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Does the Equivalence Scale Matter? Equivalence and Out-of-Pocket Payments

We evaluate the effects of different equivalence scale parameter estimates on the distribution of catastrophic health payments in South Africa. Our analysis makes use of Xu et al.’s (2003) initial estimate, which underscores the World Health Organization’s methodology (Xu, 2005). We also update it using more recent data for one of the original countries included in Xu et al. (2003), South Africa. South Africa is considered, because the data used in Xu et al. (2003) was collected before the end of Apartheid, and the end of Aparthied has led to extensive social and economic changes, which could have influenced equivalence. We extend the empirical exercise by estimating a base-independent equivalence scale via semiparametric methods. Using these equivalence scales, we examine their effect on the distribution of catastrophic health payments using thresholds of 5%, 10% and 15%. The revised estimates suggest that the initial equivalence estimates were overstated by as much as 35%, such that poverty lines in the country were understated by as as much as 17%. However, despite these large differences, the distribution of catastrophic health expenditures were unaffected.

Working paper 687
1 June 2017
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