Does Universal Health Insurance in Korea provide a Lesson for U.S. Health Care Financing?

Abstract

This note provides a commentary on Lee, C. “Is Universal Health Insurance Superior in Terms of Healthcare Payment? Estimating the Financial Burden of Healthcare in Korea: 2009 to 2019.” INQUIRY, 2022, 59:1-8. Lee, using a unique data set, shows that the Korean single payer system is regressive, despite previous attempts to increase public expenditures. The policy recommendation, to improve access by making public payments even more progressive to household income, is examined. This note concludes that making health expenditures progressive to household income does not solve the root cause of the demand for health care, a key factor in health care access, nor can the policy implications generalize to the multi-payer U.S. system.

• What do we already know about this topic?

• Healthcare financing in single payer systems is regressive to household income.

• How does your research contribute to the field?

• This note argues that attempting to make regressive healthcare payment regimes more progressive without addressing the demand for healthcare is likely to make the system even more regressive.

• What are your research’s implications toward theory, practice, or policy?

• For a multi-payer healthcare system like the U.S., a policy of increasing competition among private payers is more likely to achieve financial sustainability and innovation to improve access.

Introduction

Lee ¹ estimates the financial burden of healthcare, including the quantum of insurance premiums, in Korea using a unique panel dataset on health insurance and utilization. The authors find that out-of-pocket spending has declined steadily from 2009 to 2019, with the public payer shouldering more of the expenditure burden. Despite that, the authors find that the household financial burden of healthcare remained regressive to income. According to the data, a third of households spent more than 10% of income on healthcare, a threshold regarded by the World Health Organization as a high burden and distortionary to expenditures on other basic needs. The authors compare their results to the U.S. and argue for a single payer system that reimburses progressively with household income.

Analysis

That healthcare spending is regressive to income level is unsurprising. In fact, this is the case for any kind of spending on necessities such as food. ² The income elasticity of caloric intake ³ tends to be low along the demand curve. The same is the case for shelter, energy, and healthcare. The article’s argument for examining insurance premiums, as a contribution to the literature, does not change this dynamic. Neither does focusing on the supply side (payments) of the equation.

Methodologically, the paper does not adjust for household heterogeneity (households with/without children, multigenerational households, and so on) that may also explain healthcare burden on income. This is important because the unit of analysis in the paper is the household (sum of household healthcare expenditures, including health insurance premiums). Lower income households are more likely to be multigenerational in Asian cities such as Seoul, Korea, where the cost of housing is the second highest in Asia. ⁴ In such households, total expenditures on healthcare are likely to be higher on average, relative to household income. The same dynamic is less evident in rural areas where the cost of housing can be several orders of magnitude lower. More critically, the supply induced demand (SID) for healthcare ⁵ means that less access to healthcare in rural areas also means less demand. Hence, there are unobserved systematic variances in the causes of healthcare burden that may not be directly related to income. Thus, the household burden of healthcare needs to be adjusted for geography, regional cost of living, and supply variability in the data.

The author’s policy recommendation, that the public payer should increase reimbursements to decrease the burden on lower income households, ignores the demand and supply sides of the problem and their proximate causes. We know from studies on the social determinants of health (eg, poor nutrition, reduced access to early surveillance, and lower education) ⁶ that socioeconomic status is negatively associated with health outcomes. ⁷ Add age to that calculus ⁸ and it is unsurprising that in aging societies such as Korea and the U.S., poorer older adults consume more healthcare compared to their higher income counterparts. Increasing reimbursements does not meaningfully shift the demand curve, which may require interventions at earlier life stages to reduce later demand for the care of preventable diseases.

The policy generalization from Korea to the U.S. misses the fact that the latter does not have a single payer for healthcare. Partly, this is because public and private payers are institutionally entrenched and previous attempts at designing a single payer system, even at the state level, have largely been unsuccessful. ⁹ Public payers (Federal payments through the Centers for Medicaid and Medicare, and others) account for about 50% of total healthcare expenditures in the U.S. ¹⁰ The other half are provided by a mix of employer and private insurance, and patient out-of-pocket payments. Simply increasing public payments is unlikely to have a meaningful effect on the regressive nature of healthcare expenditures because private payers could rationally adjust their reimbursements in response to increased provisions from the public side. The last major revision of the public health insurance system, the 2010 Affordable Care Act, has seen mixed success as private payers continued to adjust their coverages, leading to some crowd-out. ¹¹ Finally, there are other public payers in the U.S., such as the Veterans Administration, the Department of Defense, and various state level programs that would not be covered by the Lee et al proposal.

In the U.S. multi-payer system, a more pragmatic policy would be to exploit the potential competition that comes from having more than 1000 insurance providers ¹² by removing the regulatory and administrative barriers that prevent them from selling products across state lines. The resulting pooling of risk and transparency in pricing would be lower costs, stronger incentives for primary care and prevention, and robust innovation in health services such as telemedicine to increase revenues while expanding access to sparsely served and lower income areas.

Conclusion

In conclusion, this was an instructive paper that employed a unique dataset to provide insight into the burden of household healthcare expenditure in Korea, a single payer-multiple provider system. It is unclear if the policy implication, which is to increase the public share of healthcare expenditures, addresses the demand side of the problem. It is unlikely that the findings can generalize to a multi-payer system like the U.S. or even a vertically integrated (single payer-single provider) system like the U.K. where healthcare is already strictly rationed.