Private Voluntary Health Insurance In Development - ISBN: 082136619X

xiiContents9.510.110.2A.1A.2A.3A.4Countries with the Highest Private Health InsuranceExpenditures, 2000Correlation of Government Policy Changes and HealthInsurance Penetration in Australia, 1972–2000Technical Control CycleTypes of Private Health InsuranceSchematic for Health EconomicsKutzin’s Framework of Health Financing FunctionsFramework for Analysis of the Market for VoluntaryHealth Insurance in the European 7.78.18.2Framework for Analyzing Policy Options for VoluntaryHealth InsuranceMarket Indicators for Benefits of Voluntary Health InsuranceInsurance Coverage under Easy and Hard AccessFactors Affecting the Size of the Benefit PackageFactors Affecting Risk Selection EffortFactors Affecting the Net Price of Health Insurance (Loading)Factors Affecting Insurer-Driven Vertical IntegrationFactors Affecting Provider-Driven Vertical IntegrationForms of IntegrationFactors Affecting the Degree of Concentration of Health InsuranceSellers in Markets for Private Health InsuranceRegulations that Tend to Lower EfficiencyRegulations that Tend to Enhance EfficiencyHealth Insurance Regulation in Specific CountriesTransparency International Corruption Index 2003,Selected CountriesCountries with the Heaviest Reliance on Private InsuranceMain Data Sources and EvaluationRelative Importance of Private Health Insurance in LatinAmerica and the Caribbean, 2002Relative Importance of Private Health Insurance in theMiddle East and North Africa, 2002Relative Importance of Private Health Insurance in EasternEurope and Central Asia, 2002Relative Importance of Private Health Insurance inSub-Saharan Africa, 2002Relative Importance of Private Health Insurance in East Asiaand the Pacific, 2002Relative Importance of Private Health Insurance inSouth Asia, 2002Private Health Insurance in OECD Countries:Market Size and RolesGrowth in Public Expenditure on Health and PrivateHealth Insurance, 86189192195198200216219

A.2A.3A.4A.5A.6A.7A.8A.9Policy Goals, Objectives, and InstrumentsAustralian Health Insurance Industry Averages for MajorAccounting Items, Fiscal Year Ending June 2002Breakdown of Australian Industry Assets (Public Funds),June 2002Australian Asset Sector Allocations (Public Funds),June 2002Overview of Health Insurance in Four Sub-SaharanAfrican CountriesSelected Pricing and Risk Selection Restrictions for IndividualHealth Insurance among 51 U.S. Jurisdictions as of 2005Size of PHI Market and Percentage of CoverageRegulatory Challenges for Private Voluntary HealthInsuranceMinimum Initial Capital Requirement and Required PremiumVolume to Ensure Commercial InterestSolvency Requirements and Investment Regulations,Selected CountriesComposition of Health Financing by Region and CountryIncome LevelSummary of the Topical Coverage, Scope, and Nature of63 Journal Articles on Voluntary Health FinancingSummary of the Topical Coverage, Scope, and Nature of23 Papers on Voluntary Health FinancingSummary by Region and Type of Voluntary Health Financingor InsuranceSummary by Performance Indicator and Evidence Score(All Items)Summary by Performance Indicator and Evidence Score(Data-Analytic Subset)Internal and External Economic Validity of theData-Analytic SubsetValidity of Data-Analytic Subset by Type of Data andEmpirical AnalysisCharacteristics of the Studies of Moderate InternalEconomic 1344368368375376378

Forewordffective management of risk is essential to development. The recent bird fluillustrated the global reach of unexpected events with potentially devastating welfare and economic consequences. Currency fluctuations can destabilize even a robust economy. The impact of crop cycles on the livelihood of ruralpopulations is well-known. Floods, earthquakes, and hurricanes strike withoutwarning. And civil strife and wars can drag even a prosperous country into ruin.This volume is about managing risk. Not the risk of national or man-madedisasters but the risk of illness. The developing world is plagued by many ofthe historical scourges of poverty: infectious disease, disability, and prematuredeath. As countries pass through demographic and epidemiological transition,they face a new wave of health challenges from chronic diseases and accidents.In this respect, illness has both a predictable and an unpredictable dimension.Illness is predictable in that as people age, most will experience a period of illnessand disability before dying. The overall burden of illness and aggregate financialconsequences are well-known. But the impact on individuals, households, andlocal communities is much more varied.Contributors to this volume emphasize that the public sector has an important role to play in the health sector, but they demonstrate that the private sectoralso plays a role in a context in which private spending and delivery of healthservices often composes 80 percent of total health expenditure. Managing risksin the private sector begins at the household level. The mother who washes herhands before feeding her baby and the elderly person who uses a cane to steadyhimself or herself when walking are managing risk. Individual savings play arole. Local communities that band together and provide micro health insuranceare anticipating future needs.Private voluntary health insurance is merely an extension of such nongovernmental ways to deal with the risk of illness and its impoverishing effects inlow- and middle-income countries. Given a choice between spending 10 out ofpocket or 10 channeled through insurance, the editors and authors of this volume compellingly argue in favor of the latter. Providing appropriate incentivesfor populations to enter into risk-sharing arrangements should be a high publicpolicy priority in developing countries.EMichael U. KleinGuy M. EllenaRodney LesterVice President andChief EconomistInternational FinanceCorporationDirector of Healthand EducationInternational FinanceCorporationProgram DirectorFinancial Markets forSocial Safety NetThe World Bankxv

