NBER Working Paper 22353: Insurance and the High Prices of Pharmaceuticals

By David Besanko, David Dranove, Craig Garthwaite
National Bureau of Economic Research, June 2016

Abstract

We present a model in which prospective patients are liquidity constrained, and thus health insurance allows patients access to treatments and services that they otherwise would have been unable to afford. Consistent with large expansions of insurance in the U.S. (e.g., the Affordable Care Act), we assume that policies expand the set of services that must be covered by insurance. We show that the profit-maximizing price for an innovative treatment is greater in the presence of health insurance than it would be for an uninsured population. We also show that consumer surplus is less than it would be if the innovation was not covered. These results show that even in the absence of moral hazard, there are channels through which insurance can negatively affect consumer welfare. Our model also provides an economic rationale for the claim that pharmaceutical firms set prices that exceed the value their products create. We empirically examine our model’s predictions by studying the pricing of oncology drugs following the 2003 passage of Medicare Part D. Prior to 2003, drugs covered under Medicare Part B had higher prices than those that would eventually be covered under Part D. In general, the trends in pricing across these categories were similar. However, after 2003 there was a far greater increase in prices for products covered under Part D, and as result, products covered by both programs were sold at similar prices. In addition, these prices were quite high compared to the value created by the products – suggesting that the forced bundle of Part D might have allowed firms to capture more value than their products created.

From the Introduction

While our model is too stylized to offer precise numerical predictions, a canonical example that broadly fits real world data confirms some of the model’s surprising implications. First, we show that the profit- maximizing price for products is far greater in the presence of health insurance than it would be for an uninsured population, and consumer surplus is lower. The decrease in consumer surplus is quite large and exceeds the consumption smoothing benefits of health insurance for these products. We further show that this negative effect on consumer welfare grows as the number of innovative products increases. In fact, as the number of innovative products covered by insurance increases, the high prices they charge for their products eventually cause some consumers to not purchase insurance, resulting in a decrease in total surplus. We note that these results do not rely on moral hazard in that it exists even when customers never buy a product at a price that exceeds its value. Therefore, these results show that even in a situation where insurers could eliminate moral hazard (either through well designed cost sharing or effective managed care organizations) there are still other channels through which insurance can reduce welfare.

We note that the ability of firms to capture more value than they create solely results from regulations requiring an insurance bundle and that without these regulations, even in the presence of moral hazard, a monopolist selling an innovative product would be constrained by the effect that its price would have on insurance premiums.

From the Conclusions

While health insurance bears many similarities to more traditional financial insurance products, it also conveys the important benefit of breaking the liquidity constraint that many consumers face when attempting to purchase costly but valuable medical goods and services, including high priced pharmaceutical treatments. Previous work has asserted that this increase in access represents a benefit for consumers. However, our results, which endogenize the prices charged by the monopoly manufacturers of high value products, demonstrate that consumers may actually enjoy less consumer surplus, even in the absence of moral hazard. This occurs because insurance allows firms to more fully price out the expected benefits that their drugs generate for consumers, charging prices that may be far higher than what they would select if patients had to pay the entire price of their drugs out of pocket. This not only reduces consumer surplus, it may also reduce total surplus if some consumers are liquidity constrained from purchasing insurance. Thus, regulations requiring insurers to provide coverage for all new high-value products, such as the minimum insurance definition of the ACA, can decrease consumer surplus and, potentially, decrease total surplus.

While there may be worries that attempts at price controls in pharmaceuticals will be welfare reducing through reduced innovation, our results suggest that some existing regulations may provide incentives for innovation that are themselves not welfare maximizing because they are based on prices that exceed value.

http://www.nber.org/papers/w22353

***

Comment:

By Don McCanne, M.D.

Although this paper is quite technical, the conclusions are straightforward. Health insurance makes expensive products and services affordable for patients and thus they will use them – a desirable policy outcome since patients will then receive the care they should have. But beyond that, by bundling services and products into the same insurance package, it allows monopoly manufacturers of high value products, such as expensive pharmaceuticals, to charge prices that exceed the value their products – an undesirable policy outcome.

The authors indicate that the mandate to include certain benefits in insurance products, such as the essential health benefits required by the Affordable Care Act, allows the firms to capture more value than their products created (i.e., charge prices greater than the value of the product).

Those preferring market solutions might suggest that specific mandated insurance benefits be eliminated thus creating a greater sensitivity to high prices. But since far too many patients do not have enough liquid assets to pay these high prices (they are “liquidity constrained”), they would have to do without beneficial health care services and products that are truly unaffordable in the absence of insurance. This is yet one more example of why the tradeoffs in depending on a market of insurance plans can lead to excessive prices and financial barriers to care.

