The Impact of Financing Health Services on Income Inequality in an Unequal Society: The Case of South Africa

Background: Equitable health financing is crucial to attaining universal health coverage (UHC). Health financing, a major focus of the National Health Insurance in South Africa, can potentially affect income distribution. Objective: This paper assesses the impact of financing health services on income inequality (i.e. the income redistributive effect [RE]) in South Africa. Methods: Data come from the nationally representative Income and Expenditure Survey (2010/2011). A standard approach is used to estimate and decompose RE for the major health financing mechanisms (taxes, insurance and out-of-pocket health spending) into the sum of the vertical effect (i.e. the extent of progressivity or regressivity), horizontal inequity (i.e. the extent to which ‘equals’ are not treated equally) and reranking effect (i.e. the extent to which individuals or households change ranks after paying for health services). Results: Financing health services through direct taxes (RE = 0.0072, P < 0.01) and private health insurance (RE = 0.0103, P < 0.01) significantly reduce income inequality, while indirect taxes (RE = −0.0025, P < 0.01) and out-of-pocket health spending (RE = −0.0009, P < 0.01) lead to significant increases in income inequality. Although private health insurance contributions may reduce income inequality, enrolees are only a small minority, mainly the rich. Also, total taxes (RE = 0.0048, P < 0.01) and total health financing (RE = 0.0152, P < 0.01) contribute to significant reductions in income inequality, with the vertical effect dominating. Conclusion: Taxes that contribute to reducing income inequality hold promise for equitable health financing in South Africa. The results are relevant for and support the current National Health Insurance policy in South Africa and the global move towards UHC.