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The Effects of Reform in the National Health Insurance Contribution Scheme: on Equity in Health Insurance Contribution Burden

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(1). Research Paper. The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. December 2017. Eunkyeong Lee John M. Kim Myung-jae Sung Chang-woo Lee.

(2) Korea Institute of Public Finance 336, Sicheong-daero, Sejong-si, Korea Tel: 82-44-414-2114 Fax: 82-44-414-2179 URL: www.kipf.re.kr ◯ C 2017 KIPF.

(3) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. December 2017. Eunkyeong Lee ․ John M. Kim ․ Myung-jae Sung ․ Chang-woo Lee.

(4) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 2. Contents. Ⅰ. Introduction ······························································································ 7 Ⅱ. Current State and Issues of the National Health Insurance Contribution Scheme ··············································································· 12 1. Current State of the Contribution Scheme ······································ 12 2. Issues of the Current Contribution Scheme ····································· 17 Ⅲ. Previous Studies and Introduction of Scenarios ······························· 21 1. Previous Studies ················································································ 21 2. Introduction of Scenarios ·································································· 25 Ⅳ. Effect of Reform in the National Health Insurance Contribution Scheme: Cross-Sectional Analysis ······················································· 27 1. Background ························································································ 27 2. Analysis of Income Redistributive Effects ······································ 28 3. Expected Effects of Improvement in Insurance Contribution Assessment ························································································ 43 Ⅴ. Effect of Reform in National Health Insurance Contribution Scheme: Longitudinal Analysis ············································································ 59 1. Current State of Contribution Burden on Households ···················· 60.

(5) Contents. 3 The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 2. Change in Insurance Contribution Burden by Scenario ·················· 69 3. Analysis of Redistributive Effect ····················································· 81 Ⅵ. Conclusion and Policy Implications ····················································· 89 References ······································································································································· 94.

(6) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 4. List of Tables. <Table II-1>. Changes in the Rate of Health Insurance Contribution for the Employee Insured and the Amount borne by the Self-Employed Insured per Point ··················································································· 14. <Table II-2>. Current State of the Employee Insured and the Self-Employed Insured ······ 15. <Table II-3>. Insurance Contribution Revenue by Year ················································· 16. <Table IV-1>. Descriptive Statistics of the Household Income and Expenditure Survey (Annualized Basis) by Statistics Korea (As of 2014) ··················· 29. <Table IV-2>. Distributions of Various (Cash) Transfer Incomes by Income Decile ········ 40. <Table IV-3>. Joint Distribution of Average Property by Income Decile and Age (Based on the 2013 NaSTaB Data) ························································· 47. <Table IV-4>. Post-Reform Distribution of Health Insurance Contribution Burden by Income Decile ·························································································· 48. <Table V-1>. Current State of Household Income and Health Insurance Contribution Burden ················································································· 62. <Table V-2>. Longitudinal Analysis (2009-2014): Gross Household Income, Health Insurance Contribution and Contribution Burden Rate ······························ 64. <Table V-3>. Average Income, Average Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile: by Household ··················· 65. <Table V-4>. Households with the Employee Insured: Average Income, Average Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile ······················································································· 67. <Table V-5>. Households with the Self-Employed Insured: Average Income, Average Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile ········································································ 68. <Table V-6>. Health Insurance Contribution and Contribution Burden Ratio by Household in Standard A ··································································· 70. <Table V-7>. Longitudinal Analysis of Standard A: Incomes Subject to Contribution Assessment, Household Insurance Contribution and Contribution Burden Ratio ···························································································· 72.

