Validity of WTP
Most informal sector workers in Wuhan are currently not eligible to participate in the BHI (see below). If the City Government of Wuhan decides to open the BHI to a broad range of informal sector workers, this study will offer a rare opportunity to assess the criterion validity of WTP responses by comparing actual demand to demand predicted from a contingent valuation study. For now, we can only examine the construct validity of the WTP responses, i.e. investigate whether WTP relates to certain constructs as predicted by theory. Two commonly used tests of construct validity of WTP are the income elasticity test and the scope test [70
]. With the rare exception of inferior goods, demand theory predicts that income elasticity of goods is positive and there is no evidence to suggest that health insurance is an inferior good. We found that the income elasticity of BHI is indeed positive after controlling for sex, age, migration status, employment status and health expenditure. Our results thus pass the income elasticity test.
The scope test assesses whether WTP increases as more of a good is supplied [71
]. We found that mean WTP significantly increases and that the demand curve is shifted upward as the scope of the BHI increases, i.e. as either the reimbursement ceiling, the deductible or the coinsurance are removed from the baseline BHI. A few respondents were willing to pay less for one of the variants of BHI than for the baseline BHI. However, this does not imply that the answers of these respondents are invalid. While the removal of the ceiling, the deductible or the coinsurance never decreases the scope of the BHI, respondents may truly value the BHI variants less than the baseline BHI because they associate other changes in the BHI with the change in scope. For instance, a respondent may expect that the BHI without coinsurance will be less sustainable than the BHI with coinsurance and thus value the former less than the latter.
Weaker tests of construct validity of WTP responses include assessments of the relationship between respondents' characteristics other than income. All our independent variables influenced WTP for BHI as hypothesized, with two exceptions. First, WTP decreases significantly with age. We had hypothesized that WTP for health insurance would be a positive function of age because the risk of disease increases with age. However, it is plausible that age not only proxies for disease risk but is also associated with factors that are not controlled for in our regression analyses and are negatively associated with WTP for BHI. Younger informal sector workers may be more likely than older workers to be employed in occupations that carry a high risk of accidents, for instance in construction. Also, the age variable may capture cohort effects. For instance, older informal sector workers may believe that their children will finance their health care should they become ill, while younger workers do not.
Second, the relationship between education and WTP was not very strong. We had hypothesized that higher education leads to higher WTP for BHI, because people who discount the future at a lower rate both invest more in their education and are willing to pay more in order to insure against future health expenditure. However, it seems plausible that educational attainment in China has in the past not been determined by preferences but by factors such as place of birth, party affiliation or early educational performance. Overall, tests of construct validity suggest that the results of our contingent valuation study are valid.
Health policy in China is formulated centrally, but decentralization has given lower levels of government power to adapt policies from higher levels to local circumstances, leading to a situation where "governments at all levels are both policy-makers and policy-implementers" [9
]. Discrepancies between central policy directives and local policy implementation have been observed for several health policies in China, such as disease control policies [73
] and health care price setting [74
The introduction of the BHI in Chinese cities is an example of the simultaneity of policy formulation and implementation at the local level. While the 1998 central government policy includes detailed directives about the attributes of the BHI (e.g. the proportions of a formal sector worker's salary that employer and employee need to contribute to the BHI) [6
], some municipal governments have implemented modified versions of the BHI, for instance in Shanghai and Beijing [75
]. Municipal governments have even more discretion in making decisions about expanding BHI to informal sector workers. The 1998 central government policy allows such an expansion, but does not require it. Recently, however, different levels of the Chinese government within and outside the health sector have called for improved social protection, including health insurance, for urban informal sector workers [20
In 2004, the City Government of Wuhan issued the Wuhan City regulation about basic health insurance for urban informal sector workers
. The regulation defines the eligibility criteria for participation in the BHI such that most informal workers are, in fact, barred from joining [80
]. First, only those informal sector workers who have a permanent household registration (hukou
) in Wuhan can join, which excludes migrant workers from participation. Second, men can only join if they have been enrolled in the state-run old-age pension scheme for at least 30 years and women can only join if they have been enrolled for at least 25 years. Since only formal sector workers are entitled to participate in the state-run old-age pension scheme, this second condition effectively prevents all informal sector workers from participating in the BHI who have never worked in the formal sector. Moreover, it excludes all men who were laid-off after less than 30 years of formal sector work and all women who were laid-off after less than 25 years from joining the BHI. Third, men younger than 16 or older than 60 years of age and women younger than 16 or older than 55 years of age are not eligible to participate in the BHI. The upper age limits prevent many of those few former formal sector workers who have been working long enough in the formal sector to meet the second eligibility criterion from participating in the BHI, because they are too old.
