Social Health Insurance

Social Health Insurance in Health System Financing

Social health insurance is the financing route in which the law obliges defined groups, typically employees and their employers, to pay into a health insurance fund at a rate set by earnings rather than by health risk. Dependants are usually covered by the same contribution, and the fund, or several sickness funds, buys care for everyone enrolled. For health economists the design decides how the cost of care is shared across income groups and whose budget an economic evaluation speaks for. It also explains why entitlement so often follows employment, and why schemes that start with salaried workers can widen inequality instead of reducing it. The German archetype and its sickness funds are described under the Bismarck model.

What makes health insurance social

The European Observatory study of social health insurance (SHI) in western Europe, edited by Saltman, Busse and Figueras in 2004, stresses that these schemes are deliberately unlike commercial insurance. In Saltman's opening chapter they are built as part of social incomes policy and are meant to redistribute, with cross-subsidies flowing towards the ill, the less well-off, the old and families. Commercial insurance, by contrast, is an actuarially precise device in which each person protects his or her own interests. The study's foreword traces the mandatory statutory form of sickness funds to Bismarck's Germany in 1883.

Saltman lists seven structural components found in all eight systems studied (Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Switzerland and Israel). They are risk-independent contributions, sickness funds as payers, solidarity, pluralism, corporatist negotiation, participation in governance and choice of provider and, partly, of fund. Contributions are tied to members' income, typically a percentage of wages, sometimes only up to a ceiling. They are not linked to health status, a spouse and children are covered for the same contribution, and the money is collected separately from general state revenue. At the time of the study, between 63% (the Netherlands) and 100% (France, Israel, Switzerland) of the population were in the statutory system, and every system required the same broad benefits package for all members.

Three ways of setting what members pay

How a contribution is calculated decides what kind of solidarity a scheme delivers. In their chapter of the 2004 study, Wasem, Greß and Okma separate income-related contributions, community-rated premiums and risk-related premiums, and set out which redistribution each one achieves.

Because health care costs usually rise with age, paying each year's benefits from that year's contributions means that younger members support older ones over time.

Why compulsion protects the pool

Voluntary health insurance is exposed to adverse selection, and it can also stay solvent by keeping costly people out. Kutzin, writing in the Bulletin of the World Health Organization in 2013, observes that excluding poor people or others with high health risks contributes to the financial viability of a voluntary scheme. Compulsory membership with risk-independent contributions removes both routes, because members cannot opt out when healthy and funds cannot price applicants by risk.

Selection can return on the insurer side once members may choose between several funds. A fund with a healthier membership needs a lower contribution, so funds gain from attracting good risks, the cream skimming problem. The 2004 study records that funding is equalised across members through national pools, regional or foundation pools, mandatory risk adjustment between funds, or state subsidies. The statistical case for sharing cost across a large membership is set out under risk pooling.

Worked example with income-related contributions and sponsored members

All numbers in this example are illustrative and in a generic currency. A scheme covers three groups for one year, and contributions are charged on earnings up to a ceiling of 45,000.

1. Find the contributory base and the government transfer. Counted earnings are 16,000 million (1,000,000 members at 16,000 each) plus 9,000 million (200,000 members at 45,000 each), a base of 25,000 million. The government pays 500 for each of 500,000 sponsored members, a transfer of 250 million.

2. Set the contribution rate that balances the fund.

$$t = \frac{E - G}{B} = \frac{1500 - 250}{25000} = 0.05$$

where $t$ is the contribution rate on counted earnings, $E$ is expected spending on covered care (1,500 million), $G$ is the government transfer for sponsored members (250 million) and $B$ is the contributory income base (25,000 million). Administration costs are ignored.

3. Trace the cross-subsidies. A worker below the ceiling pays 0.05 × 16,000 = 800 against expected spending of 900, a net gain of 100, or 100 million for the group. A worker above the ceiling pays 0.05 × 45,000 = 2,250 against 500, a net payment of 1,750, or 350 million for the group. Sponsored members cost 1,000 each and bring 500, a gap of 500 each, or 250 million. The 350 million from higher earners equals the 100 million plus 250 million received by the other two groups.

4. Read the ceiling. The higher earner pays 2,250 / 60,000 = 0.0375 of earnings, or 3.75%, against 5% below the ceiling, so the schedule turns regressive at the top. The Kakwani index measures the progressivity of the whole schedule.

5. Compare community-rated and risk-rated premiums. Raising the same 1,250 million as a flat premium from the 1,200,000 contributors gives 1,250 / 1.2 = 1,041.67 each, which is 1,041.67 / 16,000 = 0.0651, or 6.51%, of a lower earner's income and 1,041.67 / 60,000 = 0.0174, or 1.74%, of a higher earner's. Risk-rated premiums would be 900 (5.63% of 16,000) and 500 (0.83% of 60,000), and sponsored members would face 1,000 with nobody obliged to meet the half the government does not pay.

6. Drop the sponsored members. A scheme limited to formal workers needs 1,000 million, so its rate falls to 1,000 / 25,000 = 0.04, or 4%. The lower earner now pays 640 against 900, and the fund looks healthier. Covered membership, however, falls from 1,700,000 to 1,200,000, and the 500,000 people left out are those with the highest expected spending and no contributory income.