A single payer system does not depend on markets to set prices and make determinations on coverage. Rather they include all essential services and products and use government-administered negotiated pricing to be sure that prices do not exceed value. Patients get the care they need without an excess drain on our collective funds.

NBER Working Paper 22353: Insurance and the High Prices of Pharmaceuticals

By David Besanko, David Dranove, Craig Garthwaite
National Bureau of Economic Research, June 2016

Abstract

We present a model in which prospective patients are liquidity constrained, and thus health insurance allows patients access to treatments and services that they otherwise would have been unable to afford. Consistent with large expansions of insurance in the U.S. (e.g., the Affordable Care Act), we assume that policies expand the set of services that must be covered by insurance. We show that the profit-maximizing price for an innovative treatment is greater in the presence of health insurance than it would be for an uninsured population. We also show that consumer surplus is less than it would be if the innovation was not covered. These results show that even in the absence of moral hazard, there are channels through which insurance can negatively affect consumer welfare. Our model also provides an economic rationale for the claim that pharmaceutical firms set prices that exceed the value their products create. We empirically examine our model’s predictions by studying the pricing of oncology drugs following the 2003 passage of Medicare Part D. Prior to 2003, drugs covered under Medicare Part B had higher prices than those that would eventually be covered under Part D. In general, the trends in pricing across these categories were similar. However, after 2003 there was a far greater increase in prices for products covered under Part D, and as result, products covered by both programs were sold at similar prices. In addition, these prices were quite high compared to the value created by the products – suggesting that the forced bundle of Part D might have allowed firms to capture more value than their products created.

From the Introduction

While our model is too stylized to offer precise numerical predictions, a canonical example that broadly fits real world data confirms some of the model’s surprising implications. First, we show that the profit- maximizing price for products is far greater in the presence of health insurance than it would be for an uninsured population, and consumer surplus is lower. The decrease in consumer surplus is quite large and exceeds the consumption smoothing benefits of health insurance for these products. We further show that this negative effect on consumer welfare grows as the number of innovative products increases. In fact, as the number of innovative products covered by insurance increases, the high prices they charge for their products eventually cause some consumers to not purchase insurance, resulting in a decrease in total surplus. We note that these results do not rely on moral hazard in that it exists even when customers never buy a product at a price that exceeds its value. Therefore, these results show that even in a situation where insurers could eliminate moral hazard (either through well designed cost sharing or effective managed care organizations) there are still other channels through which insurance can reduce welfare.

We note that the ability of firms to capture more value than they create solely results from regulations requiring an insurance bundle and that without these regulations, even in the presence of moral hazard, a monopolist selling an innovative product would be constrained by the effect that its price would have on insurance premiums.

From the Conclusions

While health insurance bears many similarities to more traditional financial insurance products, it also conveys the important benefit of breaking the liquidity constraint that many consumers face when attempting to purchase costly but valuable medical goods and services, including high priced pharmaceutical treatments. Previous work has asserted that this increase in access represents a benefit for consumers. However, our results, which endogenize the prices charged by the monopoly manufacturers of high value products, demonstrate that consumers may actually enjoy less consumer surplus, even in the absence of moral hazard. This occurs because insurance allows firms to more fully price out the expected benefits that their drugs generate for consumers, charging prices that may be far higher than what they would select if patients had to pay the entire price of their drugs out of pocket. This not only reduces consumer surplus, it may also reduce total surplus if some consumers are liquidity constrained from purchasing insurance. Thus, regulations requiring insurers to provide coverage for all new high-value products, such as the minimum insurance definition of the ACA, can decrease consumer surplus and, potentially, decrease total surplus.

While there may be worries that attempts at price controls in pharmaceuticals will be welfare reducing through reduced innovation, our results suggest that some existing regulations may provide incentives for innovation that are themselves not welfare maximizing because they are based on prices that exceed value.

http://www.nber.org/papers/w22353

Although this paper is quite technical, the conclusions are straightforward. Health insurance makes expensive products and services affordable for patients and thus they will use them – a desirable policy outcome since patients will then receive the care they should have. But beyond that, by bundling services and products into the same insurance package, it allows monopoly manufacturers of high value products, such as expensive pharmaceuticals, to charge prices that exceed the value their products – an undesirable policy outcome.

The authors indicate that the mandate to include certain benefits in insurance products, such as the essential health benefits required by the Affordable Care Act, allows the firms to capture more value than their products created (i.e., charge prices greater than the value of the product).

