PRIVATE HEALTH INSURANCE - World Health Organization

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World Health OrganizationGenevaEIP/FER/DP.04.3PRIVATE HEALTH INSURANCE:IMPLICATIONSFORDEVELOPING COUNTRIESDISCUSSION PAPERNUMBER 3 - 2004Department "Health System Financing, Expenditure and Resource Allocation" (FER)Cluster "Evidence and Information for Policy" (EIP)

World Health Organization 2004This document is not a formal publication of the World Health Organization (WHO),and all rights are reserved by the Organization. The document may, however, befreely reviewed, abstracted, reproduced or translated, in part or in whole, but not forsale or for use in conjunction with commercial purposes.The views expressed in documents by named authors are solely the responsibility ofthose authors. The authors would like to express special thanks and appreciation totheir colleagues G. Carrin, C. James, E. Villar, and J. Perrot for their kind support,corrections, and guidance; to J.P. Poullier and the National Health Accounts team atWorld Health Organization for providing access to a unique data source; and toF. Columbo and N. Tapay for sharing their research and conceptual frameworks. Wealso benefited from comments from two anonymous reviewers. Any errors remainingin the text are the authors' full responsibility.

PRIVATE HEALTH INSURANCE:IMPLICATIONSFORDEVELOPING COUNTRIESbyWilliam Savedoff and Neelam SekhriWORLD HEALTH ORGANIZATIONGENEVA2004

AbstractPrivate health insurance plays a large and increasing role around the world. This paperreviews international experiences and shows that private health insurance is significantin countries with widely different income levels and health system structures. Itcontrasts private health insurance across regions and highlights countries withparticularly high rates of private expenditures. It argues that policy makers need toconfront the role that private health insurance will play in their health systems andregulate the sector appropriately so that it serves public goals of universal coverage andequity.Keywords: Health Insurance, Health Policy, Private Sector, Economic Development,and Public Policy.2

Background and ContextIs there a Role for Private Health Insurance in the Health Policy of DevelopingCountries?As policy makers consider how to move towards financing mechanisms that willprotect their people from the financially catastrophic effects of illness, they have threebroad options to consider: taxation, social security, and private health insurance whichconsists of non-profit and for-profit plans, and community health insuranceschemes1.(1)Unlike taxation and social security, which are commonly viewed as promoting equity,private insurance often conjures up visions of unequal access, large numbers ofuninsured people, and elitist health care for the rich. Experience indicates thatunregulated or poorly designed private health insurance systems can indeed exacerbateinequalities, provide coverage only for the young and healthy, and lead to costescalation.(2)However, when appropriately managed, private health insurance can play a positiverole in improving access and equity in developing countries for several reasons. First,out-of-pocket spending on health services is the most common form of healthfinancing in developing countries and represents a significant financial burden forhouseholds.(3) To the extent that private insurance gives households an opportunity toavoid large out-of-pocket expenditures, it can provide access to financial protectionthat is otherwise lacking.Secondly, many developing countries have public expenditures for health of less than 10 per capita per year, with large informal sectors.2 (4) Their ability to generate taxrevenues or fund social insurance systems to provide broad financial protection forhealth care is limited. Private coverage, when appropriately regulated, may be one wayto move towards prepayment and risk pooling until publicly funded coverage canexpand sufficiently. It also allows policy makers to target limited public resourcestowards the most vulnerable groups, while those who can afford it, can contribute totheir medical costs.Thirdly, history shows that the social insurance systems of several OECD countriesevolved from voluntary private health insurance schemes based on professional guildsor communities. (5) These historical lessons in building institutional capacity and thechanging role of private coverage as public financing is strengthened, may be useful ininforming policy debates in developing countries as they consider moving towardspublic insurance systems.1This paper does not deal directly with the extensive literature on commuity health insurance althoughcommunity health insruance plans are included in the National Health Accounts data presented. Formore information on community health schemes, please see Carrin, G. et al entitled,”Community basedhealth insurance schemes in Developing Countries: Facts, Problems and Perspectives, and otherreferences cited.2The Commission on Macroeconomics and Health recommends USD 34 per capita annually to providea package of essential health interventions.3

