"No premium regulation" does not mean "no regulation"

18 Mar 2005, The Straits Times

Question

"No premium regulation" does not mean "no regulation"

Regulate insurance market to safeguard patients' interestsBy: Chua Mui Hoong 

YOU must have heard some of the stories. 

A woman had a benign ovarian cyst removed years ago. When she applied for a hospitalisation insurance policy, she was rejected. 

Someone else had a nose bleed once which resulted in a minor operation. The insurance company rejected her application for health insurance. 

From the point of view of insurance companies and their shareholders, the more 'ngiao' (nit-picking in Hokkien) the insurer, the better, to keep out high-risk patients, minimise claims and maximise profits. 

But for patients, the net result is that the whole health insurance market can be a quagmire, a risky, dangerous zone full of complex rules, which sucks you in if you're young and healthy, and spits you out at the first sign of ill health. 

Singapore is making the 'transition to a competitive and dynamic private medical insurance market' (in the words of a Feb 3 press release from the Ministry of Health on MediShield reforms). 

I support the move to give insurance a bigger role in health financing. There are clear efficiency gains to be reaped from competition. 

But I have one nagging concern: Who's safeguarding the patient's interest in this transition? 

Or are patients to be totally subject to the hard-nosed calculations of insurance companies driven solely by the profit motive? 

Let's be clear about it: Insurance companies are in the business to make money. 

They do this by having young, healthy people on their plan, and doing their utmost to reject sickly or risky patients. 

Unless there are rules against it, insurance companies will devise policies that load the odds in their favour. 

One example: Some health insurance policies may be 'renewable annually'. The agent may say this means you can stop the cover any time you are short of cash. 

This sounds reasonable enough, until you get diagnosed with, say, diabetes, one day, and the insurance company refuses to renew your cover the next year. 

'See, it says renewable annually,' your agent may point out. 

So can insurance companies reject patients at will, set premiums at will, and design plans at will? 

My view is that while insurance companies must be allowed leeway to make a fair profit, this must not be at the expense of equity and access to health financing. 

The health insurance market isn't like a normal market for goods and services. 

In economic parlance, the health insurance market suffers from market failure due to asymmetry of information. 

There are two main problems. The first is cherry-picking: Insurers favour young, healthy people and don't want older, sick people. 

The second is adverse selection. Patients who think they will incur high medical expenses, due to family history or knowledge of their own lifestyle,seek out insurance products that promise high coverage. 

MP Halimah Yacob from the labour movement asked during the recent Budget debate if there should be some regulation of health insurance premiums. 

Health Minister Khaw Boon Wan's reply: 'We should not. We do not regulate the price of rice.' 

With due respect to Mr Khaw, rice and health insurance are very different kinds of products. There is no asymmetry of information or failure in the market for rice. Even with MOH mandating more transparency, nothing approximating perfect information is possible in the health insurance market. 

With rice, even if all the rice sellers refuse your business, you can switch to noodles or bread or pasta. With health insurance, you don't have such substitutes. 

In health insurance, equity and access are key. If health insurance plans are all allowed to practise individual risk rating, some segments of the population will be rejected by all. What do you then do with the pool of uninsured? 

The concern over market failure and equity is one reason why many countries regulate premiums, and why I believe MOH should also consider the case for premium regulation. 

In a purely competitive market with no premium caps, some people pay premiums 10 times or more what others pay, according to the Handbook Of Health Economics (Vol. 1A) by A.J. Culyer and J.P. Newhouse, a tome edited by two well-known United States health economists. 

Some countries (including the US, the Netherlands and Israel) give premium subsidies to insurance plans which have a disproportionate number of older folks, so the insurer has an incentive to keep them and still charge low premiums 

Another way to regulate premiums is to impose community, rather than individual, risk rating. 

Basically, instead of letting insurance companies charge premiums based on individual risk factors like each person's age, gender, medical and family history, the state makes the insurer look at the whole insured group as a whole, and charge premiums accordingly. 

The advantage of this is that high-risk individuals (the old or sick) can get coverage. Your relative who had a cyst/minor operation can't be rejected. Or you could regulate premiums by having a ban on some risk-rating factors. For example, the state may prohibit insurers from rejecting clients due to health status or genetic information, and require insurers to provide coverage, albeit at a higher premium. 

There is no shortage of theory or practice to back the argument that health insurance needs proper regulation, if society - and not just the insurance company - is to derive benefits from it. 

In Singapore, the fact that the basic MediShield tier is more or less run by the state, ameliorates the damage that a totally private market can inflict. 

But more private and competitive elements are being introduced into the health insurance market. MediShield Plus will be privatised. In the meantime, the Central Provident Fund Board, too, has privatised its dependants protection insurance plan, and is considering privatising its mortgage protection plan. 

When a market is privatised, experience from the telecommunications and power industries tells us that intelligent and careful regulation, not no regulation, is needed. 

Leaving consumers at the mercy of insurers to reject them and set premiums at will, will result in higher profits for insurers, but is surely a far less equitable system for the group for whom health insurance was designed: the patients. 

E-mail: muihoong@sph.com.sgChua Mui Hoong alternates with guest writers in this weekly column. 

CONSUMERS AT MARKET'S MERCY 

For patients, the net result is that the whole health insurance market can be a quagmire, a risky, dangerous zone full of complex rules, which sucks you in if you're young and healthy, and spits you out at the first sign of ill health.

Reply

Reply from MOH 

"No premium regulation" does not mean "no regulation" 

In "Regulate insurance market to safeguard patients' interests" (ST, 18 Mar), Ms Chua Mui Hoong argued for "intelligent and careful regulation" of the medical insurance industry. This is to avoid the market from becoming a free-for-all, with consumers left "at the mercy of insurers". We agree. 

Ms Chua's concerns arose as she has wrongly presumed the Ministry's announcement of "no premium regulation" to mean "no regulation". 

In fact, the Government has and will continue to regulate the industry to safeguard the interests of Singaporeans. 

First, all medical insurers are subject to the prudential requirements set by the Monetary Authority of Singapore (MAS).

Second, all Medisave-approved private medical insurance plans are "guaranteed renewable". In other words, insurers must guarantee the renewal of the policy each year; they cannot stop the cover at will. 

Third, insurers offering such plans cannot withdraw coverage for specific medical conditions or load premiums after they have signed up a policyholder. In this way, policyholders will be assured of continuing protection against any future illness. 

The suggestion to regulate premiums by way of premium caps or fixing premiums may however result in perverse outcomes. For example, in response to premium caps, insurers may reduce benefits to preserve their margins, thereby leading to inadequate coverage. With fixed premiums, there will be no incentive for insurers to be innovative and proactive in promoting healthy lifestyle or managing medical costs, as they will be paid at the same rate as sluggish, indifferent ones. A better way to manage prices and improve quality is through greater competition and market incentives. Contrary to Ms Chua's observation that markets cannot work in medical insurance, healthcare experts are increasingly turning to market forces to drive improvements in the delivery and financing of healthcare services. Our recent experience with the disclosure of prices in hospitals has demonstrated this effect.