the Gini coefficients GF(x)
of the fans. These Gini coefficients are zero only if the ε h (x) are zero for all x and h. The
third term, which Aronson et al. call R, measures the extent of reranking in the move from the
pre-tax distribution to the post-tax distribution by comparing the post-tax Gini coefficient
with the post-tax concentration coefficient. 42 If there is no reranking, R is zero.

The decomposition in eqn (5) helps — at least on the face of it — to clarify the
distinction between horizontal inequity and reranking. As Figure 3 makes clear, horizontal
inequity (the existence of fans) does not necessarily give rise to reranking (the existence of
fan overlap). Furthermore, if reranking is to be deemed inequitable, then it must be on the
basis of vertical equity considerations not horizontal equity considerations. This much is
clear. Things get less clear when one considers the possible sources of reranking. In Figure
3 the only possible source of reranking is the existence of differential treatment — i.e. the
fans. Thus an occurrence which offends the principle of vertical equity — if it offends any

41
Cf. also Lambert and Aronson (1993), p.1223). As Lerman and Yitzhaki (1995) make clear, there is an index
number problem in decompositions such as eqn (5). Implicitly, KT weights the income changes in the move
from the pre-tax to the post-tax distributions by the pre-tax rankings. An alternative way of measuring
progressivity, developed by Lerman and Yitzhaki, would involve weighting the income changes by the post-tax
rankings. Using this approach would give rise to a different (though similar) decomposition from that in eqn
(5). Which is preferable is unclear. It might be argued, on the one hand, that the pre-tax ranking (and hence the
AJL decomposition) is inappropriate since one of the functions of the tax in question might be to generate a
more equitable ranking of taxpayers than that arising before taxes. But, on the other hand, weighting by the
post-tax ranking is open to the objection that one then simply assumes that the post-tax ranking is actually the
one that was intended to emerge.

42
This is similar to the measure of reranking proposed by Atkinson (1980) and Plotnick (1981).
 25

equity principle — can arise solely through the existence of horizontal inequity. As Aronson
et al. point out, there is, however, another possible source of reranking — a marginal tax rate
in excess of 100%, which may occur over limited ranges of actual tax schedules. 43 This
could cause reranking even if everyone faces the same tax schedule.

The terms H and R are always non-negative, so differential treatment always reduces
the vertical effect. Empirically, Aronson et al. show that H increases and R decreases when
the income range used to define ‘equals’ is expanded, but the total differential treatment
(H+R) remains fairly constant. Thus, whilst conceptually distinct, H and R seem likely to be
difficult to disentangle in practice. Expressing V as a percentage of RE facilitates a
comparison of the relative importance of vertical effects versus horizontal inequity and
reranking.

3.3.2. Empirical work on horizontal equity

Wagstaff and Van Doorslaer (1997) have illustrated the application of the AJL
methods to health care financing by decomposing the pro-rich redistributive effect of the
Dutch health care financing system. They find that most of this effect is due to the duality of
the system’s insurance payments, with income-related payments mainly for the lower half of
the income distribution and non- income-related premiums for the higher income groups.
They show, however, that some of the redistributive effect is due to horizontal inequity and
reranking, and that redistributive effect would have been 14% lower than it was in 1987 if all
households at each level of (equivalent) income had made exactly the same (equivalent)
health care payments. They also illustrate — by means of a microsimulation exercise — the
effects of changing the contribution rules of one of the social insurance schemes on each of
the components of the redistributive effect. The abolition of exemptions and contribution
ceilings is shown to reduce the gap between the actual and potential redistributive effect.

Van Doorslaer et al. (1998) provide a comparison of the income redistribution

consequences of the health care financing mixes adopted in twelve OECD countries using the
methods described in section 3.3.1. Figure 4 illustrates how the various components of
redistributive effect are related for the six countries for just one source: social insurance
payments. It shows RE as well as V as a function of g and KT. At any given level of funding
(i.e. g), the vertical effect V is proportional to progressivity (or regressiveness). But similarly,
at any given level of progressivity, V can be seen to increase with g. For example, social
insurance payments are only slightly more progressive in France than in Finland, but generate
a much larger redistributive effect in France because there they represent about 12% of gross
income whereas in Finland they are less than 2% of gross income. The graph also shows that
the presence of differential treatment of equals (H+R) can substantially reduce the vertical
redistributive effect. This is not visible for the four countries where social insurance
payments only represent a very small share of income, but in the two countries with
important shares of social insurance financing RE is well below V. In France, H+R lowers the
positive redistributive effect, and in Germany, it increases the negative redistribution.
Horizontal inequity and reranking in these two countries are mainly generated by the
differences in sickness fund premiums between households with similar gross incomes due to
premium exemptions or reductions (e.g. among elderly in France) or variation in contribution

43
This would give rise to a downward-sloping section of the relationship between x and x-T(x) and may result
in a household to the left of the peak swapping places with a household to the right of the peak in the move from
the pre-tax distribution to the post-tax distribution.
 26

rates (e.g. among Krankenkassen in Germany). In other words: in the absence of this
differential treatment of households with equal incomes, the Gini reduction would have been
a lot higher in France and the Gini increase somewhat lower in Germany.

Van Doorslaer et al. (1998) also find that unequal treatment of unequals (the vertical
effect V) is far more important in terms of redistributive effect than differential treatment.
There are, however, differences across sources, as can be seen from Table 3 which shows
V100, the vertical redistributive effect V expressed as a percentage of the total RE. In gene ral,
and not surprisingly, large discrepancies between V and RE occur in the voluntary private
payments, where there is little or no relationship between payment and ability to pay.
Smaller discrepancies occur in public payments, where, at least in the cases of direct taxes
and social insurance, there is a link between payments and ability to pay. Within, public
sources, there is, however, some variation. The discrepancy between V and RE is very small
in the case of taxation, despite the well-known anomalies in personal income tax systems
(such as tax relief on mortgage interest payments and health insurance) and the inevitable
differences at a given income level in household spending levels and patterns. By contrast,
social insurance payments show a non-negligible degree of differential treatment, mainly due
to varying contribution rates and exemptions on the basis of criteria other than income. There
are also variations across countries. Surprisingly, perhaps, the discrepancy between RE and V
is fairly small in the case of the direct taxes used to finance health care in the Nordic
countries. By contrast, and less surprisingly, the discrepancy is fairly high in the case of the
social insurance scheme operating in France and (to a lesser extent) in Germany.

4. Equity in health care utilization

The interest in the work reported in this section is whether, on average, persons in
equal need of treatment receive similar treatment, regardless of their income. The issue of
vertical equity — whether persons in different degrees of need are treated in appropriately
different ways — has hardly been the subject of any research by economists. 44

4.1. Regression-based tests of inequity in health care utilization

4.1.1. Testing for inequity

Suppose there are two income groups, ‘ric h’ and ‘poor’ and we measure ‘need’ by the
presence or absence of illness, so that we have two illness categories, ‘ill’ and ‘not ill’. Let
mi be the medical expenditure received by person i, and hi be a dummy taking a value of 1 if
person i is ill (and therefore in need of medical care) and zero otherwise. Suppose we
estimate the following model:

α r + β r hi + u ri if rich
(6) mi = 
α p + β p hi + u pi if poor

where the α’s and β’s are coefficients and the u’s error terms. If, on average, people who are
not ill are treated the same, irrespective of whether they are rich or poor, we would find
α r=α p . If, on average, people who are ill are treated alike, whether they be rich or poor, then

44
See, however, Cullis and West (1979 pp. 237-39) and Mooney (1996).
 27

we would find α r+β r=αp +βp . If equity obtains amongst both need categories, then obviously
we have both α r=α p and β r=βp . One could estimate the parameters of interest either by
running two separate regressions — one for the rich group, one for the poor — or by running
a single equation with the appropriate interactions:

(7) mi = π 0 + π 1 y i + π 2 hi + π 3 y i hi + u i ,

where yi is a dummy taking a value of one if person i is rich and zero otherwise. The
relationships between the parameters in eqn (6) and those in eqn (7) are simply: π 0 =αp ,
π1 =α r-αp , π2 =βp , and π3 =β r-β p . Thus Wagstaff et al. (1991b) propose testing for inequity by
testing the joint hypothesis

(8) H0 : α r=α p and β r=βp ,

or alternatively by testing the null hypothesis 45

(9) H0 : π 1 =0 and π 3 =0.

It is important to note that estimating eqn (7) without the interaction between yi and hi — as is
often done in the literature — is tantamount to assuming that that the extra care received by
the ill is the same, irrespective of whether they are rich or poor. The general approach
outlined here can obviously be extended to the case where hi is a vector of need indicators
(not even necessarily dummy variables).

There is, of course, a parallel here with the literature on discrimination in the labour
market. There the aim is to detect whether workers of equal productivity are paid the same,
irrespective of whether they are male or female, or Black or White. Empirical analysis of this
issue proceeds by estimating a model of the type in eqn (6), in which mi is hourly wages (or
the log thereof), hi is a productivity proxy (or vector of proxies) and the sample is split by
gender or by race. It is concluded that discrimination is absent if the intercepts and slopes are
the same across the two groups and to exist if they differ. Discrimination would be measured
either as (α r-α p )+hp (β r-βp ) or as (α r-αp )+hr(β r-βp ), depending on which group was used as the
reference group. 46

One issue that merits discussion is the appropriate specification of eqn (6). As
specified above, the model includes only variables that are proxies for need. Ought one to
include factors other than need that may influence medical care utilization? And if one does,
what then is the appropriate test of inequity? There is a good deal of confusion in the
literature on both points.

The first of these points has been the subject of some debate in the discrimination
literature. 47 The view there is that one should include in one’s wage equation only those
factors that are legitimate sources of variation in average hourly wages between men and

45
Essentially the same test is proposed by Birch et al. (1993) but they propose to use it not only for income-
related inequity but also for inequity arising with respect to region of residence, education and even the level of
community contact.