Prefaceoes private health insurance have a place in development? Does it benefitonly the rich, or can it contribute to the well-being of poor and middleclass households? Does it lead to insurance market failure and distortionary effects in the health sector, or can it improve access to health care, providefinancial protection against the cost of illness, and combat social exclusion?The world of technical experts and policy analysts is divided into two campsover private health insurance. One camp claims that it leads to overconsumption of care, escalating costs, diversion of scarce resources away from the poor,cream skimming, adverse selection, moral hazard, and an inequitable Americanstyle health care system. The other camp claims that it provides access to carewhen needed without the long waits, low quality, and abuse characteristic ofpublic services provided by ministries of health. This camp asserts that manyof the problems observed in private health insurance are also observed in socialhealth insurance and government-subsidized health services.This volume presents findings of a World Bank review of the existing andpotential role of private voluntary health insurance in low- and middle-incomecountries and is the third volume in a series of reviews of health care financing.One volume in the series, Health Financing for Poor People: Resource Mobilizationand Risk Sharing, presents findings of a World Bank review of the role of community financing schemes in rural areas and inner-city slums. It reports thatthese schemes contribute to financial protection against illness and increase lowincome rural and informal sector workers’ access to health care. However, theschemes mobilize few resources from poor communities, frequently exclude thepoorest of the poor without some form of subsidy, have a small risk pool, possess limited management capacity, and cannot offer the more comprehensivebenefits often available through more formal health financing mechanisms andprovider networks. Many of these observations hold true for private voluntaryhealth insurance.Another volume in the series, Social Reinsurance: A New Approach to SustainableCommunity Health Financing, details use of community rather than individualrisk-rated reinsurance as a way to address some of the weaknesses of communityfinancing schemes. The authors show how standard techniques of reinsurance canbe applied to micro insurance in health care. These techniques are especially relevant when the risk pool is too small to protect a scheme against expected expenditure variance. In this context, reinsurance provides a “virtual” expansion of therisk pool without undermining the social capital that underpins participation byrural and urban informal sector workers in small community-based schemes.Dxvii

xviiiPrefaceThe findings of these earlier volumes are relevant to the review of privatevoluntary health insurance presented in this volume. Community financingschemes and private health insurance often have important interfaces with government programs through subsidies and provider networks. Both rely on voluntary membership. Membership is small unless the effective risk pool is enlargedthrough reinsurance or establishment of a federation with other schemes. Bothdepend on trust: members must have confidence that contributions will lead tobenefits when needed. Both are vulnerable to insurance market failures such asadverse selection, cream skimming, moral hazard, and free-rider phenomena.But private health insurance and community financing schemes differ in someimportant ways. The latter emerged where governments were unable to reach therural poor and urban informal sector workers; they are often linked with ruralloans, savings, and micro insurance programs; and many benefited from donorinvolvement during start-up. They usually serve the poor, and their benefit packages are constrained by their limited resources unless they receive a governmentor donor subsidy. By contrast, private voluntary health insurance schemes wereoften set up by large enterprises in the hope that access to health care wouldcut illness-related absenteeism and improve labor productivity. These schemestherefore serve formal sector workers and provide benefits that are often generouscompared with those provided by community financing schemes and publiclyfinanced government programs. Whereas community financing schemes tend tobe nonprofit, many private voluntary health insurance schemes are for-profit.Many countries have attempted to make membership in community-based orprivate voluntary health insurance compulsory and to offer subsidized insurancethrough the public sector. Arguments in favor of this approach include coverage of a higher proportion of the population and broadening of the risk poolthrough collection of contributions at the source from formal sector workers.Two forthcoming World Bank books, Government-Run Mandatory Health Insuranceand Fiscal Space for Health Care, examine these and other arguments.Some countries have attempted to “leapfrog” both private and public insurance by introducing legislation that gives the population at large access to afree, government-subsidized national health service, but few low- and middleincome countries have secured universal access through this approach. First,at low-income levels, weak taxation capacity limits the fiscal space available tohealth and other segments of the public sector. Second, the public lacks trust ingovernment-run programs that require payment today for benefits that may ormay not be available tomorrow due to shifting priorities and volatile resourceflows. Finally, public subsidies often do not reach the poor when programs aredesigned to provide care for everyone. The result is underfunded and low-qualitypublicly financed health services that leave the poor and other households without adequate care and exposed to severe financial risk in the event of illness.How scarce money is spent in the public sector probably has a greater impacton the services available to the poor than the presence or absence of private andgovernment-run mandatory health insurance. Public sector spending is the topic