A few cities in China allow broader categories of informal sector workers to participate in the BHI if they contribute the same proportion of their incomes as formal sector workers or pay premiums similar to the average absolute premium paid by formal workers [77
]. However, participation in these voluntary BHI schemes has been low [82
]. Workers in the formal sector pay only a part of the total contribution directly from their salaries, while their employers pay the remainder. In contrast, informal sector workers usually have to pay the total contribution from their own incomes because they are either self-employed or employed in small-scale enterprises that do not contribute to their employees' insurance coverage [83
This is the first study to investigate WTP to participate in social health insurance among informal sector workers in a large Chinese city. Many factors, such as political will and financial, managerial and technical resources, will influence municipal governments' decisions to offer informal sector workers participation in the BHI. Our study may support the decision making by providing evidence about the social desirability of the BHI, preferences for BHI attributes, and characteristics of informal sector workers that influence the valuation of BHI.
On average, informal workers are willing to pay substantial absolute amounts and substantial proportions of their incomes to obtain social health insurance coverage. We find that average WTP is significantly higher than estimates of average cost of BHI based on the premium contributions of formal sector workers and past health expenditure of informal sector workers. From a normative perspective, the provision of the BHI to informal sector workers should thus increase social welfare.
Whether the net benefits of the BHI will be positive or not depends on the validity of our cost estimates. For our first cost estimate – the average premium contribution of formal sector workers – to accurately represent the average cost of BHI, the contribution rates that are stipulated in the 1998 central government policy need to be sufficiently high, so that the total premium contributions to the BHI cover total costs. The fact that in their implementation of the BHI for formal sector workers some cities have chosen contribution rates that are higher than the rates stipulated by the central government suggests that this assumption may not hold true [67
]. For instance, in Shanghai employers are required to contribute 10% of an employee's annual wage to the BHI, while employees contribute 2% [75
]. Even if the stipulated rates did lead to contributions that are sufficient to cover the costs of BHI for formal sector workers, they might not lead to contributions sufficient to cover the costs of BHI for informal sector workers, for instance because the latter face higher risks of work-related injuries and diseases than the former [82
For our second cost estimate – the informal sector workers' past health expenditure, to approximate well the cost of BHI – the demand for health care must not be affected by insurance. However, insurance is likely to change the demand for health care because it decreases the price of health care (as well as workers' disposable incomes), and may lead to increased moral hazard behaviours.
While our cost estimates may thus be too low, the estimates of the benefits of BHI that do not take into account aversion to income inequality may underestimate the true size of the benefits from BHI. The equity weighted mean WTPs for BHI are much higher than non-equity weighted mean WTPs. If we assume, for instance, that the correct inequality aversion parameter for China is 1.5, the benefits of the BHI will be more than twice as high as the unweighted benefit estimates, so that net social benefit will be positive, unless costs have been underestimated by more than a factor 2. One indication that Chinese society is indeed inequality averse is that Chinese policy makers have stipulated that formal sector workers should contribute an equal proportion of their incomes to the BHI, i.e. to receive BHI coverage workers with higher incomes are required to pay larger absolute amounts into the social risk pooling fund than workers with lower incomes.