46
Cf. e.g. Joshi and Paci (1998)

47
Cf. Joshi and Paci (1998) and Gill (1994)
 28

women. All agree that the core set of variables to be included are those capturing human
capital, because these capture productivity and differences in productivity are a legitimate
source of wage differences. This is not to say that there are not influences on wages other
than human capital. Rather that these are probably not legitimate reasons for men and
women having, on average, different hourly wages. By omitting such factors from one’s
wage equation, one forces their effects to get channelled into different intercepts or different
slope coefficients on the productivity proxies. Including these other factors would result in
an unwarranted reduction in the estimate of discrimination, since one would be taking out of
one’s estimate some differences that should not be taken out because they are not legitimate
sources of wage differences. There are a couple of twists to this story. One is that there may
be variables other than human capital that could, depending on one’s view, be regarded as
legitimate influences on wages but are hard to measure. One could argue that women have a
preference for jobs with flexible hours to make raising children easy, even though such jobs
are badly paid. Some argue that this preference ought to be netted out of the discrimination
measure but acknowledge that in practice it cannot be done since this preference is hard to
measure. The other twist is that there may be variables that are neither wholly legitimate nor
wholly illegitimate sources of wage differences between men and women. Occupation is an
example. 48 It may be that women prefer certain occupations even though they are not well
paid because they are attractive for other reasons. This might be argued to be a legitimate
source of wage differences. On the other hand, it may instead be the case that employers
force women into these occupations by segregating workers (employment discrimination).
This would not be viewed as a legitimate source of wage differences. Omitting occupation
would result in discrimination being overestimated, but including it would lower the estimate
of discrimination by too much.

The logic of these arguments applies, it would seem, with equal force to the
measurement of inequity in the delivery of health care. In one’s estimating equation one
ought to include only those variables that are regarded as legitimate sources of differences in
medical care utilization across income groups. If one is interested in testing for equal
treatment for equal need, this means including only indicators of need. This means including
measures of health but also demographic variables, since most health indicators must be used
in conjunction with demographic variables if they are to capture need properly. Non-need
variables, by contrast, ought to be excluded from the estimating equations.

This leaves the question: How should inequity be assessed if non-need variables are
included in the estimating equations? Suppose, for the moment, that one estimates eqn (6).
Then the difference between the mean medical care utilization of rich and poor is equal to:

(10) m r − m p = (α r − α p ) + hr ( β r − β p ) + β p (hr − h p ) .

The first and second terms reflect inequity, while the last is the legitimate source of
difference between rich and poor due to the fact that the two groups differ in their need for
care. Now, suppose that instead of estimating eqn (6), one estimates the pair of equations:

a r + br hi + cr xi + ε ri if rich
(11) mi = 
a p + b p hi + c p x i + ε pi if poor,

48
Cf. Gill (1994).
 29

where x i is a variable that does not reflect medical need. The individual’s area of residence
would be an example. The difference in expected values between the mean medical care
utilization of rich and poor is equal to:

(12) m r − m p = (a r − a p ) + hr ( br − b p ) + b p ( hr − h p ) + x r ( cr − c p ) + c p ( x r − x p ) .

The first and second terms reflect inequity, as before, while the third, as before, does not.
What of the fourth and fifth terms? The fourth clearly reflects inequity — it captures
differences between rich and poor in the effects on utilization of a variable that does not
reflect medical need. The variable x i ought not, of course, to influence utilization in either
group, so that the fifth term should also count as inequity. Thus the only legitimate source of
difference between rich and poor in their mean medical utilization is the term capturing need
differences — the third term. All the rest is inequity.

What does this imply about testing for inequity in a model containing both hi and x i?
It indicates that, at a minimum, one ought to include in one’s assessment of inequity
differences across income groups in the a’s, b’s and c’s — not simply differences in the a’s
and b’s, or worse still only differences in the a’s. But even if one does include differences in
c’s in one’s assessment, one would still get an inaccurate estimate the degree of inequity,
since one would have captured only the first, second and fourth terms in eqn (12), not the last
term. In a study where there are just two income groups, including the last term is
straightforward. But in studies where income is measured in terms of quintiles, it is far from
obvious how one ought to proceed. Furthermore, unless hi and x i are uncorrelated, the
estimates of β r and β p obtained from eqn (6) will differ from the estimates of br and bp
obtained from eqn (11). So, if one were to seek to assess inequity by focusing on the term
capturing the legitimate source of difference in utilization (the third term in eqns (10) and
(12)), one would get a different picture depending on whether one estimated eqn (6) or eqn
(11). In general, the best that can be hoped from studies that include x-variables is some tests
of differences in the a’s, b’s and c’s.

This is not to say that including x-variables is totally counter-productive. Their

inclusion could shed light on the channels through which discrimination occurs, providing
one has estimated first a model with only the h-variables in it. Suppose that one estimates
eqn (6) and rejects the null hypothesis of no inequity in eqn (8). Suppose one then estimates
a model along the lines of eqn (11) with private insurance coverage as the x-variable.
Suppose this turns out to be significant and one cannot reject the hypothesis:

(13) H0 : a r=ap , br=bp and cr=cp =0.

Then a reasonable inference would be that the rejection of the hypothesis in eqn (8) was due
to differential private insurance coverage (x r≠x p ) and that it was this that was accounting for
the difference in intercepts and slope coefficients in the first model. Again, a single-equation
version of eqn (12) could be devised. The analogue of eqn (7) for eqn (12) is:

(14) mi = π 0 + π 1 yi + π 2 hi + π 3 y i hi + π 4 xi + π 5 xi y i + u i .

The null hypothesis of no inequity equivalent to that in eqn (13) then becomes

(15) H0 : π 1 =0, π 3 =0, π4 =0 and π5 =0.

 30

4.1.2. Empirical tests of inequity

Benham and Benham (1975) estimate an equation similar to eqn (7) with yi as a
continuous variable but π 3 constrained to be zero. They find that the t-statistic on their
estimate of π 1 is just below the critical value in their 1963 equation but is well below the
critical value in their 1970 equation. They conclude that “the US has moved in the direction
of greater equity” (p.101). However, since π 3 is set equal to zero, this is an incomplete test.

Puffer (1986) estimates equations similar to eqn (7) for the UK and US, where mi is a
categorical variable defined over the number of primary care physician visits and yi is one if
the respondent is in the bottom income quartile. 49 In the case of the UK, π1 and π3 are
typically zero, but the coefficient in the π 3 vector pertaining to gender is significant: the
probability of contact is lower amongst those in the bottom quartile simply because being
female has a smaller impact on contact probability amongst persons in the lower quartile. In
the case of the US, π 1 and π 3 are insignificant except in the specification where excellent
health is interacted with the bottom income quartile dummy; in this case, π 1 turns out to be
significantly negative, implying that the care received by those not in excellent health is less
if the person is in the bottom income quartile than otherwise.

Van Doorslaer et al. (1992) report results for eight countries of regressions along the
lines of eqn (6). In their study, mi is imputed medical care expenditures, based on the number
of primary care visits, specialist/outpatient visits and hospital days, and separate regressions
along the lines of eqn (1) are estimated for the five income quintiles. A two part model is
run with the first part (zero versus positive imputed expenditures) being estimated as a logit
model and the second part (the amount of imputed expenditures conditional on the figure
being positive) by truncated OLS. The likelihood ratio tests of inequity in the first part are
rejected in all countries except Denmark. By contrast, in all but two countries the hypothesis
of no inequity is rejected in the second part and in all but two countries the null is rejected for
the two-part model overall. The rejection is especially decisive in the case of the US, but the
intercepts and the coefficients on the health and demographic variables do not increase or
decline monotonically across income quintiles. 50

Birch et al. (1993, p.96) estimate a two-part model version of eqn (7) for the use of
family physician visits in Canada. The impose the constraint π 5 =0 and correct for sample
selectivity. Household income is entered as a continuous variable and need is proxied by
self-assessed health status dummies. They find that the coefficients π 1 and π3 are not
significantly different from zero and conclude that “household income is not associated in
any significant way with utilization” (p. 99). 51

Hamilton et al. (1997) estimate ordered probit models for physician visits for both
Canada and the US along the lines of eqn (14). In their paper, x-variables include variables
such as years of education, marital status, race and doctors per 1000 population in the

49
Comparing the UK and US in this area is difficult, of course, because primary care physicians in the US
deliver care in some specialties that in the UK would be delivered by specialis ts.

50
The largest intercept, for example, is the bottom quintile’s. The smallest is the 2nd bottom quintile’s.

51
The authors then estimate a variant of eqn (7) with π3 =0. They find some significant π5 coefficients on x
variables such as education, social support and region of residence and interpret this as pointing towards “non-
income -related barriers to reasonable access” (p. 99).
 31

individual’s local area. The income variable yi is specified as income, income squared and
income cubed. The coefficients π 3 and π 5 are constrained to be equal to zero, thereby ruling
out some aspects of inequity — i.e. differences in the a’s are allowed for, but not differences
in the b’s or c’s. In the US, but not in Canada, the π 1 coefficient on income is significantly
positive in the positive visits equation for males, and in the positive visits equation for
females, the π 1 coefficients on all three income variables are significant in the US but not in
Canada. However, given the inclusion of the x-variables in the models, and the zero
restrictions placed on the π 3 and π 5 coefficients, one has to be careful about reading too much
into the results.

The same is true of the results reported by Grytten et al. (1995), who estimate logistic
regression models for patient- and physician- initiated visits in Norway for 1975 and 1985.
Their models contain no interactions and their test of inequity is simply whether or not π 1 is
significantly different from zero. They find that it is not and conclude from this “that
equality of utilization has been achieved within a publicly financed primary health service”
(p. 950). A fuller test would of course be to remove the zero restrictions on the interactions
and test the restrictions in eqn (15).

In his study of equity in Sweden, Gerdtham (1997) also estimates a restricted model
and tests only a subset of the restrictions implied by an equitable system. He estimates a
variant of the single-equation version of eqn (14), where the x-variables include variables
such as years of education, whether the individual lives in a large city and marital status, the
income variable yi is specified as a vector of quintile dummies, and as in Hamilton et al.’s
paper, the coefficients π 3 and π5 are constrained to be equal to zero. The model is estimated
separately for different types of care and using count data methods. Some of the π 1
coeffic ients were significant in some of the contact regressions but not all.

