Francesco Paolucci, PhD

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Opting out of Medicare risk-adjusted
subsidies for private health insurance in
Australia?

• Francesco Paolucci, PhD
• Research Fellow (ACERH, ANU)
• Francesco.Paolucci_at_anu.edu.au
• Friday, February 20, 2009, 2.20pm
• Presentation to ACERH III Policy Forum

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Agenda

1. Private Health Insurance in Australia
2. Subsidising PHI in Australia Why?
3. How to Proceed?

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• Part 1.
• PHI in Australia

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Private Health Insurance (PHI)

• Voluntary coverage
• 45 of the population has PHI (2008)
• PHI share of total health expenditures 8 (2008)
• Fairly competitive market
• 38 funds (32 not-for-profit)
• 60 market share for the 4 largest insurers
• Heavily regulated (e.g. mandatory subsidies).

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PHI coverage

• Supplementary coverage for (parts of) the costs
  of services uncovered by Medicare (e.g. hospital
  charges levied by private hospitals)
• Duplicate coverage for the costs of services
  (partly) covered by Medicare
• Increased choice of doctor for hospital treatment
  (public patients are assigned a hospital doctor)
• Shorter waiting times
• Better (perceived) quality of care.

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Complex system of subsidies in PHI

• 30-40 ad valorem premium subsidy to individuals
  who purchase PHI
• Risk-equalisation scheme (i.e. cost-equalisation)
  
• A tax penalty of 1 of income (for incomes
  exceeding 70,000 p.a. for singles and 140,000
  p.a. for couples) if individuals do not hold PHI
  (the Medicare levy surcharge).
• Lifetime community-rating per product per insurer
  (with open enrolment).

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• Part 2.
• Subsidising PHI Why?

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Subsidising PHI Why?

• The introduction of a system of subsidies is a
  direct way to achieve the goal of achieving an
  affordable access to (the coverage of) health
  care services for vulnerable groups (e.g.
  low-income or high-risks individuals).

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Economic Rationales

• Competitive PHI markets without external
  intervention fail
• To adequately address externalities in the demand
  for health care services or coverage
• Altruistic egoistic preferences.
• To provide complete coverage for the individuals
  risk of becoming a bad risk
• Problem of obtaining lifetime insurance for the
  occurrence of catastrophic risks
• To sustain community-rated premiums
• Unregulated competition minimizes the predictable
  profit per contract
• Consequently PHI may be unaffordable for the
  (low-income) high risks because of risk rating
  and risk selection.

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Country-specific arguments

• The main country-specific policy argument for
  subsidising PHI in Australia is to decrease the
  financial pressure on public financing by
• Increasing consumers choice of coverage
• Increasingly relying on private resources to
  finance health care (Scotton, 1989 1995).
• Subsidising duplicate PHI may be an indirect way
  to achieve affordable access to services for
  everyone.

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Subsidising PHI not without problems

1. Duplication leading to moral hazard, high
   transaction costs, cost-shifting?
2. Subsidising duplicate PHI effective in decreasing
   the pressure on public financing overtime?
3. Is there a stable equilibrium with acceptable
   waiting times in the public sector?
4. Adverse selection?

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Interim conclusions

• Subsidising Duplicate PHI appears not to be able
  to achieve its main policy goals
• To decrease the financial pressure on the public
  scheme
• Affordability and fairness in the access to
  services for everyone.
• Subsidising PHI is unnecessary to guarantee
  affordable access to health care services already
  covered by Medicare, and disproportionate because
  it results in several problems which create
  instability and inefficiencies in the market.

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• Part 3.
• How to proceed?

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Which direction to move?

• The current public/private mix is not sustainable
  on economic grounds.
• Two options to address duplicate coverage
• Reduce PHI coverage with public coverage taking
  up the gap (Butler 2008)
• Reduce public coverage with private coverage
  taking up the gap
• Medicare choice (Stoelwinder, 2008)
• Medicare/PHI choice (Paolucci, Butler van de
  Ven 2008).

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2b. Medicare/PHI Choice

• No duplication of coverage
• Make Medicare PHI fully substitutable (i.e.
  opting-out) consumers may choose to either be
  enrolled in Medicare (zero-premium) or PHI
  (positive-premium)
• Universal coverage for a minimum basic benefits
  package (e.g. including hospital, medical,
  pharmaceuticals benefits) maintained.

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2b. Medicare/PHI Choice

• PHI allowed to cover all types of services
  covered by Medicare
• PHI has to pay all health care expenses of their
  insured, including the cost of treatment as a
  public patient in a public hospital
• PHI compete with each other acting as the prudent
  buyer of care.

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Subsidising PHI HOW?

• Competitive PHI markets require the enforcement
  of regulations/subsidies to achieve
  affordability, efficiency and prevent selection.
• The current forms of subsidies for PHI
• 30-40 premium-related subsidies
• Community rating per product
• Ex-post cost-based subsidies(although called
  risk-equalisation).