Those preferring market solutions might suggest that specific mandated insurance benefits be eliminated thus creating a greater sensitivity to high prices. But since far too many patients do not have enough liquid assets to pay these high prices (they are “liquidity constrained”), they would have to do without beneficial health care services and products that are truly unaffordable in the absence of insurance. This is yet one more example of why the tradeoffs in depending on a market of insurance plans can lead to excessive prices and financial barriers to care.

A single payer system does not depend on markets to set prices and make determinations on coverage. Rather they include all essential services and products and use government-administered negotiated pricing to be sure that prices do not exceed value. Patients get the care they need without an excess drain on our collective funds.

Progressive redistribution without guilt

By Josh Bivens
Economic Policy Institute, June 9, 2016

What this report finds:

Boosting income growth for the bottom 90 percent requires a policy agenda that explicitly aims to halt or reverse the rise in inequality in the United States in recent decades. The economic evidence shows no generalizable relationship between rising inequality and faster growth. This is important good news. It means that an agenda based on progressive redistribution can unambiguously raise living standards for the bottom 90 percent and even likely be better for overall growth than the agenda promoted by those who are opposed to strong efforts to check rising inequality and instead want to focus solely on spurring overall growth.

Why this matters:

The lack of a general relationship between inequality and growth means that specifics matter in policy debates. And the specifics of the modern “growth only” agenda will fail. Policies such as cutting top tax rates, deregulating industries, and signing more trade agreements will both fail to appreciably boost growth rates and continue to send a disproportionate share of income gains to the top 10 and 1 percents. The “growth only” agenda has already been tried, and the results have been slower overall growth and sluggish income gains for the vast majority in recent decades.

How we can fix the problem:

Income redistribution over the last few decades has been a zero-sum process, with gains at the top essentially coming straight out of the pockets of the bottom 90 percent of Americans. This zero-sum dynamic means that intelligent policies—including but going way beyond smarter and fairer taxing and spending—can convert these lost potential gains for the bottom and middle into actual income increases without harming overall economic growth. We should:

*  Use the levers of macroeconomic policy (monetary, fiscal, and exchange-rate policy) to target genuine full employment.

*  Make investments that markets are not making—in early childhood education, infrastructure, school construction, energy efficiency, and public health care.

*  Strengthen antitrust regulations and look for other opportunities to introduce competition to private markets, such as public options for health insurance and retirement savings.

*  Reregulate many activities of the financial sector to squeeze out the activities that don’t enhance productivity or create efficiency but simply enrich well-placed actors within finance. A financial transactions tax is the clearest example of a policy that can stop this income skimming.

*  Enact climate-change mitigation measures—realizing that policies beyond simply increasing the market price of greenhouse gas emissions can play large and useful roles.

*  Strengthen regulations and institutions that help shift bargaining leverage from capital-owners and corporate managers to low- and middle-income workers. Key examples include higher minimum wages and labor law reform that allows willing workers to join unions and bargain collectively.

http://www.epi.org/publication/progressive-redistribution-without-guilt-using-policy-to-shift-economic-power-and-make-u-s-incomes-grow-fairer-and-faster/

***

Comment:

By Don McCanne, M.D.

Health care costs for the typical working family of four now average over $25,000 (2016 Milliman Medical Index). The only way low- and middle-income individuals and families can afford health care is through progressive redistribution. How are we doing?

With Medicaid we are doing quite well. The majority of lower-income individuals in states that participate in the ACA Medicaid expansion have their health care paid for through taxes, especially progressive income taxes. Wealthier individuals pay a higher percentage of income in taxes than do lower income individuals, and the lowest income individuals pay no income taxes at all. That certainly represents progressive redistribution as far as low-income individuals are concerned, though not for those with average incomes.

Medicare is funded primarily by general revenues which tend to be progressive, and by payroll taxes which tend to be proportional to income and thus not as progressive as income taxes since the rates do not increase with income. The exception is that individuals with incomes over $200,000 do pay an additional 0.9% Medicare tax on wages, making it more progressive than it had been before ACA. However, most of the income of the wealthy is not from salaries but rather from tax-advantaged sources, thus the impact is not as great on them as it otherwise would be.

Private plans purchased through the ACA exchanges by lower-income individuals are eligible for subsidies and credits indexed to income and thus are progressively funded for this sector. But middle- and upper-middle-income individuals do not receive these subsidies and thus bear a disproportionate share of our collective (pooled) health care spending (disproportionate as a percentage of income). The latter also is true for those purchasing individual plans outside of the exchanges. For them, funding is regressive since the percent of income paid for heath care decreases as income increases.