Rosenzweig and Schultz (1991) also use a model along the lines of eqn (14) to test the
hypothesis that prenatal medical services are provided to pregnant married women on the
basis of medical need in the United States in 1980. They constrain π 3 and π 5 to be zero and
test the joint hypothesis π 1 =π4 =0. They reject the hypothesis except in the case of
amniocentesis. Their analysis goes further the other literature in this area because (i) they
attempt to control for unobeserved initial health endowment of the child, and (ii) they attempt
to infer which of four implicit pricing regimes prevails (including the allocation-according-
to-need regime). With respect to (i), it has been shown by Manning et al. (1982) that using
subjective health measures ascertained subsequent to the use of medical services may lead to
significant biases in the estimates of income or schooling effects. However, Rosenzweig and
Schultz show that even the use of objective health indicators prior to treatment as need
indicators may lead to inconsistent estimates if they are correlated with unmeasured initial
health endowments. They get round this by employing instrumental variables for the child’s
birth endowment. With respect to (ii), they show that the difference between the income
effect as estimated in the unconditional equations and in those conditional on endogenous
health can distinguish which of four different regimes dominates prenatal care allocations: (a)
the normal market regime where all consumers face the same care prices, (b) one in which
implicit prices are lower for higher income groups because of tax deductibility of medical
care expenses under progressive taxation, (c) a regime in which the poor face lower prices
because of subsidy programmes such as Medicaid, and (d) a regime in which nobody pays
user fees and health care is allocated on the basis of need. For all four prenatal services they
examine (amniocentesis, Caesarian, ultrasound and X-ray) their estimates are consistent with
regime (b): the conditional income effect is lower than the unconditional one, which means
 32

that the implicit price for these services is lower for the rich than the poor. According to
these results, then, not only is it the case that prenatal care in the US not allocated according
to need; it is also the case that access to these services, defined in terms of prices, is unequal,
with the rich enjoying better access than the poor. This, the authors argue, is because the
distributional effects of tax subsidies, which benefit the better-off most, offset the
distributional effects of Medicaid and other public programmes aimed at assisting the poor. 52

4.2. Measuring inequity

The discussion of the previous section was concerned with testing for inequity. It does
not enable inequity to be quantified — something that is essential if cross-country
comparisons or comparisons over time are to be performed. The regression approach can,
however, be extended to allow an index of inequity to be derived, providing one is prepared
to accept a more general definition of horizontal equity. 53 So far, equity has been taken to
mean that the intercepts and slope coefficients in the medical utilization equations should be
the same for all income groups, i.e. in the case of eqn (6), α r=α p and ßr=ßp . In other words a
health care delivery system cannot be said to be horizontally equitable if the rich and poor are
treated differently in any morbidity category. But what if the rich are treated favourably in
one morbidity category (e.g. the non-sick category) but the poor are treated favourably in the
other (e.g. the sick category)? A less restrictive definition of equity would regard such a
situation as horizontally equitable on balance, providing any favourable treatment afforded to
the poor amongst the sick was sufficiently large to offset the favourable treatment afforded to
the rich amongst the non-sick. But how large does "sufficiently large" have to be before one
can say that, on bala nce, no inequity exists?

4.2.1. A direct standardization-based index

One approach, suggested by Wagstaff, van Doorslaer and Paci (1991b), is to divide
one’s sample into income groups and then compute need-standardized medical care figures
for each income group using the direct standardization method (cf. e.g. Rothman 1986).
These figures indicate how much medical care people in each income group would have
received if they had been in the same degree of need as the sample as a whole. The figures
are obtained by applying the need characteristics of the sample to the mean medical care
figures of the income group in question.

Let mi denote the amount of medical care received by individual i in a given period.
The distribution of medical care by income is captured by the medical care concentration
curve LM(p) in Fig 5, which graphs the cumulative proportion of medical care against the
cumulative proportion p of the sample, ranked by income. The concentration index, CM,
corresponding to LM(p) indicates the degree of inequality in the distribution of medical care
but will tell us something about the degree of inequity only in the unlikely event that need for
medical care does not vary with income. The extent of horizontal inequity can then be
assessed by comparing the standardized concentration curve, labelled L+M ( p) in Fig 5, with
the diagonal. If L+M ( p) lies below (above) the diagonal, inequity exists and favours the

52
The relative weakness of the latter effects may have something to do with the low fees paid by Medicaid for
the procedures analysed by Rozenzweig and Schultz.

53
What follows draws heavily on Wagstaff et al. (1991b) and Wagstaff and Van Doorslaer (1998).
 33

better-off (worse-off). Two conditions can arise under which there is no inequity: (i) if
L+M ( p) coincides with the diagonal (and the standardized medical care use is the same for all
income groups) or (ii) if L+M ( p) crosses the diagonal (and inequity favouring the rich exactly
compensates inequity favouring the poor). The degree of inequity can be measured as twice
the area between L+M ( p) and the diagonal, or equivalently as:

1
(16) HIWVP = 1 − 2 ∫ L+M ( p)dp = CM+ ,
0

where CM+ is the concentration index for directly standardized medical care, defined as twice
the area between L+M ( p) and the diagonal. A positive (negative) value of CM+ indicates
horizontal inequity favouring the better-off (worse-off). The standardized values of medical
care can be computed simply using regression techniques by running a regression of mi on x i
for each income group and then applying the population average value of x i to the gth group’s
regression coefficients.

Statistical inference as described in the section on “testing for inequity” has focused
on testing the significance of differences across income groups in the regression coefficients
used to compute the directly standardized medical care values underlying the HI WVP index (cf.
Van Doorslaer et al. (1992). This only provides a partial answer to the statistical inference
question, since non-rejection of the null hypothesis is only a sufficient condition for HI WVP to
be zero. HI WVP can also be zero if the concentration curve crosses the diagonal. Furthermore,
no such test is available in the indirect standardization method discussed below. A
complementary test of the necessary condition for no inequity requires a test of the index
itself to be zero. Wagstaff and Van Doorslaer (1998) present both convenient and more
accurate estimators for the standard error of HIWVP based on the work of Kakwani et al.
(1997) that allow for the statistical testing of the index itself to be zero or to be different from
other indices.

4.2.2. Empirical work using the direct-standardization-based index

Van Doorslaer et al. (1992) report HI WVP indices for eight countries using a measure
of imputed expenditures for GP visits, specialist visits and inpatient days. 54 In the direct
standardization they include various indicators classified as either belonging to a medical,
functional or subjective model of ill- health (cf. Blaxter 1989). However, not all indicators are
available for each country and there is substantial variation in those that were included. Their
results indicate that, in general, when multiple indicators are used in the standardization, the
standardized medical expenditure distributions are less pro-poor, or more pro-rich, than when
only one indicator is included at a time. This suggests that inequalities in morbidity also exist
within some of the morbidity categories used. When the most general need standardization
specification available per country was used, four countries show a positive index
(Netherlands, Spain, UK and US) and four countries (Denmark, Ireland, Italy, Switzerland)
show a negative index. But the authors warn against reading too much into these results in
view of their sensitivity to the need indicators used in the standardization. Given their
suspicion that the inequity values reported are likely to understate any inequity favouring the
well-off, they conclude that pro-rich inequity almost certainly exists only in countries where

54
More detailed results for each of these eight countries, and for France and Portugal, can be found in the
country-specific chapters of Van Doorslaer et al. (1993).
 34

inequity favouring the well-off was detected and the null- hypothesis was rejected (i.e. Spain,
the UK and the US).

Propper and Upward (1992) report HI WVP indices for the UK for the years 1974, 1982,
1985 and 1987. The measure of utilization is imputed expenditures as in the study by Van
Doorslaer et al. (op. cit.) and the standardizing variables are age and gender, and the presence
or absence of acute, limiting and non- limiting chronic illness. In each year the authors find
inequity favouring the poor, but with an apparent trend up wards in the HI WVP index from
1982 onwards (HI WVP = -0.06 in 1987).

Lairson et al. (1995) analyse inequity in the delivery of health care in Australia in
1990 employing the same methods. They compute the HIWVP index separately for the imputed
expenditures for physician consultations (both GP and specialist), outpatient and inpatient
care, and for the total of these three types of care. They also observe a sensitivity of their
findings to the indicators used in the standardization. When us ing self-assessed health in the
need standardization, they find substantial inequity favoring the rich (HI WVP = 0.06), mainly
as a result of the rich using more physician consultations and inpatient care than the poor
given their need. Inequity favoring the poor is found for outpatient care, and for all types of
care if serious or chronic illness is included in the standardization.

4.2.3. An indirect standardization-based index

The method based on the direct standardization has a major disadvantage: it requires
the use of grouped data and its usefulness is therefore limited by the fact that the value of CM+
will depend on the number of income groups G. An alternative (Wagstaff and Van Doorslaer
1998) is to employ the method of ind irect standardization, which can be employed on
individual- level data, as well as on grouped data. The indirect standardization generates a
figure for each individual indicating the amount of medical care she would have received if
she had been treated as others with the same need characteristics were, on average, treated.
Wagstaff and Van Doorslaer interpret this as her need for medical care.

The extent of horizontal inequity can be assessed by comparing the concentration

curve of actual medical care ut ilization LM (p) with the need concentration curve, labelled
LN(p) in Fig 5: if the latter lies above (below) the former, there is horizontal inequity
favouring the better-off (worse-off). They define an alternative measure of horizontal
inequity (HI WV) as twice the area between the need and medical care concentration curves:

HIWV = 2∫ [ L N ( p) − LM ( p) ]dp = CM − CN
1
(17)
0

where CN is the concentration index for need (i.e. indirectly standardized medical care). A
positive (negative) value of HIW V indicates horizontal inequity fa vouring the better-off
(worse-off), whilst a zero value indicates that the factor of proportionality (between medical
care and need) is the same irrespective of income. The indirectly standardized medical care
figure, mi* , can also easily be computed using regression methods. Only one regression
model needs to be estimated, rather than G. The standardized values are computed as the
predicted values saved from an equation where medical care use is regressed on a vector of
need indicators. Wagstaff and Van Doorslaer (1998) show how both convenient-regression
based and more accurate standard errors for HI WV can be used for statistical inference.
 35

4.2.4. Empirical work using the indirect standardization-based index

Wagstaff and Van Doorslaer (1998) illustrate the use of the indirect standardization-
based index using data from the Netherlands 1992 Health Interview Survey. Using a two-part
model, they estimate standardized values for GP care, outpatient care and inpatient care
utilization. They find mild pro-poor and non-significant inequity indices for GP and inpatient
care, but high and significant pro-rich inequity for specialist outpatient care.

Van Doorslaer et al. (1998) have applied the indirect standardization approach to
measuring and testing for horizontal inequity the health care delivery systems in eleven
countries. They compute HIW V inequity indices for the imputed expenditures for two types of
medical care utilization (physician visits and inpatient days) and for the total of these two.
For some countries, total physician visits are further subdivided into GP and specialist visits.
Some selected results for eight of the eleven countries — which are presented in Table 4 —
illustrate their main conclusions. 55 They find little or no significant inequity in the
distribution of total medical care expenditures, though the disaggregation shows that this is
the result of opposite utilization patterns for inpatient care and physician consultations.
Significant pro-rich inequity emerges for physician visits in four countries: Denmark,
Finland, Sweden and the US. Further disaggregation for those countries for which it was
feasible shows that this in turn results from even higher pro-rich inequity in specialist visits:
the higher income groups use a lot more specialist services than is to be expected on the basis
of need. Some pro-poor inequity is found for GP visits, but this is much smaller and only
significant in the case of Belgium. Inpatient care is also distributed pro-poor but only
significantly so in the cases of Belgium and the UK. Because of the importance of inpatient
care utilization in overall expenditures, the latter is also distributed pro-poor in all countries
except the US and Switzerla nd. It is, however, never significant except in the case of
Belgium. Surprisingly, the finding of significant pro-rich inequity in the utilization of
physician visits, especially in specialist visits, does not seem to be clearly associated with
specific delivery system characteristics. It seems to occur in countries with universal
coverage (e.g. the Scandinavian countries) as well as in those with incomplete coverage (e.g.
the US), in countries with (e.g. Denmark, Netherlands) and without (e.g. Belgium) a GP
gatekeeper role, and in countries with (e.g. Belgium) and without (e.g. Denmark) substantial
cost sharing by patients. On the other hand, it does not emerge in two countries (Switzerland
and the UK) which seem to have few system characteristics in common.

