Optimal revenue structure of public health insurance: Political economy approaches (Young Jun Chun)

We try to identify the optimal revenue structure for South Korea’s public health insurance (PHI) from the political economy perspective. We have shown that: (i) an increase in the proportion of PHI revenue obtained from general taxes, stemming from a change from a basis of taxes on wage income alone to a basis of taxes on whole income plus consumption, increases public health expenditure; (ii) a rise in the progressivity of the tax burden increases public health expenditure; and (iii) the proportion of tax financing in PHI revenue is higher in countries with higher tax progressivity. These results indicate two political economy perspectives for the determination of public health expenditure. Firstly, increasing dependence on a subsidy provided by tax revenue is likely to reduce the incentive of the healthcare administration to control public-health expenditure because the administration does not have to make much effort to increase its revenue. Result (i) supports this budget-maximizing behavior. Secondly, results (ii) and (iii) indicate that the median voter theorem may apply to this problem. Under a progressive tax structure, a revenue-neutral increase in tax financing will reduce the fiscal burden of the median voter and induce a political equilibrium, with PHI policy parameters causing larger health expenditure.

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