(7) Contents. 5. <Table V-8>. Average Income, Average Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile in Standard A ·················· 73. <Table V-9>. Health Insurance Contribution and Contribution Burden Ratio by Household in Standard B ··································································· 75. <Table V-10> Longitudinal Analysis of Standard B: Incomes Subject to Contribution Assessment, Household Insurance Contribution and Contribution Burden Ratio ····································································· 77 <Table V-11> Income, Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile in Standard B ································ 78 <Table V-12> Income-Based Contribution Rate and Property-Based Contribution Rate By Household in Standard C ······················································· 80 <Table V-13> Income, Insurance Contribution and Contribution Burden to Income Ratio by Income Quintile in Standard C ············································· 81 <Table V-14> Redistributive effect of Health Insurance Contribution (2009-2014) ··· 83 <Table V-15> Longitudinal Analysis: Redistributive Effect of Health Insurance Contribution ···························································································· 83 <Table V-16> Redistributive Effect of Health Insurance Contribution in Standard A (2009-2014) ···························································································· 84 <Table V-17> Longitudinal Analysis: Redistributive Effect of Health Insurance Contribution in Standard A ··································································· 85 <Table V-18> Redistributive Effect of Health Insurance Contribution in Standard B (2009-2014) ···························································································· 86 <Table V-19> Longitudinal Analysis: Redistributive Effect of Health Insurance Contribution in Standard B (2009-2014) ·············································· 87 <Table V-20> Redistributive Effect of Health Insurance Contribution in Standard C (2009-2014) ···························································································· 87 <Table V-21> Longitudinal Analysis: Redistributive Effect of Health Insurance Contribution in Standard C (2009-2014) ·············································· 88.

(8) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 6. List of Figures. [Figure IV-1]. Gini Coefficient by Income Stage (Estimation Results of Raw Data from the HIES) ······························ 34. [Figure IV-2]. Change Rate of Gini Coefficient by Income Item (Estimation Results of Raw Data from the HIES) ······························ 39. [Figure IV-3]. Change Rate of Gini Coefficient per One Million KRW of Burden/Benefit per Household by Income Item (Estimation Results of the HIES) ························································· 41. [Figure IV-4]. Effect of Health Insurance Contribution Reform on Contribution Amount by Income Decile (Change in Amount) ································· 53. [Figure IV-5]. Effect of Health Insurance Contribution Reform on Contribution Amount by Income Decile (Change Rate) ··········································· 54. [Figure IV-6]. Distributions of Income Share and Gross Property Share by Income Decile (Based on Estimation Results of the 2009 NaSTaB Data) ······ 54. [Figure IV-7]. Gini Coefficient by Stage: Effect of Reform in Health Insurance Contribution Scheme ·············································································· 57. [Figure IV-8]. Income Redistributive Effect of Reform in Health Insurance Contribution Scheme ·············································································· 58. [Figure V-1]. Household Contribution Burden Ratio by Income Quintile ················· 66.

(9) Ⅰ Introduction. Generally, the healthcare system for public health mobilizes its financial resources from the public sector and operates in the form of social insurance or taxation. In Korea, health insurance is operated as social insurance. There are three main reasons for justifying such governmental intervention (i.e. social insurance) in goods that the private sector can provide like private insurance (Boadway et al., 2006). First, the administrative expense of social insurance is lower than that of private insurance. Another reason concerns market failure due to information asymmetry. In private insurance, information asymmetry occurs between the insurer and the insured as a result of adverse selection and moral hazard. The same applies to the supplierinsurer relationship as well. Lastly, social insurance serves as a redistributive device. While private insurance is characterized by voluntary purchase, risk-rated insurance premiums and differentiated benefits depending on contract contents, the national health insurance as social insurance is, in principle, characterized by compulsory purchase, contributions based on the ability to pay (usually measured by income level) and equal insurance benefits (i.e. the use of healthcare services). Due to these characteristics of social insurance, national health insurance plays a redistributive role (Hindriks & De Donder, 2003). First, the group with high health risk pays a lower contribution than the expected risk whereas the group with low risk pays a higher contribution than the expected risk. As a result, the redistribution occurs from the low-risk group to the high-risk group. Second, as the health insurance contribution increases along with income,.