5. Equality of health
As indicated in section 2, it can plausibly be argued that all concerns about the
distribution of health care  or access to health care  stem ultimately from a more
fundamental concern about the distribution of health itself. The absence of any health
inequality at all may well be an unattainable goal but health care systems can influence the
extent to which health inequalities exist and the extent to which they are systematically
related to characteristics such as socioeconomic status, place of residence, race, etc. In any
discussion of equity in health care delivery it is of some interest, therefore, to consider (if not
focus on) the extent to which existing delivery systems bring health distributions closer to an
equal distribution. Of course, any attempt to measure such an impact encounters the problems

55
Results for Ireland and for East and West Germany have been excluded because the surveys used for these
countries did not have all need indicators used in the specification reported here.
 36

of how to measure health, how to measure inequalities in its distribution and how to establish
the marginal impact on this distribution of the various determinants of health inequality. The
problem is compounded by the well-known fact that variations in health seem to be largely
determined by factors outside of the health care system  some known, some not known 
which have to be adequately controlled for when trying to single out the impact of a
particular system’s characteristics. 56

There is, in fact, a large literature on inequalities in health, some of which comes from
economists. It is this part of the literature that is the subject of the this section. Some of this
work is concerned with pure inequalities in health — i.e. the variation in health within a
country at any particular time. The rest of the work, like all of the work in this area by non-
economists, concerns socioeconomic inequalities in health — i.e. the varia tion in health
which is systematically related to socioeconomic status. We survey both types of work and
report the results of efforts to see whether there is any systematic variation in health
inequalities across countries, and if so, whether there seems to be any relationship between
health inequalities and country characteristics, especially those relating to the features of their
health care systems.

5.1. Pure inequalities in health

The literature here is concerned with pure inequality, in much the same way as the
economics literature on income inequality is largely concerned with pure inequality. The aim
is simply to see how far there is inequality in measures of health or ill- health across people,
irrespective of where they happen to be in society’s pecking order. This approach does not,
in contrast to the approach considered in section 5.2, capture whether persons in poor health
are rich or poor, or professionals or unskilled manual workers, or highly educated or educated
only to school- leaving age. That, argue the advocates of the pure inequality approach, is
properly viewed as part of the process of explaining health inequalities, not part of the
process of measuring them (cf. e.g. Illsley and Le Grand 1987).

5.1.1. Measurement of pure health inequality

The approach proceeds using standard measures of inequality developed in the
income inequality literature. For example, suppose that health is being measured in terms of
the number of years a person lives. One then lines people up according to their age at death
and plots on the horizontal axis the cumulative percentage of the population and on the
vertical axis the cumulative percentage of years of life. Since not everyone dies at the same
age, the resultant graph will be a Lorenz curve along the lines of Fig 6. 57 This can be
compared with the diagonal to assess the extent of inequality and the Gini coefficient thus
provides a measure of pure inequality in age at death. 58 It takes a value of zero when
everyone dies at the same age and a va lue of one when all but one person die at birth. This is
a measure of relative inequality — if everyone's age at death doubles, the Gini coefficient

56 For a recent account of the wide spectrum of determinants of population health, see e.g. Evans et al. (1994).

57
The use of the Lorenz curve to measure inequalities in age at death was first proposed by Le Grand (1985).

58
Or equivalently it is equal to the area between the Lorenz curve and the diagonal expressed as a proportion of
the area underneath the diagonal. The two are equivalent because the area under the diagonal is equal to one
half.
 37

doesn't change. By multiplying the Gini coefficient by the mean age a death, one obtains a
measure of absolute inequality — the absolute Gini coefficient or the average mean
deviation. This doubles if everyone’s age at death doubles. Alternatives to the Gini index
could, of course, be used. Amongst those used in this literature are the variance and Atkinson
(1970) index, but in principle one could use any of the other measures of inequality used in
the income inequality literature (cf. Cowell 1995, Lambert 1993).

5.1.2. Empirical work on pure health inequalities

Illsley and Le Grand (1987) report mean age-at-death and the Gini coefficient for
mean age-at-death for England and Wales. They find that mean age-at-death has risen almost
continuously over the period 1921-1983: from 60 to 70 in the case of males, and from 69 to
77 in the case of females. Over the same period, the Gini coefficient for age-at-death has
fallen almost continuously, from 0.24 to 0.12 for males, and from 0.18 to 0.11 for females.
They also find that inequality varies across causes of death (the causes with the lowest
variance in age-at-death in 1981 are cancer and circulatory diseases, and those with the
highest variance are accidents and infectious diseases) and that for some causes of death the
level of inequality has changed considerably over time (the variance in age-at-death for
infectious diseases fell dramatically over the period in question).

Le Grand (1987, 1989) reports the results of an international comparison of

inequalities in age at death using the Gini coefficient, the absolute Gini and Atkinson’s index.
Le Grand presents both unstandardized and standardized results. The former are based on
crude death rates. The latter are obtained using the indirect standardization: the resultant rates
thus give the number of deaths that would have occurred at each age in the country in
question, if it had had the same population distribution as the standard country (England and
Wales). Le Grand (1989) finds low Ginis for the standardized values in Finland, Germany,
Ireland, Luxembourg, the Netherlands and the UK, and high Ginis in France, Poland,
Portugal, Romania, the US and Yugoslavia.

Of course, given what is known about the importance of non- medical determinants of
health, one cannot conclude that all of the cross-country differences in inequality in age-at-
death are attributable to differences in the health care system. Le Grand (1987) reports some
rather interesting regression results that shed some light on the sources of differences in
inequality in age-at-death. Surprisingly, he finds that the more a country spends on medical
care per capita, the higher is its inequality in age-at-death but the degree of inequality does
not depend on the share of medical care expenditure that is publicly financed. What does
seem to be important is a country’s GNP per capita (the higher this is, the less inequality
there is in age-at-death) and the degree of inequality in income (the lower this is, the less
inequality there is).

5.2. Socio-economic inequalities in health

The pure inequality approach does not pick up the socioeconomic dimension to health
inequalities: it does not pick up whether the people in bad health are rich or poor. This aspect
of the approach has been criticized by non-economists who feel the socioeconomic dimension
is an integral part of the measurement exercise and should not be pushed back to the
explanation exercise.
 38

5.2.1. Measuring socio-economic inequalities in health

An alternative to the Gini coefficient that takes into account each person’s rank in the
socioeconomic distribution is the concentration curve approach. 59 Suppose, as before, health
is measured in terms of the number of years a person lives. This time people are lined up not
according to their age at death but according to their socioeconomic status, beginning with
the most disadvantaged. 60 We might measure socioeconomic status in terms of social (i.e.
occupational) class, or educational attainment, or income, or whatever. We then plot on the
horizontal axis the cumulative percentage of the population (ranked by socioeconomic status)
and on the vertical axis the cumulative percentage of years of life. Insofar as those towards
the bottom of the socioeconomic ladder die earlier than those at the top, the resultant graph
will look like Figure 7. This concentration curve differs from the Lorenz curve in Figure 6 in
that, unlike the latter, it remembers people's socioeconomic status.

The concentration curve can be compared with the diagonal to assess the extent of
socioeconomic inequa lity in health. If country X has a concentration curve that lies
everywhere closer to the diagonal than country Y, we can reasonably say that X has a lower
level of socioeconomic inequality in health than Y. The concentration index provides a
measure of socioeconomic inequality in health, being defined as twice the area between the
concentration curve and the diagonal and taking a value of zero when everyone dies at the
same age and a value of one when all but the least disadvantaged person die at birth. 61 Like
the Gini coefficient, this is a measure of relative inequality — if everyone's age at death
doubles, the concentration index doesn't change. By multiplying the concentration index by
the mean age a death, one obtains a measure of absolute inequality — the absolute
concentration index. This, of course, doubles if everyone's age at death doubles. The
concentration index will give the same result as the Gini coefficient only if people's order in
the health parade is the same as their position in the ir socioeconomic status parade.

It is possible, as we shall see below, to adapt the concentration index for any measure
of health or indeed ill- health. In the case of ill- health, the concentration curve will lie above
the diagonal if ill- health is concentrated amongst those at the bottom of the socioeconomic
ladder. In this case, the concentration index is negative. The concentration curve approach
can also be used with grouped data. For example, the data may refer to differences by social
class or by some other categorical measure of socioeconomic status.

The approach can be used with unstandardized or standardized data (Kakwani et al.
1997). In the case where the direct standardization is used, one has to work necessarily with
grouped data (e.g. income groups) and one obtains age-sex standardized values of one’s
health or ill- health variable for each group from which a new concentration curve can be
constructed. To assess the degree of inequality, this is compared to the diagonal. Twice the
area between the concentration curve and the diagonal is the directly standardized
concentration index and is denoted in Kakwani et al. by C+. If the indirect standardization is

59
Wagstaff et al. (1989, 1991a), Kakwani et al. (1997)

60
The procedure outlined in this paragraph and the next was proposed by Wagstaff et al. (1989). See Wagstaff
et al. (1991a) for further details.

61
Or equivalently it is equal to the area between the Lorenz curve and the diagonal expressed as a proportion of
the area underneath the diagonal. The two are equivalent because the area under the diagonal is equal to one
half.
 39

used, one obtains a concentration curve that indicates the distribution of health or ill- health
by socio-economic status that would be observed simply through the covariance between
demographic factors and socio-economic status. Twice the area between the actual
concentration curve and this counterfactual curve gives the inequality index appropriate for
measuring inequalities using the indirect standardisation. This is denoted by I* in Kakwani et
al.

