Issues of the Current Contribution Scheme

Possible problems regarding the health insurance contribution scheme are divided into three main areas. The first area includes problems related to whether the total amount and fiscal balance of the health insurance finance are adequate from the macro-fiscal perspective. In other words, some questions can be raised if fiscal resources provided by a certain contribution scheme are adequate enough to ensure sound and sustainable finance. The second area is related to a set of questions concerning equity from the micro-fiscal perspective: i.e. equity in contributions among individuals or classes defined by certain characteristics. The third area concerns how a contribution scheme is executed in the operational process, rather than the design of the scheme itself. This is related to errors, corruption or other work inefficiencies that can occur in the process of executing a given contribution scheme.

Most of the problems raised about the health insurance contribution scheme are related to the issue of equity. As discussed earlier, equity issues arise from ambiguousness concerning whether the key criteria in contribution assessment are based mainly on income or the standard of living. Equity here refers to whether contribution is made fairly among two or more groups. Thus, according to which groups are in comparison, the equity issue can be divided again into the one between the employee insured and the self-employed insured and the one within each group with the same employment status. The latter’s case, comes down to a problem in which the upper class bears relatively less burden than the lower class as the comparison is based on income or the standard of living within each group with the same employment status. In the former’s case—i.e.

equity between the employee insured and the self-employed insured—, the problem of measurement and different standards of contribution assessment come in to play as complex factors, on top of the above problem.

To look at representative problems in which these equity issues are pointed out to be present in specific ways and, thus, need improvement, they include differences by employment status in such aspects as contribution assessment factors, the eligibility of dependents, income calculation criteria and the subject of contribution payment.

A. Difference in Contribution Assessment Factors by Employment Status

As for most of the employee insured (those with global income of 72 million or less KRW, contribution is assessed based on earned income only. In contrast, it is difficult to track down the income of the self-employed. For this reason, contribution paid by the self-employed insured is assessed based on every item, such as property and automobile, through which the ability to pay can be determined. Included in property are real estate, key-money lease/monthly rent, etc., and most of the property owned by the self-employed insured are housing for residential purposes. Contribution is assessed based on automobile and property although they do not generate actual income. Also, the object of contribution assessment in the case of the self-employed insured includes interest, dividend, business, annuity and other incomes, from which inequity arises. For the employee insured, contribution is imposed only on earned income even when their global or financial income is the same as or more than that of the self-employed insured. As for the self-employed insured, however, contribution assessment includes every single item of income. Therefore, the burden of health insurance contribution can be higher on the self-employed insured even when the employee insured and the self-employed insured might have the same amount of income.

Another issue of concern on inequity between the employee insured and the self-employed insured is the share of contribution. Currently, the employee insured pay 50% of the contribution and the rest is paid by the employer whereas the self-employed insured pay 100% of the contribution, which has caused a controversy over inequity. However, from the economic perspective, the 50%

contribution borne by the employer is actually passed on to employees in the form of the labor costs, and employees get to pay the whole or part of it. Also, the claim about inequity is untenable since it overlooks the fact that the government takes up the role of the employer in bearing financial support that corresponds to contributions paid by the self-employed insured. The misguided perception seems to be due to the legal provision on the governmental support, from which it is difficult to recognize that such governmental support corresponds to the ‘contribution borne by the employer’ in the case of the self-employed insured.

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Yet, inequity occurs not only between the employee insured and the self-employed insured, but also within the self-employed. The employee insured should pay an additional contribution of 180,000 KRW if their global income other than earned income is 72.01 million KRW. But if their global income is 71.99 million KRW, they do not have to pay any additional contribution.

That is, the difference of only 20,000 KRW in annual incomes results in an additional contribution as much as 180,000 KRW, and this has led to complaints.

Within the self-employed insured, different grades are assigned according to contribution assessment factors, such as income, property, labor force participation and automobile. However, the grading system is not standardized;

neither does the score for each item. Still, the amount of contribution is assessed by tallying up the scores, assigning one of 105 grades to the sum of the scores and, then, multiplying it by the amount per point.

B. Eligibility of Dependents

Depending on employment status, the eligibility criteria for dependents differ as well. While there is no limit in the number of dependents to be covered for the employee insured, all household members of the self-employed insured should share the payment of contribution as the insured since such factors as gender, age, labor participation rate. In the case of the self-employed insured, all household members of the self-employed insured should share the payment of contribution because the amount of contribution is assessed by household based on gender, age and labor force participation rate, etc. In practice, therefore, dependent coverage applies to the employee insured only.

To take a look at the eligibility of dependents for the employee insured, eligibility is approved if each item of global income is less than 40 million KRW, In other words, dependents are considered eligible not when the total global income does not exceed 40 million KRW, but so long as all of the following requirements are met at once: interest and dividend incomes of less than 40 million KRW; earned and other incomes of less than 40 million KRW, annuity income of less than 40 million KRW and business income of 5 million KRW or less. As such, controversies over inequity can ensue since it amounts to a free ride in comparison to employees or self-employed persons who should

pay insurance contributions if they have earned income as few as 5 million KRW.