By far the largest source of health insurance is through employer-sponsored plans. Almost all economists agree that these are paid for by the employee through forgone wage increases (certainly a contributing cause to flat wages of the last couple of decades). This funding is quite regressive since, as income increases, the percentage of wages devoted to health insurance premiums decreases. Further, premiums are subsidized by tax expenditures (the deductibility of premiums for employer-sponsored plans) which increase as the individual’s income increases. High-income individuals receive very generous government subsidies for their health insurance plans whereas lower-income individuals may receive little or none at all. Thus health financing for the majority of us is quite regressive.

The article by Josh Bivens is quite long but well worth reading if you want to understand policies that will shift us to progressive redistribution without having to feel guilt. The economic improvement for the great majority of us, creating a more robust economy, is well worth the trade off of expecting the wealthy to accept more progressive redistribution, which would certainly never negatively impact their very comfortable or even indulgent lifestyles.

Health care? Based on the examples above, we can certainly adopt policies that would significantly improve progressive redistribution so that health care is affordable for everyone. That is exactly what a well-designed single payer system does. No guilt, just ghastly politics.

Progressive redistribution without guilt

By Josh Bivens
Economic Policy Institute, June 9, 2016

What this report finds:

Boosting income growth for the bottom 90 percent requires a policy agenda that explicitly aims to halt or reverse the rise in inequality in the United States in recent decades. The economic evidence shows no generalizable relationship between rising inequality and faster growth. This is important good news. It means that an agenda based on progressive redistribution can unambiguously raise living standards for the bottom 90 percent and even likely be better for overall growth than the agenda promoted by those who are opposed to strong efforts to check rising inequality and instead want to focus solely on spurring overall growth.

Why this matters:

The lack of a general relationship between inequality and growth means that specifics matter in policy debates. And the specifics of the modern “growth only” agenda will fail. Policies such as cutting top tax rates, deregulating industries, and signing more trade agreements will both fail to appreciably boost growth rates and continue to send a disproportionate share of income gains to the top 10 and 1 percents. The “growth only” agenda has already been tried, and the results have been slower overall growth and sluggish income gains for the vast majority in recent decades.

How we can fix the problem:

Income redistribution over the last few decades has been a zero-sum process, with gains at the top essentially coming straight out of the pockets of the bottom 90 percent of Americans. This zero-sum dynamic means that intelligent policies—including but going way beyond smarter and fairer taxing and spending—can convert these lost potential gains for the bottom and middle into actual income increases without harming overall economic growth. We should:

*  Use the levers of macroeconomic policy (monetary, fiscal, and exchange-rate policy) to target genuine full employment.

*  Make investments that markets are not making—in early childhood education, infrastructure, school construction, energy efficiency, and public health care.

*  Strengthen antitrust regulations and look for other opportunities to introduce competition to private markets, such as public options for health insurance and retirement savings.

*  Reregulate many activities of the financial sector to squeeze out the activities that don’t enhance productivity or create efficiency but simply enrich well-placed actors within finance. A financial transactions tax is the clearest example of a policy that can stop this income skimming.

*  Enact climate-change mitigation measures—realizing that policies beyond simply increasing the market price of greenhouse gas emissions can play large and useful roles.

*  Strengthen regulations and institutions that help shift bargaining leverage from capital-owners and corporate managers to low- and middle-income workers. Key examples include higher minimum wages and labor law reform that allows willing workers to join unions and bargain collectively.

http://www.epi.org/publication/progressive-redistribution-without-guilt-using-policy-to-shift-economic-power-and-make-u-s-incomes-grow-fairer-and-faster/

Health care costs for the typical working family of four now average over $25,000 (2016 Milliman Medical Index). The only way low- and middle-income individuals and families can afford health care is through progressive redistribution. How are we doing?

With Medicaid we are doing quite well. The majority of lower-income individuals in states that participate in the ACA Medicaid expansion have their health care paid for through taxes, especially progressive income taxes. Wealthier individuals pay a higher percentage of income in taxes than do lower income individuals, and the lowest income individuals pay no income taxes at all. That certainly represents progressive redistribution as far as low-income individuals are concerned, though not for those with average incomes.

Medicare is funded primarily by general revenues which tend to be progressive, and by payroll taxes which tend to be proportional to income and thus not as progressive as income taxes since the rates do not increase with income. The exception is that individuals with incomes over $200,000 do pay an additional 0.9% Medicare tax on wages, making it more progressive than it had been before ACA. However, most of the income of the wealthy is not from salaries but rather from tax-advantaged sources, thus the impact is not as great on them as it otherwise would be.

