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Markets for Health Insurance

Paul ShawWorld Bank Institute

Tehran, IranOctober 18-22, 2003

Health Insurance: What is it?• Aims to protect people from the high costs associated

with low probability, serious illness or injury• Step 1: Financial contributions (or premiums) are

collected from people when they are healthy, willing and able to pay.

• Step 2: The contributions (or premiums) are pooled into a Fund.

• Step 3: In return for the premiums that contributors pay, they are entitled to receive a package of pre-specified health care entitlements.

• Step 4: The Fund draws on the pooled contributions to pay providers to serve contributors who experience serious illness or injury.

The appeal of Health Insurance to buyers and sellers

• Risk pooling helps buyers avoid a large, unpredictable loss at times of serious illness or injury

• Pooling a large number of similar events helps sellers to improve the predictability of the event and lays the basis for insurance markets

• Society benefits because of an increased sense of personal security, and protection of households from catastrophic financial loss and indebtedness at times of serious injury and illness.

Who are the sellers and buyers of health insurance in competitive markets ?

• Sellers tend to be relatively large organizations that can manage the collected funds, pay providers to serve the needs of clients, and make a profit.

• Sellers of insurance may own a network of providers or may contract out.

• Buyers tend to be employers (on behalf of their employees), self-employed workers and other individuals such as retirees who VOLUNTARILY join HI schemes?

• Insurance coverage may be limited to the contributors, such as employees, but usually also includes their household dependents.

Countries with competitive markets for health insurance

• US

• Chile

• Philippines

• Lebanon

Who gets HI in Competitive Markets?

• Those willing and able to pay (the relatively well off)

• Workers (and their dependents) in the formal sector, less so the informal sector

• Relatively poor households for whom government or some other entity pays their premiums to join

Reliance on Market?Type of Insurance

Financing Provision

Private Yes Yes

Social No, mandated Yes

NGO Yes Often

Community Yes Often

National No, mandated Often

Private Insurance• Many organizations compete for the financial

contributions of members• The private insurance organizations usually

contract with providers, under competitive arrangements, to provide services

• Risk pools may become fragmented• Admin. costs tend to be high• Financial Motivation: make a profit, pay

shareholders

Social Health Insurance

• Government mandates that formal sector employees contribute set premiums

• SH organization usually contracts with providers, under competition, to serve clients

• Risk pools can be large (all formal sector employees)

• Admin costs moderate• Financial Motivation: Revenue from premiums

covers all costs to serve members

NGO Funds• Special interest organizations may collect

funds voluntarily• NGO funds may own or contract with

providers• Risk pools may be small• Admin. costs likely moderate• Financial motivation: revenue from

premiums covers all costs to serve contributors

Community Funds

• Voluntary collection of funds• Usually contract with providers or make special

negotiated arrangements with local providers (limited competition)

• Risk pools likely small• Admin. costs moderate• Financial motivation: revenue from premiums

covers all costs to serve contributors

National Insurance• Mandated contributions• Mix of ownership of providers plus some

contracting out under competitive conditions

• Risk pool satisfies Law of large numbers• Admin. Costs relatively low• Financial motivation: revenue from

premiums covers all costs of serving contributors

Health Insurance in IranSocial Security Organization

Medical Service Insurance Organization

Other

Organizations

Membership 23.4 million 29.1 million 3.1 million

No. funds 1 4 several

Mandated membership

All formal workers

Government workers

Voluntary membership

None

Rural households

Self-employed

Others (students)

Various households

The Poor

Providers SSO

Private

Public

Private

Public

Private

Generic Problems I: Adverse Selection

• People who are relatively ill seek to join insurance plans more so than do people who are relatively healthy.

• Since 70% of health insurance expenditures are represented by only 20% of members, having a large share of relatively ill people can bankrupt a health insurance scheme.