C. Regressivity in Assessment of Contribution by the Self-Employed Insured

In the case of the self-employed insured, the contribution scheme is regressive since contribution burden is likely to be less for those with more income and/or property. Of course, regressivity exists to a certain degree also in the case of the employee insured due to the upper and lower limits of contribution, but it is not as serious as in the case of the self-employed insured where the contribution rate drops drastically as income and property increase. The reason for the regressivity in the latter’s case is that there are grades according to the level of income or property with points assigned to each grade yet the points do not go up in direct proportion to the income level.

Let us examine the rate of contribution (monthly contribution/the median value of annual income divided by 12 months) based on the monthly contribution calculated by multiplying points assigned to a given grade by the amount per point. As for the Grade 1 with the low income, the contribution rate is 14.9%, which is more than twice that of the employee insured (6.12%). Meanwhile, Grade 50’s contribution rate stands at 2.8%, which is a significant decrease to as few as about a fifth of that of Grade 1. This clearly reveals regressivity in contributions made by the self-employed as the more income one has, the lower the ratio of the contribution rate to income becomes.

Property-based contribution assessment shows a much more serious degree of regressivity. While the amount of property soars by 3,000 times from Grade 1 to Grade 50, the difference in points between the two grades is merely 67 times (1,475 points/22 points). As such, while the property-based contribution is to the tune of 58% in Grade 1 (the poor class with almost no property) the figure posts just 3.5% in Grade 50 (the wealthy class with a large amount of property). As the property-based grade goes down, the property-based contribution rate increases at a more abrupt pace. This shows how regressive property is as a contribution assessment base for the self-employed insured.

Ⅲ

Previous Studies and Introduction of Scenarios

1 Previous Studies

Previous studies on the national health insurance contribution scheme have focused on reform scenarios i.e. policy reforms about how the current contribution scheme is to be changed. However, we aim to focus on the effects of changes in a reform scenario on redistribution and the finance of the health insurance, rather than the scenario itself. However, the effects can differ greatly depending on how a scenario is designed, which leads us to find it necessary to analyze scenarios first. Thus, we begin this chapter by reviewing previous studies on reform plans.

In response to the consolidation of the finance of the National Health Insurance in 2002, Choe Byeong-ho et al. (2001) raise the equity problem in the current contribution scheme and discuss improvement measures with the scope of their study limited to the self-employed insured. They suggest two alternatives. One way (Alternative 1) is to grant points to each factor like gender, age, income, property and automobile and, then, add all the granted points to assess the amount of contribution. And the other way (Alternative 2) is to assess the amount of contribution only based on income, property and automobile for those with a certain level of income or more and based on gender, age, property and automobile, instead of income, for those with less than a certain level of income. In their study, a comparison is made between the two alternatives and the current scheme, and they present the attendant changes in contribution. In a comparison between Alternative 1 and the current scheme, 82.48% of the

households with no income data is expected to pay less while 72.73% of the households with income data is expected to pay more. Also, to take a further look at the households with income data by income level, those with lower income are expected to experience the lowest increase in contribution.

In their research for the NHIS, Lee Yong-gap et al. (2006) suggest an income-centered, equitable contribution scheme plan. While income is selected as the contribution assessment factor, they include capital gain to reflect the payment ability based on property. Therefore, a person who has income (earned income and global income) pays the contribution in proportion to his or her income whereas for a person who has property yet no income, the amount of contribution is assessed in proportion to capital gain. And a person who has no income pays just the basic contribution (4,000~7,900 KRW.) As for minors under 19 years old, the authors claim that they are to be exempt from contribution because they are dependents. As for people who need social protection (seniors aged 65 or older or the disabled, etc.), they argue that a reduction in contribution or exemption should be considered.

In Lee Yong-gap et al. (2006), a transitional model is designed in consideration of the current conditions, and four scenarios are presented as per the rate of contribution and basic contribution. According to their simulation analysis, the contribution burden decreases for the households of the self-employed insured and the burden increases for the households of the employee insured by 17-19%

while the neutrality of the entire finance is maintained.

Their study marks the first to propose a specific idea on basic contribution.

Overall, the proposed alternative is income-centered yet partially considers property in that property-based contribution is imposed on the wealthy with a large amount of property while contribution assessment is based on income.

Of course, there remain concerns about a significant rise in contribution for the employee insured and the public’s acceptance of contribution assessment based on capital gain.