Private plans purchased through the ACA exchanges by lower-income individuals are eligible for subsidies and credits indexed to income and thus are progressively funded for this sector. But middle- and upper-middle-income individuals do not receive these subsidies and thus bear a disproportionate share of our collective (pooled) health care spending (disproportionate as a percentage of income). The latter also is true for those purchasing individual plans outside of the exchanges. For them, funding is regressive since the percent of income paid for heath care decreases as income increases.

By far the largest source of health insurance is through employer-sponsored plans. Almost all economists agree that these are paid for by the employee through forgone wage increases (certainly a contributing cause to flat wages of the last couple of decades). This funding is quite regressive since, as income increases, the percentage of wages devoted to health insurance premiums decreases. Further, premiums are subsidized by tax expenditures (the deductibility of premiums for employer-sponsored plans) which increase as the individual’s income increases. High-income individuals receive very generous government subsidies for their health insurance plans whereas lower-income individuals may receive little or none at all. Thus health financing for the majority of us is quite regressive.

The article by Josh Bivens is quite long but well worth reading if you want to understand policies that will shift us to progressive redistribution without having to feel guilt. The economic improvement for the great majority of us, creating a more robust economy, is well worth the trade off of expecting the wealthy to accept more progressive redistribution, which would certainly never negatively impact their very comfortable or even indulgent lifestyles.

Health care? Based on the examples above, we can certainly adopt policies that would significantly improve progressive redistribution so that health care is affordable for everyone. That is exactly what a well-designed single payer system does. No guilt, just ghastly politics.

Report of Reference Committee A
2016 AMA Annual Meeting, June 11-15, 1016

Excerpt from the Reference Committee report:

Overall your Reference Committee notes a distinction between supporting a single payer system and supporting a study on the issue. Your Reference Committee found testimony by the sponsor to be reasonable and persuasive. Your Reference Committee notes numerous reports by the Council on Medical Service evaluating health care financing payment models and believes it may be timely to reassess a variety of health care financing models, including single payer.

Resolution 111 – SINGLE PAYER HEALTH CARE STUDY

Recommendation A:

Madam Speaker, your Reference Committee recommends that Resolution 111 be amended by addition and deletion as follows:

RESOLVED, That our American Medical Association research and analyze the benefits and difficulties of a single-payer health care system in the United States variety of health care financing models, with consideration of the impact on economic and health outcomes and on health disparities and including information from domestic and international experiences. (Directive to Take Action)

Recommendation B:

Madam Speaker, your Reference Committee recommends that Resolution 111 be adopted as amended.

Recommendation C:

Madam Speaker, your Reference Committee recommends that the title of Resolution 111 be changed to read as follows:

UPDATED STUDY ON HEALTH CARE PAYMENT MODELS

HOUSE OF DELEGATES ACTION: Resolution 111 adopted as amended.

http://www.ama-assn.org/sub/meeting/index.html

***

Comment:

By Don McCanne, M.D.

AMA members understand that the financing of health care in the United States is highly flawed, even after implementation of the Affordable Care Act. Although the AMA’s official position has been to oppose single payer reform, it has become clear that it is time to take another look at various models of financing health care, including single payer.

The Illinois delegation to the AMA House of Delegates offered a resolution calling for a single payer health care study. The Reference Committee amended the resolution to call for an updated study on health care payment models, with the comment that single payer would be included.

The House of Delegates adopted the resolution as amended.

As a Life Member of the AMA, I am proud that our organization has elected to begin a process based on facts rather than ideology.

Report of Reference Committee A
2016 AMA Annual Meeting, June 11-15, 1016

Excerpt from the Reference Committee report:

Overall your Reference Committee notes a distinction between supporting a single payer system and supporting a study on the issue. Your Reference Committee found testimony by the sponsor to be reasonable and persuasive. Your Reference Committee notes numerous reports by the Council on Medical Service evaluating health care financing payment models and believes it may be timely to reassess a variety of health care financing models, including single payer.

Resolution 111 – SINGLE PAYER HEALTH CARE STUDY

Recommendation A:

Madam Speaker, your Reference Committee recommends that Resolution 111 be amended by addition and deletion as follows:

RESOLVED, That our American Medical Association research and analyze the benefits and difficulties of a single-payer health care system in the United States variety of health care financing models, with consideration of the impact on economic and health outcomes and on health disparities and including information from domestic and international experiences. (Directive to Take Action)

Recommendation B:

Madam Speaker, your Reference Committee recommends that Resolution 111 be adopted as amended.