Combating Adverse Selection• Mandate everyone to join (e.g.., social +

national health insurance), including their household members

• Create waiting period so not just the relatively ill gain membership first

• Sellers of private insurance, who compete for financial survival and where the profit motive is king, will do their best to exclude those most ill = ‘crème skimming’

Waiting Periods in Iran

• Only for the self-employed in MSIO.

-- a three month waiting period before individuals are covered for inpatient care

Generic Problems 2: Moral Hazard

• When people pre-pay for a package of health entitlements, they may be motivated to OVERLY demand and use services, thus placing great pressure on providers

• This occurs because insurance reduces or removes price barriers to health care.

Discussion• Assume that a household head pays out-

of-pocket for health consultations and the demand curve looks like ‘OPP DEMAND’ in the following figure.

• Next, assume the household head is given a health insurance policy that pays 50% of the price normally paid.

• What impact would this have on the household head’s demand curve?

Effect of Insurance Policy on Demand

quantity

price

P1

OPP Demand

OPP = out-of-pocketQ1

Demand withInsurance

Q2

P2

E

Combating Moral Hazard

• Require a co-payment at times when people demand service, thus giving them a reason to consider if they really want the service

• Require a ‘deductible’ of X dollars that people must first pay from their own pockets before insurance kicks in and pays providers.

Co-Payments in Iran

• No co-payments for PHC network• MSIO co-payments are set at 25% for outpatient

and 10% for inpatient care for all individuals. But rural households must pay 25% for inpatient care.

• SSO beneficiaries face no cost-sharing provided they use SSO facilities, but face 10% cost-sharing of inpatient care and 20% of out-patient care at non-SSO contracted facilities

Generic Problems: Imperfect Information

• Buyers are often ill-informed and confused about their entitlements, resulting in many grievances

• The service entitlements contained in different packages may be hard to comprehend

• Choice and location of providers that members are entitled to use if ill or injured may be poorly understood

• Quality of product may not be homogeneous (e.g.., different levels of malpractice)

Combating Imperfect Information: A US Example

• The National Committee for Quality Assurance (NCQA), a private accreditation body for HMO’s issues report cards based on about 50 standardized measures of a plan’s performance (such as childhood immunization rates, breast cancer screening, and asthma inpatient admission rates.

• BUT, less than 20% of surveyed respondents made much use of such information. Most important to them was details on plan benefits and out-of-pocket costs.

Generic Problems:Entry + Exit Requirements

• Legal permission to operate a health insurance organization is difficult to obtain, due to organizational and financial and budgetary requirements that must be met. This may result in few HI organizations, collusion, and price fixing

• Exit may be restricted because HI organizations have collected money on behalf of individuals, have obligations, and may be seen as socially desirable entities – socially – even if they are inefficient.

Generic Problems 3:Administrative or Technical Efficiency

• If too many HI organizations establish themselves to serve a population, they may only be capable of attracting relatively small membership, resulting in risk pools that are too small

• HI organizations may have to spend a lot of money to attract new clients, and may pass these costs on to clients in the form of higher premiums.

Generic Problems 4:Inclusion, Exclusion + Equity

• On the one hand, health insurance pools contributors, be they young vs. old, healthy vs. ill, rich vs. poor. As long as they are members, and paid contributions, they are entitled to health care. In this sense, health insurance has positive cross-effects that could serve equity

• On the other hand, those unable to pay – usually members of small companies, households in urban informal markets, and rural households – are likely to be excluded from competitive HI markets

• More generally, the relatively rich tend to have HI, the relatively poor don’t

Generic Problems 5: Grievance Procedures

• Because HI organizations pool contributions to provide care at times of serious illness or injury, the issue of serious malpractice arises more in HI contexts than in primary health care

• Setting up adequate grievance procedures and the capacity to enforce legal decisions on the behalf of claimants, might be beyond the capacity the legal system, and result in claims that can’t be collected from HI organizations.

Class rating + discussion

(on a 5 point scale)

Health Insurance in Competitive Markets

Buyers

-- informed?

-- time to shop?