7. Interpretation. The contribution rate reflects both the cost of covered care and the share of that cost carried for people who contribute little or nothing. The lower rate in step 6 is no gain in efficiency, since it comes from leaving the costliest and poorest group outside the pool, the pattern Kutzin warns about below.

Extending coverage beyond formal employment

Large employers can deduct payroll contributions at source, which is rarely possible for farmers, traders and casual workers. Carrin and James, analysing eight countries' experience of implementing SHI in the International Social Security Review in 2005, link the transition to universal coverage to income level, the structure of the economy, the distribution of the population, administrative capacity and the level of solidarity, and stress the stewardship role of government. Wagstaff, in Health Economics in 2010, argues that SHI can cover the formal sector and the poor relatively easily but fares badly in covering informal workers who are not poor until the economy reaches a high level of development. He adds that collection costs can be substantial, that non-enrolment and evasion are common even in the formal sector, and that SHI can harm the labour market.

The Republic of Korea shows the incremental route. Kwon reports that Korea introduced mandatory SHI for industrial workers in large corporations in 1977 and extended it step by step to the self-employed until it covered the entire population in 1989. Kutzin notes that in 1989 most citizens were still at risk of very high and potentially catastrophic out-of-pocket payments because cost sharing was large and open-ended, particularly in hospital. Universal enrolment and universal health coverage are therefore separate achievements, and the depth of cover depends on the benefit package and on cost sharing.

Kutzin's wider warning concerns schemes that begin with salaried workers in low and middle income countries. He argues that such schemes concentrate resources on a relatively small and economically advantaged group and do not naturally evolve to include everyone else, citing Mexico and Thailand, where formal-sector contributions are directly subsidised from general tax revenue. In Kyrgyzstan and, to some extent, the Republic of Moldova, the route to universality was designed in from an early stage by putting payroll contributions and general revenue transfers into the same pool for formal and informal sector populations.

Social insurance and tax funding as overlapping labels

The line between SHI and tax funding is less sharp than the labels suggest. The 2004 study's foreword notes that some systems calling themselves SHI rely on public taxes and out-of-pocket payments for up to 50% of total funding. Saltman records that Israel replaced premiums to its four sick funds with a mandatory health tax in 1995, and that Greece, predominantly tax-funded since 1983, and Belgium, a long-standing SHI system, each raise nearly as much revenue from taxes as from SHI premiums. Denmark, Italy, Portugal, Greece and Spain replaced SHI with predominantly tax-funded arrangements between 1973 and 1986.

Analysis of health system financing therefore follows revenue raising, pooling and purchasing for the whole population, not the name of the scheme. The tax-funded counterpart is described under the Beveridge model.

Which sickness fund flows count in economic evaluation

In an SHI system the budget holder is a fund, and the evaluation perspective decides which of the fund's flows count. The German reference case of the IQWiG General Methods version 8.0 is described on the Bismarck model page. Under it, transfers that the SHI merely passes on to insured persons, such as sickness allowance, are left out, and co-payments are not treated as reimbursable costs.

The same document allows a pure SHI perspective, a social insurance perspective or a societal perspective depending on the commission, with results from an extended perspective reported separately. The pure SHI perspective counts payments such as sickness allowance, which shows that a cash benefit paid by the fund is a cost to the payer but a transfer within the insured community.

Common misreadings of social health insurance

Most errors come from reading the label as a description of the whole system. The commonest are listed below.

• Universal enrolment means financial protection. Korea enrolled its whole population in 1989 while most people remained exposed to catastrophic out-of-pocket payments.
• Social health insurance is funded only from payroll. Some SHI systems draw up to half of their funding from taxes and out-of-pocket payments, and Israel replaced premiums with a health tax.
• A formal-sector scheme grows into universal coverage by itself. Kutzin argues that such schemes do not naturally evolve to include the rest of the population.
• Social health insurance works like private insurance with a mandate. Its contributions ignore individual risk and are designed to redistribute, which is the opposite of actuarial pricing.

Sources

• Carrin G, James C. Social health insurance: key factors affecting the transition towards universal coverage. International Social Security Review. 2005;58(1):45-64. https://doi.org/10.1111/j.1468-246X.2005.00209.x
• Institute for Quality and Efficiency in Health Care (IQWiG). General Methods, version 8.0 of 19 December 2025. Cologne: IQWiG; 2025. Sections 4.2 (Table 5), 4.3.4, 4.7 and 4.13. https://www.iqwig.de/methoden/general-methods_version-8-0.pdf
• Kutzin J. Health financing for universal coverage and health system performance: concepts and implications for policy. Bulletin of the World Health Organization. 2013;91(8):602-611. https://doi.org/10.2471/BLT.12.113985
• Kwon S. Thirty years of national health insurance in South Korea: lessons for achieving universal health care coverage. Health Policy and Planning. 2009;24(1):63-71. https://doi.org/10.1093/heapol/czn037
• Saltman RB, Busse R, Figueras J, editors. Social health insurance systems in western Europe. European Observatory on Health Systems and Policies Series. Maidenhead: Open University Press; 2004. Foreword, chapter 1 (Saltman RB) and chapter 10 (Wasem J, Greß S, Okma KGH). https://eurohealthobservatory.who.int/publications/m/social-health-insurance-systems-in-western-europe
• Wagstaff A. Social health insurance reexamined. Health Economics. 2010;19(5):503-517. https://doi.org/10.1002/hec.1492