Insuring health

Enabling affordable medical insurance

Context

The share of the population protected by social insurance varies widely. In middle income countries it varies from less than 10% in the Dominican Republic, Ecuador and El Salvador to more than 80% in Brazil, Costa Rica and Cuba. In some countries part of the population is denied insurance because of selection bias under private voluntary insurance. In the USA millions of people with high health risk – and thus high need for health insurance – are unable to obtain affordable coverage.

Implementation

In Brazil every citizen is legally entitled to services financed from a combination of general revenues and social security contributions, and social insurance is deducted from the wages of every salaried worker. Yet more than one-fifth of the country's population currently opts for some form of private insurance coverage.

To eliminate selection bias and expand insurance coverage, governments can require insurers to pool risks across large numbers of people. To control costs, governments have a number of options: (1) Encourage prepayment of a fixed amount for each person, as is now done in private health maintenance organizations and in the British National Health Service; (2) Require insurers to jointly negotiate uniform fees with doctors and hospitals, as is done in Japan's social insurance system and Zimbabwe's private medical aid insurance system; or (3) Require insurers to set fixed payments for specified medical diagnoses, as in Brazil. A third approach, which has been tested on a limited scale in the USA, is "managed competition" between insurers to provide a specified package of health care for a fixed annual fee.

Claim

The great uncertainties surrounding the probability of illness and the efficacy of care give rise both to strong demand for health insurance and to shortcomings in the operation of private markets.

In unregulated private markets costs escalate without appreciable health gains to the patient. Governments have an important role to play in regulating privately provided health insurance, or in mandating alternatives such as social insurance, in order to ensure widespread coverage and hold down costs.

Some types of insurance schemes contribute to pushing up health care costs. This is particularly true of third-party systems and of systems that reimburse hospitals and physicians item by item for any and all services performed, In both the Republic of Korea, which relies on universal social insurance, and the USA, which uses mostly private insurance, health care already absorbs an unusually high share of GNP. During the 1980s, for example, health expenditure in Korea increased from 3.7 to almost 7% of GNP, in large part because of expansion of third-party insurance coverage combined with fee-for-service provider compensation.

Counter-claim

Private health insurance markets work poorly because variations in health risk create incentives for insurance companies to refuse to insure the very people who most need health insurance -- those who are already sick or likely to become ill. A second reason has to do with "moral hazard": insurance reduces the incentives for individuals to avoid risk and expense by prudent behaviour and can create both incentives and opportunities for doctors and hospital to give patients more care that they need. A final reason concerns the asymmetry in information between provider and patient concerning the outcomes of intervention; providers advise patients on choice of treatment, and when the providers' income is linked to this advice, excessive treatment can result.