Introduction
In this chapter, we focus on two private mechanisms for funding health care – private health insurance and medical savings accounts. We refer specifically to countries outside the European Union (EU). Chapter 6 analyses the role of voluntary health insurance within EU countries.
In the first section, we consider the potential advantages of private health insurance and discuss its traditional failures. Then we appraise the performance of private insurance systems in relation to the policy objectives of equity in financing and access, macroeconomic efficiency and allocative, technical and administrative efficiency. Next, we present case studies analysing the experience of private health insurance in the United States, Switzerland, Australia and Chile.
These examples demonstrate that the challenges of private insurance are common across countries and are generally tackled similarly. Finally, we focus on medical savings accounts, with particular reference to their implementation in Singapore and more briefly in the United States. We argue that private health insurance without adequate regulation fails to meet society’s policy objectives. Even with heavy regulation, it is not an efficient or equitable way of funding health care.
The market for private health insurance
Neo-liberalist economists believe that the market can optimally allocate re-sources. However, this is based on the assumption of perfect competition. In
Table 5.1 Market failures in health care financing
health care, with several specific market failures, regulation may be advocated to overcome them (Table 5.1) (Hsiao 1995a). Generally, an unregulated health insurance market does not work efficiently for the following reasons:
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Individuals may have knowledge about their health that can be concealed from the insurer (adverse selection).•
Ill health is highly probable for people with pre-existing conditions or hereditary or chronic diseases and elderly people, making them ‘uninsurable’.•
The insurer lacks information about the current and future health status of the individual, which makes estimating future claims and calculating a risk-rated premium difficult.1•
Once insured, individuals may participate in risk-taking behaviour or affect their need for services (moral hazard). This ‘risk’ is often excluded from private health insurance at the time of enrolment.•
The probability of falling ill is not always independent of the probability of someone else falling ill because some diseases are communicable.Potential advantages and disadvantages of private health insurance
Private health insurance as a means of funding health care may have several advantages in practice:
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enabling the demands of relatively affluent people to be self-financed, leaving the government to target (limited) public resources on delivering health care for poor and disadvantaged people without access to private health insurance;•
mobilizing additional resources for infrastructure that may benefit poor and rich people alike;•
encouraging innovation and efficiency, which may catalyse the reform of the public sector, because of its flexibility and the profit motive (Chollet and Lewis, 1997); and•
increasing choice for the consumer.Such potential advantages may or may not be realized: how private health insurance performs depends on its design and regulation and how it interfaces with the public sector. Private health insurance also has potential problems in practice. The analysis here is limited to information problems related to defining the benefits package and setting premiums.
Defining the benefits package
For competition to operate in the health insurance market, people must be able to compare the benefit packages of different plans. If a standard minimum package is not regulated, the potentially positive role of competition based on consumer choice is greatly diminished.
Consumers are likely to be uncertain about the health care benefits being offered when they purchase private insurance in most countries. Regulators worldwide are seeking to reduce this uncertainty by pressing for the definition of a basic benefits package – the size and content of what is available to consumers (Ellwood et al. 1992). For example, the Office of Fair Trading (1998) in the United Kingdom recommended that insurers should create a bench-mark or core term product. Such a basic package would facilitate comparison of differing products by consumers. However, insurers typically are loathe to comply. Until a core or basic package is defined, consumers will be very uncertain about what their insurance purchase will provide for them as com-pared with what they would get from other insurers.
Setting premiums
Premiums can be risk rated (based on an individual assessment of the future risk of ill health), community rated (based on the average risk in a defined group or population) or group rated (based on the average risk of employees in a firm). Because people who know they are likely to need care are more likely to purchase health insurance (adverse selection), competing health insurers usually adopt risk rating and charge higher premiums to individuals likely to be at greater risk of using care. As a result, private health insurance tends to discri-minate in favour of healthy, young adults who use little health care. Because of the potential for spreading financial risk across several people, many private insurers only market their plans to groups (usually of employees). Purchasing individual insurance, therefore, tends to be very expensive, and poorer people (with a risk of ill health that is higher than average) have great difficulty
purchasing health insurance (Chollet and Lewis 1997). Although government subsidies for poor people to purchase insurance have been widely discussed (Ellwoodet al. 1992), such schemes have been difficult to implement successfully.
Because older people need relatively more health care, private insurance coverage tends to be available only at a very high premium after retirement.
Thus in South Africa and Chile, retirees ‘drop out’ of the private sector (Medical Aid Societies and the ISAPRES) into the public sector (van den Heever 1998).
Furthermore, insurers may exclude specific conditions from coverage, shifting the costs of care for these to the public system. If government forces insurers to insure sick people (‘poor risks’), who are often elderly, the insurers may leave the market.
Community rating is often developed based on a concern for equity and solid-arity. In the context of voluntary purchase of insurance, however, good risks (relatively healthy people) may consider the community-rated premium too expensive and exit the pool to self-insure, leaving the less good risks to drive up the community-rated premium and gradually make insurance less affordable.