The concentration index has a number of attractions as a measure of socioeconomic

inequalities in health. Unlike the range, used often by non-economists, it reflects the
experiences of the entire population and not just those of the two extreme groups. It is also
sensitive to the distribution of the population across socioeconomic groups — unlike the
range, for example, the index would change if the sizes of the various groups changed even if
their mean age at death did not. Furthermore, since the concentration curve remembers
people’s socioeconomic status, the index ensures that the socioeconomic dimension to
inequalities is taken into account. This distinguishes the concentration index from the Gini
coefficient as well as several other inequality measures that have been used by non-
economists in the mistaken belief that their index does indeed capture the socioeconomic
dimension. 62

One index used by non-economists that does capture the socioeconomic dimension to
health inequalities is the slope index of inequality (SII). This, it turns out, is closely related to
the concentration index. 63 As in that approach, people are ranked by their socioeconomic
status, beginning with the most disadvantaged. A bar is then drawn for each socioeconomic
group whose height is equal to the class's mean health (or age at death or whatever) and
whose width is equal to the proportion of the population in the class in question. The
midpoints of each bar measured on the horizontal axis indicate the relative rank of each class.
For example, if the bottom class contains 20% of the population, its relative rank is 0.1, and
so on. A regressio n line is then estimated with the observations being the midpoints of the
top of each bar. 64 The slope of this line is the SII — it indicates the change in health
associated with moving from the bottom of the parade to the top. The SII is a measure of
absolute inequality — if everyone's health doubles, the SII doubles. A variation on the SII
which is a measure of relative inequality is the relative index of inequality (RII), which is
simply the SII divided by mean health. Clearly, if everyone's health doubles, the RII remains
unaffected.

It turns out that the RII is equal to the concentration index, divided by twice the
variance of the relative rank variable, and the absolute concentration index is equal to the RII,
multiplied by the same amount. 65 So, the concentration index and the RII ought to produce
identical rankings when comparisons are being made over time or across countries, as will
the absolute concentration index and the SII. The equivalence between the concentration

62
This is true of the pseudo Lorenz curves used by Preston et al. (1981) and Leclerc et al. (1990), the index of
dissimilarity used by Preston et al. (op. cit.) and Koskinen (1985), and the index of inequality used by Pappas et
al. (1993). See Wagstaff et al. (1991a) for further details.

63
Wagstaff et al. (1991a), Kakwani et al. (1997)

64
To ensure homoscedasticity the equation has to be estimated using weighted least squares rather than ordinary
least squares. See Wagstaff et al. (1991a) for details.

65
Wagstaff et al. (1991a), Kakwani et al. (1997)
 40

index and the SII also suggests a quick way of computing the concentration index — line
people up by their socioeconomic status and run a regression of their health or ill- health on
their relative rank. This in turn suggests a straightforward way of obtaining standard errors
for the concentration index. However, as Kakwani et al. (1997) have shown, such standard
errors are potentially unreliable due to the serial correlation induced by the ranking variable.
They develop alternative standard error estimators.

5.2.2. Empirical work on socioeconomic inequalities in health

A large number of studies of socioeconomic inequalities in morbidity and mortality
has been undertaken by non-economists using the SII or RII. These are not surveyed here.
We focus instead on contrib utions to this field from economists; this has, for the most part,
been based on concentration indices.

Propper et al. (1992) use the concentration index approach to analyse health
inequalities in the UK for the years 1974, 1982, 1985 and 1987. They employ four different
measures of health: the presence or absence of acute illness (illness or injury restricting
activity in the previous two weeks); the presence or absence of non-limiting chronic illness;
the presence or absence of limiting chronic illness; and whether or not people rates their
health as “not good” on a scale including “not good”, “fairly good” and “good”. Individuals
were ranked by equivalent household income and the analysis restricted itself to adults. With
the exception of non-limiting chronic illness in 1985 and 1987, pro-rich inequalities were
found in each year for each indicator. Inequalities were most pronounced for the self-
assessed health variable, but were also fairly pronounced for the limiting chronic illness
variable. Except in the case of non- limiting chronic illness, inequalities increased between
1974 and 1982, and then again between 1982 and 1985. Between 1985 and 1987, however,
they fell — in the cases of acute illness and limiting chronic illness, back to their 1982 levels;
in the case of self-assessed health, even further.

Van Doorslaer et al. (1997) present the results of an analysis of inequalities in self-
assessed health for nine countries. As in the study of Propper and Upward, individuals were
ranked by equivalent household income. Ill- health was measured by the multiple-category
responses from a question in which respondents were asked to rate their general health status,
the responses typically ranging from excellent to poor. Responses to this question have been
found to be good predictors of subsequent mortality in a variety of industrialized countries
(Idler and Benyamini 1997). With a question like this, one might be tempted to convert the
variable into a dichotomous variable by dividing the sample into those whose health is, say,
at least good, and the rest, by choosing some arbitrary cut-off point. 66 The vertical axis of
Figure 7 would then be interpreted as the cumulative proportion of persons reporting their
health as worse than good. However, empirical results from the Netherlands suggests that
this is potentially unreliable and can lead to different conclusions concerning trends in or
differences in inequalities in health, depending on where the cut-off point is chosen. 67 Instead
of dichotomising, therefore, it was assumed that underlying the responses to the self-assessed
health question is a latent variable with a standard lognormal distribution. 68 In effect, the
latent health scores for each of the response categories are obtained by dividing up the area

66
Cf. e.g. Wagstaff et al. (1989).

67
Cf. Kunst (1992), Kunst et al. (1995) and Wagstaff and Van Doorslaer (1994).

68
This method was proposed by Wagstaff and Van Doorslaer (1994).
 41

under the standard lognormal distribution according to sample proportions falling into each of
the response categories. Each respondent is assigned the latent health score corresponding to
their response. This score is increasing in ill health, since the best response category is put at
the left- hand tail of the distribution. The lognormality assumption means that the difference
between Excellent and Good is smaller than the difference between Good and Fair, which is,
in turn, smaller than the difference between Fair and Poor, and so on. Individuals were
ranked by equivalent household income and the direct method of standardization was used.
The study found pro-rich inequalities in latent ill- health in all nine countries, with low levels
of inequality in Sweden and East Germany and high levels in the UK and US. In all
countries inequality was found to be significant. The US was found to have a significantly
higher level of inequality than the UK, which, in turn, had a significantly higher level of
inequality than the remaining countries, amongst which no significant differences in
inequality were found. Dominance-checking was also undertaken. The results showed that
the US concentration curve lay everywhere outside the UK’s, which in turn lay everywhere
outside all the remaining curves apart from that of the Netherlands.

Van Doorslaer et al. went on to explore the statistical association between health
inequality indices and two measures of health spending and the level and distribution of
income for the nine countries in the study. 69 Neither total health care expenditure per capita,
nor the percentage of total expenditure spent publicly appeared to have any statistical
association with health inequality, suggesting that neither higher spending, nor higher public
sector shares are associated with lower health inequality. Of the two other variables  the
GDP per capita and the Gini coefficient of income inequality  only the latter proved to bear
a consistent and significant positive association with health inequality. It appears, therefore,
that income-related inequality in health is more associated — in these countries, at least —
with the distribution of income in a society than to its aggregate income level or its levels of
health spending.

The results reported in the study by Van Doorslaer et al. may be sensitive to the
choice of transformation of the self-assessed health responses. Two recent studies shed light
on this issue. Gerdtham et al. (1998) obtained, by means of a telephone survey in Uppsala
County, information on income, self- assessed health and two measures of quality of life
(QoL) — a visual analogue rating scale (RS) measure and a time trade-off (TTO) measure.
They then compare the average QoL scores of persons reporting their health as Excellent,
Very Good, Good, Fair and Poor. They find that for both the RS and TTO results, the
difference between Excellent and Very Good is smaller than the difference between Very
Good and Good, which is, in turn, smaller than the difference between Good and Fair, which
is, in turn, smaller than the difference between Fair and Poor. This lends some support to the
lognormal transformation. Gerdtham et al. go on to compute concentration indices for self-
assessed health and the two QoL measures. They find no statistically significant differences
between the three inequality index values. A similar finding is reported by Humphries and
Van Doorslaer (1998). They compute the directly standardized concentration index for two
alternative measures of health: the self-assessed health question, with responses scored using
the latent variable approach, and the McMaster Health Utility Index, a generic health index
that captures both quantitative and qualitative aspects of eight dimensions of health, namely

69
These variables were chosen because they had been used before in a cross-country comparison of (non-
income -related) health inequality by Le Grand (1987). One rationale for including aggregate health spending
would be that its coefficient would capture any differences across the income distribution in the impact of health
spending on health (cf. Bidani and Ravallion 1997).
 42

vision, hearing, speech, ambulation, dexterity, emotion, cognition, and pain. The authors find
that inequalities in ill- health are slightly higher when measured using the self- assessed health
variable than when measured using the HUI, but not significantly so.

6. Conclusions
In all of the areas covered by the survey, useful progress has been made and important
conclusions have been reached. There are, of course, important issues that remain unresolved
— both at the conceptual and empirical levels — but work in the area has advanced,
especially over the last 15 years or so, and is continuing to do so.

On the issue of the nature of equity, a number of useful lessons have been learnt, but a
number of questions remain unanswered. These have been outlined in section 2.2.5 and do
not need repeating here. Important contributions have been made by economists in this area,
with the issues now being more sharply focused than was the case 10 or 15 years ago.
Nonetheless, there is still a divergence of views on key normative issues. It seems quite
probable that such differences will persist. Differences persist amongst philosophers and
others on these issues, and it seems unrealistic to expect economists — who are, after all, not
noted for their ability to agree with one another — to agree on them. On the empirical work
reviewed in sections 3-5, a clearer picture is emerging. This work has continued apace, with
substantial but successful importation from other areas of economics, notably the fields of
public finance, income distribution and redistribution, and labour economics. Like other
areas on the microeconomic side of health economics, the work has benefitted from the huge
advances in personal computer technology over the last 15 years.

What, then, has been learnt from this empirical work? On the issue of health care
financing, there is now a body of evidence showing the regressiveness of out-of-pocket
payments, especia lly in countries such as the US. Clear pictures have emerged concerning
the progressivity of other financing sources. Taxation tends to be a progressive way of
raising revenues, but the degree of progressivity depends on the mix between direct and
indirect taxes, and whether the direct taxes are general taxes or semi-earmarked local taxes of
the type used in Scandinavia. Social insurance emerges as progressive in countries where the
higher income groups are included in the scheme, and regressive where they are not; in such
countries, this is partially offset by a more progressive private insurance structure than would
otherwise be the case. Private insurance is regressive in countries such as the US where the
bulk of the population relies on it for cover. The literature has also produced useful insights
into the progressivity consequences of financing reforms and changes: the reforms proposed
for the US in the early 1990s would have reduced the system’s overall regressiveness; the
increase in private insurance and out-of-pocket payments in Australia between 1984 and 1989
moved the system from progressive to broadly proportional; and the ill- fated Dekker
proposals would have reduced but not eliminated the regressiviness of Dutch health care
financing system. Useful results have also been produced on the issue of horizontal equity in
health care finance. These suggest that although horizontal inequity does have an impact on
the distribution of income, the impact is very small compared to the effect of progressivity: in
cases where the source in question is progressive, horizontal equity reduces the pro-poor
redistributive effect, but not by much. The results also point to cross-source and cross-
country variation: horizontal inequity in social insurance is more pronounced in absolute and
relative terms in France and Germany than in the UK and US; horizontal differences are more
pronounced in the case of private payments than public payments, reflecting in part the
 43

greater degree of voluntariness (some choose to privately insure, whilst others choose not to),
but also the randomness associated with ill- health which is part of the cause of the large
horizontal differences observed in out-of-pocket payments.