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a. Premium-adjusted subsidies

• Effective in achieving affordability.
• But, not optimal
• They reduce the consumers and insurers
  incentives for efficiency
• Less effective price-competition and risk of
  premium inflation
• A welfare loss because of the moral hazard due to
  over-insurance.
• They create a misallocation of subsidies.
• ? tradeoff affordability - efficiency

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b. Premium rate restrictions

• Goal to create implicit cross-subsidies from
  the low-risks to the high-risks.
• Effect Such pooling of people with different
  risks creates substantial predictable profits and
  losses for subgroups ? and thereby create
  incentives for risk-selection.
• ? tradeoff affordability - selection

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c. Risk-equalisation

• Is it RE?
• Risk factors
• Age 8 age bands (ABP)
• Crude proxy for chronic conditions (HCCP).
• Current RE system is ex-post (retrospective)
  cost-equalisation scheme (CE) that re-distributes
  a posteriori a budget made of (mainly) age-based
  contributions of all insurers derived from their
  actual claims (costs) according to their market
  share.

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Effects of CE

• Highly imperfect matching with the true risk
  structure of insurers population resulting in
  over/under compensations (i.e. misallocation of
  subsidies).
• Strong incentives for selection (historically a
  constant threat to the stability of PHI market in
  Australia).
• Lack of incentives for efficiency.

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Why not risk-adjusted subsidies?

• In RE schemes the total budget is set a priori
  according to societys priorities, and is
  allocated to the insurers only on the basis of
  the selected risk factors of their insured
  population.
• Most countries in the world adopt ex-ante
  (prospective) RE in Belgium, Germany, Israel, The
  Netherlands, Switzerland etc.

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Effects

• Risk-equalisation schemes achieve affordability
  in competitive PHI markets
• No distortion of premium competition
• Insurers are fully free to ask risk-rated
  premiums
• Consumers are fully price sensitive at the
  margin.

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The preferred strategy

• Risk equalisation (RE) first-best regulatory tool
  to escape from the tradeoffs between
  affordability, efficiency and selection (van de
  Ven Schut 2008-7 Paolucci et al. 2006)
• In the case of perfect risk equalisation there is
  no need for any other strategy and no tradeoff
  exists.
• Each of the other strategies inevitably
  confronts policymakers with a tradeoff.

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c. Medicare/PHI Choice

• PHI receives a risk-adjusted opt-out subsidy
• Long run both PHI and Medicare receive the same
  risk-adjusted subsidy
• Allow insurers to risk rate replace community
  rating by a premium rate band
• For high-risks e.g. chronically ill people
  stop-loss compensation or additional
  premium-subsidies.

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Pragmatic solution

• Effects of Medicare/PHI Choice
• Policy goals achieved
• Substantial reduction of problems
• PHI more tools and incentives for efficiency
  less selection
• PHI becomes attractive for low-risks
• Reduction of moral hazard total health care
  costs
• Low transition costs
• Politically attractive.

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Issues for discussion

• National Health Hospitals Reforms Commission
  (NHHRC) Interim Report, February the 16th 2009.
• Option A Status quo with shared responsibilities
  between Commonwealth and State and Territory but
  re-aligned and clearer accountability.
• Option B Commonwealth to be solely responsible
  for all aspects of health care, delivering
  through regional health authorities.
• Option C Commonwealth to be solely responsible
  for all aspects of health and health care,
  establishing tax-funded compulsory insurance with
  consumer choice of multiple competing public
  private health plans.
• Chapter 12 Strengthening the governance of
  health and health care, page 273-298.

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Issues for discussion

• What role for PHI?
• Option A and B address fragmentation/duplication
  in public funding/delivery PHI supplementary?
  Duplicative? Both? Opt-out substitutive
  supplementary benefits?
• Only Option C addresses duplication also between
  public and private financing.
• Why what regulation/subsidies for PHI?
• Option A B Community-rating? Premium-related
  subsidies? Risk-adjusted or cost-basted
  subsidies, or both?
• Option C risk-adjusted subsidies open
  enrolment. Community-rating? Premium-related
  subsidies? Risk-adjusted or cost-basted
  subsidies, or both?
• Option A Status quo with shared responsibilities
  between Commonwealth and State and Territory but
  re-aligned and clearer accountability.
• Option B Commonwealth to be solely responsible
  for all aspects of health care, delivering
  through regional health authorities.
• Option C Commonwealth to be solely responsible
  for all aspects of health and health care,
  establishing tax-funded compulsory insurance with
  consumer choice of multiple competing health
  plans.
• Chapter 12 Strengthening the governance of
  health and health care, page 273-298.

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Issues for discussion

• What benefits covered by PHI?
• Aged-care? Denticare? Risk-adjusted subsidies
  problematic.
• What social health insurance model?
• France? Germany? The Netherlands?
• Why not Australias? Medicare/PHI choice
  compatible with 3 NHHRCs options