(10) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 8 redistribution takes place from the high-income group to low-income group, even when they face the same risk. In this sense, the national health insurance is functioning as a redistributive device while pooling the health risk of individuals to spread out healthcare expenses. According to Boadway et al. (2006), there is no need to resort to social insurance for redistribution purposes because income tax has a redistributive effect in the first-best situation with perfect information However, social insurance is used as an effective tool for redistribution policy in the second-best situation where there are tax distortions under imperfect information. This is because the redistributive effect of social insurance does not cause the same type of distortion as income tax (Rochet, 1989; Cremer & Pestieau, 1996). In particular, social health insurance exerts a high redistributive impact when risk is negatively correlated with income and low-income class is more likely to be exposed to diseases (Boadway et al., 2001). Among various roles of health insurance as social insurance, this study focuses on its redistributive effects in light of contribution burden. The level of individual contribution burden is determined based on the insurance contribution scheme. Despite the consolidation of the national health insurance finance in the early 2000s, the contribution scheme has been dualized into one for the employee and the other for the self-employed. This has caused a persistent controversy over the issue of equity. It is because insurance contribution is imposed only on earned income in the case of the employee while it is determined by various factors, such as global income, property, automobile, gender and age, in the case of the self-employed. This equity controversy not only hinders social integration but also hampers the financial stability of the health insurance. This study aims to analyze the effects of the reform of the health insurance contribution scheme on the improvement of equity (redistribution) and the finance of the health insurance through the change in contributions paid by households or individuals. The focus of this study does not lie in proposing a yet another alternative in the midst of the controversy over the reform. Rather, its objective is to analyze the effects of a reformed contribution scheme based on the existing alternatives. In doing so, the analysis will be based on the potential level of contribution burden, not limited to the current level of burden. In other words, when we assume that the contribution scheme is reorganized to be single.

(11) Introduction. 9 income-based, the reform effect will be analyzed based on all incomes that can be achieved potentially—including under-reported and unreported incomes—not just on incomes that National Tax Service or National Health Insurance Service (NHIS) is aware of. Generally, when the contribution scheme reform is discussed, revenue-neutral reform is the usual basis. However, this study is not limited to a revenue-neutral reform because it aims to analyze potential effects. To be more specific in terms of methodology, it is because the ultimate purpose of the reform is to increase the range of objects of contribution—i.e. to find and expand the sources of tax revenue. In this respect, the analysis will be conducted based on the expected effects of the reform that includes unreported incomes. Therefore, in our analysis, the contribution level will be slightly higher than the current level. In summary, broadening the scope of incomes subject to insurance contribution assessment means both the diversification of the type of income subject to contribution assessment and an increase in the rate of income reporting. This study uses three standards. Standards A and B are simplifications of the contribution scheme into a completely income-based one. Standard B is a hypothesis that applies minimum contribution while Standard C is a hypothesis in which the contribution assessment base is increased to include all incomes and property regardless of employment status—in contrast to the current scheme that imposes property-based contribution only on the self-employed—by adding a 20% property-based contribution to an 80% income-based contribution. When we assume that the existing contribution scheme is converted to an income-based one according to these three standards, we will look mainly at the redistributive effects of Standard A, which is the most simplified version, and use the effects of Standard C, which is the least feasible yet includes property-based contributions, for comparative purposes. In examining the distribution (incidence) and redistribution effects of the national health insurance system, this study combines the short-term effects from the cross-sectional viewpoint and long-term effects from the life-cycle viewpoint, using two data sources: one from the Household Income and Expenditure Survey (hereinafter the HIES) published from 2006 to 2014 by the Statistics Korea, and the other from the National Survey of Tax and Benefit (hereinafter NaSTaB) published from 2008 to 2014 by the Korea Institute of Public Finance. These.

