Chapter 5 - Health Insurance Schemes

Page 1 of 17
Chapter 5: Health Insurance Schemes Private

Certificate in Health Insurance

Confidentiality statement

This document should not be carried outside the physical and virtual boundaries of TCS and
its client work locations. Sharing of this document with any person other than a TCSer will
tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
Certificate in Health Insurance TCS Business Domain Academy

Page 3 of 17

Contents

Chapter - 5 Health Insurance Schemes - Private ............................................................... 4
Introduction ...................................................................................................................... 4
5.1 Private Health Insurance ........................................................................................ 5
5.2 Drivers for Improving Private Health Insurance Market ......................................... 5
5.3 Classification of Voluntary Health Insurance (VHI) .................................................6
5.4 Classification of Private Health Insurance (US Perspective) ................................... 8
5.5 Pricing of Private Health Insurance ...................................................................... 10
5.5.1 Price Dimensions ............................................................................................. 12
Summary ........................................................................................................................ 14
References ...................................................................................................................... 16


Page 4 of 17

Chapter - 5 Health Insurance Schemes - Private

Introduction
Private health insurance is prevalent in countries where public healthcare system has
deficiencies and people are willing to spend to purchase an insurance that addresses those
issues and also meet their respective needs. It is not mandatory unlike public insurance and
is often called as Voluntary health insurance. Under private health insurance premium
pricing can be done using underwriting, risk rating and experience rating. Also there are
several dimensions of price that would determine the premium. This chapter tries to explain
different types of drivers that guide the private health insurance market, their classification
across nations and their pricing structures.

Learning Objectives
On completion of this chapter, you will understand the:
Drivers of private health insurance market
Classification of private health insurance
Pricing of private health insurance
Price dimensions of insurance premium


Page 5 of 17

5.1 Private Health Insurance
Definition
Private health insurance is a mechanism for people to:
Protect themselves from the potentially extreme financial costs of medical care if
they become severely ill,
Ensure that they have access to health care when they need it.

It is an alternative to government-run public health care system. These schemes are run by
private for-profit organizations. It is also called as Voluntary Health Insurance (VHI)
(Voluntary Health Insurance and Private Health Insurance are used inter-changeably in this
Chapter) because there is no government mandate on it, and the contributions (premiums)
towards this are to be paid by the policy holders themselves.

Private health insurance schemes, pool the risk of high healthcare costs across a large
number of people, by collecting premiums based on the average cost of healthcare for the
entire group of people in the insurance risk pool. Such premiums collected are used to settle
the claims of the members of the pool when they fall ill. This risk-spreading function helps
to make the cost of healthcare reasonably affordable for most of the people.
5.2 Drivers for Improving Private Health Insurance Market

Since this is an alternative to public health insurance, the drivers of private health insurance
would be the deficiencies in existing public healthcare system. There are four aspects of the
public system that are of special importance in establishing the range of opportunities
available to insurers for the development of a market for VHI.

Scope of coverage (benefits covered by the public system): If a definite benefit
package is not defined or if it is a limited benefit package that is the area where
these private insurers can work on in attracting people.
Depth of coverage (the proportion of benefit cost met by the public system): If the
benefits are not fully covered or the user of health care is to make contribution
while availing service, then it would be a drawback in public healthcare.

Page 6 of 17

System inclusiveness (the proportion of the population to which coverage is
extended): Private insurers can target people who are not eligible for public
healthcare schemes or the people who opt out of it for lack of customer satisfaction.
Consumer satisfaction (perceptions about quality of care): If there is any
dissatisfaction with the public system, in conjunction with willingness to pay for
privately financed healthcare over and above the mandatory contribution made to
the public system, then it is a definite driver for the private health insurance market.

Collectively these four drivers can be termed as gaps in coverage. Private insurance will
have to fill these gaps in order to attract people.
5.3 Classification of Voluntary Health Insurance (VHI)
This classification is highly evident in European nations. There are three types of VHI
corresponding to the above mentioned four drivers of market development. They are
Complementary VHI, substitutive VHI and supplementary VHI each of which will be
explained in detail.

Complementary voluntary health insurance: Complementary VHI tries to address
deficiencies in scope and depth of coverage within the public system. Regarding
scope of coverage, public systems are increasingly choosing to exclude services that
might, under more favourable resource conditions, have reasonably been included
in the public benefits package (a typical example being dental care). Where this is
taking place, markets in complementary VHI may emerge to facilitate access to
such care on an insured basis.
Ex: In Spain and Netherlands, complementary VHI covers dental care.