Studies testing for inequity in the delivery of health care (i.e. unequal treatment for
equal need) have varied somewhat in their model specifications and methods, but nonetheless
some tentative conclusions can be drawn. There is growing evidence that in the US the
distribution of health care by income is not consistent with health care being allocated
according to need: this emerges in studies just of the US, as well as in comparative studies in
which other countries (Canada and various of the EU countries) typically emerge in a more
favourable light. Stud ies that have sought to measure the degree of inequity have reached
much the same conclusion, though there is some evidence that in some countries (including
the US) pro-poor inequities in inpatient care are compensating for pro-rich inequity in
specialist and outpatient care. Interestingly, this does not seem to be true of Australia where,
overall, there appears to be substantial pro-rich inequity in the delivery of health care.
Interestingly, too, there does not appear to be any straightforward link within the EU
countries between the degree of inequity overall and the features of the system (e.g. whether
GPs have a gatekeeper role, whether copayments are high, etc.).

The research by economists on health inequalities has examined both pure inequalities
and socioeconomic inequalities in health. Unsurprisingly, given that the rank correlation
between health and socioeconomic status is not unity, the results produce rather different
findings. The UK, for example, appears to have a relatively low level of pure inequality in
age-at-death but a relatively high level of income-related inequality in self-assessed health.
The US, by contrast, has high levels of both types of inequality. Work on both areas has also
shed light on the causes of cross-country variations in health inequality; interestingly, in both
exercises, income inequality emerges as an important predictor of health inequality.

In all three empirical areas, then, important lessons have been learnt. There is clearly
scope for more work in all areas, especially work aimed at unravelling the causes of inequity.
We know a fair amount about the factors responsible for the cross-country and cross-source
variation in the progressivity of health care finance. We know much less about the relative
contributions of factors that give rise to differences in horizontal equity in this area. Nor do
we know much about the ultimate causes of inequity in health care delivery — what the
principle factors are within countries that prevent equals being treated equally by the health
care system, or what role system differences have in accounting for cross-country variations
in inequity. We also need to know more about the economic causes of health inequalities and
the factors accounting for cross-country differences. Given the progress that has been made
over the last 15 years, it would not seem forlorn to hope that these issues will be much better
understood by the time the 2nd edition of the Handbook of Health Economics is published.
 44

References
Aday, L.A., Andersen, R. and Fleming, G.V. (1980), Health care in the U.S. : equitable for
whom? (Sage Publications, Beverly Hills).

Andersen, R. (1975), "Health service distribution and equity" in: Andersen, R., Kravits, J. and
Anderson, O. eds., Equity in health services (Ballinger, Cambridge Mass.)

Aronson, J.R., Johnson, P. and Lambert, P.J. (1994), “Redistributive effect and unequal tax
treatment”, Economic Journal 104: 262-270.

Atkinson, A.B. (1970), “On the measurement of inequality”, Journal of Economic Theory 2:
244-263.

Atkinson, A.B. (1980), "Horizontal equity and the distribution of tax burden" in: Aaron, H.
and Boskin, M. eds., The economics of taxation (Brookings Institution, Washington DC)

Baker, J.L. and Van der Gaag, J. (1993), "Equity in health care and health care financing:
Evidence from five developing countries" in: Van Doorslaer, E., Wagstaff, A. and Rutten, F.
eds., Equity in the finance and delivery of health care (Oxford University Press, Oxford)

Barry, B.M. (1989), Theories of justice (University of California Press, Berkeley).

Benham, L. and Benham, A. (1975), "Utilisation of physician services across income groups
1963-1970" in: Andersen, R., Kravits, J. and Anderson, O. eds., Equity in health services
(Ballinger, Cambridge Mass.)

Bidani, B. and Ravallion, M. (1997). Decomposing social indicators using distributional

data, Journal of Econometrics 77(1): 125-140.

Birch, S., Eyles, J. and Newbold, K.B. (1993), “Equitable access to health care:
methodological extensions to the analysis of physician utilization in Canada”, Health
Economics 2(2): 87-101.

Blaxter, M. (1989), "A comparison of measures of inequality in morbidity" in: Fox, J. eds.,
Health inequalities in European countries (Gower, Aldershot).

Braybrooke, D. (1987), Meeting needs (Princeton University Press, Princeton, N.J.).

Cantor, J. (1988), The burden of financing health care in the United States. John Hopkins
School of Hygiene and Public Health. Baltimore.

Collins, E. and Klein, K. (1980), “Equity and the NHS: Self reported morbidity, access and
primary care”, British Medical Journal 281: 1111-5.

Cowell, F.A. (1995), Measuring inequality (Prentice Hall/Harvester Wheatsheaf, London ;

New York).

Cullis, J.G. and West, P.A. (1979), The economics of health: An introduction (Martin
Robertson, Oxford).

Culyer, A.J. (1971), “Medical care and the economics of giving”, Economica 151: 295-303.

Culyer, A.J. (1976), Need and the National Health Service: Economics and social choice
(Martin Robertson, Oxford).

Culyer, A.J. (1980), The political economy of social policy (Martin Robertson, Oxford).
 45

Culyer, A.J. (1989), “The normative economics of health care finance and privision”, Oxford
Review of Economic Policy 5: 34-58.

Culyer, A.J. (1990), "Commodities, characteristics of commodities, characteristics of people,

utilities and the quality of life" in: Baldwin, S.e.a. eds., The quality of life: Perspectives and
policies (Routledge, London)

Culyer, A.J. (1993), "Health, health expenditures, and equity" in: Van Doorslaer, E.,
Wagstaff, A. and Rutten, F. eds., Equity in the finance and delivery of health care (Oxford
University Press, Oxford)

Culyer, A.J., Maynard, A. and Williams, A. (1981), "Alternative systems of health care
provision: An essay on motes and beans" in: Olson, M. eds., A new approach to the
economics of health care (American Enterprise Institute, Washington D.C.)

Culyer, A.J., Van Doorslaer, E. and Wagstaff, A. (1992a), “Access, Utilisation and Equity: A
Further Comment”, Journal of Health Economics 11(2): 207-10.

Culyer, A.J., Van Doorslaer, E. and Wagstaff, A. (1992b), “Utilization as a measure of equity
by Mooney, Hall, Donaldson and Gerard: Comment”, Journal of Health Economics 11(1):
93-98.

Culyer, A.J. and Wagstaff, A. (1993), “Equity and Equality in Health and Health Care”,
Journal of Health Economics 12(4): 431-57.

Daniels, N. (1985), Just health care (Cambridge University Press, Cambridge).

Davis, K. (1993), "Equity in the distribution of health care: The British debate" in: Van
Doorslaer, E., Wagstaff, A. and Rutten, F. eds., Equity in the finance and delivery of health
care (Oxford University Press, Oxford)

Donabedian, A. (1971), “Social responsibility for personal health services: An examination of

basic values”, Inquiry 8: 3-19.

Evans, R.G., Barer, M.L. and Marmor, T.R., Eds. (1994), Why are some people healthy and
others not? (Aldine de Gruyter, New York).

Gerdtham, U.G. (1997), “Equity in health care utilization: further tests based on hurdle
models and Swedish micro data”, Health Econ 6(3): 303-19.

Gerdtham, U.-G., Johannesson, M., Lundberg, L., et al. (1998), “A note on validating
Wagstaff and Van Doorslaer's health measure in the analysis of inequalities in health”,
Journal of Health Economics (forthcoming).

Gill, A.M. (1994), “Incorporating the causes of occupational differences in studies of racial
wage differencials”, Journal of Human Resources 29(1): 20-41.

Gillon, R. (1986), Philosophical medical ethics (Wiley, Chichester ; New York).

Goodin, R.E. and Le Grand, J. (1987), Not only the poor : the middle classes and the welfare
state (Allen & Unwin, London ; Boston).

Gottschalk, P., Wolfe, B. and Haveman, R. (1989), "Health care financing in the US, UK and
The Netherlands: Distributional consequences" in: Chiancone, A. and Messere, K. eds.,
Changes in reve nue structures (Wayne State University Press, Detroit)

Grytten, J., Rongen, G. and Sorensen, R. (1995), “Can a public health care system achieve
equity? The Norwegian experience”, Med Care 33(9): 938-51.
 46

Hamilton, B.H., Ho, V. and Paarsch, H.J. (1997), The distribution of outpatient services in
Canada and the US: An empirical model of physician visits. Working paper, John M. Olin
School of Business. St Louis, (Washington University).

Hochman, H.M. and Rodgers, J.D. (1969), “Pareto optimal redistribution”, American
Economic Review 59: 542-57.

Holahan, J. and Zedlewski, S. (1992), “Who pays for health care in the United States?
Implications for health system reform”, Inquiry 29(231-248).

Humphries, K.H. and Van Doorslaer, E. (1998), Income-related health inequality in Canada,
(Centre for Health Evaluation & Outcome Sciences, Vancouver)

Hurst, J.W. (1985), Financing health services in the United States, Canada and Britain,
(Nuffield/Leverhulme Fellowship Report, King Edward's Hospital Fund for London, London)

Idler, E.L. and Benyamini, Y. (1997), “Self-rated health and mortality: a review of twenty-
seven community studies”, Journal of Health and Social Behavior 38(1): 21-37.

Illsley, R. and Le Grand, J. (1987), "The measurement of inequality in health" in: Williams,
A. eds., Health and economics (Macmillan, London)

Janssen, R., Van Doorslaer, E. and Wagstaff, A. (1994), “Health- insurance reform in the
Netherlands, Assessing the progressivity consequences”, Economic and Social Review 25(4):
303-320.

Joshi, H. and Paci, P. (1998), Unequal pay for men and women: Evidence from the British
birth cohort studies (MIT Press, Cambridge, Mass.).

