Expected Effects of Improvement in Insurance Contribution

A. Reform Scenarios

The health insurance system has life-cycle characteristics in that contributions are mainly borne by age groups who earn income actively—i.e. the young and the middle-aged—while benefits are received primarily in the old age are received. The most noticeable mismatch between the main period of contribution payment and the main period of benefit occurs in this case. If the life-cycle characteristics are taken into consideration, the mismatch problem can be eased to a certain degree.

Thus, this study also analyzes expected policy effects of a case in which the property-based contribution method is added to reflect the life-cycle effect partially. Of course, regarding a property-based health insurance contribution scheme is rare even in developed countries. Also, given the situation of Korea, it is highly unlikely to adopt property-based standards for insurance contribution assessment; there is little prospect that they would be introduced. However, it is worthwhile to compare the equity effect of the two policy alternatives: i.e.

a single income-based scheme and an incorporation of the life-cycle effect (at least partially). Therefore, this section, regardless of feasibility, analyzes and discusses the equity effect of reform in the health insurance contribution scheme including the case of a partial incorporation of a property-based assessment scheme to improve the readers’ understanding by broadening the horizon of discussion on the subject matter.

The comparison and analysis of the equity effect are conducted based on the following three standards: a case where contribution is assessed in proportion with all global incomes in principle (Standard A); a case where the lower limit of contribution is set when the income does not reach a certain level (Standard B); and a case where a combination of income-base and property-based assessment schemes is introduced with the respective proportion being 80% of the amount of contribution assessed based on Standard A and 20% of the amount of contribution assessed based on property (Standard C). The policy effect analysis based on the below three standards will be equally applied in this chapter and in Chapter V (panel analysis).

Standard A: Earned income, business income, financial income (when it is more than 20 million KRW), annuity income (when it is more than 12 million KRW), other incomes (when they are more than 3 million KRW)⁸⁾ - However, when the income is more than the standard amount, contribution is assessed based on the whole amount, not just on the excess.

Standard B: Standard A + Minimum insurance rate applied

Minimum insurance rate: applied when it is annual 3.36 million KRW or less (0.28 million KRW × 12 months)

Minimum contribution: 0.28 million KRW × 6.12% × 12 months

= 17,136 KRW × 12 months = 205,632 KRW

(Payment by the employee insured: 8,568 KRW per month, 102,816 KRW per year)

8) It should be noted that other incomes are excluded from analysis since the HIES by Statistics Korea does not include the income item set forth as other incomes under the 「Income Tax Act」.

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Standard C: Health insurance contribution rate is assessed based on both income and property

However, income-based : property-based = 80% : 20%

Income-based contribution: 80% of the health insurance contribution assessed based on Standard A (i.e. income-based assessment)

Property-based contribution: property-based contribution rate should be 1/4 of income-based contribution on average.

Scope of property: financial assets + real estate assets (the rate of market-value adjustment of assessment standard is assumed to be 80%.)

Microsimulation was conducted to estimate and analyze the expected effect of contribution scheme reform scenarios introduced above. The raw data (based on annualized data) included in the HIES 2014 by Statistics Korea was used for the simulation.

This study analyzes the expected effect of a reform in the contribution assessment scheme that covers a more comprehensive scope of income reported in the HIES, beyond the narrowly defined scope of taxable income, which is currently used as the assessment standard. Therefore, the measured effect of change in the amount of contribution is much higher in this study, compared to the existing contribution scheme, which is based on the scope of taxable income that the health insurance contribution assessment authority (i.e. the NHIS) or the taxing authority can track down in practice. In other words, since the HIES contains unreported business incomes that are not off the radar, it should be noted that reform-driven changes in contribution burden are the maximum effect that is expected when all incomes are subject to contribution assessment—i.e. the potential maximum effect—, rather than the actual effect.

B. Distribution of Estimated Property in the HIES

The HIES does not provide property-related information. However, when the property-based standard is added to the health insurance contribution scheme as in Standard C, information on property distribution by household is needed.

In this section, we came up with a total of 100 cells by combining current income-based 10 deciles included in the 7th-year NaSTaB data (those included in the 2013 data set) and 10 age groups classified according to the householder’s age with a 5-year interval (a total of 10 age groups divided with a 5-year interval from less than 25 to 65 years old or older). Then, the mean and standard deviation of property were estimated for each cell. Under the assumption that property is normally distributed in each cell and the same applies to the data from the HIES, we estimated the distribution of property and used it for analysis.