Regarding depth of coverage, public systems might require patients to pay a user
charge for accessing services (an example might be a flat-fee payable when visiting
a General Practitioner (GP) or specialist). Again, markets in complementary VHI
may emerge to enable patients to pay such charges on an insured basis. This type of
complementary VHI is found, for example, in France.
Hence, when public healthcare is deficient in terms of scope or depth of coverage, a
market for VHI that complements (fills the gap) the public system may develop.


Page 7 of 17

Substitutive voluntary health insurance: Substitutive VHI addresses deficiencies
in system inclusiveness. In some countries, certain population groups (for instance,
individuals with an annual income above a threshold, or those below a specified
age) may be excluded from, or allowed to opt out of the public system. Markets in
substitutive VHI develop to make it possible for these groups to access health care
on an insured basis. Substitutive VHI is thus so-called because it substitutes for (i.e.
takes the place of) the public system.
Ex: Germany and Netherlands follow this type of VHI system.

Markets in substitutive VHI will tend to offer packages that provide a level of cover
broadly comparable to that offered by the parallel public system. However, they
may also offer a range of alternative packages, some of which will cover a more
limited range of services (those that might be considered essential, for instance),
and some of which will cover a wider range of services. Different packages may
require higher or lower levels of cost sharing. Differences in package design such as
these will be reflected in the price of the premium.

Supplementary voluntary health insurance: Supplementary VHI tries to address
issues like low levels of consumer satisfaction with the public system, and is
designed to provide access to healthcare through alternative insurance packages.
Supplementary VHI markets will grow when low levels of consumer satisfaction are
coupled with willingness to pay for privately financed healthcare over and above the
mandatory contribution made to the public system (to which full right of access is
retained). This is the principal form of VHI operating in the United Kingdom.

There are several possible causes of low levels of consumer satisfaction with
publicly financed healthcare. Important causes are those related to the non-clinical
dimensions of quality like:
Presence of long waiting times
Unhappiness with the facilities environment (ward accommodation,
impersonal service or unattractive surroundings)
Restrictions on product availability (for instance, patients not given the
choice of a brand drug based on non-coverage, instead asked to choose an
available generic version)

Page 8 of 17

Scope and depth of coverage offered by supplementary VHI is reflected in the price
of the premium. Supplementary VHI usually covers many of the services covered by
the public system this being sometimes referred to as its duplicatory function,
while seeking to maintain non-clinical dimensions of quality at a comparatively high
level. It may also extend to cover benefits that are excluded from the public system,
such as access to alternative therapies (here, supplementary VHI might be thought
of as partially serving a complementary function).

There are two classes of benefits which supplementary VHI usually extend their
cover for:
Benefits pertaining to resource-intensive aspects (ex: accidents &
emergency services)
Benefits that place insurers at a higher level of moral hazard (instances
where insured can extend significant control over situation and take undue
advantage thus raising predicted costs of the insurer)

5.4 Classification of Private Health Insurance (US Perspective)

Organizations that provide Private Health Insurance in US are broadly categorized into two
types (based on the regulatory body monitoring)

State Licensed Health Insurance Organizations
These organizations are generally regulated by the state law, and at times
additional standards are imposed by the federal law or entirely supersede the state
authority. These state licensed Health Insurance Organizations are further sub-
divided into three types. They are:
Commercial Health Insurers: They usually are for-profit organizations
offering health insurance policies. They are organized (based on their
capitalization structure) in two ways, one as a stock company where
stockholders have ownership and other by way of mutual insurance
company where the organization is owned by the policyholders itself.
Ex: Aetna Health Insurance is a stock company, MICA (Mutual Insurance
Company of Arizona) is an example of mutual insurance company.

Page 9 of 17

Blue Cross and Blue Shield Plans: When these plans were started, they are
not-for-profit organizations regulated by the special state laws of state
hospital called as Blue Cross and state medical associations called as Blue
Shield. These laws vary from state to state in terms of insuring all the
applicants and providing financial advantage for enrolling these plans.
Presently some states still are operating under the special state laws and
the rest are organized as commercial health insurers.

Health Maintenance Organizations (HMOs): HMOs are generally licensed
under the state laws. They ensure healthcare services are provided through
health insurance. Hence they perform two functions, one as an insurer
where the healthcare costs are spread across the people who are enrolled in
the HMO and the other as a healthcare provider by providing the necessary
healthcare facilities to the enrolees.
Ex: Kaiser Permanente and Harvard Pilgrim are few examples of state
licensed HMOs

Self-funded Employee Health Benefit Plans
They are operated under the federal law. They are usually sponsored either by
employers or the employee organizations or a combination of them. In this case,
sponsor assumes the entire risk of bearing the cost of healthcare of the enrolled
members. In this type of plans, sponsors partner with one or more TPAs (Third Party
Administrators) who are specialized in administering the benefit plans. Here the
third party administrators perform a role similar to an HMO, with the difference
being that the sponsor reimburses the healthcare costs incurred by the
administrator in due course.