(12) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 10 data are complementary to each other in the analysis of short and long-term effects. Unlike the public data (sample cohort data provided by the NHIS), they also include detailed information on income and health insurance contribution as well as various demographic and economic variables, which helps analyze the effect of the contribution scheme reform from various angles. The NaSTaB data is longitudinal, and this has several advantages: it distinguishes individual health insurance contributions made by the employee from those made by the self-employed; it allows an accurate look at individual contributions since they are recorded by the units of won; and incomes can be accurately identified since the proof of income tax payment is collected for the NaSTaB data set. However, as only about half of the income tax reporters submit the document of proof, large numbers of income information are omitted in the samples, and there is not sufficient detailed information with which to make an estimate of the omitted income variable. As for the HIES’s cross-sectional data, it is impossible to distinguish the employee insured from the self-employed insured, and many items related to income tax burden are omitted in the data set. However, it has abundant information on the amount of income by individual and income type as well as detailed information needed for the estimation of the income tax burden, which makes it possible to estimate household incomes at a reliable level. What we mean by income here is not taxable income used in the NHIS (i.e. income that the taxation authorities use for tax administration purposes), but a comprehensive concept of income that encompasses unreported nontaxable incomes (transfer income, other incomes subject to separate withholding taxation, and unreported business income, etc.). Since this study aims to analyze incidence and redistributive effects when the object of contribution assessment is expanded to all incomes, we consider it more desirable to base the analysis on the broader and more comprehensive conception of household income. This study consists of the followings. Chapter II presents the current state and problems of the national health insurance contribution scheme. Chapter III first discusses scenario analyses conducted in previous studies and reform scenarios prepared by the aforementioned planning task force, the party-government consultative body and individual parties, and then introduce.

(13) Introduction. 11 a set of scenarios to be used in this study. Chapter IV conducts a cross-sectional analysis on the effect of the reform in the health insurance contribution scheme using the HIES data. Chapter V conducts a panel analysis on the effect of the reform in the health insurance contribution scheme using the NaSTaB data. And lastly, Chapter VI presents the conclusion and policy implications..

(14) Ⅱ Current State and Issues of the National Health Insurance Contribution Scheme. 1. Current State of the Contribution Scheme. In Korea, the national health insurance system was introduced in 1977, and universal healthcare was achieved in 1989. At the time of introduction, insurance contribution was imposed and levied on employees by each workplace association and on the self-employed by separate associations organized at Si/Gun/Gu level. However, as the NHIS became a single insurer in July 2000, a single contribution assessment standard was needed. Initially, the government intended to consolidate the contribution scheme with an income-based standard, but the preexisting separate contribution schemes by employment status were maintained after all because a proper system was not in place to track down individual incomes. Currently, the health insurance contribution scheme1) is largely divided into two parts: the employee insured and the self-employed insured. Looking at each part, however, the scheme can be divided, again, into several groups based on income. In the case of the employee insured, the contribution is imposed per each employee and calculated by multiplying the monthly salary by the rate of contribution (6.12% as of 2016), half of which (3.06%) is paid by the employer. Here, the calculation is based on the monthly salary reported in the. 1) Refer to the “Introduction to the System” section in the NHIS homepage. http://www.nhis.or.kr/menu/retriveMenuSet.xx?menuId=B2230 (Accessed 2016. 7.22.).

