Health insurance in flux

Brian Turner Economist Brian Turner takes stock of the current structure of the insurance market and the risks of a shortfall in younger customers.

“May you live in interesting times” is often cited as a Chinese curse although there is some uncertainty about its actual origins. However, it is certain that, when it comes to the Irish private health insurance market, we are indeed living in interesting times and some people may well feel this is a curse.

Recent developments in the market include the capping of the tax relief available on premiums and the commencement in 2014 of charging insurers for the use of public beds in public hospitals, as well as changes (due to take effect on 1 March) in the stamp duty and age-related credits under the risk equalisation scheme.

The reasoning behind these moves is understandable. Currently, private health insurance is subsidised by the State, including through tax relief on premiums and the fact that insurers have not, to date, been charged for private patients accommodated in public beds in public hospitals (apart from the statutory bed charge, currently €75 per night).

Since the State receives its income primarily through taxation, which everyone pays, this means that those who do not have health insurance are contributing to this subsidisation of those who do. Since take-up is higher among those on higher incomes, such subsidisation is regressive. Therefore, the reduction or removal of such subsidies would address one of the inequities in the Irish health system.

However, the timing of such moves – and the consequent effect on premiums – is not ideal, given that the health insurance market is already under strain. Like-for-like health insurance premiums have almost trebled in the last decade and have more than doubled since the number with health insurance peaked in December 2008.

The capping of tax relief, which has already come into effect and will affect around 90 per cent of plans available in the market, will add 25 cent per euro above a net premium of €800 for an adult or €400 for a child. Although it will have a greater effect on higher priced plans, a family of two adults and two children on the ‘standard’ level of cover (a semi-private room in a private hospital) could see up to a double-digit percentage increase in premiums as a result of this move alone.

Public beds

There is some disagreement surrounding the additional costs to insurers of the charging for public beds in public hospitals. The Department of Health claims that the move will raise around €39 million in 2014, but Insurance Ireland suggests the figure will be nearer to €130 million. In a market where claims costs are approximately €2 billion per year, the latter figure would represent an increase in costs of 6.5 per cent.

It should be noted that, while charges will be introduced for the use of public inpatient beds, charges will be reduced for day beds, incentivising the use of the latter, cheaper setting. However, as a majority of private patients are already treated on a day case basis, it is unclear to what extent further use of this setting is possible.

Risk equalisation, which is necessary to underpin community rating in a market with multiple insurers, is designed to be cost-neutral at a market-wide level with the stamp duty paying for the risk equalisation credits. However, the design of the current scheme and the fact that the vast majority of plans are considered advanced cover plans mean that the increased stamp duty will disproportionately affect lower-priced plans, while the increased risk equalisation credits will have a greater benefit for plans that have a higher mix of older consumers which tend to be higher-cost plans.

Therefore, all of these measures will add upward pressure to premiums, adding to ongoing factors such as an ageing population and improvements in medical technology, and will almost certainly result in further discontinuation of health insurance. Since the market peaked in 2008, the number of people with cover has fallen by 250,000. Given the increase in premiums and the economic conditions in the intervening period, the fact that this represents a fall of less than 11 per cent from the peak demonstrates great resilience among health insurance consumers.

19721188_xxl Age structure

However, the profile of those who have dropped their cover is worrying. Figures from the Health Insurance Authority show that, between 2009 and 2012, the number insured contracted in every age group under 60, while every age group from 60 upwards saw an increase with the decreases being greater the younger the age group, and the increases being greater the older the age group. For example, the insured population aged 18-29 fell by over a quarter over the period, while the number aged 80 and over with insurance increased by almost 18 per cent albeit from a much lower base.

Given the difference in average claim costs between these age groups – €312 per person aged 18-29 in 2012 versus €4,344 in the 80-plus age group – this has serious implications for the market. By my calculations, the shift in age profile in the market added almost €150 million in claim costs to the market in 2012 relative to a situation where the age profile had stayed the same as in 2009.

Community rating, whereby everyone pays the same for the same plan, relies on inter-generational solidarity, whereby younger people cross-subsidise older people in the expectation that, when they get older, they in turn will be cross-subsidised by a future generation of younger people.

However, if the stream of younger consumers coming into the market tapers off, average claim costs will rise, increasing premiums, which could drive further younger people out of the market (as they perceive health insurance as poorer value for money given that they are less likely to claim) and so on in a cycle known as an ‘adverse selection death spiral’.

One response to this problem would be to introduce lifetime community rating, whereby people pay a premium loading if they wait until older ages to take out health insurance. Introduced in Australia in 2000, this led to a significant increase in take-up among younger people. However, such a move in Ireland would not currently be credible if people anticipate a move to universal health insurance in 2016.

Furthermore, the current situation in our voluntary health insurance market gives some indication of potential issues under a move to universal health insurance. In particular, such a move would presumably involve the charging of full economic cost for all beds in all hospitals with consequent implications for premiums. Furthermore, the effectiveness of the risk equalisation scheme, which is currently relatively new, in addressing incentives for cherry-picking of younger, healthier consumers, will need to be proven.

One thing is for certain. This market is not going to get boring any time soon.

Brian Turner is a lecturer in economics at University College Cork, specialising in health insurance and financing.

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