According to the Consultation Report on the Voluntary Health Insurance Scheme (VHIS) released in January, the government has decided to postpone the setting up of a high risk pool backed up by government funding until its financial model and implications are reassessed.
We believe high risk pool (HRP) is a wrong policy tool for implementing the VHIS for two reasons.
First, it is an unjust use of public money. Second, it is ineffective in deterring insurers’ risk-selection behavior, which will financially render HRP unsustainable and negatively affect the quality of insurance products.
We urge the government to drop the HRP entirely and adopt risk equalization as a policy tool instead. The advantage of risk equalization over HRP is that it can help achieve the main objective of VHIS while involving no public money.
Under the government’s plan, the main objective of the VHIS is to guarantee a standard health insurance plan at affordable standard premium rates to people who want to take up private health insurance, including high-risk subscribers.
In other words, private insurers will be mandated to provide guaranteed acceptance of all standard health insurance plan subscriptions at fixed standard premiums.
For the government, HRP is a tool for stabilizing the insurance market, which may otherwise collapse eventually under the market condition of “guaranteed acceptance” at fixed standard premiums.
Without a stabilizing measure, a healthcare insurance market where “guaranteed acceptance” at fixed standard premium rates is mandated may collapse for two reasons:
1) A continuous exit of insurers with an adverse risk profile due to bankruptcy because insurers can neither charge higher premiums nor reject any high-risk subscribers.
2) A continuous exit of non-high-risk enrollees due to rapid increases in premiums – rapid premium increases occur when insurers with adverse risk profiles demand frequent premium increases than otherwise needed in order to cover their losses.
In such a scenario, even if the market does not collapse, it should be noted that insurance premiums will be higher than they will otherwise be in a market stabilized by an appropriate measure.
According to the government’s plan, HRP stabilizes the insurance market by separating high-risk and non-high-risk subscribers.
For non-high-risk subscribers, they will remain insured and their insurance claims are to be paid by individual private insurers.
For high-risk subscribers, however, their premiums will be paid to, and their insurance claims paid by, HRP.
Since high-risk subscribers’ premiums are not commensurate to their risks, it can be foreseen that the funding of HRP will not eventually be sufficient for paying all insurance claims.
To ensure that the funding of HRP is sufficient, it has to be backed up by public money.
In the government’s original VHIS, public money is therefore used to stabilize the insurance market by keeping health insurance premiums relatively low while protecting insurers from bankruptcy.
From the perspective of individual insurance subscribers, their premiums are thus either indirectly or directly subsidized by public money.
This use of public money is unjust because private health insurance is for those with deeper pockets only.
Subsidizing private health insurance uptake with public money is in effect subsidizing the relatively well-off with public money to secure better healthcare.
The government justifies this use of public money by arguing that expanding private health insurance uptake will ease pressure on the public healthcare system, which will in turn benefit the less well-off.
But experiences in other countries provide little support for this argument. Instead, international evidence shows that private health insurance often actually harms the public system in time.
One major reason for this is that expanding private healthcare utilization simply takes badly needed doctors and nurses out of the public system and reduces its capacity.
We take the view that subsidizing private health insurance uptake with public money is in essence a policy of “[f]or whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath.”
No reasonable person should accept such a policy.
What is more, the injustice may be even graver because the financial commitment to HRP can be a lot greater than the government’s original estimation.
This is because the government has underestimated the risk-selection behavior of insurers and hence its potential drain on public money.
Risk selection refers to insurers’ profit-maximization behavior to select low-risk enrollees (cream-skimming or cherry-picking) and reject high-risk enrollees (lemon-dropping).
For individual insurers, risk selection is a more effective strategy for maximizing profits than improving efficiency through, say, lowering the costs of healthcare or of operation.
Between lemon-dropping and cherry-picking, the former is more effective than the latter for maximizing profits because on average the predictable losses on the “lemons” are higher than the predictable profits on the “cherries”.
Under the HRP arrangement, one obvious risk-selection strategy is to drop the lemons to the high-risk pool.
The government surmises that so long as insurers are allowed to charge a certain amount of premium loading such that the risk of some higher-risk individuals that they take on will commensurate with the premium charged, they will have an incentive to keep these higher-risk individuals under their portfolios so as to retain the profits from insuring them.
It is clear from such government thinking that the important point mentioned above has been missed, namely, that on average, the losses on the “lemons” are higher than the profits on the “cherries”.