<Table IV-3> presents the distribution of the average value of property for each cell according to the NaSTaB data and the distribution of estimated property in the HIES based on the former. According to the NaSTaB data (as of 2013), the extent of relative disparity is significant by income decile in the distribution of financial assets. Yet, the disparity is slightly smaller in the distribution of real estate assets in relative terms. As for financial assets, the decile ratio is similar to that of market income in <Table IV-3>. As shown in <Table IV-3>, the ratio of Decile 10 to Decile 1 is much less than 10, which implies that disparity in the distribution of real estate assets by income decile is less than relative income disparity. This is predictable in the sense that the structure of property held by households in Korea is mainly composed of real estate assets and that a considerable number of low-income, post-retirement elderly households hold property like housing based on the life-cycle hypothesis.

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〈Table IV-3〉Joint Distribution of Average Property by Income Decile and Age (Based on the 2013 NaSTaB Data)

(Unit: 1,000 KRW) 30~34 47,531 1,946 10,114 4,837 18,374 16,086 13,982 36,546 43,167 45,174 20,082 35~39 1,626 4,161 15,096 19,085 10,723 25,945 35,717 43,527 43,979 144,509 41,484 40~44 2,451 3,251 8,905 14,704 14,529 22,284 22,865 72,751 42,239 52,398 32,907 45~49 5,316 5,791 8,433 7,601 12,962 18,449 34,047 40,395 66,229 79,347 33,088 50~54 6,792 8,690 8,589 9,787 23,112 17,713 14,438 42,562 38,484 159,300 43,795 55~59 2,354 7,507 18,404 32,594 32,758 24,899 42,736 35,409 66,844 84,634 38,483 60~64 5,982 16,858 21,532 17,772 47,511 36,429 51,326 78,629 43,628 101,557 35,864 65~ 5,707 10,491 18,421 48,240 35,795 50,660 84,801 67,631 49,739 91,875 19,697 Average 5,601 9,707 13,451 18,743 21,191 23,492 33,338 49,963 49,388 90,995 29,897 Real Estate 40~44 24,814 46,183 30,768 36,374 100,051 308,473 117,112 207,958 236,547 334,916 167,225 45~49 104,033 37,246 25,573 82,831 37,295 97,608 228,873 358,777 465,842 750,505 257,451 50~54 82,500 127,511 43,352 47,658 94,572 142,488 196,823 368,371 325,575 560,021 242,048 55~59 3,368 30,016 84,884 169,304 177,879 178,955 223,087 279,959 387,167 609,031 240,568 60~64 23,801 118,936 222,662 141,838 335,244 276,310 261,245 276,912 301,919 372,299 224,400 65~ 72,940 120,474 205,394 290,859 319,371 279,561 555,959 467,254 649,440 1,035,882 177,770 Average 65,962 95,929 107,834 92,635 118,277 139,849 189,290 208,885 294,455 474,299 170,064 Note: Based on estimations made by the authors

Source: Calculated by the authors based on the 2013 NaSTaB data

C. Incidence by Income Decile

<Table IV-4> shows the results of the health insurance contribution distribution by income decile estimated through the simulation of reform scenarios (Refer to Subsection A above.). Here, it needs to be noted that the

income information contained in the HIES was investigated more comprehensively than incomes reported to the taxing authorities during tax return.

As for the reformed standard for contribution assessment, we applied the consolidation of the current scheme into a single income-based one (Standards A and B) and the combination of income-based and property-based schemes (Standard C). The key of all three standards is to expand significantly the scope of income subject to contribution assessment. When the rate of insurance contribution is maintained at the current level yet the scope of income that is subject to contribution assessment is expanded and includes unreported incomes exceeding the current size of taxable income tracked down by the taxing authorities, the amount of contribution assessed based on reformed scenarios is expected to be the maximum possible level and, thus, increase greatly, compared to the current level.

