Monday, November 23, 2015

A conversation on universalism and taxing the private option

My colleague and friend Ken Shadlen and I have begun a conversation on how to deal with the private option in social policy (much influenced in my case by my joint work with Juliana Martínez). Here you have the initial exchange. Feel free to join the conversation!

Ken: When I was in Brazil I was talking with someone about the "problem" of wealthy people leaving the SUS [the public health system] for private options and then coming back to the state system for expensive treatments. It got me thinking.... Why not put a special sales tax on private health care plans (like a higher VAT or something like that), and earmark the money for public health system. After all, if the rich people are leaving public sector for basic stuff, that actually could be good as it allows public resources to be used on smaller number of people, and the point that the rich people come back to public sector for expensive stuff is sort of irrelevant, because they'd be covered in the public sector anyway if they didn't leave. So those who want to go can go, but at a higher price, so there are not just fewer people left to treat in the pub sector but there's more money to treat the with too.

Diego: I think you are totally right and it is something that can be expanded to education. Expanding taxes on the private option is a way to expand revenues (although we had not thought about earmarking and I think it is a great idea) and reduce demand. However, this is much easier to do if the only ones leaving are the top 10% (or 15%) than if large parts of the middle class (say the top 40% of the population) are both in the private and public sector. In those cases, a tax on the outside option will be rather unpopular and very difficult to implement. At the end that is why confronting the outside option requires a commitment of the middle class to public services, which also require that those services are of relatively high quality.

Ken: I understand what you write, but if the top 40% of the population is leaving that suggests that the pub sector needs to be improved, which only makes a tax to acquire the revenues that much more important. I’m less sure about this line of reasoning for education, because the effects of segregation on those left behind less clear in education. The poor people in the public health system may benefit from the rich people not being there consuming doctors’ and nurses’ time and resources, and, provided the resources are available, the poor people left can be treated well. In contrast, the poor people in the public education system do benefit from having the richer people in their classroom, and the quality of education being delivered in a public education system that is almost all poorer kids will be worse. So here I think everything is different. To put it simply, I don’t think exit from the public system has to damage the system in health, but I do think it does so in education.

Diego: I agree that in terms of the delivery, the exit from the middle class is worse in education than health. Yet it is also quite problematic in health for two reasons: (a) The creation of tax specifically for these services will become politically challenging. The middle class will argue that "not only the public health is weak but we also need to pay for our private insurance! It is double payment!" If this tax affects the middle class, then it may be impossible to implement it. (b) Much of the argument about involving the middle class in public services is about voice: if public health care is poor, they are more likely to protest individually and collectively than the poor. This is why letting the middle class simply leave is quite problematic (the very rich are likely to leave almost by definition in much of Latin America).


KS said...

Thanks for both of these clarifications Diego. I agree entirely with the second point, we want the middle classes in the public systems to provide voice and help make the public systems function better. I'm thinking of the tax as a way to keep them in, using tax to turn the private option into a luxury good out of the reach of most.

The problem, as you say in your first point, is getting from here to there. The new equilibrium could be a good one, with middle classes inside the public system and the public system providing good services thanks to revenues imposed on elites who purchase the luxury of exit, but getting there is exceptionally tough where so many middle class people already have private plans. This entails moving them back into the public syste, which will be hard to do. It will be especially hard to move people who've already exited (partially) the public system back in without already, first, improving the public system, and now I feel like a dog chasing its tail, that the way you improve the public system is to have an improved public system.

But I'm not gonna give up either. How about something more gradual? I imagine that there is variation in private health plans, and that variation probably corresponds closely to income. So make the tax progressive, with the high tax for the more fancy plans of the wealthy and, to start, the tax on the less fancy plans less onerous. Then, later, once the revenues have been invested and the public system improves, then raise tax on private plans across the board.

Eduardo said...

Diego and Ken - very interesting discussion, thanks for posting it. I think there is one further nuance to be added here. In the last 10-15 years, there has been an explosion in the number of unexpensive private schools and universities, as well as health insurance plans, targeting the low-middle class.

These are controversial for a number of reasons, not least because it is not always clear that their quality is superior to what people can get in the public sector (in the case of higher education, it is clearly inferior).

It seems to me that any additional tax on those 'private services for the (almost) poor' would be deeply problematic.

Separately, in the case of the health service, there is already a provision according to which private insurers must pay SUS if their clients use the public system. Many insurers, however, seem to drag their feet and the SUS struggles to be paid (see

In the case of education, the place for state intervention could well be in the passage from secondary to tertiary education - as privileged students who attended good private schools find it easier to pass entrance exams to good public universities. This often leaves poor students who attended bad state schools with no option but attending bad private universities (if they go to university at all). It seems logical that rich students (or those coming from private schools) who go to public universities should pay tuition fees. But that, of course, wouldn't be without political and practical challenges (and not always fair).