(15) Current State and Issues of the National Health Insurance Contribution Scheme. 13 previous year (business income in case of the employer), and the amount is settled based on the total amount of wages of the pertinent year reported after contribution is imposed. Contribution by the employee insured has upper and lower limits. If the monthly salary exceeds 78.1 million KRW, 78.1 million KRW (contribution: 4,779,729 KRW) is applied as the upper limit, and if the monthly salary is less than 0.28 million KRW, 0.28 million KRW (contribution: 17,136 KRW) is applied as the lower limit. Starting from September 2012, if the income other than the wage of a wage earner exceeds 72 million KRW per year, the additional contribution has been imposed on the monthly income based on the income other than wage. The monthly income refers to the income of the employee insured excluding the wage included in the monthly wage, and it is calculated by dividing the sum of the interest income, dividend income, business income, earned income, annuity income and other incomes by 12. Here, the sum reflects 100% of the interest, dividend, business and other incomes and 20% of earned and annuity incomes. For the rate of contribution, 3.06%, which is the rate borne by the employee, is applied on wage income. The rate of contribution for the monthly income does not have a lower limit, but the upper limit is the same as that of the monthly wage of 78.1 million KRW. Contribution for the self-employed insured is imposed per household. The amount of contribution is assessed by calculating a household’s score based on the self-employed subscriber’s income, property, automobile, the standard of living, and labor force participation rate and multiplying the total score by the amount per point. Here, different contribution standards apply based on an annual income of 5 million KRW. For low-income class with an annual income of 5 million KRW or less, income assessment is based on the standard of living and labor force participation rate, and for the households with an annual income of more than 5 million KRW, taxable income is calculated based on global income (20% of wage and annuity incomes and 100% of interest, dividend, business and other incomes). The score for the standard of living and labor force participation rate are divided into 30 grades and taxable income into 75 grades. As for property, which is included in the contribution assessment base regardless of annual income, the score is divided into 50 grades, and the object of contribution assessment includes housing, buildings, lands, ships, airplanes (100%.

(16) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 14 of the assessment standard property tax) and key-money lease/monthly rent (30% of key-money lease/monthly rent). In the case of automobiles, the score is divided into 7 grades considering type, displacement volume and the years of use. As the self-employed insured have no employer who pays half of the contribution, unlike the employee insured, the whole contribution should be paid by households. In the case of the self-employed insured, the minimum contribution is a monthly payment of 3,590 KRW with a score of 20 assessment points and the maximum contribution is a monthly payment of 2,277,330 KRW with 12,680 assessment points. <Table II-1> presents changes in the rate of contribution for the monthly wage and monthly income of the employee insured and the amount of contribution paid by the self-employed insured per assessment point. As of 2016, the rate of contribution for the monthly wage of the employee insured is 6.12% and that for the monthly income is 3.06%, half of the former, and the amount borne by the self-employed insured per point is 179.6 KRW. 〈Table II-1〉Changes in the Rate of Health Insurance Contribution for the Employee Insured and the Amount borne by the Self-Employed Insured per Point (Unit: %, KRW) Rate of contribution for the employee insured Rate of contribution for monthly salary. Rate of contribution for monthly income. Amount borne by the self-employed insured per point. 2006. 4.48. -. 131.4. 2007. 4.77. -. 139.9. 2008. 5.08. -. 148.9. 2009. 5.08. -. 148.9. 2010. 5.33. -. 156.2. 2011. 5.64. -. 165.4. 2012. 5.80. 2.90. 170.0. 2013. 5.89. 2.95. 172.7. 2014. 5.99. 3.00. 175.6. 2015. 6.07. 3.04. 178.0. 2016. 6.12. 3.06. 179.6. Source: NHIS, http://www.nhis.or.kr/menu/retriveMenuSet.xx?menuId=B2230 (Accessed 2016.7.22)..