Recommendation C:

Madam Speaker, your Reference Committee recommends that the title of Resolution 111 be changed to read as follows:

UPDATED STUDY ON HEALTH CARE PAYMENT MODELS

HOUSE OF DELEGATES ACTION: Resolution 111 adopted as amended.

http://www.ama-assn.org/sub/meeting/index.html

AMA members understand that the financing of health care in the United States is highly flawed, even after implementation of the Affordable Care Act. Although the AMA’s official position has been to oppose single payer reform, it has become clear that it is time to take another look at various models of financing health care, including single payer.

The Illinois delegation to the AMA House of Delegates offered a resolution calling for a single payer health care study. The Reference Committee amended the resolution to call for an updated study on health care payment models, with the comment that single payer would be included.

The House of Delegates adopted the resolution as amended.

As a Life Member of the AMA, I am proud that our organization has elected to begin a process based on facts rather than ideology.

Voluntary health insurance in Europe: role and regulation

By Anna Sagan and Sarah Thomson
World Health Organization
European Observatory on Health Systems and Policies
Observatory Studies Series No. 43

This book offers a succinct overview of the size, operation and regulation of markets for voluntary health insurance (VHI) in countries across Europe. We define VHI as health insurance that is taken up and paid for at the discretion of individuals or employers on behalf of employees, including group policies sponsored by employers that come with the job and are thus not strictly voluntary. VHI can be offered by public and quasi-public bodies and by for- profit (commercial) and non-profit-making private organizations.

National policy developments

The period from 2000 to 2015 has been marked by policy developments in four main areas: the extension of publicly financed coverage to groups of people previously excluded, which has effectively abolished several markets for VHI playing a substitutive role; an intensification of measures to make VHI more accessible and affordable, especially but not only where VHI plays a substitutive or complementary role; an increase in domestic legal challenges to some of these measures; and a reduction in the provision of tax incentives to take up VHI.

In spite of well-established evidence about the inefficiency and inequity of many forms of tax incentive for VHI, over half of the countries in this study (19 out of 34) offer some form of tax incentive for people to buy VHI. However, there has been a notable trend to reduce or abolish tax incentives for VHI, often because they have been found to be expensive for governments and a poor use of public funds. In France, Greece and Portugal, reductions in tax incentives were in part a response to fiscal concerns in the context of the economic crisis. Countries have also reduced or abolished tax incentives for equity reasons or used tax incentives in a targeted way to promote equity and access to health care.

National policy concerns

National policy concerns about VHI often include one or more of the following: inequitable (two-tier) access to health services; the magnitude of public subsidies for VHI; the challenge of ensuring affordable access to VHI for some groups of people; the high administrative costs associated with VHI; and the transaction costs linked to the complexity VHI brings to health systems, particularly in larger markets for VHI.

Concerns about unequal access to health care – so-called two-tier access, in which people with VHI enjoy easier, faster or preferential access to treatment – have been debated in Austria, Denmark, Finland, France, Germany, Italy, Latvia, Poland, Portugal, Spain and the United Kingdom. These concerns are driven by a number of factors. For example, where providers receive payment from public sources and VHI (doctors work in both sectors or there are private beds in public hospitals – the case in most countries), and VHI-paid fees are higher than publicly paid fees, doctors and hospitals will have incentives to prioritize VHI-financed patients. This may result in longer waiting times for those who rely on publicly financed coverage, as well as their having to be treated by less experienced junior medical staff. In addition, the time doctors devote to working in a private capacity is lost to the public sector and doctors working in both sectors may experience role conflicts.

Differential access for people with VHI goes against the principle of access on the basis of need rather than ability to pay. In the United Kingdom, these concerns have been countered by arguing that users of VHI are paying for VHI coverage over and above their tax-financed contributions to the NHS and, furthermore, that their use of VHI-funded care relieves pressure on the NHS, to the benefit of people who rely on the NHS for treatment. Even if this claim is valid, the benefits of VHI may not outweigh the cost in terms of doctors’ time and public subsidies. Similar claims have been made in Ireland in the past, where some have argued that public subsidies for VHI are justified because those who opt for VHI effectively forgo a statutory entitlement while continuing to contribute to the funding of the public health service through taxation. They have also argued that VHI reduces demand for publicly financed health care. However, the evidence does not support this claim; a significant proportion of VHI-financed care takes place in public hospitals at less than full economic cost – 60% of adult inpatients with VHI, according to recent figures.

Explicit and implicit public subsidies for VHI have generated fiscal, efficiency and equity concerns in some countries. Implicit subsidies may come from public funding of medical education; failure to charge VHI the full economic cost of using beds in public hospitals; the potential for VHI to shift costs onto the publicly financed part of the health system in other ways if the system lacks transparency and accountability – for example, where there is double coverage; and the backup function of the publicly financed system.