〈Table IV-4〉Post-Reform Distribution of Health Insurance Contribution Burden by Income Decile Private Income 6,414 13,525 20,939 28,187 34,951 40,516 49,349 58,379 71,999 106,336 43,056 16.6 Private Transfer

Income 1,386 1,888 1,862 2,147 2,015 3,019 2,714 2,648 2,892 3,644 2,421 2.6 Public Pension 2,050 2,100 2,267 1,877 1,841 2,358 1,433 1,765 1,605 2,043 1,934 1.0

Other Social

Security Benefits 594 869 692 655 950 677 613 742 614 456 686 0.8 Public Transfer

Income 2,644 2,970 2,959 2,533 2,791 3,035 2,046 2,507 2,219 2,499 2,620 0.9 Gross Transfer

Income 4,042 4,858 4,830 4,679 4,801 6,041 4,733 5,129 5,087 6,119 5,032 1.5 Gross Income 10,456 18,383 25,769 32,866 39,752 46,557 54,083 63,508 77,086 112,455 48,088 10.8 Income Tax 21 90 216 412 684 1,007 1,447 2,295 3,499 8,304 1,797 395.4

Property Tax 71 110 119 150 199 210 205 313 258 405 204 5.7

Direct Tax 92 201 334 562 882 1,216 1,651 2,608 3,757 8,709 2,001 94.7 Public Pension

Contribution 34 164 419 614 964 1,192 1,440 1,747 2,219 3,070 1,186 90.3 Health

Insurance Contribution

150 324 501 706 1,000 1,122 1,298 1,578 1,954 2,724 1,136 18.2

Effect of Reform in the National Health Insurance Contribution Scheme:

Standard A 117 358 627 871 1,158 1,391 1,687 2,007 2,446 3,671 1,433 31.4 Standard B 130 368 635 881 1,167 1,400 1,694 2,015 2,453 3,677 1,442 28.3 Standard C 381 573 788 984 1,213 1,400 1,636 1,893 2,243 3,223 1,433 8.5 Other Social

187 506 961 1,386 2,057 2,425 2,876 3,499 4,384 6,045 2,432 32.3

Total Direct Tax 279 706 1,295 1,948 2,940 3,641 4,527 6,107 8,141 14,754 4,433 52.9 Disposable

Income 10,177 17,677 24,473 30,918 36,812 42,916 49,556 57,400 68,946 97,701 43,655 9.6 Value Added

Tax 402 726 1,084 1,377 1,701 1,959 2,238 2,554 2,844 3,868 1,875 9.6 Individual

Consumption Tax

43 96 148 161 276 277 321 434 484 805 305 18.7

Traffic〮Energy〮En

vironmental Tax 36 144 393 519 660 810 946 1,007 1,224 1,543 728 42.9

Liquor Tax 53 86 116 156 153 153 188 197 213 231 155 4.4

Tobacco Tax 72 120 165 183 174 182 187 165 164 148 156 2.1

Total Excise

Tax 607 1,172 1,906 2,396 2,965 3,381 3,880 4,357 4,929 6,595 3,219 10.9 Post-Tax

Income 9,570 16,505 22,567 28,522 33,847 39,535 45,676 53,043 64,017 91,106 40,436 9.5 In-Kind Basic

Living Security Benefits

828 86 0 0 0 0 0 0 0 0 91 0.0

Health Insurance

Benefits 2,420 2,275 2,167 2,059 1,999 2,078 2,008 2,067 2,063 2,091 2,123 0.9 Education 158 475 1,096 2,083 2,555 3,191 3,531 4,236 4,610 5,578 2,751 35.3

Childcare 0 31 176 371 486 477 473 445 466 289 321

-Housing 11 19 36 31 36 11 3 1 0 0 15 0.0

In-Kind Benefits 3,418 2,887 3,475 4,544 5,076 5,757 6,014 6,750 7,139 7,958 5,302 2.3 Final Income 12,988 19,392 26,042 33,066 38,923 45,292 51,690 59,793 71,157 99,064 45,738 7.6 Earned〮Business〮

Lease〮Annuity Income

5,635 11,850 19,349 26,093 33,746 40,048 47,897 56,654 69,616 101,644 41,250 18.0

〈Table IV-4〉Continue

Standard C 231 249 287 278 213 278 338 315 289 499 297

Ratio to Gross Current Level 1.43 1.76 1.94 2.15 2.52 2.41 2.40 2.48 2.53 2.42 2.36

Standard A 1.12 1.95 2.43 2.65 2.91 2.99 3.12 3.16 3.17 3.26 2.98 Standard B 1.24 2.00 2.46 2.68 2.94 3.01 3.13 3.17 3.18 3.27 3.00 Standard C 3.64 3.12 3.06 2.99 3.05 3.01 3.02 2.98 2.91 2.87 2.98

Ratio to Current Level 2.66 2.73 2.59 2.71 2.96 2.80 2.71 2.79 2.81 2.68 2.75

Standard A 2.08 3.02 3.24 3.34 3.43 3.47 3.52 3.54 3.51 3.61 3.47 Standard B 2.31 3.11 3.28 3.38 3.46 3.50 3.54 3.56 3.52 3.62 3.50 Standard C 6.76 4.84 4.07 3.77 3.59 3.50 3.42 3.34 3.22 3.17 3.47 Note: 1. Except health insurance benefits and health insurance contribution, the rest of the analysis above

cites <Appendix Table 2> in Sung Myung-jae (2016). For the distribution of health insurance benefits, the parameters used for the year 2013 were revised and estimated using performance values from the 2014 data because there was no information available on average health insurance benefits per capita by gender and age when Sung (2016) performed the estimation.

