Solidarity in competitive markets for voluntary health insurance

1. Solidarity in competitive markets for voluntary health insurance Francesco Paolucci, Femmeke Prinsze, Piet Stam & Wynand van de Ven iBMG-Institute of Health Policy and Management Erasmus University Rotterdam Paolucci@bmg.eur.nl Thursday 21 April 2005 Civitas Health Policy Roundtable Novotel Den Haag Centrum

2. World-wide trend • Health care expenditures are growing while financing based on Mandatory Health Insurance (MHI) cannot grow accordingly. • Many countries are considering the option to rely increasingly on Voluntary Health Insurance (VHI) schemes. • This trend causes widespread concerns regarding a potential loss of solidarity, in terms of access to insurance coverage.

3. Solidarity • Solidarity = Cross-subsidization. • Risk-solidarity: from low-risks to high-risks. • Income-solidarity: from high-income groups to low-income groups.

4. MHI • Competitive mandatory health insurance (MHI) guarantee some Income- & Risk-Solidarity via regulations, such as: • Compulsory enrollment for certain (categories of) individuals; • Risk-adjustment system; • Open enrollment; • Community-rated premiums (CRP).

5. VHI • Voluntary (supplementary) health insurance markets are competitive and unregulated in most countries. • Unregulated competitive insurance markets cannot sustain implicit cross-subsidies because competition minimizes the predictable profits per contract (=Equivalence). • They tend to Risk-Rated Premiums (RRP).

6. The Dutch case • In the Netherlands (2004), many benefits were transferred from MHI to VHI. • Currently, VHI providers self-regulate by adopting more or less community-rated premiums (CRP) which result in some Risk-Solidarity. • But in the long term, the transition from MHI to VHI implies a loss of Risk-Solidarity given that VHI providers will (CRP) RRP.

7. Objective • Provide an empirical illustration of the consequences for Risk-solidarity of the transition from CRP to RRP in the VHI market; • Discuss the available alternatives to maintain a “socially acceptable” level of solidarity, if desired, in VHI markets.

8. Method • Simulation of scenarios in which benefits covered by MHI are transferred to VHI; • Calculation of CRP and RRP (premium range) for each simulated benefit package; • Analysis of the implications for solidarity in the market for VHI.

9. Data • Administrative data issued by the largest Sickness Fund in the Netherlands (AGIS, 2002); • N=1.5 million; • Analysis with 0.5 million individuals with identical package.

10. Graph I Max RRP Risk Rated Premiums CRP Min RRP Age

11. Graph Max RRP for DCG individuals DCG Min RRP for DCG individuals Max RRP Risk Rated Premiums Max RRP for Non-DCG individuals CRP no DCG Min RRP Min RRP for Non-DCG individuals Age

12. Benefits Risk-factors Current VHI Complete VHI Results Demographic model CRP= 75* Min RRP= 6 Max RRP= 125 CRP= 75 Min RRP= 6 Max RRP= 135 CRP= 75 Min RRP= 6 Max RRP= 130 CRP= 538  Min RRP= 146 Max RRP= 1276 Demographic + DCGs CRP= 538  Min RRP= 138 Max RRP=2581 Demographic + PCGs CRP= 538 Min RRP= 132 Max RRP= 2302 Demographic + DCGs + PCGs CRP= 538  Min RRP= 127 Max RRP= 3239 * Units in euros per month CRP= 75 Min RRP= 6 Max RRP= 138

13. Conclusions • If benefits MHI  VHI coverage  RRP more probable in the long-run; • CRP  RRP in VHI markets implies a substantial increase in the premium range for the complete VHI benefit package; • This implies a reduction of Risk-solidarity, of which Policy makers should be aware when transferring benefits from MHI to VHI; • If Society considers this reduction too high, the preferred alternative to maintain an “acceptable level of Risk-solidarity” in a VHI is by implementing a system of “explicit premium subsidies” (van de Ven et al. , JHE, 2000).

14. Issues for discussion • If Risk-Solidarity is required, should the coverage be Mandatory or Voluntary? • After the change from CRP to RRP, is VHI still a tool for cream-skimming?