Catastrophic health payments: does the equivalence scale matter?

We present a revised method for estimating equivalence scales. Such scales are used to adjust household welfare to account for the size of the household, and are used extensively in the application of the World Health Organization's (WHO) methodology for the evaluation of catastrophic health payments. Applications of the WHO method are underpinned by early estimates that do not control for household income, and, therefore, are likely to overstate equivalence. Thus, in addition to revising the method, we update the scale estimates for one country, South Africa, using more recent data. South Africa is considered, because the end of Apartheid has led to extensive social and economic changes that have influenced household structure and, presumably, equivalence. We also present information on the possible degree to which earlier estimates are overstated, as well as the effect that has on other components of the WHO method, especially the determinants of out-of-pocket expenditures and catastrophic health payments. We find that, in the worst case, initial estimates could be overstated by as much 46%, leading to the understatement of poverty lines by as much as 17%. Despite these large differences, the average incidence of catastrophe in health expenditure was largely unaffected. Instead, differences in scales affect conclusions related to the determinants of out-of-pocket payments and catastrophic health expenditures, as well as the distribution of catastrophe across household size. Given that South Africa has low levels of catastrophic health expenditure, the effect could be even larger in other countries, and, therefore, we recommend that researchers consider a range of scales, when examining catastrophic health expenditures.