Page 10 of 17

5.5 Pricing of Private Health Insurance

Pricing of any insurance product is the job of an actuary, and this is done by taking various
risk and cost factors into consideration. There are several methods of pricing a private
health insurance:
Underwriting
Risk rating
Experience rating

After applying any of these methods, there are four dimensions which need to be
considered to compute the price of the premium, they are:
Scope of cover purchased
Risk characteristics of the purchaser
Product options
Loading charge

Each of these methods is explained in detail below:
Underwriting
It is the process by which the insurer decides the nature and amount of risk that he
is willing to assume. Underwriters generally exclude all the pre-existing conditions
because of the difficulty of assessing their future cost implications and at the same
time in order to help avert adverse selection. There are two key forms of
underwriting:
Full Medical Underwriting: In this form of underwriting, individual is required to
complete a form giving details of his/her medical history and current health
status which is called as medical history declaration. The insurer may also
contact the applicant or the GP (General Practitioner) for verification or for
further information (if necessary). Insurer also tries to assess the extent and
severity of pre-existing conditions and make an assessment of the probability of
a recurrence. On the basis of the information provided on the form and by the
GP, the insurer will decide whether pre-existing condition will be covered or not.
Based on the associated risk of such coverage, premium charged will be decided
accordingly.

Page 11 of 17

Moratorium underwriting: Moratorium underwriting does not require details of
an individuals medical history at the time of taking the policy. Information
about the subscribers relevant medical history is requested at the time of claim.
On the basis of this information, the insurer decides whether or not to meet the
claim (moratorium underwriting is also known as point-of-claim underwriting).
When the subscriber does not experience symptoms or receive treatment, tests
or advice for the condition or for related conditions for a specified duration post
purchase of insurance, then it cant be excluded from the cover.

Risk Rating
Underwriting is concerned with delimiting the risk that the insurer will assume,
while risk rating is more directly related to the pricing of the risk. Certain criteria
(like age) are taken into consideration while determining the premium. General
information pertaining to the applicant like gender, age, occupational, smoking
status and place of residence etc.., becomes the criteria in assessing premium.

Supposing if age is considered to be the sole criteria, applicants in higher age
group are supposed to pay a higher premium, compared to the ones in a lower age
group. And also there will be a ceiling age (generally 65 years) beyond which
policies wont be issued because insurers find it difficult to determine an
appropriate price for the premium.

An example of risk rated premium:
Age Indexed Premium (%)
35 100
40 116
45 125
50 148
55 161
60 208
65 268
Table: Average indexed premium, by age (Source: Association of British Insurers, 2003)


Page 12 of 17

Experience rating
This is applicable in case of group insurance, where the market is divided into
groups based on their sizes. Usually in case of employee group insurance, they are
categorized into small groups (generally group size less than 50) and large groups
(generally group size greater than 50).

Small group schemes are generally underwritten and priced in a similar way to that
used in the individual market, but will take account of claims history, group size and
age composition, type of industry and company location. Large-group schemes, in
contrast, tend not to be underwritten but are priced solely on the basis of the
groups claims experience for the previous year. Experience rating in the corporate
market is often thought of as a form of community rating, as all employees within
the group will be accorded the same risk value (i.e. the average for the group).
However, experience rating can equally be thought of as a form of risk rating, as it is
the single employer who pays the premium (even if it is those who are covered who
are referred to as the subscribers), and past claims expenditure is, in effect, a
reflection of the risk presented by the group as a single entity.

Large-group schemes require cover to be extended to all employees within given
categories such as age group, status within the company, and length of service. This
is to ensure that risk is spread widely, and that adverse selection is avoided.
Renewal of group schemes rests in the hands of insurer, so there is no guarantee of
cover being extended for subsequent years.
5.5.1 Price Dimensions
Of the four dimensions considered for pricing premium, scope of the cover and risk
characteristics of the purchaser are considered as fundamental dimensions and the price of
the premium will always reflect a combination of these two. It means there is no single price
for a given level of cover that is applicable to all in an actuarially fair market (which
comprised of individuals who are non-alike across the dimensions of consideration).