From a behavioural perspective, our result that coverage declines steeply with increasing premium contributions at low contribution levels suggests that government subsidies would be an effective mechanism to increase coverage with BHI among informal sector workers. Our results further suggest that informal sector workers do not value the BHI as a mechanism to recover the relatively frequent but small financial losses associated with common illnesses but because it protects against the rare but large financial losses associated with catastrophic care. The informal sector workers in our sample state a WTP that is on average higher than their health expenditure in the past year. In fact, only 62 of the 609 respondents would have received any money from the BHI at the level of their past year's health care spending; all other workers spent less on health care than the deductible. Nevertheless most workers are willing to pay positive amounts for the BHI, suggesting that workers value the protection against rare diseases that are expensive to treat. This conclusion is strengthened by our finding that average WTP for BHI increases significantly when the ceiling on coverage is removed, even though not one of the informal sector workers in our sample had health expenditure exceeding the ceiling in the past year.
A recent study investigated WTP for private health insurance in four small cities in China's Shandong and Sichuan Provinces [35
]. As described above, this study differs from ours in important aspects, including the target population, the type of insurance and the setting. Nevertheless, it is interesting that the study finds that respondents value insurance for catastrophic diseases (such as cancer and end-stage renal disease) and inpatient care more highly than insurance for outpatient care. This reinforces our finding that people in urban China value financial protection against catastrophic care expenditure more highly than recovery of costs of treating minor diseases.
Our results suggest three potential limitations of a voluntary BHI for informal sector workers. First, voluntary BHI for informal sector workers may suffer from some adverse selection. We find that WTP increases significantly with health expenditure in the past year. As past health expenditure proxies future health expenditure [84
] at any given premium contribution those who take out the BHI would be expected to incur higher health expenditure than those who do not. However, while past health expenditure significantly increases WTP, the effect is not very large. A 10% increase in past health expenditure leads to 0.76% increase in WTP for baseline BHI and to a 1.39% increase in WTP for BHI without ceiling. In comparison, a 10% increase in income will lead to a 4.39% increase in WTP for baseline BHI and a 4.69% increase in WTP for BHI without ceiling.
Second, large proportions of informal sector workers will choose not to buy the BHI at relatively low contribution levels. At a price of 25 RMB per month (i.e. our estimate of average monthly costs of the BHI based on the contributions of formal sector workers) 35% of informal sector workers will buy the BHI. At a price of 20 RMB coverage of informal sector workers will increase to 43%.
In order to increase coverage, policy makers should consider changing the attributes of the BHI. According to our results, at any given premium contribution the coverage that will be achieved if informal sector workers were offered the BHI without ceiling, without deductible or without coinsurance will be higher than the coverage that can be achieved if they are offered the baseline BHI. While the average WTP for BHI without ceiling is not significantly higher than the average WTP for BHI without deductible or coinsurance, almost all respondents ranked the BHI without ceiling highest (by the WTP criterion) among the four different types of BHI offered. Including catastrophic care cover in the BHI would have the additional advantage of improving the effectiveness of the BHI in ensuring access to needed health care and averting poverty, while removing the deductible or the coinsurance may come with the disadvantage of increasing consumer moral hazard. Our findings suggest that even if the government decides neither to subsidise nor change the BHI, coverage will increase over time as the Chinese economy continues to grow (because WTP for BHI increases significantly with income).
Third, at any given premium the most vulnerable informal workers will be least likely to buy the BHI. Holding other factors equal, workers who do not buy the BHI will on average be older, poorer, and more likely to be migrants and without permanent employment than workers who do buy the BHI. In order to increase coverage amongst the most vulnerable workers, policy makers may consider a number of means, including targeted public marketing campaigns, specific subsidies (for instance for older workers) or changes to the BHI that specifically increase the attractiveness of the BHI for vulnerable workers (for instance, portability of the BHI may increase coverage amongst migrants).