(17) Current State and Issues of the National Health Insurance Contribution Scheme. 15 <Table II-2> presents the current state of health insurance subscribers by employment status. The number of the employee insured is steadily increasing: in 2005, the number of the employee insured was 27 million (57%) and the self-employed insured 20 million (43%); in 2014, the figures posted 36 million (71%) and 15 million (29%), respectively. This is because employees working at workplaces with fewer than five employees became eligible for the employee insured status as the criteria was eased in 2003; and currently, employees working at workplaces have just one or more full-time employees are classified as the employee insured. On the contrary, the rate of dependents of the employee insured decreased steadily from 64% in 2005 to 57% in 2014, which is can be attributed to the strengthened eligibility criteria for the dependent status during this period. 〈Table II-2〉Current State of the Employee Insured and the Self-Employed Insured (Unit: 1 mil. people, 1 mil. households, %) 2005 Health Insurance Subscribers (A). 2006. 2007. 2008. 2009. 2010. 2011. 2012. 2013. 2014. 4,739 4,741 4,782 4,816 4,861 4,891 4,930 4,966 4,999 5,032. Sub-total 2,723 2,845 2,942 3,042 3,141 3,238 3,326 3,411 3,501 3,560 (B) The employee Subscribers 975 1,042 1,117 1,162 1,215 1,276 1,340 1,399 1,461 1,514 insured Dependents 1,749 1,803 1,825 1,880 1,927 1,962 1,986 2,012 2,040 2,046 (C) Subscribers 2,016 1,896 1,840 1,774 1,720 1,652 1,604 1,556 1,498 1,471 The self(D) employed insured (Number of 838 811 814 806 811 794 790 783 771 775 Households) Percentage of the employee insured (B/A). 57. 60. 62. 63. 65. 66. 67. 69. 70. 71. Percentage of the self-employed insured (D/A). 43. 40. 38. 37. 35. 34. 33. 31. 30. 29. Percentage of dependents (C/B). 64. 63. 62. 62. 61. 61. 60. 59. 58. 57. Source: NHIS, 「National Health Insurance Statistical Yearbook」, Each year.

(18) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 16 <Table II-3> presents the contribution revenue by employment status. As of 2002, of the total contribution revenue of 11 trillion KRW, the contribution paid by the employee insured and the self-employed insured was 7 trillion KRW (63%) and 4 trillion KRW (37%), respectively. In 2014, however, the total revenue was 42 trillion KRW—34 trillion KRW (83%) paid by the employee insured and 7 trillion KRW (17%) by the self-employed insured—, which indicates that the contribution paid by the former group represented an absolute share. In other words, this shows that the finance of Korea’s national health insurance is highly dependent on contributions imposed on earned income. 〈Table II-3〉Insurance Contribution Revenue by Year (Unit: KRW 100 million, %) Insurance Contribution Total (A). Percentage of Percentage of contribution by contribution by the The The employee self-employed self-employed the employee insured (B) insured (B/A) insured (C/A) insured (C). 2002. 109,277. 68,719. 40,558. 63. 37. 2003. 137,409. 91,684. 45,725. 67. 33. 2004. 156,142. 108,283. 47,859. 69. 31. 2005. 169,277. 121,209. 48,068. 72. 28. 2006. 188,106. 138,965. 49,141. 74. 26. 2007. 217,287. 163,485. 53,802. 75. 25. 2008. 249,730. 190,297. 59,433. 76. 24. 2009. 261,661. 202,377. 59,284. 77. 23. 2010. 284,577. 220,831. 63,746. 78. 22. 2011. 329,221. 261,416. 67,806. 79. 21. 2012. 363,900. 293,796. 70,103. 81. 19. 2013. 390,319. 318,751. 71,568. 82. 18. 2014. 415,938. 343,865. 72,073. 83. 17. Note: 1. Based on settled amounts 2. Contribution paid by the employee insured and that by the self-employed insured are based on the assessed amount of contribution and the imposed amount of contribution, respectively. 3. National subsidy is excluded, and contribution paid by the employee insured includes voluntarily and continuously insured persons’ contribution and the monthly income-based contribution 4. Based on actual residence on resident registration Source: NHIS, 「National Health Insurance Statistical Yearbook」, Each year.

(19) Current State and Issues of the National Health Insurance Contribution Scheme. 17 2. 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..

(20) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 18 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..

(21) Current State and Issues of the National Health Insurance Contribution Scheme. 19 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.

(22) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 20 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..

(23) 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.

(24) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 22 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.

(25) Previous Studies and Introduction of Scenarios. 23 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 incomecentered 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.

(26) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 24 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..