Kakwani, N.C. (1977), “Measurement of tax progressivity: An international comparison”,

Economic Journal 87(345): 71-80.

Kakwani, N.C., Wagstaff, A. and Van Doorlsaer, E. (1997), “Socioeconomic inequalities in

health: Measurement, computation and statistical inference”, Journal of Econometrics 77(1):
87-104.

King, M.A. (1983), “An index of inequality: With implications to horizontal equity and social
mobility”, Econometrica 51: 99-115.

Koskinen, S. (1985), "Time trends in cause-specific mortality by occupational class in

England and Wales" IUSSP 20th General Conference, Florence.

Kunst, A.E. (1992), International variation in socioeconomic inequalities in self-reported

health, (Dutch Central Bureau of Statistics, Voorburg)

Kunst, A.E., Geurts, J.J. and van den Berg, J. (1995), “International variation in
socioeconomic inequalities in self reported health”, J Epidemiol Community Health 49(2):
117-23.

Lairson, D.R., Hindson, P. and Hauquitz, A. (1995), “Equity of health care in Australia”, Soc
Sci Med 41(4): 475-82.

Lambert, P.J. (1993), The distribution and redistribution of income: A mathematical analysis
(Manchester University Press, Manchester).

Lambert, P.J. and Aronson, J.R. (1993), “Inequality Decomposition Analysis and the Gini
Coefficient Revisited”, Economic Journal 103(420): 1221-27.
 47

Le Grand, J. (1978), “The distribution of public expenditure: The case of health care”,
Economica 45: 125-42.

Le Grand, J. (1982), The strategy of equality : redistribution and the social services (G. Allen
& Unwin, London ; Boston).

Le Grand, J. (1985), “Inequalities in health: The human capital approach”, Welfare State
Programme Discusion Paper.

Le Grand, J. (1987), “Inequalities in Health: Some International Comparisons”, European

Economic Review 31(1/2): 182-91.

Le Grand, J. (1989), "An international comparison of distributions of ages-at-death" in: Fox,

J. eds., Health inequality in European countries (Gower, Aldershot)

Le Grand, J. (1991), “The Distribution of Health Care Revisited: A Commentary”, Journal of

Health Economics 10(2): 239-45.

Leclerc, A., Lert, F. and Fabien, C. (1990), “Differential mortality: some comparisons
between England and Wales, Finland and France, based on inequality measures”, Int J
Epidemiol 19(4): 1001-10.

Lerman, R.I. and Yitzhaki, S. (1995), “Changing Ranks and the Inequality Impacts of Taxes
and Transfers”, National Tax Journal 48(1): 45-59.

Leu, R.E. and Frey, R.L. (1985), "Budget incidence, demographic change and health policy
in Switzerland" in: Culyer, A.J. and Terny, G. eds., Public finance and social policy (Wayne
State University Press, Detroit)

Lindsay, C.M. (1969), “Medical care and the economics of sharing”, Economica 144: 351-
362.

Lockwood, M. (1988), "Quality of life and resource allocation" in: Bell, M. and Mendus, S.
eds., Philosophy and medical welfare (Cambridge University Press, Cambridge)

MacLachlan, G. and Maynard, A. (1982), "The public/private mix in health care: The
emerging lessons" in: MacLachlan, G. and Maynard, A. eds., The public/private mix in health
care: The relevance and effects of change (Nuffield Provincial Hospital Trust, London).

Manning, W.G., Newhouse, J.P., and Ware Jr., J.E. (1982). "The status of health in demand
estimation; or beyond excellent, good, fair and poor" in: Fuhcs, V. ed. Economic Aspects of
Health (Chicago University Press, Chicago).

Maynard, A. and Williams, A. (1984), "Privitisation and the National Health Service" in: Le
Grand, J. and Robinson, R. eds., Privitisation and the welfare state (Allen & Unwin, London)

Miller, D. (1976), Social justice (Clarendon Press, Oxford).

Mooney, G. (1983), “Equity in health care: Confronting the confusion”, Effective Health
Care 1: 179-85.

Mooney, G. (1996), “And now for vertical equity? Some concerns arising from aboriginal
health in Australia”, Health Economics 5(2): 99-103.

Mooney, G., Hall, J., Donaldson, C., et al. (1991), “Utilisation as a Measure of Equity:
Weighing Heat?”, Journal of Health Economics 10(4): 475-80.
 48

Mooney, G., Hall, J., Donaldson, C., et al. (1992), “Reweighing Heat: Response”, Journal of
Health Economics 11(2): 199-205.

Mooney, G. and McGuire, A. (1987), "Distributive justice with special reference to

geographical inequality in health care" in: Williams, A. eds., Health and economics
(Macmillan, London)

Mooney, G.H. (1986), Economics, medicine, and health care (Wheatsheaf, Brighton).

Mooney, G.H. (1994), Key issues in health economics (Harvester Wheatsheaf, New York).

Newhouse, J.P., and the Health Insurance Experiment Group (1993). "Free for all? Lessons
from the RAND health insurance experiment" (Harvard University Press, Cambridge M.A.).

Nozick, R. (1974), Anarchy, state, and utopia (Basic Books, New York).

OECD (1992), The reform of health care: A comparative analysis of seven OECD countries,
(OECD, Paris)

Olson, E.O. and Rodgers, D.L. (1991), “The welfare economics of equal access”, Journal of
Public Economics 45: 91-106.

Pannarunothai, S. and Mills, A. (1997), “The poor pay more: health-related inequality in
Thailand”, Soc Sci Med 44(12): 1781-90.

Pappas, G., Queen, S., Hadden, W., et al. (1993), “The increasing disparity in mortality
between socioeconomic groups in the United States, 1960 and 1986 [published erratum
appears in N Engl J Med 1993 Oct 7;329(15):1139] [see comments]”, N Engl J Med 329(2):
103-9.

Plotnick, R. (1981), “A Measure of Horizontal Inequity”, Review of Economics and Statistics

63(2): 283-88.

Preston, S.H., Haines, M.R. and Pamuk, E. (1981), "Effects of industrialisation and
urbanisation on mortality in developed countries" IUSSP 19th International Population
Conference, Manilla, (IUSSP).

Propper, C., and Upward, R. (1992), “Need, Equity and the NHS: The Distribution of Health
Care Expenditure 1974-87”, Fiscal Studies 13(2): 1-21.

Propper, C. (1995). "For richer, for poorer, in sickness and in health: the lifetime distribution
of NHS health care" in: Falkingham J and Hills J, eds., The Dynamics of Welfare (Prentice
Hall Wheatsheaf, London).

Puffer, F. (1986), “Access to primary care: A comparison of the US and the UK”, Journal of
Social Policy(15): 293-313.

Rasell, E., Bernstein, J. and Tang, K. (1994), “The impact of health care financing on family
budgets”, International Journa l of Health Services 24(4): 691-714.

Rasell, E. and Tang, K. (1994), Paying for health care: Affordability and equity in proposals
of health care reform. Working paper. Washington D.C., (Economic Policy Institute).

Rawls, J. (1971), A theory of justice (Harvard University Press, Cambridge, Mass.,).

Rice, T.H. (1997), “Can markets give us the health system we want?”, Journal of Health
Politics, Policy and Law 22(2): 283-426.
 49

Rice, T.H. (1998), The economics of health reconsidered (Health Administration Press,
Chicago).

Rockefeller, J.D. (1991), “A call for action: The Pepper Commission's blueprint for health
care reform”, Journal of the American Medical Association 265(19): 2507-10.

Rosenzweig, M.R. and Schultz, T. (1991), “Who Receives Medical-Care: Income, Implicit
Prices, and the Distribution of Medical-Services Among Pregnant-Women in the United-
States”, Journal of Human Resources 26(3): 473-508.

Rutten, F. and Janssen, R. (1987), "Een economische beschouwing over gelijkheid in de

gezondheidszorg" in: Wetenschappelijke Raad voor het Regeringsbeleid, eds., De ongelijke
verdeling van gezondheid (Staatsuitgeverij, Den Haag)

Sen, A.K. (1992), Inequality reexamined (Clarendon Press, New York).

Sugden, R. (1983), Who cares? IEA occasional paper, No. 67, (Institute for Economic
Affairs, London)

Suits, D. (1977), “Measurement of tax progressivity”, American Economic Review 67: 747-
52.

Tobin, J. (1970), “On limiting the domain of inequality”, Journal of Law and Economics 13:
263-78.

Townsend, P. and Davidson, N. (1982), Inequalities in health: The Black Report (Penguin,
Harmondsworth).

UNDP (1993), Human Development Report 1993 (Oxford University Press, New York).

Van Doorslaer, E., Wagstaff, A., Bleichrodt, H., et al. (1997), “Income-related inequalities in
health: Some international comparisons”, Journal of Health Economics 16: 93-112.

Van Doorslaer, E., Wagstaff, A., Calonge, S., et al. (1992), “Equity in the Delivery of Health
Care: Some International Comparisons”, Journal of Health Economics 11(4): 389-411.

Van Doorslaer, E., Wagstaff, A., Van der Burg, H., et al. (1998), Equity in the delivery of
health care: Further international comparisons, (Erasmus University, Rotterdam)

Van Doorslaer, E.K.A., Wagstaff, A. and Rutten, F.F.H., Eds. (1993), Equity in the finance
and delivery of health care: An international perspective Commission of the European
Communities health services research series; no. 8 (Oxford University Press, Oxford).

Von der Schulenburg, J.M. (1994), “Forming and reforming the market for third-party
purchasing of health care: a German perspective”, Soc Sci Med 39(10): 1473-81.

Wagstaff, A., Paci, P. and Van Doorslaer, E. (1991a), “On the measurement of inequalities in
health”, Soc Sci Med 33(5): 545-57.

Wagstaff, A. and Van Doorslaer, E. (1993), "Eq uity in the finance and delivery of health
care: concepts and definitions" in: Van Doorslaer, E., Wagstaff, A. and Rutten, F. eds.,
Equity in the finance and delivery of health care: An international perspective (OUP,
Oxford).

Wagstaff, A. and Van Doorsla er, E. (1994), “Measuring inequalities in health in the presence
of multiple-category morbidity indicators”, Health Economics 3: 281-291.
 50

Wagstaff, A. and Van Doorslaer, E. (1997), “Progressivity, horizontal equity and reranking in
health care finance: a decomposition analysis for The Netherlands”, Journal of Health
Economics 16: 499-516.

Wagstaff, A. and Van Doorslaer, E. (1998), Measuring and testing for inequity in the delivery
of health care; ECuity Project Working Paper No. 12, (Erasmus University, Rotterdam)

Wagstaff, A., Van Doorslaer, E., Calonge, S., et al. (1992), “Equity in the finance of health
care: Some international comparisons”, Journal of Health Economics 11(4): 361-87.

