MediShield reform in 2005 restored risk-pool

20 Feb 2008, The Straits Times

Question

Name of the Person: Chua Mui Hoong

Regulate private health insurers to minimise cherry-picking

IN HEALTH insurance terms, there are two types of people: cherries and lemons.

Cherries are sweet young things in the pink of health. Every insurer wants them on his books, to pay premiums for benefits they don't claim. Then there are 'lemons': puckered, sour things that have a bad habit of falling sick, requiring medical treatment and making large claims.

I used to be one of those rosy cherries, faithfully paying premiums for insurance policies I never made a claim on. Then, a few years ago, I was diagnosed with cancer. Now, although the cancer is in remission, I'm still considered a 'lemon' - someone with a 'pre-existing condition' whom no insurer wants on his books. I am fortunate to be covered by both MediShield and my company's medical benefits. But I wonder: How do those with 'pre-existing conditions' pay for their medical expenses if they have no MediShield and no employer coverage? And how do other countries with national insurance plans cope with high-risk people?

It turns out that many countries actively regulate private health insurers so they have to cover higher-risk groups.

In fact, I am coming to the conclusion that insurers here are able to impose exclusions and limitations forbidden in more sophisticated countries. In Singapore's context, there are some 2.8million people covered under the national health insurance plan, MediShield. But 700,000 people are not covered. An estimated 280,000 to 560,000 more are underinsured: that is, they may be covered by some basic MediShield plan, but could do with more coverage.

Health Minister Khaw Boon Wan has encouraged those concerned with how means testing will affect their out-of-pocket medical expenses, to buy more insurance.

The problem is that among those who lack insurance or are underinsured is a significant group who cannot get any more insurance. In Singapore, health insurers usually reject the very old, those with congenital diseases, and those with prior illnesses. Insurers may take you on if you had a prior condition, but are wont to exclude from coverage the very disease for which you most need insurance.

Singaporeans get used to such decisions by insurers. But they create a national problem, since such decisions result in a large pool of people who are uninsured or underinsured. This is where a third party - a state regulator - needs to step in. Health insurance, after all, is not a commodity like a car or a computer, where you can say that the market can be left to operate freely. Instead, it's a social good. An adequately insured person makes fewer claims on the community and on state resources.

In Singapore's context, the Monetary Authority of Singapore regulates insurers, but mainly from a financial point of view, for example, making sure they are financially sound and have money set aside to pay out claims.

The Health Ministry has rules for insurers who offer enhanced MediShield products, but these are on things like co-payment and deductibility. No authority looks at health insurers to scrutinise their practices to make sure the terms they offer patients are fair and equitable.

Take, for example, the 'pre-existing condition' clause. Insurers here routinely turn down outright applications from those who had a serious illness. Or they may offer insurance, but exclude the 'pre-existing condition' from coverage.

From a free-market perspective, insurers are acting sensibly in turning down those with high risks. This keeps premiums low for healthy others, so the argument goes.

But health insurance shouldn't be treated like a free market, as there are large social costs involved. Left to themselves, insurers would turn down all high-risk individuals - which would be bad for society as a whole.

A healthy health insurance market balances the risks and incentives for insurers and the insured. It creates a market where patients can get coverage for illness, while insurers assume reasonable liabilities in exchange for the chance to make some profit.

Regulation is essential to lubricate a healthy insurance market, and critical to improve access to coverage.

Even free-market America, with the world's most privatised health-care system, has federal and state laws that govern health insurance. The Health Insurance Portability and Accountability Act (Hipaa for short) passed in 1996, for example, 'protects workers and their families by limiting the exclusions for pre-existing medical conditions'.

This Act defines pre-existing conditions strictly, avoiding a situation where an insurer rejects you because of an illness you had 10 years ago.

A pre-existing condition is defined as one for which you sought medical advice, diagnosis, care or treatment six months before the insurance you seek. And if an insurer wants to exclude that condition, it can at most exclude it for 12 to 18 months.  Of course, Americans pay the cost of such liberal insurance regimes - very high premiums, and high health expenditure as a percentage of gross domestic product. Debate rages in the United States on how to rein in health-care spending.  But other countries also have similar laws. Apart from curtailing 'pre-existing condition' exclusions, Australia goes further in entrenching open enrolment, which means the insurer cannot deny anyone coverage on the basis of his health status.

