Does competition in health insurance harm solidarity? –

Experiences from Switzerland

Annual TILEC-Tranzo conference 2012at Tillburg University, the Netherlands

26th January 2012, Tillburg

Prof. Dr. Konstantin BeckDirector CSS Institute

for empirical Health Economics

Yes, it does!

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Agenda

I. The institutional setting and its solidarity components

II. The problem with solidarity → risk selectionI. How do insurers select?II. How appropriate is the reform of risk

equalization? III. The problem with efficiency → unintended

redistributionIV. Conclusions

Swiss Market for Social Health Insurance

Swiss Social health insurance is mandatory for all inhabitants

64 competitive insurers offer the strictly defined package of services (covers 40% of total HCE or 24 Billion CHF)

Open enrolment (annual / semi annual) Community rated premium / differentiation

according to coverage (as higher deductibles, managed care) and geography

Copayment (14 %)

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Swiss Market for Social Health Insurance II

Insurers also offer supplementary insurance Basic package is a non-profit business Voluntary higher copayment or restricted

access to care (gatekeeping/managed care) entitles for premium rebates up to 50%

51% of the total population opt for managed care

Inpatient care is subsidised by 55% Changes in Social Health insurance must be

approved by Swiss voters

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Solidarity in Swiss SHI-Market

1. Access to health supply → mandatory coverage

2. Income solidarity → Individual transfers to low income citizens to reduce premium burdenand55% of inpatient care is tax financed

3. Age solidarity → one premium for ages 26 to death

4. Health solidarity → Community rated premium, open enrolment

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Agenda

I. The institutional setting and its solidarity components

II. The problem with solidarity → risk selectionI. How do insurers select?II. How appropriate is the reform of risk

equalization? III. The problem with efficiency → unintended

redistributionIV. Conclusions

Insurer’s incentives Insurers have clear incentives to reduce costs

that lowers premiumo By selling high copayment plans and reduce

moral hazardo By selling managed care plans

But they have as well incentives to do selection:o Profit: Beck/Zweifel (1996) showed in a

simulation: Up to 50% premium advantage is possible despite risk adjustment

o It’s an effective measure to prevent bankruptcy

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Selection with conglomerates

Central Administration

Cheap low-risk-fund

Medium fund for medium risks

Expensive High-risk-fund

Centralisedselling point :

Transfer of means by reinsurance

New applicants

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

# of insured with 6 largest funds 1996 to 2010

0

200'000

400'000

600'000

800'000

1'000'000

1'200'000

1'400'000

1996 1998 2000 2002 2004 2006 2008 2010

The most successful fund (#2 in 2012)

is the risk selecting fund

Point in time, when the fund starts to evidently select risks

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Market for SHI 1997/2011

* Figure not published yet

Year Numberof funds

Number ofconglomerates

Number of fundsin conglom.

% funds inconglomerates

% insured in conglomerates

1997 124 1 13 10 3

1999 108 2 19 18 22

2001 99 2 18 18 22

2003 93 2 19 20 24

2005 86 3 22 26 40

2007 87 4 25 29 48

2008 89 6 30 34 59

2009 89 7 35 39 63

2010 82 8 39 48 63

2011 64 8 27 42 *

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

What risk adjustment is applied (1996 – 2011)?

0

100

200

300

400

500

600

700

Costs per head and month

Risk classes according to age and gender

19-25

26-30

31-35

36-40

41-45

46-50

51-55

56-60

61-65

66-70

71-75

76-80

81-85

86-90

91+

}} } } } } } } } } }}}}}

Average

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Political debate 1996 - 2012 1996 slightly improved demographic formula 1998: CSS insurance proposes prior hospitalization

as a first step to improve the formula

100

200

300

400

500

600

700

19-25

26-30

31-35

36-40

41-45

46-50

51-55

56-60

61-65

66-70

71-75

76-80

81-85

86-90

91+

}} } } } } } } } } }}}}}

Costs per head and month

Risk classes according to age and gender and prior hospitalization

Average

Political debate 1996 - 2012 (II) 1996 slightly improved demographic formula 1998: CSS insurance proposes prior hospitalization as a first

step to improve the formula 2007: Decision of the national parliament to introduce prior

hospitalization in 2012. Meanwhile a PCG-formula (CSS & Erasmus University) and

an AP-DRG-Model (University of Lausanne) have been developed.o R2 Demographic 11%

+ prior hospitalisation 21%+ Pharmaceutical Cost Groups30%

2011: The minister of health defines a PCG-formula as a goal for 2017

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Impact on premiums when deterring high risk customers*

No Risk Adjustment: 46%

0% 5% 15% 25% 35% 45%

RA demographic: 32%

(bench mark)

(Reform 2012) ..with prior hospitalization: 19%

(Reform proposal 2017) ..with PCG in addition: 16%

(RA 1996-2011)

Managed Care: 13% - 25%

*) expected annual costs > 1000 € (over 5 years)

How to measure risk selection?• Think of a total average premium• Calculate the sum of (absolute) deviations of all individual premiums from total average premium

• Split off this sum of deviations into legal and illegal deviations• Express the later as percentage of the sum• But what are illegal deviations?

• Some funds are member of a conglomerate• Calculate average premium within each conglomerate• We denominate deviations of all individual premiums within a conglomerate as illegal deviations.

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Time schedule in Swiss SHI market

Premium 2008RA-ReformPremium 2009Premium 2010Premium 2011Premium 2012

Decision: Effective:

2007 2008 2009 2010 2011 2012

possibly influenced by RA reform

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Index of risk selection 1997-2011The index measures the minimum impact risk selection has on solidarity (new revised formula von Wyl/Beck, 2012)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1997 1999 2001 2003 2005 2007 2009 2011 ________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Agenda

I. The institutional setting and its solidarity components

II. The problem with solidarity → risk selectionI. How do insurers select?II. How appropriate is the reform of risk

equalization? III. The problem with efficiency → unintended

redistributionIV. Conclusions

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

A simple model of plan choice

young old

0

To be compensated

in MC

not in MC

0

iiii MCAgeHCE 10

01

0

1

HCE Derived from Schokkaert / van de Voorde (2009)

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

A simple model of plan choice II

young old

0

To be compensated

in MC

not in MC

0

iiii MCAgeHCE 10

01

0

1

HCE the way people switch :

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

A simple model of plan choice III

young old

0

To be compensated

In MC

not in MC

0

iiii MCAgeHCE 10

01

0

1

HCE

All cost reduction is

fully redistributed

RA contribution

RA subsidy

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

How the solution should look like

young oldTo be compensated

In MC

not in MC

iiii MCAgeHCE 10

HCEThis step is only

possible, as long as beta is independent of age (additive separability)

00

01

0

1

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Real problem with efficiency

Although the described problem looks very unlikely, we have exactly this type of problem in the Swiss risk adjustment formula.

Fair rebating premiums for young adults is impossible (although intended by the law) because of this phenomenon. (It’s even a pareto-suboptimal situation)

And all cost saving models pay too high transfers to the insured with full coverage.

Conclusions

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

Again: Competition needs sophisticated regulation in order not to harm solidarity and efficiency.

The first reform of the Swiss RA-formula shows evidence of reduced risk selection…

…but improving the formula is still necessary for the Swiss market for social health insurance.

The PCG-formula is the top candidate to do this job.

Optimizing the actual risk adjustment formula would make insuring young adults attractive and still allows the same (net-) transfers to the elderly.

It would also increase incentives to contain costs.

________________________________________________________________________________________________________

for empirical Health Economics Prof. Dr. Konstantin Beck

.

Thank youfor your attention!