Healthcare Policy Forum Newspaper Article Series:
Sustaining the healthcare system by private insurance?
George Cautherley, Convenor, Healthcare Policy Forum
Regulating the private health insurance market and industry to protect consumer interests would seem uncontentious as a public policy objective. What would be contentious is using private insurance as a policy tool to "enhance the long-term sustainability of our healthcare system" through encouraging the uptake of private insurance with public subsidies. For this policy tool to have a chance of helping sustain the healthcare system, apart from bringing more private funding to the system, private insurance must at least be able to contain healthcare costs and improve the quality of care. If not, the "alleged" runaway costs now blamed on the public healthcare system can similarly break the private purse. The government's faith in the cost-containing and quality-enhancing capability of private insurance however appears misplaced.
Australia, like Hong Kong, introduced a policy in 1998 to proactively encourage the uptake of private healthcare by providing a 30% subsidy on premiums to ease pressures on the public system and to contain healthcare costs. Notwithstanding the fact that Australian private healthcare insurance is highly regulated and premium increases require government approval, premium rises have been well above general inflation since the introduction of the policy. According to official statistics, annual increases in premiums averaged over 6% between 2002 and 2009. The projection is that premium increases higher than general inflation will continue. Meanwhile, Australia's total healthcare expenditures have risen with the increase in private insurance coverage. According to OECD data in 2005, the country's rate of increase in total healthcare expenditures was higher than other advanced countries.
Leonie Segal, Deputy Director at the Centre for Health Economics, Monash University argues that the private insurance policy has made the healthcare system less rather than more efficient, and calls for a total overhaul of the policy to transfer the insurance subsidy to the public system instead.
The Australian case is in fact not atypical. It simply confirms the empirical observation that health systems relying more on private insurance to fund healthcare tend to be more expensive but lacking in evidence of improved health outcomes, whereas systems confining private insurance to their periphery tend to be more able to keep healthcare costs under control.
The costliness of private insurance lies less in moral hazard - over utilization and over treatment - than it is commonly believed. All forms of healthcare insurance - private or public (tax-based or social insurance) - are subject to moral hazard so long as they are third-party paying systems. What makes private insurance more expensive than a public system is its lack of cost-containing measures and capability. As governments are in control of a single pool of funding in public systems, they have greater bargaining powers vis-a-vis healthcare providers and hence greater ability to exercise cost and quality control than private insurance systems. Cost measures like global budgets and price regulation used in public systems are absent in private insurance systems.
It has always been argued that competition in private insurance market can help contain costs and keep premiums low. However, market force does not necessarily work. Because of information asymmetry, the public may have difficulty in comparing insurance products, the performance of different insurers as well as the quality of care of different providers. The transaction costs of switching insurance plans across different insurers may be high. Also, as noted above, insurers may be simply unable to compete on premium prices as they lack bargaining powers to negotiate with healthcare providers on prices and quality.
High overhead costs are another major factor accounting for the costliness of systems replying more private insurance. The costs may also further limit insurers' ability to compete on premium prices. Marketing, underwriting, billing, claims administration, dispute arbitration, and contracting with providers have to be paid for on the part of insurers though all these activities contribute to no one's health. In public systems, most of these activities do not exist. In the United States, according to an OECD study, the administrative cost of private insurers is about 11.7% while the corresponding costs of the public programmes Medicare and Medicaid are only 3.6% and 6.8% respectively. Likewise, in Australia, the administrative cost of the public system is about 3.7% while that of the private insurance industry averages about 11.1%. Similar levels of administration costs of private insurers are found in other OECD countries: Netherlands (10.4%), Canada (13.2%), Ireland (9.7%) and Germany (14%). The figures do not necessarily suggest mismanagement in the private insurance industry but simply that room for cutting administration cost in the long run is limited and that at the same level of healthcare output, systems with a greater private insurance presence are bound to be more expensive.
The OECD concludes in a country report regarding the experience of Australia that: "Private funds have not effectively engaged in cost controls. They seem to have limited tools and few incentives to promote cost-efficient care". One may try to argue that the Australian experience is not directly transferable to Hong Kong. Yet, it is difficult to avoid the following general conclusion in another study summarizing OECD experience: "It is important to be realistic about the potential benefits of competitive [private healthcare insurance] markets and what they mostly likely will not achieve. For example, cost-containment within health system is often best achieved through means other than an expansion of private health insurance's role."
The challenge that confronts the Government is to demonstrate convincingly to the community that its voluntary private insurance package contains unique elements that can protect against the negative outcomes that have been the experience of publicly subsidized health insurance in other jurisdictions so far.
The Chinese version of this article was published in Ming Pao on 27 January 2011.
The above does not necessarily represent the views of the Foundation. Reproduction of the presentation requires written permission from the author.