Insurers’ incentive to drop lemons to the high-risk pool is likely to be higher than the government expects.
The consequence of such lemon-dropping behavior is that the government’s financial commitment to HRP can be a lot costlier than originally estimated and HRP’s financial sustainability can be seriously jeopardized.
The government has also overlooked the fact that insurers will still have ways to risk-select even when “guaranteed acceptance” is mandated, for example, by not contracting with doctors renowned for treating complicated or serious chronic diseases, or alternatively, contracting with doctors whose clinics are not wheel-chair-accessible.
Through such tactics, insurers seek to reduce their chances of having to take on high-risk patients.
Competitive dropping of “lemons” will threaten the quality of care for the chronically ill, reduce the efficiency of the insurance industry as well as lead to increases in premiums.
Due to its adverse impacts on the public healthcare system and for considerations of justice, we are of the view that the uptake of private health insurance should not be actively encouraged with public money.
Notwithstanding, for consumers who are willing to buy private healthcare, their demand for value-for-money and reliable insurance coverage is wholly legitimate.
On balance, therefore, the VHIS remains an acceptable policy so long as:
No public subsidies are used to encourage the uptake of health insurance;
Insurers’ risk-selection behavior can be effectively deterred so that they will compete on quality rather than on dropping “lemons” and that consumers will be provided with value-for-money insurance plans;
The insurance market can be effectively stabilized; and
The public healthcare system will not be adversely affected.
In view of these considerations, we propose risk equalization as an alternative tool to HRP for implementing the VHIS given its capability for stabilizing the insurance market and deterring risk-selection behavior while not necessitating public money input.
Risk equalization aims to equalize the risk profiles among insurers. It is practiced in various forms and degrees in countries such as Australia, Germany, Ireland, the Netherlands, and Switzerland.
Using Ireland’s original risk equalization scheme introduced in 2003 as an illustration, the risk profiles among insurers can be equalized in the following way:
In general, it is supposed that the risk profile of each insurer should be equal to that of the population.
For example, if age and gender are considered as the relevant risk factors and if X percent of the market are within the “50–59-year-old male” risk group, then each insurer should in principle have X percent of their membership being 50–59-year-old male.
Under this consideration, insurers who have a favorable risk profile are required to compensate insurers with an adverse risk profile by paying the latter a risk equalization payment.
In other words, insurers who have a favorable risk profile will be penalized, and this will in turn dis-incentivize insurers to risk-select.
A central fund (sometimes called a solidarity fund) is usually set up to facilitate the equalization payment transfers.
With this arrangement, insurers pay risk equalization contributions to and receive risk equalization compensations from the fund.
The amount an insurer receives from or pays to the central fund may be calculated in the following way:
An insurer’s “expected expenditures” under the assumption that it has a risk profile equal to that of the population are calculated. One formula for calculating the insurer’s “expected expenditures” is based on the insurer’s business/operation costs.
The “expected expenditures” are then compared with the insurer’s “actual expenditures” resulting from its actual risk profile.
The difference between the “expected expenditures” and the “actual expenditures” (subject to an adjustment to ensure that the central fund is self-financing, i.e., to ensure that the total payments to the fund is equal to the total outlays of the fund) is the amount that an insurer will receive from or will pay to the fund.
It is noteworthy that in addition to deterring risk-selection behavior, risk equalization can also help promote efficiency and cost containment of the health insurance market if insurers’ own business/operation costs are used for calculating payment transfers.
This is because this calculation method allows an insurer to retain the profit gains resulting from its own efforts in improving the efficiency of its business.
A simulation study based on actual market data shows that payment paid to a recipient insurer (i.e., an insurer with an adverse profile of risk) will not diminish if it becomes more efficient.
Likewise, the payment that a contributing insurer (i.e., an insurer with a favorable profile of risk) has to pay to the central fund will decrease to the same extent as it has become more efficient.
Notwithstanding that a more effective market stabilizing measure has been found, given that our public healthcare system is already under serious strain, we are skeptical whether Hong Kong is ready for the VHIS.
We notice from the Consultation Report that the government is aware of the issue of “brain drain” from the public healthcare system sector and the resulting strain on the public healthcare system.
We also learn from the consultation document in 2014 about a steering committee to conduct a strategic review on healthcare manpower planning.
However, the “Conclusion and Way Forward” chapter of the Consultation Report is completely silent on the manpower planning issue.
Until and unless the government shows that the healthcare manpower issue is going to be properly addressed, the entire VHIS should be put on hold.
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