This is done by insisting on what is called 'community rating' rather than 'individual rating', which means the insurer looks at the risk profile of the entire group to be insured when they come up with the premiums to be paid, rather than look at the individual's risk profile.

The result: Risks are pooled, premiums kept reasonable for all.  Such regulation strikes a balance between the interests of health consumers who desire and need insurance, and the interests of health insurance companies which want to maximise profits by imposing extreme exclusions. In a 2004 paper on Private Health Insurance In OECD Countries, Francesca Colombo and Nicole Tapay surveyed the private health insurance markets in Organisation for Economic Cooperation and Development countries and summarised the range of policy options to improve access to coverage.

On pre-existing conditions, the OECD paper noted that 'many countries have limited the length of pre-existing condition exclusions' which insurers can impose. Other regulatory measures to improve access for high-risk people include: making insurers' plans available to all, to prevent insurers from 'cherry-picking' only the young and healthy; capping premiums which higher-risk individuals have to pay; and creating a 'risk equalisation' fund, which can be paid for by the state, to compensate insurers for taking in higher-risk people who would otherwise be uninsured.

The Singapore Government has been gearing up actively to weave a more robust social safety net in the last few years. There is Workfare for the low-income. For older workers, higher returns on retirement savings, a law that makes it easy to stay employed, and a compulsory annuity for the very old, promise a more financially secure retirement.

The other big piece of the social safety net is health insurance. Recent improvements to MediShield go a long way to improve the health insurance umbrella.

What is needed is to regulate the private insurers too, to improve coverage and access even for high-risk groups. This may result in higher premiums which the healthy young may baulk at, but they should bear in mind that one day, they too will be old and sick.  It would be a pity if the social safety net came to nought because workers' earnings, Workfare supplements and annuity payouts have to go to pay for medical treatment, in the absence of adequate health insurance.

Reply

Reply from MOH 

MediShield reform in 2005 restored risk-pool

We agree with Ms Chua Mui Hoong on the need to "Regulate private health insurers to minimise cherry-picking" (15 Feb).  The MediShield reform in 2005 was specifically for that purpose.  All policyholders of private rider plans to MediShield are now automatically policyholders of the basic MediShield too, with the riders supplementing MediShield.  The reform has restored the MediShield risk-pool with all the "cherries" returned to MediShield.

MOH actively monitors the private insurers to ensure clear and fair contractual terms.  In particular, all policyholders are guaranteed renewability of coverage by their insurers.  In other words, once a policyholder is insured, his insurer cannot use the basis of any subsequently-developed medical condition to selectively increase his premium or exclude him from coverage and renewal.  This is in fact the personal experience of Ms Chua whereby her MediShield insurance remains intact despite her cancer diagnosis.  This important rule prevents cherry-picking during the term of insurance. 

However, the insurance industry does exclude pre-existing illnesses, in line with industry practice overseas.  This is to avoid adverse selection.  Otherwise, a person may apply for insurance coverage only after he knows that he has an illness.  Ms Chua's suggestion that the Government should require all insurers to accept applicants with pre-existing illnesses will give policyholders the wrong incentive to leave their insurance plans and to re-enter only after they have developed an illness.  This must lead to much higher premiums for all policyholders and will be unfair to those who stay loyal to their insurers throughout. 

Ms Chua cited the American Health Insurance Portability and Accountability Act as an example which limits the exclusions for pre-existing medical conditions.  But the US example has resulted in extremely high premiums, costing up to thousands of US dollars per month.  US insurance companies are also known to discourage their agents from selling plans to people with pre-existing illnesses.  As a result, insurance is still effectively unaffordable and out-of-reach for the vast majority of such people in the US.  We should be careful not to adopt such an example.

In any case, the vast majority of Singaporeans are still without MediShield not due to medical conditions, but rather inertia.  Hence, the best advice is still for these Singaporeans to sign on to MediShield and to consider a private insurance rider immediately, while they are young and healthy.  This is the correct way to eliminate the risk of being uninsurable if an illness should subsequently develop. 

We are however mindful of the insurability challenge faced by those with congenital illnesses.  Unfortunately there has so far not been a fair and affordable solution via the insurance industry.   Meanwhile, we have to rely on Government subsidies and Medifund to assist such patients if they are from the low-income group.