Insurance

Risk Pooling to Decrease Health Costs

Insurance is an instrument of risk-pooling, rather than pre-payment for medical care. This basic concept is not always understood and the results are almost inevitably dissatisfaction, conflict, inefficiency, and failure of the insurance program, business, or NGO initiative.

Example: SARS Insurance. SARS currently infects much less than 1 person / million. Consider any country in the world: every family could pay a penny each year for SARS insurance. If a million families did this, and only one person fell ill, that person would have ten thousand dollars available to cover their medical costs.

From this example it is clear that it is not the pennies each family pays that are then used for their own medical care: SARS insurance is not pre-payment for the individual, but pooling of risk where each person is protected from an unlikely event.

For individuals, insurance is best understood as an efficient way of avoiding health care costs for illnesses which are unlikely to happen, but if they do happen would cause financial ruin. The chances of being incapacitated by SARS, for instance, is nearly zero. But if it were to happen, a household’s income could be spent overnight on intensive care for the afflicted family member. That combination of factors - low likelihood but unaffordable consequences if occurring - would make insurance a perfect solution.

As the box example shows: the larger the pool, the more effective the risk-pooling. If, in the box case, 10 people were part of a SARS insurance pool and one person fell ill, he would have only $0.10 to spend on treatment.

Government organized insurance

Social Health Insurance is a government mandated risk-pooling instrument in which regular payments are made by government (and often by businesses) for staff. Payments go to a central and independently managed insurance fund. Beneficiaries seek care, and all or part of the treatment cost is paid retrospectively by the Social Insurance fund. The private sector is usually limited to participation through mandatory employer contributions: most social insurance programs only pay for care provided by government facilities. This is true throughout Latin America and in most of Asia.

Large scale social insurance programs are being initiated in China, Vietnam, Nigeria, Tanzania, and many other countries. This represents an attempt to pool risk, and to provide independence to the financing branch of government. In Nigeria, government employees can access care through any pre-approved private provider. In China and Vietnam, benefits are targeted to rural families (China) or the poor (Vietnam) with documented success.

Private insurance

India made private health insurance legal just before 2000, but with the condition that a small percentage (about 5%) of the covered population for each company must be the rural poor. This mandate appears to have been quietly dropped, presumably because of the cost of reaching this population, the lack of understanding of risk pooling by potential members, the lack of money available for insurance purchase even at subsidized rates, and general absence of any qualified providers in rural areas who could serve the target beneficiaries.

To address those common problems, some innovative programs are investing both in subsidized large-scale insurance for low-income households (with a gradual decline in subsidy over many years) and in concurrent investment in care provision networks. The outcomes are unknown but will be of great interest to many.

The groups who do understand the benefits of insurance are corporations that provide health coverage for employees - either by their own volition or because of government mandate. This is the primary market for private insurance in developing countries, and the risk pooling, and consequently predictably expenses, are of benefit to both employers and employees. For especially high-cost services, such as AIDS treatment with antiretrovirals, some insurance companies have begun risk-pooling amongst themselves in order to share this risk across a larger population.

Microinsurance and ‘Mutuelles’

Micro insurance funds are essentially identical to the francophone African ‘mutuelles’. Both are small scale locally managed voluntary risk pooling funds, sometimes with a negotiated assurance of service provision from a local provider or clinic. Most microinsurance programs are local and independent, some are grouped into a larger pool (re-insured) as in the Philippines. Many microinsurances program exist, and they have been at various times the darling initiative of the World Bank, UNICEF, and the ILO. By and large they do not work well and are unlikely to work well for two basic reasons: small numbers are not good for pooling risk, and management costs make very small payments difficult to collect or manage well.

Microinsurance programs are a potentially useful way of helping members save money against future health expenditures - like the Vietnamese Hoi, or Africa micro-banking groups in which each member pays a small monthly fixed amount and everyone takes it in turn to receive the full amount - but this is not insurance, does not pool risk, and depends on mutual trust which is limited to neighbors and close acquaintances.

Strengths

  • risk protection
  • predictable costs
  • external payer (insurer) negotiating treatment cost
  • large payer can demand and evaluate quality
  • allows benchmarking and cost-comparisons
  • long history of cost management

Weaknesses

  • poor understanding often lead to failure
  • very poor can’t afford self-payment management costs are high
  • lack of qualified providers in many places
  • inefficient unless pooling done on large scale