Finally, private health insurance continues to be important even in countries whereuniversal coverage has been achieved. Policy makers who plan ahead for thissupplementary role will be better prepared to ensure that private coverage willcomplement public systems as they develop.This paper provides an overview of the extent of private coverage around the world. Itis not intended as an analysis of how voluntary insurance markets function, theirhistorical development or how they are currently regulated. Rather, the paperhighlights how wide spread private insurance has become and is intended to encouragepolicymakers and researchers to pay attention to private coverage and the role it can,and does, play in health care systems.MethodsAlthough most countries have some type of private health insurance market (6), dataon private insurance expenditures, populations covered, premiums charged and impacton the health care system, are very limited. This study uses data on private insuranceavailable through National Health Accounts (see Appendix #1) which have severallimitations: NHA data are not available for all countries and may underestimate therole of private insurance, particularly in developing countries where the private markettends to be unregulated; trend data for most developing countries is not reliablebecause reporting on private coverage is relatively recent. Also, since little systematicdata have been collected on insurance markets in developing countries, evidence tendsto be empirical and anecdotal. Despite these limitations, the increasing role of privateinsurance suggests that this topic needs greater attention. We hope that this paper willunderscore the need to collect more extensive and reliable data in this area.What is Private Health Insurance?Private health insurance has historically been characterised as voluntary, for-profitcommercial coverage. However, in looking at private coverage around the world, it isevident that a wide variety of arrangements are described under the umbrella of privateinsurance and that the boundaries between public insurance3 and private insurance arebecoming increasingly blurred (7). The OECD Adhoc Group on Private Insurance usesthe difference in how insurance is funded as the key criterion to distinguish betweenprivate and public insurance. (8) Ultimately, all money comes from household income,but in public insurance programs this money is channelled through the State, via ageneral or social insurance tax collector, whereas in private insurance the money ispaid directly to the risk pooling entity (figure 1).It is useful to recognise the spectrum of arrangements that range from purely private,for-profit commercial insurance to purely publicly funded and publicly managedinsurance. Figure 2 suggests a spectrum between these two extremes, classified alongthree key dimensions:Whether insurance is mandatory or voluntary. 3The term public insurance is used here to encompass the full range of schemes that are variouslydescribed as "social insurance" or "national insurance".4

Whether contributions are risk rated (minimal risk transfer), community rated(transfer of risk between healthy and sick) or income based (transfer of risk betweenhealthy and sick; and higher income and lower income). Whether management of the scheme is commercial for-profit, private non-profit, orpublic/quasi-public.This spectrum is not meant to be construed as a causal or developmental model butrather highlights the variety of different arrangements that exist. Although privateinsurance and public insurance are often discussed in terms of the extremes, the mostcommon arrangements are actually found in the centre.As the spectrum shows, in general, private insurance tends to be voluntary, whilepublic insurance tends to be mandatory, but this is not always the case. For example, inUruguay and Switzerland purchase of private cover is mandatory similar to publicinsurance systems,4 whereas in Mexico, the recently approved public insurance scheme(Seguro Popular) is voluntary. (10) Another example of this variety is found in theUnited States where insurance coverage is voluntary, yet several states mandateemployers over a certain size to provide health coverage for their employees (7).In the dimension of contributions, private insurance premiums tend to be risk rated orcommunity rated, while public insurance contributions tend to be income related, butagain exceptions exist. In management of insurance schemes, the variations are morepronounced. In Australia and Ireland, for example, the largest “private” insurancecompanies are publicly owned and in many social insurance systems, private entitiesmanage publicly financed sickness funds.In addition to the three dimensions above, private insurance can be classified by thedifferent roles it plays in the health financing system.5 When it provides PrincipalCoverage, private insurance is the primary form of prepayment for some portion of thepopulation. For example, in the United States, private health insurance provides themain coverage for the non-poor who are under 65 years of age; while in theNetherlands, households above a certain income threshold are not allowed toparticipate in the public sickness funds, and in most cases, purchase private coverage(5). Principal insurance usually pays for a broad package of health services; oftenmirroring those financed in a public system.In Supplementary Coverage, private insurance complements coverage provided by apublicly funded system and covers a limited set of interventions that address theparticular gaps in a country’s public coverage. For example, insurance policies maycover residual health care costs (such as co-payments in France); services not includedin the basic publicly funded package (such as outpatient drugs or dental care in4Some authors consider Switzerland to have a social insurance scheme while others, such a s the OECDAdhoc Group on Private Insurance characterises its scheme as private insurance.5 The OECD Adhoc Group on Private Insurance identifies four categories of private health insurance: Primary, Duplicate, Complementary, andSupplementary. For our purposes, we have chosen to emphasize the difference between systems in which private health insurance provides "principalcoverage" (corresponding to the OECD's category of "primary health insurance") and those in which it provides "supplementary coverage"(corresponding to the OECD taskforce's other three categories). (8)5

