Healthcare financing, like fiscal policies, have explicit distributional implications. It is often important for policy purposes to make explicit such distributional consequences. A number of decomposition frameworks have been developed in literature for analyzing redistributional impact of fiscal and transfer policies. This study examines the conceptual basis of two of such decomposition frameworks—the Aronson, Johnson and Lambert (AJL) (Aronson et al. , 1993) model, which has dominated much of literature, and the Duclos, Jalbert and Araar (DJA ) (Duclos et al ., 2003) model. The models are applied to estimate the components of inequity in healthcare financing in Nigeria. The results show clear differences in the estimated components of inequity. The study also finds that underlying the decomposition frameworks are conceptual differences on account of which interpretation of inequity components estimated from the two models must be done with care.

Equity in health financing systems has recently become the central concern of policy makers and researchers (Wagstaff and van Doorslaer, 2000). The key issue in assessing the fairness of a health financing system is basically a concern about how sensitive and how responsive the healthcare system is to the socioeconomic status of its users (Gureje, 2004). It is about how the health system protects the population, particularly the most vulnerable ones, from expenditure shocks associated with the cost of treating ill-health (Preker, 2005). In general, equity in healthcare financing requires the separation of health services utilization and health financing (Wagstaff and van Doorslaer, 2000). Ideally, health services utilization ought to be according to need, while healthcare financing ought to be according to the Ability to Pay (ATP). This separation is important because ATP reflects the existing distribution of income and wealth in society, which, at least from an egalitarian perspective, may be considered unfair (Atkinson and Stiglitz, 1980).

On the other hand, ill-health, though a random variable at individual level, often follows the socioeconomic gradients and reflects the underlying structural defects in the society (Black et al., 1980; Pamuk 1985 and 1988; Barrera 1990; Judge, 1995; Kennedy et al., 1996; Mackenbach et al., 1997; Marmot et al., 1997; van Doorslaer et al., 1997; Wilkinson, 1997; Lerer et al., 1998; Hanstrom, 1999; Lahelma et al., 1999; Wildman, 2003; and Irwin and Scali, 2005). This implies that the burden of financing health may be heavier for the more disadvantaged households or an individual whose ATP may be severely impaired either temporarily or permanently. Furthermore, ill-health may generate externalities that spill over to other people’s consumption functions. In that case, the society for one reason or the other may want to ensure that the distribution of health services is not strictly according to ATP (McGuire, 1988). Even from the purely utilitarian perspective, the policy maker may want to ensure that healthcare is available to as many members of the population as possible as the contrary may have an impact on economic growth (Bhargava et al., 2001). This may be considered a specific form of social egalitarianism (McGuire et al., 1988).

Applied Economics Journal, Healthcare Financing, Financing Health, Decomposition Frameworks, Social Welfare Analysis, Social Welfare Function, SWF, Equally Distributed Equivalent, EDE, Federal Office of Statistics, FOS, National Bureau of Statistics, NBS, Social Decision Maker.