Four reasons why labor taxes are not a good way to finance healthcare in low- and middle-income countries

The COVID-19 pandemic has led millions of people to simultaneously lose their jobs and their health coverage, making the idea of funding health insurance with labor taxes look like a pretty bad idea. Yet the flaws of labor-tax financed social health insurance are not news to people who have reviewed the history and evidence of social health insurance, as explained in a newly published Health Affairs commentary, “The Case Against Labor-Tax Financed Social Health Insurance for Low and Low-Middle Income Countries.” The paper lays out reasons why labor-taxes not only fail to realize policy-makers’ aims in terms of raising adequate revenues, but unleash a series of dynamics that make health systems less equitable and less likely to achieve Universal Health Coverage (UHC) than alternative revenue sources based on general revenues.

Surprisingly, more than 60 percent of today’s low- and middle-income countries are adopting or considering a health financing scheme designed in the 19^th century even when none of them would imagine building their infrastructure dreams on steam engines. When Bismarck created Prussia’s Social Health Insurance system in the 1880s it was a dramatic leap forward for the dream we have subsequently come to call “Universal Health Coverage” (UHC). But the conditions that made it possible for that approach to evolve into UHC in Germany simply don’t exist in most countries today.

Surprised by interest in financing healthcare through labor taxes …

The Health Affairs commentary was motivated by a recent study at the United States Agency for International Development (USAID) that was prompted by many technical assistance requests for support to design labor-tax financed Social Health Insurance (SHI). USAID initiated a study to find out: (i) how many low- and low-middle-income countries are considering this strategy, and (ii) what was driving this demand despite:

• Lack of evidence that this is a successful health financing strategy, and
• 20 years of global experts advising against this strategy.

The researchers interviewed health finance experts working with low- and middle-income countries, obtaining information on 85 percent of those countries and reaching a surprising conclusion: over 61% of these countries are considering or have already initiated labor-tax SHI programs.

They found a combination of factors contributed to the interest in labor-tax SHI, including:

• pressure from donors to raise domestic revenues in order to transition away from external aid;
• misunderstanding the goal of Universal Health Coverage (UHC) as requiring insurance institutions; and
• the assumption by ministries of health that the policy would give them access to additional dedicated funds.

… when experience shows it fails in so many ways

This interest in labor-tax SHI contradicts at least two decades of research and writing on health system financing that show labor taxes are not a good source of funding for health systems. In the Health Affairs commentary, the authors provide four principal reasons for this conclusion:

• Labor-tax SHI often redistributes health care services and financing away from the poor and toward wealthier formal sector workers – the exact opposite of the goal embodied in UHC.
• Evidence shows that labor-taxes have not generated net additional resources for health (and are unlikely to increase domestic resource mobilization).
• Since WWII, successful progress toward UHC (including expanding coverage for the poor) has relied on expanding general revenues for health, not labor-taxes.
• In countries with large informal employment, labor taxes will distort labor markets without raising significant revenues.

Large decisions around health sector reforms, like how health care is financed, are rarely based on technical evidence or global best practice alone.  Politics, cultural context, and national history play important roles in these big decisions and how they come about.  Yet empirical evidence is a reality check that should inform policy discussions, if only to avoid repeating the mistakes of the past.

Steam engines made sense in the 19^th century, but not today. It is disappointing to see almost two-thirds of the world’s low- and low-middle-income countries putting efforts into establishing labor-tax SHI institutions when the approach has so many drawbacks. The recent uptake of interest in using labor-tax financing runs counter to the goals of expanding healthcare access for the poor, increasing domestic resources for health, and progressing toward Universal Health Coverage. As countries emerge from the worst of the current pandemic and reactivate their economies, we hope they will pursue reforms which build on this evidence by shifting health system financing away from labor taxes and toward general revenues, and eliminating institutions that link healthcare access to employment status. In this way, they can reconstruct their systems on more equitable and sustainable health financing foundations.

In addition to the authors of this blog, the other co-authors of this paper are William Hsiao; Joseph Kutzin; Agnés Soucat; Ajay Tandon; Adam Wagstaff; and Winnie Yip.