Transiting to a Competitive and Dynamic Private Medical Insurance Market

03 Feb 2005

Last week, the Ministry of Health (MOH) announced the details of the reformed MediShield. The reform will fix the current limitations of the MediShield scheme, bringing substantial benefits to Singaporeans by easing their financial burden if and when confronted with a major hospitalisation.

REFOCUSING ON LARGE HOSPITAL BILLS

The limitations of MediShield, pertaining to high co-payment by patients and unduly low deductibles, also affect some of the Medisave-approved private medical insurance schemes (PMIS), although to a lesser degree. This is because the private insurers have been updating their insurance parameters periodically. Nevertheless, some inadequacies exist.

We should fix these limitations now before they become too severe for the patients to bear. Timely adjustments require less drastic adjustments.

In formulating these adjustments, MOH has taken the approach of letting the insurance industry free play, subject to certain minimum regulatory requirements.

These requirements are to: (a) preserve the use of Medisave principally for inpatient care; and (b) discourage open-ended and comprehensive medical insurance which has led to serious moral hazard problems of abuse and over-servicing elsewhere.

Specifically, MOH will require these private insurance plans to incorporate (a) a minimum deductible and (b) a minimum co-insurance element.

The current deductible levels have remained unchanged for more than a decade. They have gone out of line with current cost. Periodic adjustments are necessary to reflect the changing cost of hospitalisation.

From July 1, MOH will reset the minimum deductible level from $2,500 to $3,000 for Class A and private wards, and from $1,500 to $2,000 for Class B1 wards.

Current projections suggest that in 2010, MOH may have to raise the minimum deductible level to $4,000 for Class A and private wards, and $3,000 for Class B1 wards. But MOH will review this closer to the date.

As for the minimum co-insurance requirement, the current prescribed rate is 15%. MOH has decided to reduce it to 10%. This will give the private insurers greater flexibility in designing their insurance plans.

Some can take advantage of this relaxation to offer higher payouts for their policyholders who incur large bills.

RESTRUCTURING THE INDUSTRY

Subject to the insurers meeting these two minimum requirements, MOH's vision is a competitive and dynamic medical insurance sector, catering to the catastrophic medical insurance needs of Singaporeans who want and can afford private hospital and Class A/B1 facilities.

With a million policyholders already subscribing to PMIS and the prospect for further expansion in the role of medical insurance, MOH expects the sector to become an important player in the financing of healthcare. To nurture this development, MOH will promote greater market competition and use it to drive the industry towards offering innovative and competitively priced insurance products.

The current industry structure does not quite generate such a high level of competition that the industry deserves. It is unsatisfactory in two aspects.

First, it unnecessarily fragments the national risk pool at the basic level.

Second, it unduly focuses the energies of the private insurers on selecting young and healthy lives, neglecting the older population. But young policyholders today will grow old in time. We must anticipate their future needs and try to protect their long term interests from now, instead of postponing these problems to a future date.

After extensive consultations with the private insurers, MOH has decided to restructure the industry in the following way.

First, MediShield will form the basic tier of insurance protection for all Singaporeans at the Class B2/C level. The details were announced last week.

Second, private insurers will offer enhancement plans on top of the basic MediShield tier. The enhancement plans will provide additional benefits to meet the needs of Singaporeans who want more coverage, including protection against stays in Class A/B1 or private wards.

The market for these enhancement plans will be fully open to all private insurers. Aside from the insurers with existing medical insurance schemes, namely AIA, Asia Life, Great Eastern, NTUC Income and OAC, other insurers like Aviva and Prudential have expressed keen interest to enter the market.

MOH welcomes their participation. They should add to the breadth and depth of our private medical insurance market. They can start offering their enhancement plans from July 1.

For as long as the enhancement plans meet the minimum regulatory requirements, policyholders can use Medisave to pay for the premiums, subject to prevailing Medisave withdrawal limits.

INTEGRATION WITH MEDISHIELD

MOH will require the private insurers to integrate their enhancement plans with the reformed MediShield as one single product. This will be done in a way that is seamless and transparent to the policyholders.

The integrated product will be jointly insured by the private insurer offering the enhancement plan and the Central Provident Fund Board (CPFB) as the operator of MediShield.

In effect, the private insurers and CPFB will become joint insurers of the policyholders. Policyholders who purchase the enhancement plans will then become policyholders of the reformed MediShield too. They will receive all benefits due to them as MediShield members, in addition to the enhanced benefits promised to them by the private insurers.

Such integration will benefit the policyholders.

First, they will enjoy the benefits of both the reformed MediShield as well as the enhanced benefits offered by the private insurer. With integration, the private insurer will provide a single point of contact to service the policyholders. When policyholders make claims, they need only to file one claim to their private insurer. In turn, the private insurer will administer all payouts to policyholders, including any payouts from the basic MediShield tier. Settlement between the private insurers and CPFB will be at the back-end, transparent to the policyholders.

This arrangement will save policyholders the need to file two separate claims, one with the private insurer and the other with MediShield.