In addition, the distribution according to the reform of contribution assessment is based on estimations made by the authors using the raw data of the HIES by Statistics Korea.

Source: Calculated by the authors based on the HIES data

The amount of health insurance contribution according to each standard (1.433 million KRW per household [Standards A and C] to 1.442 million KRW [Standard B]) is estimated to greatly increase from the current level (1.136 million KRW). The increase rate of contribution is 26.1% in Standards A and C and 26.9% in Standard B, showing that the latter is a little higher than the former. Standard A and Standard B have a quite similar character because both of them are income-based with the only difference being whether or not the lower limit is set on insurance contribution. In other words, Standard B imposes the minimum amount of contribution on those who earn the lowest income and

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Standard A does not while both of them assess contribution based on income.

It is a natural outcome that Standard B with the lower limit on contribution shows a slightly higher level of the total contribution burden than Standard A across all income deciles.

In the case of a shift toward a single income base, it is estimated that a change in the level of contribution burden becomes quite asymmetrical by income decile. In both Standards A and B, the average contribution burden on Income Decile 1, which refers to the lowest 10%, decreases by 33,000 KRW (Standard A) or 20,000 KRW (Standard B) while the contribution level increases in the remaining income deciles. In particular, the higher the income decile is, the level of absolute burden goes higher (Refer to [Figure IV-4].) As for Deciles 3 to 10, the increase rate of contribution burden fluctuates in the range between 16% and 35%, but the deviations of the contribution increase rate are not significant by income decile (Refer to [Figure IV-5].)

The average health insurance contribution declines only in Decile 1, unlike other income deciles. Since the share of income is smaller than that of property in Decile 1, the amount of contribution gets smaller in that group if the contribution scheme changes to a single, income basis from the current system in which contribution assessment for the self-employed insured is based on other components than income (e.g. property, automobile ownership, etc.) Recently, elderly households makes up a near majority of the low-income class—especially Decile 1. From the life-cycle perspective, elderly households belong to the retirement period. Also, the level of average property accumulation is higher than other age groups due to the characteristics of the old age.

As shown in [Figure IV-6], the fact that the share of property is higher than that of income in Decile 1 proves this point. In the case of the self-employed insured, this leads to a relatively larger amount of contribution compared to income level since the level of property they hold is also subject to contribution assessment under the current system. Therefore, those in the lowest-income decile should pay a relatively higher level of health insurance contribution according to the value of property they have under the current system because the share of property is relatively larger among those with the lowest income. If the insurance contribution scheme is converted to a single income basis, the absolute burden will be reduced.

As explained briefly above, the difference between Standards A and B consists in whether or not the lower limit is applied to insurance contribution.

Generally, those who earn income less than the minimum standard are more likely to be the low-income class. Also, the number will decrease as the level of income increases. This expectation holds true in the result of our estimation as well. The differential in insurance contribution between Standards A and B is an average of 13,000 KRW in Decile 1, followed by 8,000 KRW in Decile 3, 9,000 KRW in Decile 5, 8,000 KRW in Decile 8 and 6,000 KRW in Decile 10, which shows that the differential decreases more gradually in higher-income deciles.

In Standard C, the average value of the total contribution burden is the same as Standard A except that 20/100 of the average amount of the total contribution is subject to a single contribution rate in proportion to the total value of property (80% for real estate assets). If the rate of contribution to the value of property is inversely calculated for the average burden per household of property-based contribution to be 1/4 of income-based contribution based on the distribution of estimated property of the HIES estimated in Subsection B above, the value is estimated to be 0.164%.