Slovenia); or allow easier access to services and payment for private providers (such asin Australia and the U.K. where private policies enable faster access to specialists andelective hospital care).International SituationVariations by Income LevelBased on available data, thirty-nine countries in the world have private healthinsurance exceeding 5% of total health expenditures. Although private insurancemarkets are most well developed in wealthier countries, almost half (46%) of thesecountries are in the low and lower-middle income categories. (Table #1).Private insurance tends to play a different role depending on a country's wealth andinstitutional development. In many lower- and middle-income countries, privateinsurance may be the only form of risk pooling available and it usually providesprincipal coverage to those in the formal sector, with private policies frequentlysubsidised by employers. Historically, this is not unlike the situation in WesternEurope in the nineteenth century when the only significant forms of insurance wereprovided by mutual associations, employers, guilds or unions - on a voluntary basis.For example, 10% of Sweden's workforce was covered by voluntary private insuranceschemes called "Friendly Societies" in 1885.(11) In Germany, Bismarck establishedthe first national social insurance system by knitting together voluntary pre-existingoccupationally and industrially based sickness funds. (12)By contrast, in most OECD countries today, with the exception of the U.S., privateinsurance provides supplementary coverage to predominantly publicly funded systems.In France, for example, 85% of the population purchases private policies to pay for copayments; while in the Netherlands over 90% of the population purchases eitherprincipal or supplementary insurance plans (figure 3). In the OECD, when privateinsurance provides principal coverage, it generally faces significant restrictions. TheEuropean Union's directive on health insurance states that health insurance should onlybe subject to normal financial regulations except where a “general good” could bedemonstrated. (14). When private health insurance is the only form of risk pooling forthe population, the public interest can be clearly demonstrated, and the insuranceregulations of many countries reflect this. (7)Among wealthy countries, Australia and Ireland are unique in explicitly encouragingprivate health insurance as a strategy to complement public financing. Historically,both countries used private insurance to provide principal coverage for significantsegments of their population and it is now used to relieve pressures on the publicsystem. As a result of targeted interventions, about 45% of the population in each ofthese countries purchase private insurance. Despite the fact that private coverage isnow supplementary, both countries have strong regulatory structures to manage themarket and require private insurers to community rate premiums and meet guaranteedissue and renewal requirements. 6 (15)Variations by Region6Guaranteed issue and renewal requirements ensure that everyone has an opportunity to be offeredcoverage regardless of health status, and that those who become sick are not terminated.6