In Shin Young-seok el al. (2007) and Shin Young-seok (2011), a reform plan is divided into short-term and mid- to long-term tracks as part of a measure to secure the finance of the national health insurance. For the short-term, the research points out areas in which improvement can be made quickly under the current contribution scheme; for the mid- to long-term, it argued for an

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income-based, single contribution scheme. As for the short-term plan, the research proposes the strengthening of the criteria for dependent eligibility, the disqualification of a person with annuity or business/lease income of one million KRW or more as a dependent, the reorganization of the scheme of double contribution assessment regarding property and automobile, the abolishment of the 5 million KRW income criterion for the self-employed insured, the introduction of basic contribution, and a shift in assessment base from evaluated income to taxable income. And the mid- to long-term plan argues for an income- centered reorganization by adopting such measures as the change of employment status for those working at a workplace with one or more employees from the self-employed insured to the employee insured, the introduction of basic contribution (for 20% of the whole nation including farmers and fishermen, the low-income vulnerable class and self-employed small business owners) and the expansion of contribution assessment base to include incomes other than earned income.

In their research for the NHIS, Shin Hyeong-jun et al. (2008) present a follow-up study on policy measures to improvement equity in the contribution scheme. Instead of a complete reform, the study focuses on a partial reform to address certain unreasonable elements in the existing system, which includes the abolishment of the 5 million KRW income criterion for the self-employed insured, the introduction of basic contribution, and improvement of the employee insured’ dependent scheme. Shin et al. takes a reserved position about a complete shift toward an income-centered contribution scheme based on their analysis, which shows that the income estimation rate is only about 40% in the case of the self-employed insured (24% in the case of households with the income of 5 million KRW or less.) For this reason, they propose a scenario that abolishes the 5 million KRW income criterion for the self-employed insured (less than 5 million KRW for 84.2% of the self-employed insured and 5 million KRW or more for 15.8% of the self-employed insured), unifies the income grade system, replaces the points assigned according to gender and age in the contribution assessment based on the standard of living with the introduction of basic contribution based on age and assesses the amount of contribution by abolishing the existing redundancies, such as income, automobile and property, in the contribution assessment based on the standard of living. According to

the scenario, the contribution is assessed, instead, by multiplying total points (i.e. basic points + income points + property points + automobile points) by the amount per point.

In this study, Shin et al. conduct a simulation analysis on two models in which points are differently distributed among contribution assessment factors.

Thus, Model 1 is characterized by a high concentration of points in the property factor and Model 2 in the income factor. The result of analysis of Model 1 (a larger share of the property factor) indicates that 24% of the households would see an increase in their insurance contributions while 76% would pay less contribution. In the case of Model 2 (a larger share of the income factor), the result shows that 25% is expected to pay more and 75% to pay less, which indicates no significant difference between the two models.

As for research by Korea Employers Federation (2012), it is pointed out that the establishment of an equitable contribution scheme is a more urgent task rather than the consolidation of the different contribution schemes applied to the employee insured and the self-employed insured. Regarding a change to an income-centered contribution assessment scheme, they also argue there will be much weightier burden on the national treasury due to a loss arising from excluding property and automobile from the contribution assessment base for the self-employed insured as well as an already low rate of income estimation within the group. Still, their research stops short of coming up with a specific reform plan while proposing only the improvement of the unreasonable dependent scheme.

Ryu Geon-sik (2011) introduces 5 brief plans regarding the reform of the contribution scheme. In the first plan, he calls for the strengthening of income estimation measures on the self-employed insured and the reduction of contribution assessed based on housing and automobile. The second and third plans are related to the strengthening of dependent eligibility criteria (the exclusion of siblings and the disqualification of person with a certain amount of property.) The fourth one includes a phased expansion of the contribution assessment base for the employee insured from earned income to non-earned income (starting with annuity income.) And the fifth plan concerns a shift toward an income-centered contribution scheme regardless of employment status in the mid to long term.

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Shin Hyeon-woong (2015) narrows the problems of the current contribution scheme down to three: the inclusion of property and automobile in the contribution assessment on the self-employed; contribution assessment based only on earned income in the case of the employee insured; and lax eligibility criteria on the dependents of the employee insured. In that regard, he suggests limiting the assessment base to income while extending the object of contribution assessment to include non-earned income, and strengthening the dependent eligibility criteria.

2 Introduction of Scenarios

The purpose of this study is to establish simple and reasonable standards for the health insurance contribution scheme and focus on the analysis of its effect, not to present a new reform scenario. The basic principle for the reform that this study has looked at is to eliminate a distinction between the employee insured and the self-employed insured and assess the amount of contribution in proportion to the ability to pay. Here, the ability to pay is to be based on

The purpose of this study is to establish simple and reasonable standards for the health insurance contribution scheme and focus on the analysis of its effect, not to present a new reform scenario. The basic principle for the reform that this study has looked at is to eliminate a distinction between the employee insured and the self-employed insured and assess the amount of contribution in proportion to the ability to pay. Here, the ability to pay is to be based on