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Column: Our fragile health insurance market faces collapse if age groups aren’t balanced

Clearly insurers are not building a mixed age profile of customers under their own steam, writes Patricia Conboy, who says those that don’t should be penalised.

Patricia Conboy

THE COST OF private health insurance premiums in Ireland doubled between 2007 and 2012. Subscribers, young and old, are being priced out of the market.

The key to breaking this vicious cycle of rising costs and declining numbers of subscribers is the more equal division of older subscribers among the private insurance companies operating in the Irish market.

This entails radical legislative action from the Minister for Health. Legislation compelling each of the companies to insure a balanced proportion of older people and penalising those companies which fail to do so would be a game-changer.

Collapse

In the absence of radical action, Ireland’s fragile community-rated private health insurance market faces collapse. Community-rating  means that everyone is charged the same rate for the same product regardless of their age, sex or health status. Effectively the risks of illness and the associated costs are pooled rather than individualised.

Older people tend to have higher rates of illness and to make more claims on their insurance for medical treatment. According to the Health Insurance Authority, the average 80 year old costs 11 times more than the average 0 – 49 year old.

Young people are typically healthier, ‘cheaper’ and more profitable for health insurers.  The collapse of  community-rating would mean that many people who are old, or sick, or both would not be able to afford private health insurance when they need it most.

Balance

Health insurance was opened to competition 17 years ago. Though companies are required to operate an open enrolment policy, there is little evidence that new companies in the market have actively targeted older people who are less attractive commercially for business. Currently, the distribution of customers aged 70 – 79 years is as follows : Aviva, 9  per cent; GloHealth, 0 per cent; Laya, 12 per cent; and VHI, 78 per cent. Clearly insurers are not building a mixed age profile of customers under their own steam.

The impetus will have to come from legislation and, critically, from financial penalties for those who fail to incorporate a balanced proportion of older people in their market share. If community rating is to work in a market with multiple providers, it must be supported by an effective system of risk equalisation.

Essentially, this is a mechanism for managing and distributing health insurers’ differences in costs due to the differing ages and health status of their subscribers. Stamp duties are levied on health insurers to fund credits for older and less healthy customers.  There are shortcomings in the Irish system of risk equalisation.

Firstly, the measurement of health status – a proxy indicator based on bed nights in hospital – is not fit for purpose. Secondly risk equalization rates are insufficient to compensate insurers for the costs of older, more expensive subscribers.

Equalisation

Earlier this year, the VHI estimated that risk equalisation rates compensated them for 55 per cent of the costs of their older customer base.  The Department of Health’s view was that the rates were 70 – 75 per cent effective. Whichever estimate one takes, the size of the gap between costs and compensation is substantial.

These shortcomings, combined with the disproportionate allocation of older subscribers across the market make a lethal combination.

In November, the Minister for Health announced modest increases in risk equalisation rates. Companies with a younger market share objected loudly to the increases stating that these charges would drive further premium increases.

Why so? In fact what risk equalisation does is move money around the system from the young and the healthy to the old and the sick.  If insurers had a mixed profile of customers, the stamp duty paid out and credits collected would balance each other out.

In passing risk equalisation charges onto their subscribers, companies are failing to effectively operate a mechanism which is fundamental to the maintenance of a community-rated private health insurance market.

Community-rating  – a principle based on solidarity between young and old, between the healthy and the sick –  is a principle worth defending with all the tools available to policy-makers.  A legal requirement that each company operating in the Irish health insurance market take a balanced share of older customers, or suffer penalties if it does not do so, is both fair and transparent.  The Minister for Health should legislate.

Patricia Conboy is an Independent Specialist on Ageing and Older People’s Issues. She was Director of Older & Bolder (2008 – 2013), and previously Policy Analyst with National Council on Ageing and Older People 2003 – 2008. You can visit her website here.

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