PotLICY RESEARCH WORKING PAPER _2550_

# Summary findings

In its latest _World Health Report,_ the World Health Organization (WHO) argues that a key dimension of a health system's performance is the fairness of its financing system. The report discusses how policymakers can improve this aspect of performance, proposes an index of fairness, discusses how it should be put into operation, and presents a league table of countries ranked by the fairness with which their health services are financed.

Wagstaff shows that the WHO index cannot discriminate between health financing systems that are regressive and those that are progressive-and cannot discriminate between horizontal inequity and progressiveness or regressiveness.

The index cannot tell policymakers whether it deviates from 1 (complete fairness) because households with similar incomes spend different amounts on health care (horizontal inequity) or because households with different incomes spend different proportions of their income on health care (vertical inequity, given the WHO's interpretation of the ability-to-pay principle)although the two have different policy implications.

With the WHO's index, progressiveness and regressiveness are both treated as unfair. This makes no sense, because policymakers who may be strongly averse to regressive payments (which worsen income distribution) may in the name of fairness be quite receptive to progressive payments (requiring that the better-off, who may be willing to spend proportionately more on health care, are required to pay proportionately more).

Wagstaff compares the WHO index with an alternative and more illuminating approach developed in the income redistribution literature in the early 1990s and used in the late 1990s to study the fairness of various OECD health care financing systems.

He illustrates the differences between the approaches with an empirical comparison, using data on out-ofpocket payments for health services in Vietnam for 1993 and 1998. This analysis is of some interest in its own right, given the large share of health spending from outof-pocket payments in Vietnam and the changes in fees and drug prices over the 1990s.

This paper-a product of Poverty and Human Resources, Development Research Group, and the Health, Nutrition, and Population Team, Human Development Network-is part of a larger effort in the Bank to investigate the links between health and poverty. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Anna Marafion, room MC3-558, telephone 202-473-8009, fax 202-522-1153, email address amaranon@worldbank.org. Policy ResearchWorkingPapers are also posted onthe Web at http://econ.worldbank.org. The author may be contacted at awagstaff@worldbank.org. February 2001. (21 pages) _The Policy Research Working Paper Series disseminates the findings of work_ **_in_** _progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations_<sup>_are less than fully polished. The_</sup> _papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represen_ **_t_** _he view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center