(27) Previous Studies and Introduction of Scenarios. 25 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 global income, and all Korean people should pay contributions in principle. Income subject to contribution assessment is global income (earned income, business income, financial income, annuity and other incomes) that is generated regularly. All incomes should be reflected 100% and the contribution rate is 3.06%, which is the rate borne by the employee insured, out of the contribution rate of the pertinent year, 6.12% (as of 2016). In other words, the total contribution rate is 6.12% in the case of earned income, with half paid by the employee and the other half paid by employers. As for the rest of the income, however, the rate starts from 3.06% because there is no employer. Under the standard, the contribution is assessed in direct proportion to income. Thus, it can be imposed on the low-income class with a unit of 100 KRW or 10. To resolve this inconvenience, we present the second standard in which the minimum fixed amount of contribution is imposed if the annual global income falls in the range of less than 0.28 million KRW x 12 months (3.36 million KRW), which is the minimum contribution range for the employee.

(28) The Effects of Reform in the National Health Insurance Contribution Scheme: On Equity in Health Insurance Contribution Burden. 26 insured, and a fixed-rate contribution for those with the annual global income exceeding the range. For the employee insured, the monthly minimum contribution will be 17,136 KRW (0.28 million KRW x 6.12% (as of 2016)), individuals will pay the half of it (i.e. 8,568 KRW.) Therefore, individuals with a monthly global income of less than 0.28 million KRW pay the minimum fixed amount of 8,568 KRW, and individuals with a monthly global income of 0.28 million KRW or more pay their contributions at a fixed rate of the monthly global income x 6.12%/2. Only in the case of earned income, their employers will pay the other half (3.06 %.) The contribution burden presented under this simplified standard is the result obtained when the contribution is assessed only based on income. From the life-cycle viewpoint, however, the retired, elderly group live on property like real estate or financial assets as their income base weakens. In this regard, it seems reasonable to consider property, rather than income, when measuring their ability to pay insurance contribution. Of course, property-based contribution assessment is very unfeasible, but we include in our analysis the complementation of income-based contribution with property-based contribution to compare how the amount of contribution changes from an academic perspective. Here, we will assess the rate of contribution based respectively on income and property with 80% of the contribution from income and 20% from property under the premise that the total contribution revenue is equal to the first standard. The range of property here is the same as that is currently applied to the self-employed insured by the NHIS, such as housing, real estate, financial assets, automobile and key-money lease/monthly rent. However, as there are many unresolved issues—e.g. inaccuracy of property reporting in the survey data and whether debt should be added or deducted—, we limit the share of property in contribution assessment to 20%. In including property in insurance contribution assessment, the third standard can be an attractive alternative in that individuals with more property are likely to have the ability to pay more contributions. However, much caution should be paid to a property-based health insurance contribution assessment. Also, it should be noted that it is very unfeasible in practice since there are many demerits in terms of transparency, objectivity and comprehensiveness in contribution assessment despite the merit of satisfying the ability principle..

(29) Ⅳ Effect of Reform in the National Health Insurance Contribution Scheme: Cross-Sectional Analysis. 1. Background. Recently, shifting the existing health insurance contribution scheme to a single, income-based standard is being actively discussed. The reform plans suggested from various circles are different in their details, but are similar in that they are focused on changing the current standard to a single, income-base one. The main object of this chapter is to evaluate the expected policy effects of a shift toward an income-based contribution scheme from the equity perspective. Most previous analyses of the equity effect of the health insurance system focus on the joint distribution between the burden of insurance contribution and benefits. If the research method employed in the previous research is adopted, income groups are classified based on taxable income estimated by the taxing authority or the NHIS. This method is effective in analyzing the distribution, redistribution and cross-subsidization effects of the health insurance system itself, such as insurance benefits relative to contribution burden within the frame of the health insurance scheme, and it (the former) is employed in. most of the recent studies that analyzes the expected effects of a change to an income-based contribution assessment standard. However, these analyses are limited in that they discuss the equity effect within the given framework of the health insurance system while failing to provide information on the equity effects on the.

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