If Standard C is applied (with the rate of contribution to the value of property being 0.614%), the average amount of the total contribution is the same as Standard A, but it is estimated that a change in the amount of burden exhibits a very different pattern from Standard A. In Standards A and B where contribution is assessed solely based on income, the average amount of contribution burden decreases in Decile 1, the figure increases greatly in Standard C. On the contrary, the rate of change in health insurance contribution is estimated to decrease in higher-income deciles, compared to Standards A and B. As such, the decile ratio (=10 decile ÷ 1 decile), which measures the progressivity of health insurance contribution, is estimated to decrease 8.5 times—much less than Standard A (31.4 times) and Standard B (28.3 times) not to mention the current level (18.2 times). Since this is smaller than the decile ratio of market income or gross income, the income redistribution effect of Standard C is estimated to have a negative value. Based on our cross-sectional analysis, Standard C’s effect on income redistribution is expected to have a negative value. This phenomenon seems to result from a discrepancy between

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the distribution of income and that of property.

A negative income redistributive effect of a property basis incorporated into the contribution scheme is largely due to the fact that the analysis focuses on a short-term structure of income redistribution structure from a cross-sectional perspective while ignoring the life-cycle effect. Thus, caution should be paid that the effect of the incorporation of a property-based assessment on the redistribution of lifetime income does not always have a negative value when reevaluated based on lifetime income in accordance with the life-cycle hypothesis.

[Figure IV-4] Effect of Health Insurance Contribution Reform on Contribution Amount by Income Decile (Change in Amount)

(Unit: 1,000 KRW)

Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Average (Unit: 1,00 0 KRW)

Standard A Standard B Standard C

Source: Based on estimations made by the authors through an analysis of the raw data in the HIES 2014 by Statistics Korea

[Figure IV-5] Effect of Health Insurance Contribution Reform on Contribution Amount by Income Decile (Change Rate)

(Unit: %)

Decil e 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Average Standard A Standard B Standard C

Source: Based on estimations made by the authors through an analysis of the raw data in the HIES 2014 by Statistics Korea

[Figure IV-6] Distributions of Income Share and Gross Property Share by Income Decile (Based on Estimation Results of the 2009 NaSTaB Data)

(Unit: %, times)

Decile 1 Decile 2Dec ile 3Decile 4 Decile 5 Decile 6 Decile 7 Decile 8Decile 9 Decile 10

Relative Ratio of Gross Property Share to Income Share

Source: Illustrated based on the contents of <Table III-2> in Sung Myung-jae (2011)

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D. Income Redistributive Effect

Compared to their income level, some of the self-employed insured should pay a relatively higher contribution despite a low level of income under the current contribution scheme because of a disparate assessment standard including property (e.g. automobile, etc.). This adversely affects the progressivity of the distribution structure of health insurance contribution burden.

First, if the health insurance contribution scheme is consolidated to a single, income-based assessment as in Standards A and B, the progressivity of health insurance improves due to the asymmetrical distribution of the income that is subject to contribution assessment by gross income decile—i.e. the distribution structure where a higher-income decile has a higher percentage of the income subject to assessment out of gross income. Additionally, since the scope of income that is subject to contribution becomes more comprehensive when the health insurance contribution scheme is reformed, health insurance contribution also increases by 26 to 27% from the current level. In other words, the reform will result in an increase in both the progressivity of health insurance contribution burden and the size of the total health insurance.

If other conditions are the same, the income redistributive effect gets larger as progressivity in the structure of contribution burden increases. Meanwhile, an increase in the size of the total contribution burden, the tax burden structure of which is progressive vis-à-vis income, also means an increase in the income redistribution effect of health insurance contribution when other conditions are the same. Therefore, the contribution scheme is converted to an income-based one will lead to an improvement in the income redistribution effect of health insurance contribution because both the progressivity of the contribution burden structure and the scale of total health insurance contribution burden will increase.

[Figure IV-7] presents changes in the Gini coefficient in each major item stage, from the market income stage to the final income stage, as of 2014 under the current health insurance system. In the case of health insurance contribution, the current level of Gini coefficient and the expected levels of the post-reform Gini coefficient are listed side by side. [Figure IV-8] shows the income redistribution effect by item, which was measured based on the relative ratio

by calculating the ratio of reduction in the Gini coefficient to the Gini coefficient of the previous stage with the private income Gini coefficient as the denominator.

Also, it shows the income redistribution effect expressed as the post-reform Gini coefficient reduction rate.

As a result, when the contribution scheme is converted into an income-based assessment (Standards A and B), the post-tax income-based Gini coefficient (income after health insurance contribution) was estimated to be slightly smaller than in the present. This implies, as examined above, that when the contribution

As a result, when the contribution scheme is converted into an income-based assessment (Standards A and B), the post-tax income-based Gini coefficient (income after health insurance contribution) was estimated to be slightly smaller than in the present. This implies, as examined above, that when the contribution