Unless there is a single pool consisting of the entire population of a country (such as a national health service), regulators have to define the rules governing pooling. Without appropriate regulation, there will be market segmentation, cream-skimming and exclusion of vulnerable groups, which may be inconsistent with social objectives. In particular, solidarity principles may be undermined, as can be seen in the export of private health insurance to Latin America (Perez-Stable 1999; Stocker et al. 1999). For instance, in Mexico, in an effort to improve the efficiency of the public sector, it was proposed that more affluent people should be allowed to opt out of social security and transfer their contributions to private insurers (in a way similar to that created by the Pinochet regime in Chile). This was resisted in Mexico because it was seen that the migration of these ‘good risks’ to the private sector would leave the state with the ‘poor risks’, and the average cost of provision would rise.
In the United States, most insurance is group rated and employer plans cover 90 per cent of the people who are privately insured (Gruber 1998). The greater purchasing power of large employers and generous tax incentives mean that group-rated insurance among large employers is better value than either individually purchased insurance or group-rated insurance for small employ-ers. Many of the people without any insurance are low-income workers and employees of small firms. In 1998, employers’ health plans covered 47 per cent of the employees of firms with less than 200 workers. Average premiums among small firms were about 10 per cent higher than the average premiums of large firms and usually offered fewer benefits with higher deductibles (Gabel et al. 1999). The group rating of premiums benefits those in large employee pools but leaves employees of small firms and self-employed people with high risk-rated premiums.
The complexity of market regulation
Regulating markets is an element in making competition work: using resources
efficiently and controlling costs. However, private health insurance markets are often not regulated adequately.
In an effort to create such a regulatory framework for the United States, a group of academics, insurers and providers met at Jackson Hole in Wyoming (Ellwoodet al. 1992). Their efforts demonstrate the complexity of regulation required to create and sustain a competitive health care market anywhere in the world. The architects of these proposals identified six causes of market failure in the United States health insurance market:
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Cost-unconscious demand: with the third party (insurer) paying passively for benefits, neither providers nor consumers have an incentive to economize.•
Biased risk selection as a source of profit: insurers can garner profits by product differentiation and cream-skimming.•
Market segmentation to minimize price competition: large numbers of complex heterogeneous benefit packages segment the market, making comparison difficult and choice based on price practically impossible.•
Lack of information on outcomes relative to cost: little outcome measurement and a reluctance to focus such investments on care packages rather than particular events.•
Little choice for members of small groups: half the employed people in the United States are in groups of less than 100 and have little choice of health plan.•
Perverse public subsidies:2 tax breaks benefit rich employees – the richer the insuree, the greater the subsidy. Subsidies might be better targeted at poor people to facilitate their sustained membership of plans.Market characteristics such as these are ubiquitous and require careful regu-lation. To remedy these market failures in the United States, the Jackson Hole Group proposed an elaborate and complex regulation framework. The major elements of the proposals were:
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Universal access: federal legislation would ensure everyone has access to at least a minimum benefit package, financed through a combination of obligatory employer contributions, government subsidies and individual resources.•
Choice of packages: at least one collective purchaser acting on behalf of small employers (health insurance purchase cooperative) would be created in each state that could pool risks across employer groups and exploit economies of scale in financing and purchasing.•
National regulation: three standard-setting boards would be established to ensure uniform definitions and uniform standards of performance, to ensure clinical effectiveness information and to ensure the market worked efficiently.These plans were described as a ‘blueprint without a real life counterpart’
(Reinhardt 1993): the regulation was in principle correct but in practice could not be implemented. The Jackson Hole proposals were ambitious, complex and resource intensive. They suggest that, for a health financing system
character-ized by managed care similar to that in the United States to work efficiently, a complex and coordinated set of regulations and incentives is needed to encourage private markets to serve the public interest.
Performance of private health insurance
In this section, we focus on health policy objectives that recur in reform debates around the world (Hsiao 1995b; Maynard and Bloor 1995). Those especially relevant to an analysis of private health insurance are equity in financing and access, macroeconomic efficiency and allocative, technical and administrative efficiency.
Equity in financing and access
Wagstaff et al. (1999) and van Doorslaer et al. (1999) conclude that private health insurance contributes to the regressivity of health care financing in the United States and Switzerland. However, in Germany and the Netherlands, mainly affluent people purchase private insurance, and it therefore contributes to the progressivity of the financing system. The same effect, but to a lesser extent, is seen in England and Portugal, where the purchase of private health insurance is concentrated among affluent people (Wagstaff et al. 1999). Draw-ing conclusions about the impact of private health insurance on equity in different contexts requires an assessment of the overall effect on equity (com-bining an analysis of the distribution of cost and benefits). In terms of equity on the delivery side, private health insurance creates access based on a willing-ness and ability to pay and typically discriminates against poor, ill and elderly people. Such discrimination creates inequality in access to services and may ultimately widen the gap in inequality in health outcomes.
Equitable access to health care has been further undermined as a result of greater sophistication in risk rating, which enables insurers to select preferred risks. The result is that a growing number of people in the United States lack private health insurance. The export of private health insurance to many Latin American countries has threatened solidarity because of private incent-ives to ‘skim’ the market, leaving poor risks and elderly people in the state system. Such effects can be seen in Chile and elsewhere, but have been re-sisted to date in Mexico (Perez-Stable 1999; Stocker et al. 1999).