Scope of cover: The extent and the characteristics of the cover vary for each of the
health insurance products, and these products are categorized into three types.
Comprehensive policies: Comprehensive policies offer the widest range of
benefits and are the most expensive to purchase. Beyond the core benefits,

Page 13 of 17

they offer a significant level of outpatient care and access to a wide range of
further benefits.
Standard policies: Standard policies offer fewer benefits beyond the core
benefits, but are cheaper to purchase. They may impose restrictions or give a
limited choice like monetary limit on outpatient benefits, fewer empanelled
hospitals etc..,
Budget policies: Budget policies are the least expensive. These enable
consumers to purchase a relatively limited quantity of cover for a significantly
lower premium.

Risk characteristics of the purchaser: The unique aspect of a medical insurance is
that the risk characteristics of each purchaser will be unique because of the
differentiating factors like age, gender, profession, location etc.., and hence
premium needs to be assessed accordingly.

Product Options: As explained in scope of cover, depending on the subscribers
choice of accepting constraints accordingly will be his/ her premium level. Applying
constraints will reduce the insurers claims-related expenditure, hence this
reduction will reflect in lower price of premium. Such constraints/ options that
affect the price include:
Restrictions on choice of hospital
Level of hospital accommodation permitted
Depth of coverage (level of cost sharing)
Application of a no-claims discount

And if subscriber wishes to extend the cover to dependants, the premium will get
increased.

Loading Charge: The fourth dimension is the loading charge. This reflects the
insurers administrative costs and profit. It also reflects insurance premium tax that
is levied by the government.


Page 14 of 17

Summary
Private Health Insurance is a mechanism for people to:
Protect themselves from the potentially extreme financial costs of medical
care if they become severely ill,
Ensure that they have access to health care when they need it.
Private Health Insurance is an alternative to government-run public health care
system
Private health insurance schemes, pool the risk of high healthcare costs across a
large number of people, by collecting premiums based on the average cost of
healthcare for the entire group of people in the insurance risk pool
Drivers for private health insurance market are-
Scope of coverage being less in the public system
Insufficient depth of coverage
System inclusiveness (public system that does not cover entire population)
Lack of customer satisfaction in the public system
Classification of Voluntary Health Insurance (VHI):
Complementary voluntary health insurance
Substitutive voluntary health insurance
Supplementary voluntary health insurance
Reasons for low customer satisfaction are:-
Presence of waiting times
Unhappiness with the facilities environment (ward accommodation,
impersonal service or unattractive surroundings)
Restrictions on product availability (for instance, patients not given the
choice of a brand drug based on non-coverage, instead asked to choose an
available generic version)
Classes of benefit package for supplementary VHI are:-
Benefits pertaining to resource-intensive aspects
Benefits that place insurers at a higher level of moral hazard


Page 15 of 17

Classification of Private Health Insurance (US Perspective)
State Licensed Health Insurance Organizations which include Commercial
Health Insurers, Blue Cross and Blue Shield Plans, Health Maintenance
Organizations (HMOs)
Self-funded Employee Health Benefit Plans
Methods of pricing a private health insurance:
Underwriting, where the insurer decides the nature and amount of risk that
he is willing to assume. It is of two types:
o Full Medical Underwriting
o Moratorium underwriting
Risk rating takes into consideration certain general information about the
applicants in determining the price
Experience rating takes into consideration the risk rating experiences of
individual groups in calculating the premium
Four dimensions of price are:-
Scope of cover whether they are comprehensive, standard or budget in
terms of the cover
Risk characteristics of the purchaser
Product Options
Loading Charge


Page 16 of 17

References
http://www.euro.who.int/__data/assets/pdf_file/0007/98422/Private_Medical_Insurance_UK.
pdf
Ajay Mahal , Health Policy Challenges for India: Private Health Insurance and Lessons from
the International Experience
Musgrove, Philip. 1996, Public and Private Roles in Health: Theory and Financing
Patterns, Discussion paper #339. Washington, D.C.: The World Bank, Human Development
Department
Private Health Insurance Provisions, Congressional Research Service July 27, 2009
Francesca Colombo and Nicole Tapay , Private Health Insurance in OECD Countries: The
Benefits and Costs for Individuals and Health Systems, OECD HEALTH WORKING PAPERS
Gary Claxton, How Private Insurance Works: A Primer, Georgetown University, Institution
for Health Care Research and Policy

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.

Page 17 of 17

Chapter 5 - Health Insurance Schemes

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Chapter 5 - Health Insurance Schemes

Diunggah oleh

Hak Cipta:

Format Tersedia

Page 1 of 17

Chapter 5: Health Insurance Schemes Private

Anda mungkin juga menyukai