It will also allow policyholders of existing private medical insurance schemes to remain with their current insurers, if they so wish.

Second, they will enjoy the benefits of automated claims filing, as CPFB will integrate the claims filing system of private insurers into their current automated system.

Currently, unlike MediShield, private medical insurance claims are filed manually by policyholders to their respective insurers. Policyholders have to submit paper forms to their insurers, with copies of their hospital bills and reports.

MOH and CPFB will help the private insurers to automate the claims filing system, so that they can implement electronic filing of medical insurance claims. Implementation of this e-filing system will be phased in progressively, starting from July 1.

The e-filing system will enable hospital bills and medical information to be submitted electronically from the hospitals to the insurers for claims processing.

It will simplify the filing of claims for policyholders and help insurers cut down processing costs and time.

Third, they can look forward to the benefits of stiffer competition among the private insurers, as integration will effectively remove cherry-picking in the industry, which does not benefit policyholders in the long run.

Instead, it will facilitate proper competition among the private insurers, to bring greater benefits to their policyholders. MOH expects as an eventual outcome a wider range of such enhancement plans, offering different benefits at different prices, to meet the different needs of Singaporeans.

MEDISHIELD PLUS POLICYHOLDERS

To speed up the development of stronger competition, CPFB will spin off its existing MediShield Plus portfolio, in its entirety, to a private insurer through an open tender.

The current MediShield Plus portfolio comprises 350,000 policyholders. This is a sizeable portfolio, accounting for about one-third of the current private insurance market. This will be transferred en bloc to the selected private insurer.

As the MediShield Plus plans are compatible with the new regulatory requirements, CPFB will tender out the portfolio as it is, with minimal adjustments to its insurance parameters and benefits.

Private insurers will be invited to bid for the portfolio. The selection of bids will be based on the proposed premiums submitted by private insurers.

The most competitive bid will win the tender. In this way, we will have an opportunity to set a competitive price for the enhanced plans. To avoid gaming, MOH will require the successful insurer to guarantee the premiums for at least 3 years.

The insurer would, however, be allowed to offer the policyholders an opportunity to migrate to any enhanced plan with revised premiums, but this will be purely on a voluntary basis.

Unlike MediShield which is in operating deficit, MediShield Plus plans have been operating with healthy surpluses. There is therefore scope for an innovative insurer to provide further benefits for its policyholders. But we will let the tender bring out such efficiencies through competition.

MOH aims to award the tender by September 2005, with the cut-over of MediShield Plus policyholders to the new insurer soon after that.

The interests of MediShield Plus policyholders will be fully protected. MOH will require the new insurer to ensure seamless continuation of insurance coverage, with guaranteed renewal of policies. No additional medical underwriting will be required.

POLICYHOLDERS ON EXISTING PRIVATE MEDICAL INSURANCE SCHEMES

Now that the reformed MediShield has been finalised, the private insurers with existing medical insurance schemes can proceed to redesign their schemes into the new enhanced plans. When ready, they will inform their policyholders of any revised parameters and the arrangements to migrate to these plans from July 1.

Like the MediShield Plus plans, MOH will require the private insurers to ensure a seamless transition of their policyholders to the new plans, with guaranteed renewal of policies and no further underwriting.

To facilitate the transition, MOH will allow private insurers up to two years to migrate their policyholders to their new plans.

During this two-year transition period, MOH will allow their policyholders to continue to use Medisave to pay their current insurance plans.

Those who want to switch over to the new plans earlier can do so. However, MOH will leave it to the private insurers to decide how best to work out the transition arrangements for their respective policyholders.

PORTABLE MEDICAL BENEFITS

NTUC and the unions have been advocating portable medical benefits for the workers. The objective is to protect workers who resign or become retrenched from losing their medical insurance benefits over night. This is particularly troublesome for workers who have developed chronic illnesses during employment and who may then find themselves uninsurable.

Once their enhanced plans are finalised, private insurers may wish to offer and promote these plans to employers and unions. If, as an example, employers provide additional contributions to their employees' Medisave to help them buy such insurance products, then the employees will have an opportunity to continue with the insurance, even after they have left the company. In this way, their medical insurance benefits, including loyalty discount benefits, will not become suddenly terminated.

There is scope for innovation in designing such schemes. The greater competition engendered by the industry reform will facilitate such development.

CONCLUSION

With a potential market of more than 1 million policyholders, Singapore can support a competitive and dynamic private medical insurance industry. MOH also believes that there is scope for further expansion in the role of medical insurance in the private sector, provided we are alert to the potential moral hazard problems and conscientiously act to minimise them through appropriate regulatory requirements.

Within such regulatory boundary, the private insurers should be given full play to innovate and to compete, so as to attract and serve their clientele. MOH will promote greater disclosure and transparency so that the market can be more efficient.

MOH is optimistic that the tender of MediShield Plus portfolio will catalyse the development of the market and squeeze out existing market inefficiencies. Proper competition should drive market premiums, thus bringing about real benefits to all policyholders.

MOH will work closely with private insurers to help bring about this transformation of the industry.