Macroeconomic efficiency
The policy discussion of macroeconomic efficiency tends to focus either on con-cerns about how health expenditure ‘crowds out’ other forms of public and private expenditure or how it affects wage costs and international competitiveness.
The argument that public expenditure crowds out private expenditure on health care has no substantial empirical support. Research into whether the expansion of Medicare is ‘crowding out’ private health insurance in the United
States seems to show that, because of the income definition of Medicare, it is unlikely that people can substitute between the two (Shore Sheppard et al.
2000).
United States economists argue that private health costs do not affect com-petitiveness under the present health system. They argue that private health insurance costs do not raise overall labour costs but simply change the com-position of labour costs from wages to benefits. There is no knock-on effect on prices and the ability to sell products overseas, therefore, remains unaffected.
Even if labour costs increased, other studies have suggested that this would affect the value of the dollar and not international competitiveness (Glied 1997). However, because insurance is often provided by employers, it reduces the flexibility of the labour market: employees are reluctant to move jobs due to transitional loss of access to benefits (Gruber 1998).
The desire to have macroeconomic cost control of health care expenditure is well articulated by finance ministries around the world. Two main schools of thought currently inform decisions as to how expenditure control can best be achieved: market competition or cash-limited budgets.
Some people who advocate market competition as a means of controlling costs recognize that extensive regulation would be needed for this purpose (Ellwoodet al. 1992). Others advocate the market without any government intervention, including tax subsidies (Friedman 1962).3 The evidence base for such advocacy is limited, as in most areas of health care policy there is con-tinuous reform (social experimentation) but little evaluation.
Private health insurance is usually one of several sources of revenue. Even in the United States, where everyone who can afford to do so should voluntarily purchase insurance, government financing of health services accounts for a significant share of total health expenditure. Multiple sources of funding are more difficult to control than a single source. Furthermore, where multiple sources exist, an effort to reduce the flow of funds down one ‘pipe’ (such as tax-funded expenditure) can lead to compensatory increases in funding down other pipes (such as private insurance). Although the evidence base is incom-plete, a consensus appears to exist that, if the goal is cost containment, single-pipe tax-financed systems are superior to multiple-single-pipe insurance systems in macroeconomic cost control.
Allocative efficiency
In an ideal world, the market is supposed to allocate resources optimally. In practice, the resource allocation process in the private insurance sector (as in the public sector) is unclear. Neither the public nor the private sector can fund all the health care demanded by users.4 A crucial policy issue, therefore, is how access to care will be rationed or priorities set5 to allocate health care resources efficiently. The issue, for both the public and private sectors, is which criteria should determine access to care. There is no obvious criterion in the private sector apart from willingness and ability to pay. This leaves open the question – willingness and ability to pay for what?
If clinical effectiveness alone were to drive private-sector reimbursement, many insurees would be given what is inefficient but clinically effective. If user preferences (as determined perhaps by provider preferences because of supplier-induced demand) determine the contents of the benefits package, again the system could be clinically effective but inefficient (Maynard 1997a).
In most countries, private insurers compete with or complement the state system. If the state allocates based on ability to benefit (cost-effectiveness), the private sector will be left with a residue (such as what is inefficient and costly). Private health insurance may also cover cost-effective services because the public sector does not deliver them because of mismanagement, such as hip and knee replacements and cataract removal in the National Health Ser-vice in the United Kingdom. Private health insurance may cover more rapid access to services or the costs of amenities (such as private hospital rooms) not covered in the public insurance benefit package.
Technical efficiency
Achieving technical efficiency depends on several factors, not all of which are directly related to the source of funding. However, how purchasing is organ-ized can have a significant influence on the ability of a system to achieve technical efficiency. A system predominantly funded by voluntary contribu-tions to private insurance companies has a fragmented funding pool and purchasing function. The monopsonistic purchasing present in most publicly financed systems6 does not exist if there are multiple private insurers;7 the insurers tend to be price takers rather than price makers. Only since the early 1990s, with the creation and export of managed care (in particular, the intro-duction of vertical integration between insurer and provider or contracts be-tween an insurer and selected providers), have private insurers strengthened their leverage over providers and begun to define and enforce contracts with providers more vigorously. However, even when individual insurers function as quite active purchasers, the nature of a private insurance market fragments and dilutes this purchasing power at the level of the health care system.
Anti-trust legislation has been one obstacle to developing the insurers’ pur-chasing potential. In principle, insurers using their power separately or in collaboration to affect service delivery in terms of price, quantity and quality can be construed as using monopolistic market power.8
Administrative efficiency
Transaction costs may be systematically higher in a health system with com-peting insurers than in a monopsonistic system because of the costs associated with marketing, promotion and underwriting. In addition, if private insurers operate on a for-profit basis, further revenue needs to be generated to pay
Transaction costs may be systematically higher in a health system with com-peting insurers than in a monopsonistic system because of the costs associated with marketing, promotion and underwriting. In addition, if private insurers operate on a for-profit basis, further revenue needs to be generated to pay