VHI take-up is systematically concentrated among people with higher socioeconomic status, partly because VHI is less accessible to the most vulnerable population groups: older or disabled people, people with chronic conditions, unemployed people and poorer households. This raises questions about policies that lower the breadth, scope or depth of publicly financed coverage in the expectation that VHI will fill the gap. Even in countries with well-established VHI markets that cover a large share of the population, such as France, there is evidence of inequities in the depth of VHI coverage, with resulting inequities in the use of health services. Earlier, we showed how some countries have increasingly adopted measures to address access and affordability issues, particularly in the larger VHI markets. Such measures have not always been sufficiently effective, however, as the French example reveals.

The relatively high administrative costs associated with VHI have been a source of concern in several countries. This is especially the case in countries that have promoted VHI by allowing private insurers to offer publicly financed benefits. In such instances, private insurers have not been seen as providing good value for money.

VHI can bring significant complexity to a health system, adding to transaction costs for governments and households. Monitoring and regulation of VHI markets, efforts to ensure VHI is accessible and affordable for those who need it, developing policies to establish clear boundaries between public and private financing and service delivery, responding to domestic and EU legal challenges – all are likely to be time consuming and expensive.

http://www.euro.who.int/__data/assets/pdf_file/0005/310838/Voluntary-health-insurance-Europe-role-regulation.pdf?ua=1

***

Comment:

By Don McCanne, M.D.

Many European nations, in addition to having some form of universal or near-universal health insurance, also have optional voluntary health insurance plans (VHI). These have raised concerns about access, inequity, two-tiered care, queues, inefficient use of public funds, and the excess costs and inefficiencies due to greater administrative complexity. “Private insurers have not been seen as providing good value,” according to this report.

If their public programs fully covered costs for all reasonable health care services that would be expected in a comprehensive health care system, then there should be no need for additional voluntary health insurance. Certain services that should not be funded by a public program, such as luxury hospital suites or vanity cosmetic surgeries, should be paid for privately and not through a common insurance risk pool. Using private payment to jump the queue should be prohibited as well to ensure that the wealthy would continue to support an egalitarian public program.

We already have considerable experience with the waste, inefficiencies, and administrative excesses of plans that are somewhat comparable to their voluntary health plans, except our waste and inefficiencies are even worse. Medigap plans and private Medicare Advantage plans are prime examples. But what we do lack is a universal public financing infrastructure, and that makes our system much more dysfunctional, inequitable, and outrageously priced than the European systems.

Thus a well-designed single payer system that covers everyone for all essential services – an improved Medicare for all – would obviate the need for voluntary health insurance. We’d be much better off without it.

Voluntary health insurance in Europe: role and regulation

By Anna Sagan and Sarah Thomson
World Health Organization
European Observatory on Health Systems and Policies
Observatory Studies Series No. 43

This book offers a succinct overview of the size, operation and regulation of markets for voluntary health insurance (VHI) in countries across Europe. We define VHI as health insurance that is taken up and paid for at the discretion of individuals or employers on behalf of employees, including group policies sponsored by employers that come with the job and are thus not strictly voluntary. VHI can be offered by public and quasi-public bodies and by for- profit (commercial) and non-profit-making private organizations.

National policy developments

The period from 2000 to 2015 has been marked by policy developments in four main areas: the extension of publicly financed coverage to groups of people previously excluded, which has effectively abolished several markets for VHI playing a substitutive role; an intensification of measures to make VHI more accessible and affordable, especially but not only where VHI plays a substitutive or complementary role; an increase in domestic legal challenges to some of these measures; and a reduction in the provision of tax incentives to take up VHI.

In spite of well-established evidence about the inefficiency and inequity of many forms of tax incentive for VHI, over half of the countries in this study (19 out of 34) offer some form of tax incentive for people to buy VHI. However, there has been a notable trend to reduce or abolish tax incentives for VHI, often because they have been found to be expensive for governments and a poor use of public funds. In France, Greece and Portugal, reductions in tax incentives were in part a response to fiscal concerns in the context of the economic crisis. Countries have also reduced or abolished tax incentives for equity reasons or used tax incentives in a targeted way to promote equity and access to health care.

National policy concerns

National policy concerns about VHI often include one or more of the following: inequitable (two-tier) access to health services; the magnitude of public subsidies for VHI; the challenge of ensuring affordable access to VHI for some groups of people; the high administrative costs associated with VHI; and the transaction costs linked to the complexity VHI brings to health systems, particularly in larger markets for VHI.