-- rational thinkers?

Sellers

-- entry to market easy?

-- many sellers?

-- seller induced demand?

Product

-- relatively homogeneous?

-- price known in advance?

Winners + Losers in Competitive Health Insurance Markets

• Winners = buyers who are willing + able to pay, get good service, and maximize their utility through choice

• Winners = sellers who have a broad risk pool, low admin costs, and make a profit

• Losers = those left out because they can’t afford to join, excluded because of provider crème skimming, or members of poorly functioning plans

• Losers = sellers that can’t attract enough members, or suffer from adverse selection, and go bankrupt.

• Losers = society, insofar as fragmented markets and exclusion of households weakens the sense of social solidarity

Government Action to Protect Possible Losers

• Regulate the sellers (entry + exit)

• Regulate the providers (quality, standards)

• Regulate information markets (entitlements)

• Regulate grievance procedures

• Regulate, Regulate, Regulate with mixed success

Alternative Permutations + Combinations to Competitive markets: 1

• Government assumes responsibility for pooling revenues on behalf of citizens and provides universal coverage for a basic package of health entitlements.

• No private insurer can finance/provide services in the basic health entitlements

• Private voluntary insurance is ONLY permitted for health goods and services outside the basic health entitlements

• Example = Canada

Comparison of Two Models:

Canada versus USA

Features of the Canadian Model

• Gov’t has the mandate to collect and pool revenues and does it well

• Prevents a two-tier system, one for rich vs. one for poor, in financing/provision of basic health entitlements

• Costs to administer the system are borne by 10 provinces, representing population of each province.

• Allows voluntary insurance for limited health goods and services, beyond the basic entitlements, that Canadians really desire

• Government allows private providers to serve clients and reimburses them under negotiated fee arrangements

Features of US Model• Private, Social Insurance and Government

Insurance for the poor and elderly form a Mix of insurance coverage

• Competition for private finance and provision

• Many private and employer sponsored insurance pools

• Ability and willingness to pay is key

Selected Comparison CriteriaCanada USA

% Uninsured 0 15-20

% GDP spent on Health 8.5-9.5 13-14

% Health $$ going to Administration

6-7 14-20

Citizen views on rebuilding system completely

-- 1988/90

-- 1998

-- 2001

5

23

18

29

33

28

Health outcomes Better

Why Fees + Hospital Costs are Lower in Canada

1. Negotiated fees between physician’s organizations and provincial governments for physicians

2. Regulation of hospital costs by provincial governments, including capital expenditures

3. Provincial limit on capital costs associated with expensive new technologies.

The Reality of Mixed Systems• Government almost always acts as ‘insurer of

last resort’ for the relatively poor• Social health insurance is often in place,

representing 20-30% of formal sector workers• Cooperatives health insurance is often in place

for rural plantation workers• Community health funds collect premiums and

pay for services for minimum health entitlements• Private health insurance companies compete for

relatively well-off clients

Features of the Iran Approach• 23.4 million covered through SSO, mainly

in urban areas

• 3.1 million covered by other institutions like Imam Khomeini Foundation

• 29.1 million covered through MSIO, mostly government workers, farmers, students

• 5.4 million not covered by any form of insurance

Features of the Thailand Model• Mandated membership of formal sector

employers and employees but NOT their household dependents: 15% of workforce is insured by SHI

• Earmarked money for SHI members allows relatively generous benefits entitlements and has resulted in a two-tier system

• With only one powerful SHI fund acting as a purchaser of services for members, administrative costs have been kept low and standards have been strictly enforced

A Few Summary Points• Health insurance financing and provision is

extremely complex• Making use of competitive markets for provision of

health insured services (via contracting) makes more sense than for financing of health insurance

• Maximizing size of risk pools gains benefits from the ‘law of large numbers’ and minimizes duplication of administrative costs associated with managing manage many smaller risk pools

• Government and NGO watch-dog organizations have a major role to regulate “insurance markets”