Abstract
Many countries are considering the option of reducing the share of mandatory basic health insurance (BI) and to increasingly rely on voluntary supplementary health insurance (SI) schemes to cover health care expenditures. In theory, competitive markets for SI tend to risk-rated premiums. After discussing the determinants of risk rating in competitive SI markets, we estimate the potential for risk rating due to the transfer of benefits from BI to SI coverage. For this purpose, we simulate several scenarios in which benefits covered by BI are transferred to competitive markets for SI. We use a dataset from one of the largest insurers in the Netherlands, to calculate the potential premium range for SI resulting from this transfer. Our findings show that, by adding risk-factors, the minimum SI premium decreases while the maximum increases. Moreover, we observe that risk rating primarily affects the maximum premium. The magnitude of the premium range is especially substantial for benefits such as medical devices and drugs. For these services the potential consequences of risk rating in terms of access to affordable insurance coverage may be considered not “socially acceptable”, since they result in high SI-premiums for certain risk/income groups. Therefore, when transferring benefits from BI to SI policy makers should be aware of the implications for the affordability of insurance coverage.
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Notes
- 1.
Throughout this chapter, we consider gender as a potential risk factor given that insurers may use it to risk-rate premiums in several countries’ private voluntary health insurance markets. In accordance with EC-law, the Council Directive 2004/113/EC of December 2004, adopted to implement the principle of equal treatment between men and women in the access to and supply of goods and services (Article 13 of the EC-Treaty), establishes that Member States may decide “to permit proportionate differences in individuals’ premiums and benefits where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data”, which must be regularly updated and made public (Article 5(2) of the Council Directive (2004)/113/EC). An example of gender-based premium differentiation outside the EU is South Africa (Armstrong et al. 2004). In any case, forbidding the use of gender as a risk factor would not affect significantly the premium range relative to the other risk factors, i.e. age and health status.
- 2.
If available, the preferable indicator of firms’ market power is the relevant price-sensitivity, since it directly provides information about the shift in the (incumbent or new entrant) firms’ market shares due to price-variations. Market shares as such are more crude proxies of firms’ market power (often adopted by Antitrust Authorities as indirect indicators, when data on price-sensitivities lacks). They can be measured at the level of the individual firms on the “relevant market” in order to establish the market dominance of each firm. Alternatively, concentration ratio’s (CR8, CR4 and the Hirschman-Herfindahl index) report the aggregated market share of the largest firms in the market. If market shares are not decisive, the competitive advantage of the dominant firm should be taken into account including entry barriers. Entry barriers are particularly important to determine the degree of contestability of the market.
- 3.
SeeChap. 6 for more details on the strength of the links between SI and BI carriers.
- 4.
Switching rates in the Dutch BI market increased by 18% after the introduction of the new Dutch national health insurance scheme in January 2006. In the coming years, this may lead to an increase in the SI’s switching rates, given that BI and SI are linked (see Chap. 6).
- 5.
The choice of risk adjusters is considered as an endogenous determinant of the level of risk rating, since health questionnaires are designed by the insurers. Consequently, insurers may influence, at least to a certain extent, the quality of the questions proposed and thereby the quality, in terms of predictive power, of the resulting risk adjusters.
- 6.
Under the regulatory constraints currently present in the Dutch (and most other countries’) SI market, most information about relevant risk-factors may be collected by insurers via health questionnaires. The fact that most risk-factors are observable decreases the possibility (and the consequences) of adverse selection, which in fact appears not to be an issue at least in the Netherlands given that 90% of the population holds SI.
- 7.
In unregulated competitive insurance markets the use of health status indicators as risk adjusters by insurers is very likely to happen in the long run. Nonetheless, large and sudden fluctuations in the premiums may be difficult to accept for enrollees if these variations are due to a change in health status.
- 8.
Since January 2004, BI in the Netherlands no longer covers for the costs of physiotherapists and dentists for adults; of the first in-vitro fertilisation treatments (IVF); of the contraceptive pill for women older than 21 years; and of taxi transport of sick people to the doctor. Psychotherapy was limited to 30 treatments (Van Kolfschooten 2003).
- 9.
No Medigap policies sold after January 1, 2006 include drug coverage. People can only buy prescription drug coverage through the new Medicare Part D prescription drug plans. If people did not join a drug plan during the initial enrolment period (November 15, 2005 and May 15, 2006), they can join during the annual enrolment period between November 15 and December 31 of each year, and they will have to pay a penalty (see www.calmedicare.org/drugs/mpdc/guide/medigap.html).
- 10.
For all benefits (packages), the more insurers risk-rate the higher (lower) is the maximum (minimum) premium paid by the highest (lowest) risk-groups. Moreover, the increase in the maximum premium produced by the use of additional risk adjusters is much larger than the decrease in the minimum premium.
- 11.
In order to provide a “prediction” of the profitability of risk rating, the difference between expected expenditures in each risk-cell and the community-rated premiums may be considered. Simulation techniques that take into account also the differences in price-sensitivity may be adopted to predict the number of individuals moving (i.e. switchers). We thank a referee for bringing up this point.
- 12.
This represents the percentage of individuals that would pay less than €538 (community-rated premium) if they switched to insurers adopting a demographic model to risk-rate premiums. In particular, more than the 15% (25%) of enrollees would have a substantial reduction of 338 (€238) in their premium contribution.
- 13.
Pauly and Herring’s (2007) analysis of US data on the relationship between premiums and coverage in individual insurance market and health risk shows that actual premiums paid for individual insurance are much less than proportional to risk, and risk levels have a small effect on obtaining coverage.
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Paolucci, F. (2011). The Potential for Risk Rating in Competitive Markets for Supplementary Health Insurance: An Empirical Analysis. In: Health Care Financing and Insurance. Developments in Health Economics and Public Policy, vol 10. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-10794-8_4
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