Concerns about unequal access to health care – so-called two-tier access, in which people with VHI enjoy easier, faster or preferential access to treatment – have been debated in Austria, Denmark, Finland, France, Germany, Italy, Latvia, Poland, Portugal, Spain and the United Kingdom. These concerns are driven by a number of factors. For example, where providers receive payment from public sources and VHI (doctors work in both sectors or there are private beds in public hospitals – the case in most countries), and VHI-paid fees are higher than publicly paid fees, doctors and hospitals will have incentives to prioritize VHI-financed patients. This may result in longer waiting times for those who rely on publicly financed coverage, as well as their having to be treated by less experienced junior medical staff. In addition, the time doctors devote to working in a private capacity is lost to the public sector and doctors working in both sectors may experience role conflicts.

Differential access for people with VHI goes against the principle of access on the basis of need rather than ability to pay. In the United Kingdom, these concerns have been countered by arguing that users of VHI are paying for VHI coverage over and above their tax-financed contributions to the NHS and, furthermore, that their use of VHI-funded care relieves pressure on the NHS, to the benefit of people who rely on the NHS for treatment. Even if this claim is valid, the benefits of VHI may not outweigh the cost in terms of doctors’ time and public subsidies. Similar claims have been made in Ireland in the past, where some have argued that public subsidies for VHI are justified because those who opt for VHI effectively forgo a statutory entitlement while continuing to contribute to the funding of the public health service through taxation. They have also argued that VHI reduces demand for publicly financed health care. However, the evidence does not support this claim; a significant proportion of VHI-financed care takes place in public hospitals at less than full economic cost – 60% of adult inpatients with VHI, according to recent figures.

Explicit and implicit public subsidies for VHI have generated fiscal, efficiency and equity concerns in some countries. Implicit subsidies may come from public funding of medical education; failure to charge VHI the full economic cost of using beds in public hospitals; the potential for VHI to shift costs onto the publicly financed part of the health system in other ways if the system lacks transparency and accountability – for example, where there is double coverage; and the backup function of the publicly financed system.

VHI take-up is systematically concentrated among people with higher socioeconomic status, partly because VHI is less accessible to the most vulnerable population groups: older or disabled people, people with chronic conditions, unemployed people and poorer households. This raises questions about policies that lower the breadth, scope or depth of publicly financed coverage in the expectation that VHI will fill the gap. Even in countries with well-established VHI markets that cover a large share of the population, such as France, there is evidence of inequities in the depth of VHI coverage, with resulting inequities in the use of health services. Earlier, we showed how some countries have increasingly adopted measures to address access and affordability issues, particularly in the larger VHI markets. Such measures have not always been sufficiently effective, however, as the French example reveals.

The relatively high administrative costs associated with VHI have been a source of concern in several countries. This is especially the case in countries that have promoted VHI by allowing private insurers to offer publicly financed benefits. In such instances, private insurers have not been seen as providing good value for money.

VHI can bring significant complexity to a health system, adding to transaction costs for governments and households. Monitoring and regulation of VHI markets, efforts to ensure VHI is accessible and affordable for those who need it, developing policies to establish clear boundaries between public and private financing and service delivery, responding to domestic and EU legal challenges – all are likely to be time consuming and expensive.

http://www.euro.who.int/__data/assets/pdf_file/0005/310838/Voluntary-health-insurance-Europe-role-regulation.pdf?ua=1

Many European nations, in addition to having some form of universal or near-universal health insurance, also have optional voluntary health insurance plans (VHI). These have raised concerns about access, inequity, two-tiered care, queues, inefficient use of public funds, and the excess costs and inefficiencies due to greater administrative complexity. “Private insurers have not been seen as providing good value,” according to this report.

If their public programs fully covered costs for all reasonable health care services that would be expected in a comprehensive health care system, then there should be no need for additional voluntary health insurance. Certain services that should not be funded by a public program, such as luxury hospital suites or vanity cosmetic surgeries, should be paid for privately and not through a common insurance risk pool. Using private payment to jump the queue should be prohibited as well to ensure that the wealthy would continue to support an egalitarian public program.

We already have considerable experience with the waste, inefficiencies, and administrative excesses of plans that are somewhat comparable to their voluntary health plans, except our waste and inefficiencies are even worse. Medigap plans and private Medicare Advantage plans are prime examples. But what we do lack is a universal public financing infrastructure, and that makes our system much more dysfunctional, inequitable, and outrageously priced than the European systems.

Thus a well-designed single payer system that covers everyone for all essential services – an improved Medicare for all – would obviate the need for voluntary health insurance. We’d be much better off without it.