Does competition in health insurance harm solidarity? – Experiences from Switzerland

1. Does competition in health insurance harm solidarity? – Experiences from Switzerland Annual TILEC-Tranzo conference 2012at Tillburg University, the Netherlands 26th January 2012, Tillburg Prof. Dr. Konstantin Beck Director CSS Institute for empirical Health Economics

2. Yes, it does!

3. Agenda • The institutional setting and its solidarity components • The problem with solidarity → risk selection • How do insurers select? • How appropriate is the reform of risk equalization? • The problem with efficiency → unintended redistribution • Conclusions ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

4. 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

5. 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

6. Solidarity in Swiss SHI-Market Access to health supply → mandatory coverage Income solidarity → Individual transfers to low income citizens to reduce premium burdenand55% of inpatient care is tax financed Age solidarity → one premium for ages 26 to death Health solidarity → Community rated premium, open enrolment ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

7. Agenda The institutional setting and its solidarity components The problem with solidarity → risk selection How do insurers select? How appropriate is the reform of risk equalization? The problem with efficiency → unintended redistribution Conclusions ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

8. Insurer’s incentives • Insurers have clear incentives to reduce costs that lowers premium • By selling high copayment plans and reduce moral hazard • By selling managed care plans • But they have as well incentives to do selection: • Profit: Beck/Zweifel (1996) showed in a simulation: Up to 50% premium advantage is possible despite risk adjustment • It’s an effective measure to prevent bankruptcy ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

9. Selection with conglomerates Central Administration Transfer of means by reinsurance Medium fund for medium risks Expensive High-risk-fund Cheap low-risk-fund Centralisedselling point : New applicants ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

10. # of insured with 6 largest funds 1996 to 2010 Point in time, when the fund starts to evidently select risks 1'400'000 1'200'000 1'000'000 800'000 600'000 400'000 The most successful fund (#2 in 2012) is the risk selecting fund 200'000 0 1996 1998 2000 2002 2004 2006 2008 2010 ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

11. Market for SHI 1997/2011 Number of funds Number of Number of funds % funds in % insured in Year conglomerates in conglom. conglomerates conglomerates 1997 124 1 13 10 3 1999 108 2 19 18 22 2001 99 2 18 18 22 2003 93 2 19 20 24 2005 86 3 22 26 40 2007 87 4 25 29 48 2008 89 6 30 34 59 2009 89 7 35 39 63 2010 82 8 39 48 63 2011 64 8 27 42 * * Figure not published yet ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

12. What risk adjustment is applied (1996 – 2011)? Costs per head and month 700 600 500 400 300 Average 200 100 0 } } } } } } } } } } } } } } } 19- 26- 31- 36- 41- 46- 51- 56- 61- 66- 71- 76- 81- 86- 91+ 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Risk classes according to age and gender ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

13. Political debate 1996 - 2012 • 1996 slightly improved demographic formula • 1998: CSS insurance proposes prior hospitalization as a first step to improve the formula Costs per head and month 700 600 500 400 300 Average 200 100 } } } } } } } } } } } } } } } 19- 26- 31- 36- 41- 46- 51- 56- 61- 66- 71- 76- 81- 86- 91+ 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Risk classes according to age and gender and prior hospitalization

14. Political debate 1996 - 2012 (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 2012. • Meanwhile a PCG-formula (CSS & Erasmus University) and an AP-DRG-Model (University of Lausanne) have been developed. • R2 Demographic 11% + prior hospitalisation 21% + Pharmaceutical Cost Groups 30% • 2011: The minister of health defines a PCG-formula as a goal for 2017 ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

15. Impact on premiums when deterring high risk customers* *) expected annual costs > 1000 € (over 5 years) No Risk Adjustment: 46% RA demographic: 32% (RA 1996-2011) ..with prior hospitalization: 19% (Reform 2012) ..with PCG in addition: 16% (Reform proposal 2017) (bench mark) Managed Care: 13% - 25% 0% 5% 15% 25% 35% 45%

16. 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

17. Time schedule in Swiss SHI market Decision: Effective: possibly influenced by RA reform Premium 2008 RA-Reform Premium 2009 Premium 2010 Premium 2011 Premium 2012 2007 2008 2009 2010 2011 2012 ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

18. Index of risk selection 1997-2011 The index measures the minimum impact risk selection has on solidarity (new revised formula von Wyl/Beck, 2012) 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1997 1999 2001 2003 2005 2007 2009 2011 ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

19. Agenda The institutional setting and its solidarity components The problem with solidarity →risk selection How do insurers select? How appropriate is the reform of risk equalization? The problem with efficiency → unintended redistribution Conclusions ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

20. A simple model of plan choice HCE Derived from Schokkaert / van de Voorde (2009) not in MC in MC To be compensated young old ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

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

22. A simple model of plan choice III HCE All cost reduction is fully redistributed not in MC RA contribution RA subsidy In MC To be compensated young old ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

23. How the solution should look like HCE This step is only possible, as long as beta is independent of age (additive separability) not in MC In MC To be compensated young old ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

24. 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. ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck

25. Conclusions • 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

26. . Thank you for your attention! ________________________________________________________________________________________________________ for empirical Health Economics Prof. Dr. Konstantin Beck