Health Care Financing: Insurance

Health Economic Course Series: 3 of 12

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Experience with exemption schemes

• User fees:– Decreased necessary utilization,– Especially of the poor and vulnerable (regressive)

• Exemptions:– Inaccurate– High administrative costs, slow– Adverse incentives depending on where revenu was

retained

• Problem of catastrophic expenditure remains

Risk and Gambling

• Which of the following would you accept?– A lunch voucher for $10

– A lottery ticket worth $1 with a 1 in 3.000.000 chances of winning $ 10.000.000

– One years bicycle insurance worth $50. paying $400 if your bike is stolen (10% chance in Palembang)

Rational Gambler

Probability Value Uncertain Event

Expected Value

Lunch voucher

1 $10 =$10

Lottery ticket 0,00000033 $10.000.000 =$3,3

Bike Insurance

0,1 $400 =$40

Role of Insurance

= Use if contracts to redistribute risk of health care expenditure costs, whereby

Insurer accepts fixed payment (premium) from insured

Insurer contracted to make payments for uncertain events when they happen (to patient or provider)

Demanded when expected value of costs is larger or equal to premium, but most people willing to pay more for security (risk averse)

Premiums

• Premium =

Average expenditure on benefits (expected value) + administration costs (+profits)

Number insured

Paid in advance!

Types of insurance

General Taxation

Earmarked taxation

Social insurance

Community Insurance

Private insurance

Financiers Tax payers Tax payers Employee and employer taxpayers

Community Individuals

Earmarked contributions

No Yes Yes Yes Yes

Entitlement linked to contributions

No No Yes Yes Yes

Key Issues

1. Adverse selection

2. Moral hazard

3. Willingness to pay

4. Management of risk

Adverse selection

A process that occurs due to asymmetric information between insurer and insured

Impossible to know individual risk average risk basis for premium for people with different risks

Those with low risks drop out leaving only individuals with high risks drop-out of those with lower risks increases the premiums per remaining insured

Process continues until no one is insured

Solution- Compulsion / group joining the scheme- Risk-rating (age, sex, medical history)

Risk-rating and cream-skimming

• In order to avoid adverse selection, insurers could opt for risk selection– E.g. Insure specific groups or set premiums according

to risk

Risk of exclusion:

• Of those with high probability of illness• Of those with chronic disease or current illness

– Direct (e.g. targeted marketing)– Indirect (high premiums excluded people)

Moral Hazard

Excess demand resulting from services being free after the premium has been paid:

Lack of incentives to reduce probability and magnitude of claimed benefits (over-consumption)

Cost of insurance payments exceed the premium Insurance scheme unsustainableProcess continues until no one is insured!

Solution• Co-payments• Limiting benefits package• Waiting periods• No-claims-bonus

Willingness to pay

Surveys indicate that communities are willing to pay moderate to be insured

But often experience is different:– Concept of insurance new,– Limited trust in insurance providers– Willingness to pay for others may be new– Ability to pay

Solution:– Education– Subsidized schemes– Compulsory schemes

Management of risk

Health care risk difficult to assess– Uncertain across small population groups (15.000)– Difficult to measure extent of uncertainty– Costs often unknown– Epidemics unexpected

Challenge of setting sustainable and affordable premiums

Solutions:– Regulation– Capacity building– Re-insurance

The aims of Financing Reforms

1. Improve the amount of resources available (including stability/sustainability)

2. Improve the efficiency and equity of the allocation of resources (and thus eventually health outcomes)

3. Reduce catastrophic expenditure (risk-sharing/pooling, prepayment)

4. Support broader health sector aims such as responsiveness / quality improvement

Example: community financing

• Volunteer or paid community member manages the scheme

• Households pay into the scheme and receive benefits when needed

• Usually small scale

• Usually focus on hospitals, although can also be used for primary care

• Provider / community initiated

Experience?

• Raise revenues?– Low coverage (WTP) (most less than 5%, a few

>80%)

• Sustainable?– High turnover members and schemes– Better when linked to existing insurance– Moral hazard can be reduced, but there can be

problems with cost control– Sustainability affected by resources, external aid,

providers, solidarity, trust, and prior institution

Experience?

• Equity and efficiency? (evidence base weak)

– Membership rules vary, but generally voluntary– Adverse selection– Poor can be under-represented– May discourage use of some preventive services,

favor curative care– Limited benefits due to size & supply– Complex to manage

Key issues

• Embedded within s national financing strategy• Working through existing, trustworthy institutions• Enabling rather than blueprint approach• As “mandatory” as possible for all groups (cross-

subsidization)• Special provision for poor• Links with providers• Re-insurance• Capacity support

Process?

Inequalities may exist while different systems developing?

• User fees

• Introduction of community insurance

• Encouraging private insurance for rich/middle income groups

• Introduction of social insurance

• Universal coverage?

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