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Direct tax would bring fairness to medical insurance system

By ZHANG QI | 2016-11-15 | Hits:
(Chinese Social Sciences Today)


A medical staff member from a designated medical institution in a village of Tancheng Town, Shangdong Province, introduces the New Rural Cooperative Medical System to local people.


Constituting a significant part of China’s social security system, the basic medical insurance system has been undergoing rapid development across the nation. By the end of 2014, coverage had exceeded 95 percent in urban and rural areas. It is widely recognized that universal coverage reflects a fairer relationship between the insured and others. However, less attention is paid to the relationships among people who get insured.


Function of redistribution
Unlike commercial health insurance, the social medical insurance system is compulsory based on labor contracts. Compulsory insurance has weakened the correlation between the premiums people pay and medical services they will receive. Therefore, social medical insurance plays an important role in the process of redistribution.

A person who is conscious of health and makes rational choices would effectively “subsidize” others if the premiums for compulsory insurance are higher than those of the commercial insurance he would otherwise purchase voluntarily. Thus, it is necessary to reflect upon what is a fair redistribution.

Above all, a socialized medical insurance system should narrow the gap between the rich and the poor through redistribution in order to achieve the purpose of promoting human well-being. American moral and political philosopher John Rawls put forward the “difference principle” that inequalities should only be permissible if they benefit the least well off.

The difference principle is the core value criterion of Rawls’ theory of distributive justice. However, the current medical insurance system of China has to some extent run counter to the purpose and the ethical standard.


Imbalance between rich, poor
China’s basic medical insurance system targets urban workers, urban residents and rural residents. For urban workers, the insurance fund comes almost entirely from premiums, and everyone who is insured has the right to use the fund. Insurance for urban and rural residents is mostly derived from financial subsidies and basically falls under public welfare.

According to the existing regulations on medical insurance for urban workers, employers and employees share the total rate of 8 to 10 percent of the monthly payroll. It seems that all people pay insurance premiums according to the same proportion. However, it should be noted that there are minimum and maximum limits for the insurance payment base—60 percent and 300 percent of the local average wage, respectively.

Employees whose wages are lower than 60 percent of the average wage need to pay premiums based on 60 percent of their incomes. For employees whose wages are more than three times the average wage, the amount that exceeds the cap will not be factored into calculations. This indicates that the medical insurance rate is regressive. An employee’s contribution to insurance decreases as his or her wage  exceeds the maximum base and increases.

Many employers pay medical insurance for employees according to the minimum standards. There is a lack of an incentive mechanism in which people who pay higher premiums receive better medical services. As a result, employees are more likely to underreport their wages to evade individual income tax and reduce medical insurance payments.

Moreover, local governments often condone the behavior and even boast it as a preferential policy to attract investment for economic development. Rough estimates show that up to 70 percent of enterprises and individuals pay medical insurance in line with the lowest standards.
Therefore, the insurance payment base is lower than real wages, making the medical insurance rate even more regressive, and the result is that the poor shoulder a heavier burden.

From the perspective of medical services, there are complicated and different rules on reimbursement in different places. Generally, there is a minimum amount of medical expenses eligible for reimbursement. And the eligible part, subtracted from the total medical expenses, will be reimbursed at a certain rate.

People with different wage levels from the same place are the same in terms of the minimum amount and reimbursement rate. Thus, people who have more medical expenses will benefit more from the insurance fund. On the whole, the rich will benefit more than the poor.

It should be noted that the problems are the same for urban and rural residents. Similar to the head tax, urban and rural residents pay a uniform and fixed amount for medical insurance, exacerbating the imbalance between the rich and the poor.

At the beginning of this year, China announced a suggestion on integrating medical insurance for urban and rural residents. However, even if the same standards are established for financing and reimbursement, imbalances in premium payment and medical services will still remain.

In addition, there is imbalance between workers and retirees. Based on the assumption that the next generation will always be able to subsidize the one that came before, retired workers need not pay insurance fees.

However, the nation’s demographic development makes this model unsustainable. In the context of accelerated aging, there should be an increase in the insurance payment per capita to maintain the sustainability of the basic medical insurance system even if the average medical expenses do not increase, which is virtually impossible.

In fact, the health fund for urban workers is destined to hit the bottom considering the trend that growth in the average medical expenses outpaces that of the average income. Therefore, it is inevitable that retirees will have to begin paying insurance fees.


Progressive taxation
Investing government funding into the insurance for urban workers will not solve the imbalance under the current financial and taxation system. Doing so will only exacerbate the problem. At present, China mainly follows indirect taxation under which the taxpayer does not bear the burden of tax, and the burden is shifted to the consumers of the end product.

Indirect taxation has the effect of a regressive tax because it imposes a greater burden on the poor than on the rich, as both rich and poor pay the same tax amount for consumption of a certain quantity of a specific good.

Some empirical studies have shown the effect. Indirect taxes, including sales tax, value-added tax, and goods and services tax, account for about 70 percent of the total tax revenue. Direct taxes, such as business and personal income taxes, account for only one-quarter. Other taxes, such as land use tax and resource tax, account for the remaining 5 percent.

Direct taxes are progressive, reducing the tax burden of people with a lower ability to pay. Such taxes shift the burden increasingly to those with a higher ability to pay. Since tax revenue is mainly from indirect taxes, the use of tax revenue to subsidize the insurance fund for urban workers will aggravate the imbalance.

But if it is necessary, it is important to increase financial investment into the insurance fund for urban and rural residents. For urban workers, a progressive rate would mitigate the problem. However, it would be difficult to implement if the current auditing of the social security system is not improved. The fundamental way is to rely mainly on direct taxation, introducing progressive taxes, such as property tax, inheritance tax and gift tax. Both theory and practice show that reform of the financial and taxation system is a necessary approach to closing the gap between the rich and the poor.


Zhang Qi is from the Institute of Economics at the Chinese Academy of Social Sciences.