Prefacexixof four other World Bank books: Spending Wisely: Buying Health Services for the Poor;Public Ends, Private Means: Strategic Purchasing of Health Care; Innovations in Health Service Delivery: The Corporatization of Public Hospitals; and Private Participation in HealthServices. These books emphasize the important role that markets and nongovernmental providers play in improving value for money spent by the public sector.Explicit public policies are needed to secure an efficient and equitable systemof health care financing. But state involvement alone is insufficient. Contributors to this volume argue that private health insurance should receive increasedattention as an instrument, along with other financing mechanisms, for providing fiscally sustainable access to needed health services, financial protectionagainst the impoverishing cost of illness, and health insurance coverage forsocial groups often excluded from access to publicly provided health care.To achieve these goals, chapter 1, “The Evolution of Health Insurance inDeveloping Countries,” emphasizes the need to combine subsidies, insurance,savings, and user charges in a single system. With respect to insurance, it arguesin favor of voluntary health insurance (community- and private enterprise–based programs). The chapter summarizes the key health financing challenges inlow-income countries, policy options for reform, and the methodology for thevolume’s review of private voluntary health care.The remaining chapters are divided into three sections. Part 1 (chapters 2–6)reviews the economics of private voluntary health insurance, paying specialattention to constraints in low-income countries. These constraints include lowparticipation in the formal labor market and high participation in the informal labor market, low contribution compliance in the formal sector, little socialcohesion, high reliance on donor funding, a high consumer price index, highmedical inflation, high morbidity and mortality, and underuse of health servicesin the public sector and overuse of services in the private sector.Chapter 2, “Insights on Demand for Private Voluntary Health Insurance inLess Developed Countries,” reviews the economic theory of insurance demandto determine whether a case can be made for insurance coverage of high out-ofpocket payments in many developing countries. The chapter suggests that thesepayments provide a prima facie case that insurance is both desirable and “affordable” if it can be offered at relatively moderate administrative cost. It argues thatadverse selection, moral hazard, and risk selection are surmountable obstacles toat least partial coverage of out-of-pocket expenses, and it presents ways to overcome cultural impediments, such as unfamiliarity with insurance or distrust ofinsurance organizations, which could explain the lack of insurance markets indeveloping countries.Chapter 3, “Supply of Private Voluntary Health Insurance in Low-IncomeCountries,” examines dimensions of supply, which include loading, comprehensiveness of benefits, level of risk selection effort, degree of vertical integrationwith health service providers, and degree of seller concentration in the market.It argues that premium regulation and moral hazard (the tendency of consumers to be lax in prevention, opt for the more intensive treatment alternative

xxPrefacewhen ill, and push for application of the latest medical technology) influenceseveral of these dimensions. Moral hazard induces health insurers to includeonly a few benefits, because each benefit tends to increase in price, quantity,and hence expenditure. Premium regulation induces risk selection. If allowedto charge contributions according to true risk, health insurers will set premiumssuch that high-risk individuals and low-risk individuals yield the same contribution margin on expectation. In that event, risk selection is not worthwhile. Casestudies from low-income countries illustrate these theoretical predictions, whichhold true not only for private health insurance but also for community-basedand public health insurance. On the whole, the limited empirical evidence suggests that the theory developed in the chapter may be sufficiently descriptive toprovide some guidelines for policy.Chapter 4, “Market Outcomes, Regulation, and Policy Recommendations,”describes the outcomes that can be expected in unregulated voluntary marketsfor health insurance. It argues that government can be viewed as the supplierof regulation, whereas consumers and insurers are demanders of regulation. Inthe market for regulation, governments usually do not take into account theefficiency losses they impose, thereby creating a negative externality. Becausegovernments are unlikely to levy an internalizing (Pigou) tax on themselves,demand for regulation should be kept as small as possible. According to thechapter authors, the primary purpose of regulation should be to mitigate theconsequences of any insolvency, for example, by means of a guarantee fundto be built up by (private) health insurers. But because governments often seekto redistribute

United States: Private Health Insurance and the Financial Impact of Out-of-Pocket Health Expenditures M. Kate Bundorf and Mark V. Pauly 2. Feasibility Studies Brazil: Private Voluntary Health Insurance in Development Bernard F. Couttolenc and Alexandre C. Nicolella China: Private Health Insurance and Its Potential Teh-wei Hu and Xiao-hua Ying