Progressivity in the financing of decentralized government health programs: a decomposition

In many countries health services and/or health insurance are delivered but also partly financed by subnational entities that vary in their fiscal or financial capacity, e.g. local governments and social health insurance schemes. The central government typically mandates a specific (or at least minimum) level of benefit or expenditure per intended beneficiary, and sets rules about enrollment and coverage. It also typically contributes to the cost of the program, partly because the resources of subnational entities may be insufficient, on average, to meet the expenditure requirements, but partly for equity reasons. These two problems are typically addressed through tax-transfer schemes. In practice, there is considerable institutional heterogeneity across countries in the mix of vertical and horizontal schemes, and the way each works. In this Note, we show how the progressivity of health outlays by subnational entities can be decomposed into contributions from vertical and horizontal schemes, and how each of these can be further decomposed into contributions from taxes and transfers. We suggest that, in addition to providing a foundation for future empirical work, the decomposition provides some insights into the reasons for different institutional choices, and into the way vertical and horizontal tax-transfer schemes operate in practice.