Wednesday, July 16, 2008

Health ruling a victory for consumers

Wednesday's Supreme Court ruling, striking down Mary Harney's decision to impose Risk Equalisation as a breach of existing legislation, is a long overdue victory that should warm the hearts of all health insurance consumers. The Government argues Risk Equalisation - effectively a subsidy from commercial rivals in the insurance industry to VHI - is necessary to maintain "community rating" i.e. to ensure the absence of discrimination on the basis of age regarding the pricing of health insurance premia. But international evidence simply does not support this contention. Indeed there is strong evidence that risk-equalisation keeps premia high for all subscribers regardless of age, and that the form of Risk Equalisation the Government is trying to embark on raises moral problems such as the lac of age-disparity in terms of VHI and Quinn health/BUPA Ireland's subscriber-base, as well asbeing regressive in terms of transfer of resources from poorer subscribers to wealthier ones. A number of sources confirm that the Government's case for Risk Equalisation is wrongheaded. In particular I would like to highlight TCD Professor Se├ín Barrett's reply to the Report of the York Health Economics Consortium (YHEC) for the Health Insurance Authority (HIA) dated November 2003 titled Risk Equalisation and Competition in the Irish Health Insurance Market; and to the Letter to BUPA Ireland from the Chief Executive/Registrar of the HIA dated 15 March 2005 containing a determination for the period 1 July 2004 to 31 December 2004, a market positive equalisation adjustment (MPEA) from BUPA Ireland to VHI of €16,715,770.

Section 2 of the report of the Advisory Group on the Risk Equalisation Scheme(1998), examined the health expenditure patterns of persons aged 38, the average age of BUPA Ireland members, and 44, the average age of VHI members. The age difference between members of VHI and BUPA Ireland can be expected to fall further over time. The impact of VHI’s forty year earlier entry to the market in 1957 compared to the BUPA Ireland market entry in 1997 will diminish even in a market characterised by a small rate of switching. Already, for example, there was no disparity in the age group 45-54. Both VHI and BUPA had 18% of their membership in that age group. As this cohort ages the average age differential will fall further between VHI and BUPA Ireland. The biggest increase in the proportion of an age cohort who have made a health insurance claim is in the age group 35 to 44 years. Before entering this cohort 39% of respondents had made a health insurance claim, on leaving it 63% had made a claim, an increase of 24 points in the age cohort which contains the average age of both VHI and BUPA members. The rate of additional claimants slows to 2% of the age group aged 45 to 54 and 5% in the age group aged 55 to 64. Both VHI and BUPA have average membership ages in the range 35 to 44 years that is in the age group with the highest rate of new claimants. So the age-argument for forcing Quinn healthcare to subsidise the VHI falls flat. In fact for female subscribers, the data would seem to call into question whether it should be the VHI subsidising Quinn.

The report of the York Health Economics Consortium (2003) (YHEC) revealed that the average VHI premium at €435 was 33% more than the average BUPA Ireland premium of €327 (p.41), and that “the cost of private health insurance is an important determinant of whether to purchase cover” and that” lack of affordability is one of the main reasons for not having insurance cover.” The high income elasticity of demand for health insurance suggests that the incomes of BUPA members are lower than for VHI members thus questioning why the proposed transfers are supported on community rating or equity grounds. A further serious equity problem for the proposed transfers from BUPA Ireland to VHI is the subsidisation of the most expensive VHI plans by the lower premiums paid by BUPA Ireland members is another serious example of the regressiveness of risk-equalisation. According to Appendix 5 of the Report of the Advisory Group on the Risk Equalisation Scheme (1997), the lower cost VHI Plans A and B with an average premium of £160.33 and £229.29 respectively had surpluses of £4.8m and £7.0m. On the other hand, the higher cost VHI Plans, C, D and E had losses of £3.4m, £4.1m and £2,6m on average premiums of £354.43, £433.61, and £648.14. The true or economic cost premium for Plan A was £114.70, a reduction of 28% on the price charged while the true premium for Plan E was £731.30, an increase of 13% on the price charged. The Advisory Group found in its examination of the VHI low and high cost plans that “the claims frequency in each age band increases as the plans become more expensive.” (p.86). The unweighted average price of the plans receiving cross subsidisation, €479, is 2.5 times the unweighted price of the plans generating the funds for cross subsidisation implies that price and affordability are important factors in the decision on how much to spend on health insurance the transfers within VHI are likely to be substantially regressive. The further funding of these regressive transfers by levying BUPA Ireland members on lower premiums increases the regressivity involved in these transfers. Under the proposed transfer of €34m a year from BUPA Ireland to VHI a low cost BUPA essential health insurance cover with a premium of €272.39 would be levied to cross subsidise VHI Plan E costing €1,316.33 per adult. The price of the most expensive subsidised product under the HIA proposal is 4.8 times the price of the product to be levied in order to finance the cross subsidisation. The average BUPA premium was €327 while the average VHI premium was €435. Therefore, the price of the plan was 33% greater than the price of the average product to be levied to finance the cross subsidisation. CSO data shows that expenditure on health insurance rises over all ten income deciles. In the top decile, incomes are 10.1 times those in the bottom decile but health insurance expenditure is 22.9 times greater. Section C of this report deals with the HIA letter to BUPA Ireland requiring the equalisation payment of €34m annually from BUPA Ireland for transfer to VHI which had operating profits of €73.3m (before unexpired risk reserve) in their accounts to February 2004.

The Government needs to go back to the drawing-board and take a more hands-off approach to the health-insurance market. VHI needs to be privatised, given more commercial freedom, as well as being required to abide by the same open-enrollment rules as its competitors. The present system serves to entrench an inefficient monopoly through barriers-to-entry that penalise new entrants to the market. Risk Equalisation as proposed is premised on foundations that do not exist. Competition deserves to be encouraged not pilloried.

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