Latin America has the most countries with private insurance coverage. Over the pasttwo decades, Latin American countries have undertaken many reforms of their healthcare systems, and private insurance has sometimes been an explicit strategy to attractprivate funds into the health sector. Several countries have encouraged investmentfrom foreign insurers and managed care companies, by opening their health insurancemarkets, however, most countries have failed to enact adequate regulatory controls topreserve equity and ensure consumer protection. (16) Recently there have been effortsto remedy this by placing requirements on insurers for solvency, equitable ratingmethods, and standard benefit packages. Despite this, enforcement of regulationsremains weak and presents a challenge in many parts of Latin America.(16)Private health insurance markets also exist in Africa with South Africa, Namibia andZimbabwe funding a significant percentage of their health care costs through privateinsurance. Botswana, Cote d’Ivoire, Kenya, Madagascar and Mali, have large marketsas well. Community health insurance schemes are also fairly extensive in somecountries, such as the mutuelles in Senegal. (17,18) Other forms of voluntary coveragehave emerged as the result of market forces and laissez faire government policiestowards the private sector. As a result, regulation of insurers tends to be weak andprivate insurance may lead to greater inequity and cost-escalation if it expandssignificantly.In Northern Africa and the Middle East, Bahrain, Lebanon, Morocco, Saudi Arabia,and Tunisia have significant private health insurance markets. Other countries areexploring opening their markets to domestic and foreign insurers to address the needsof their large immigrant workforces, and to deal with increasing demands for healthservices fuelled by rising income levels.(19)Asia presents a particular challenge and an opportunity for private coverage. It is theregion in which out-of-pocket expenditures account for the highest share of total healthspending and where private insurance could play a role in moving towards greaterprepayment and risk pooling. However, private health insurance markets havedeveloped in some countries without an adequate regulatory framework and thesecountries run the risk of exacerbating inequalities in access to health care. Severalsuccessful and well-documented community health schemes also exist in this region.(20). Although NHA data are not available on expenditures of private insurance inIndia, it is estimated that 3·3% of the population is covered, making it the largestmarket in the region (33 million).(21) China has explored private insurance in urbanareas and has also opened its market to foreign companies. A few Pacific Islandcountries (e.g. Fiji, Samoa and Papua New Guinea) have had foreign insurers entertheir markets to provide coverage for services in the islands and enable access to carein Australia and New Zealand.(22). Both the Philippines and Indonesia have madeforays into private health insurance with varying levels of success. In the early 1990s,Indonesia introduced private health insurance schemes based on Health MaintenanceOrganization (HMO) principles (23). The Philippines has created a quasi-publicagency called the Philippines Insurance Corporation, which sells individual privatehealth insurance policies in addition to managing the country’s growing socialinsurance program. (24)7

Several countries in Eastern Europe are considering policies to encourage privateinsurers to sell supplementary health insurance coverage. (25). Slovenia has one of themost well developed private insurance systems, funding 14·6 % of total health careexpenditures in 2001; while Albania’s market funded 12% of its health expenditures inthat year. In Central Asia, Turkmenistan has a private insurance market which accountsfor 7% of its total expenditures for health (NHA 2001).Countries with the Highest Private Insurance ExpendituresIn 2000, seven countries stood out as funding over 20% of total health expendituresthrough private coverage (figure 4). Interestingly, these ranged from Zimbabwe, a lowincome country that spent 171 annually per capita on health care, to the United States,which spent the highest amount on health care in the world ( 4499 per capita) (3).Each of these countries use private insurance to provide principal coverage for somesegment of its population. Three of these are adjoining countries in Sub-Saharan Africa:Namibia, South Africa and Zimbabwe, while three are in South America: Uruguay,Chile, Brazil. while three are in South America: Uruguay, Chile, and Brazil. All ofthese countries experienced significant European immigration.(26) The countries of theAmericas won their independence much earlier, and consequently developed healthinsurance institutions over a longer period of time and in parallel to similardevelopments in Western Europe. By contrast, health insurance schemes in theAfrican countries were established under colonial governments, and have only had afew decades of independent development.In the three African countries, private insurance covers a relatively small share of

private and public insurance. (8) Ultimately, all money comes from household income, but in public insurance programs this money is channelled through the State, via a general or social insurance tax collector, whereas in private insurance the money is paid directly to the risk pooling entity (figure 1).

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