Does competition in health insurance harm solidarity? – Experiences from Switzerland Annual TILEC-Tranzo conference 2012 at Tillburg University, the Netherlands 26 th January 2012, Tillburg Prof. Dr. Konstantin Beck Director 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 selection I.How do insurers select? II.How appropriate is the reform of risk equalization? III.The problem with efficiency → unintended redistribution IV.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 burden and 55% 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 selection I.How do insurers select? II.How appropriate is the reform of risk equalization? III.The problem with efficiency → unintended redistribution IV.Conclusions

Insurer’s incentives  Insurers have clear incentives to reduce costs that lowers premium o By selling high copayment plans and reduce moral hazard o 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 Centralised selling point : Transfer of means by reinsurance New applicants ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

# of insured with 6 largest funds 1996 to ' ' ' '000 1'000'000 1'200'000 1'400' 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 Number of funds Number of conglomerates Number of funds in conglom. % funds in conglomerates % insured in conglomerates * ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

What risk adjustment is applied (1996 – 2011)? Costs per head and month Risk classes according to age and gender }} } } } } } } } }} } }} } Average ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

Political debate  1996 slightly improved demographic formula  1998: CSS insurance proposes prior hospitalization as a first step to improve the formula }} } } } } } } } }} } }} } Costs per head and month Risk classes according to age and gender and prior hospitalization Average

Political debate (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  Meanwhile a PCG-formula (CSS & Erasmus University) and an AP-DRG-Model (University of Lausanne) have been developed. o R 2 Demographic11% + prior hospitalisation21% + 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 ) 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 2008 RA-Reform Premium 2009 Premium 2010 Premium 2011 Premium 2012 Decision:Effective: possibly influenced by RA reform ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

Index of risk selection The 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% ________________________________________________________________________________________________________ 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 selection I.How do insurers select? II.How appropriate is the reform of risk equalization? III.The problem with efficiency → unintended redistribution IV.Conclusions

________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck A simple model of plan choice young old To be compensated in MC not in MC 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 To be compensated in MC not in MC HCE the way people switch :

________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck A simple model of plan choice III young old To be compensated In MC not in MC 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 old To be compensated In MC not in MC HCE This step is only possible, as long as beta is independent of age (additive separability)

________________________________________________________________________________________________________ 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 you for your attention!