Private insurance risk pooling in Ireland and U.S.
Bupa health pulls out of Ireland
Health insurer Bupa has said it will close operations in Ireland to avoid making payments to a main rival.
BBC News
December 14, 2006
The Irish High Court ordered Bupa to make “risk equalisation” payments to state health insurer VHI, which has older policyholders.
The payments are meant to limit VHI’s costs and cut premiums, thus supporting the government policy of charging clients the same for health insurance.
Under the process of risk equalisation, insurers with a higher number of elderly customers - which tend to make more claims - are compensated by insurers with younger clients.
“Irish consumers are the real losers as the market will be restored to a virtual monopoly,” said Martin O’Rourke, managing director of Bupa’s Irish operations.
http://news.bbc.co.uk/1/hi/business/6180279.stm
Comment:
By Don McCanne, MD
What is the primary function of health insurance? Pooling risk. All participants make an equitable contribution into the pool of funds that pay for health care for everyone. Disease and injury can never be equitably distributed, but the financial consequences can be.
Our policymakers continue to reject the most effective model of pooling risk - single payer - with the convenient but dubious claim that it is not politically feasible. The policy recommendations currently in vogue - employer mandate, individual mandate, high-deductible plans, association health plans, etc. - all use private insurers. The policymakers give the private plans credibility by citing their use in many other nations with universal systems of health care.
It is very important to understand how these more egalitarian systems pool risk. One of the most difficult tasks is to be certain that no insurer risks insolvency due to adverse selection - having to pay out more in benefits because of a less healthy, higher cost clientele. Likewise, it is important that other insurers do not unfairly benefit from favorable selection - increasing profit by successful selective marketing to a lower cost, healthier segment of the population. Adverse selection and favorable selection defeat the crucial function of equitably pooling risk.
So how do they do it? These egalitarian systems use sickness funds or transfer funds to adjust for the inevitable selection problems, whether inadvertent or deliberate. They either draw from a common pool, or they transfer funds between their respective pools based on the actual claims experiences. Thus when we talk about private insurance in other nations, we have to acknowledge that their version has almost no resemblance to our concept of private plans in the marketplace.
Our private insurance companies are absolutely dependent on favorable selection to produce the returns that we have come to expect of them (admired by Wall Street and reviled by reform activists). The insurers have skimmed off the nation’s employees and their healthy families, plus the healthy sector of the individual insurance market. By leaving out the less healthy, higher cost sectors of our society, they have totally defeated the purpose of pooling risk.
Suppose we did mandate universal coverage, using the private insurers. Obviously, the insurers’ risks would dramatically increase once they included high cost patients, and that risk would not be evenly distributed between insurers. Suppose claims experience resulted in record profits for Wellpoint, and Cigna was insolvent at the end of the year. The egalitarian systems would require Wellpoint to transfer funds to Cigna.
Could you imagine, with our market mentality, expecting Wellpoint to transfer perhaps tens of billions of dollars to competitors? Or could you imagine a private Medicare Advantage plan transferring funds to the traditional Medicare program only because the private plan performed well through its favorable selection marketing? The private Medicare + Choice plans once walked away for much less.
And that is what just happened in Ireland. Bupa practiced favorable selection by insuring the young and healthy, and the Irish High Court required that they transfer “risk equalisation” payments to the state health insurer. Bupa walked away.
This demonstrates why our policymakers are wrong when they insist that we must use the private insurance industry to expand coverage to everyone. We must begin with the principle that funds must be pooled, and the pool needs to be funded equitably. Private insurers cover two-
thirds of us but only pay one-third of our total health care costs. With an effective, egalitarian method of pooling, they would have to pay two-thirds of the costs (adjusted for the expansion to universal coverage). That would double the premiums that we are paying. Yet employers and individuals are already bailing out because they can’t afford our current premiums.
If we are serious about providing everyone with insurance that really works and is affordable, we are going to have to abandon the idea of separate private insurer risk pools. By design, a single payer system would establish a single risk pool covering everyone, and it would be funded in the only equitable manner that’s reasonable - through progressive tax policies that shift funds from the healthy to the sick and from the wealthy to those not so wealthy who need health care.
An egalitarian America? Did I just hear, “Bah, Humbug!”