Wagstaff, A., Van Doorslaer, E. and Paci, P. (1989), “Equity in the Finance and Delivery of
Health Care: Some Tentative Cross-country Comparisons”, Oxford Review of Economic
Policy 5(1): 89-112.

Wagstaff, A., Van Doorslaer, E. and Paci, P. (1991b), “On the measurement of horizontal
inequity in the delivery of health care”, Journal of Health Economics 10(2): 169-205.

Wagstaff, A., Van Doorslaer, E. and Van der Burg, H., et al. (1998), “Equity in the finance of
health care: Some further international comparisons”, Journal of Health Economics
(forthcoming).

Van Doorslaer, E., Wagstaff, A., van der Burg, H., et al. (1998), "Equity in the delivery of
health care: Some further international comparisons", ECuity Working Paper #10 (Erasmus
University, Rotterdam).

Wetenschappelijke Raad voor het Regeringsbeleid (1987), De ongelijke verdeling van

gezondheid (Staatsuitgeverij, Den Haag).

Wiggins, D. (1987), Needs, values, truth : essays in the philosophy of value (Blackwell,
Oxford, England ; New York, NY, USA).

Williams, A.H. (1974), "'Need' as a demand concept (with special reference to health)" in:
Culyer, A.J. eds., Economic policies and social goals: Aspects of public choice (Martin
Robertson, London)

Williams, A.H. (1976), Cost-benefit analyses in public health and medical care: comments on
a thesis written by Bengt Jonsson, (Department of Economics, University of Lund, Lund)

Williams, A.H. (1978), "'Need' - and economic exegesis" in: Culyer, A.J. and Wright, K.G.
eds., Economic aspects of health services (Martin Robertson, London)

Williams, A.H. (1981), "Welfare economics and health status measurement" in: Van der
Gaag, J. and Perlman, M. eds., Health, economics and health economics (North-Holland,
Amsterdam)

Williams, A.H. (1988), “Priority Setting in Public and Private Health Care: A Guide through
the Ideological Jungle”, Journa l of Health Economics 7(2): 173-83.

Williams, A.H. (1993), "Equity in health care: The role of ideology" in: Van Doorslaer, E.,
Wagstaff, A. and Rutten, F. eds., Equity in the finance and delivery of health care (Oxford
University Press, Oxford)
 51

Figures
(NH Chapter 40: Equity in the finance and delivery of health care)

Figure 1: The health care financing triangle

100%

DK

80% FIN
S
IRL
% raised through taxes

UK

60% P E

40% I

CH USA

20% D
NL

F
0%
0% 20% 40% 60% 80% 100%

% raised through social insurance

Source: Wagstaff et al (1998)

 52

Figure 2: Lorenz curve for pre-payment income and concentration curve for payments

100 %

cum
prop

Lpre (p)

Lpay(p)

0% cum % of population p, ranked by income 100%

 53

Figure 3: Horizontal inequity and reranking

x -T (x) - ε h(x)

x 3-T ( x 3)

x 2-T ( x 2)

x 1-T ( x 1)

x1 x2 x3 x

Source: Wagstaff and van Doorslaer (1997)

 54

Figure 4: Redistributive effect of social insurance as a function of KT and g

g=0.12
0.0200
F
0.0150
g=0.068
0.0100

0.0050 g=0.020
FIN UK
US CH
0.0000

-0.0050 D

-0.0100
-0.10 -0.05 0.00 0.05 0.10 0.15 0.20
Kakwani index
V RE

Source: Wagstaff et al (1998)

 55

Figure 5: Concentration curves of medical care and need

1.0

LM(p)

LN(p)

cumulative
proportion of
medical care

L+M ( p )
0.0
0.0 1.0
cumulative proportion of sample p, ranked by income

Source: Wagstaff and van Doorslaer (1998)

 56

7. Figure 6: Lorenz curve of inequality in age-at-death

100%
8.
cum % of
years of
life

0% cum % of pop, ranked by age-at-death 100%

 57

Figure 7: Concentration curve of age-at-death

9.

100%

cum % of
years of
life

0% cum % of pop, ranked by soc-econ status 100%

 58

TABLES

(NH CHAPTER 40: EQUITY IN THE FINANCE AND DELIVERY OF HEA LTH CARE)

TABLE 1: FINANCING MIXES -- THIRTEEN COUNTRIES

Direct Indirect General Social Total Private Direct Total

taxes taxes taxes insurance public insurance payments private

Denmark (1987) 72.5% 12.2% 84.7% 0.0% 84.7% 1.5% 13.8% 15.3%
Finland (1990) 51.0% 24.0% 75.0% 11.0% 86.0% 0.0% 14.0% 14.0%
France (1989) 0.0% 73.6% 73.6% 6.3% 20.1% 26.4%
Germany (1989) 10.5% 7.2% 17.7% 65.0% 82.7% 7.1% 10.2% 17.3%
Ireland (1987) 28.5% 39.3% 67.8% 7.3% 75.1% 10.0% 14.9% 24.9%
Italy (1991) 21.0% 17.2% 38.2% 39.2% 77.4% 1.8% 20.9% 22.6%
Netherlands (1992) 6.3% 5.0% 11.3% 64.6% 75.9% 16.3% 7.7% 24.1%
Portugal (1990) 20.7% 34.5% 55.2% 6.0% 61.2% 1.4% 37.4% 38.8%
Spain (1990) 30.8% 25.5% 56.3% 22.0% 78.3% 2.4% 19.3% 21.7%
Sweden (1990) 63.5% 8.4% 71.9% 17.8% 89.7% 0.0% 10.3% 10.3%
Switzerland (1992) 23.9% 4.8% 28.7% 6.9% 35.6% 40.5% 23.9% 64.4%
UK (1993) 29.0% 35.0% 64.0% 20.0% 84.0% 7.0% 9.0% 16.0%
US (1987) 28.1% 7.4% 35.5% 13.3% 48.7% 29.2% 22.1% 51.3%

SOURCE: WAGSTAFF, VAN DOORSLAER ET AL (1998)

 59

TABLE 2: PROGRESSIVITY INDICES – BY

COUNTRY AND SOURCE

Direct Indirect General Social Total Private Direct Total Total

taxes taxes taxes insurance public insurance payments private payments

Denmark (1987) 0.0624 -0.1126 0.0372 0.0372 0.0313 -0.2654 -0.2363 -0.0047
Finland (1990) 0.1272 -0.0969 0.0555 0.0937 0.0604 0.0000 -0.2419 -0.2419 0.0181
France (1989) 0.1112 0.1112 -0.1956 -0.3396 -0.3054 0.0012
Germany (1989) 0.2488 -0.0922 0.1100 -0.0977 -0.0533 0.1219 -0.0963 -0.0067 -0.0452
Ireland (1987) 0.2666 n.a. n.a. 0.1263 n.a. -0.0210 -0.1472 -0.0965 n.a.
Italy (1991) 0.1554 -0.1135 0.0343 0.1072 0.0712 0.1705 -0.0807 -0.0612 0.0413
Netherlands (1992) 0.2003 -0.0885 0.0714 -0.1286 -0.1003 0.0833 -0.0377 0.0434 -0.0703
Portugal (1990) 0.2180 -0.0347 0.0601 0.1845 0.0723 0.1371 -0.2424 -0.2287 -0.0445
Spain (1990) 0.2125 -0.1533 0.0486 0.0615 0.0509 -0.0224 -0.1801 -0.1627 0.0004
Sweden (1990) 0.0529 -0.0827 0.0371 0.0100 0.0100 -0.2402 -0.2402 -0.0158
Switzerland (1992) 0.2055 -0.0722 0.1590 0.0551 0.1389 -0.2548 -0.3619 -0.2945 -0.1402
United Kingdom (1993) 0.2843 -0.1522 0.0456 0.1867 0.0792 0.0766 -0.2229 -0.0919 0.0518
United States (1987) 0.2104 -0.0674 0.1487 0.0181 0.1060 -0.2374 -0.3874 -0.3168 -0.1303

Source: Wagstaff, van Doorslaer et al (1998)

 60

Table 3: V100 — Vertical redistributive effect as a percentage of

total redistributive effect

Direct Indirect General Social Total Private Direct Total

taxes taxes taxes insurance public insurance payments private

Denmark (1987) 104.0% 92.2% 104.4% 104.4% 110.6%

Finland (1990) 101.3% 96.8% 104.3% 100.0% 104.3% 93.4%
France (1989) 120.3% 93.0%
Germany (1988) 100.4% 98.5% 101.7% 85.8% 62.5% 124.3% 70.4% -75.0%
Ireland (1987) 100.9% 103.3% 75.0% 90.2%
Italy (1991) 100.4% 99.3% 101.7% 108.3% 107.7% 120.0% 73.1% 69.8%
Netherlands (1992) 102.3% 100.0% 105.1% 94.5% 93.4% 134.0% 72.0% 216.3%
Portugal (1990) 109.6% 86.1% 93.0% 136.1% 127.8% 133.3% 75.9% 75.2%
Sweden (1990) 103.1% 100.0% 107.1%
Switzerland (1992) 101.6% 94.7% 101.8% 175.3% 101.8% 98.0% 96.9% 98.1%
United Kingdom (1992) 101.3% 95.6% 102.3% 103.4% 102.3% 218.1%
United States (1987) 103.7% 95.8% 104.5% 128.7% 105.0% 91.8% 84.9% 87.5%

Source: Van Doorslaer, Wagstaff et al (1998a)

 61

Table 4: Indices of horizontal inequity – selected countries

Country Type of medical care utilization

GP visits Specialist visits All physician visits Inpatient days Total medical care
Belgium (1995) -0.033 0.039 -0.013 -0.090 -0.071

Denmark (1994) -0.003 0.0834 0.049 -0.065 -0.060

Finland (1996) 0.005 0.056 0.036 -0.070 -0.029

Netherlands (1992) -0.006 0.079 0.021 -0.070 -0.038

Sweden (1990) n.a. n.a. 0.030 -0.029 -0.014

Switzerland (1992) - - -0.004 0.056 0.040

UK (1989) 0.001 0.0275 0.014 -0.051 -0.016

US (1987) n.a. n.a. 0.043 -0.007 0.009

Notes: (i) HIWV indices are for need specification including age, sex, SAH vector and
dummy chronic illness;
(ii) significant indices in bold (p<0.05)
Source: Van Doorslaer, Wagstaff, et al. (1998b)

All in-text references underlined in blue are linked to publications on ResearchGate, letting you access and read them immediately.