Private health insurance : implications for developing countries

As policy-makers consider how to move towards financing mechanisms that will protect their citizens from the financially catastrophic effects of illness, they have three broad options to consider: taxation, social security, and private health insurance (which consists of non-profit and for-profit plans as well as community health insurance schemes).

Unlike taxation and social security, which are commonly viewed as promoting equity, private insurance often conjures up visions of unequal access, large numbers of uninsured people, and elite health care for the rich.

Experience indicates that unregulated or poorly designed private health insurance systems can indeed exacerbate inequalities, provide coverage only for the young and healthy, and lead to cost escalation. Policy and Practice However, when appropriately managed, there are several ways in which private health insurance can play a positive role in improving access and equity in developing countries.

First, out-of-pocket spending on health services is the most common form of health financing in developing countries and represents a significant financial burden for households.

To the extent that private insurance gives households an opportunity to avoid large out-of-pocket expenditures, it can provide access to financial protection that is otherwise lacking.

Second, many developing countries have public expenditures for health of less than US$ 10 per person per year; however, the Commission on Macroeconomics and Health advises that it costs US$ 34 per person annually to provide a package of essential health interventions.

Developing countries also have large informal sectors, which makes tax collection difficult. This limits the ability of developing countries to generate sufficient tax revenues or fund social insurance systems to provide broad financial protection for health care.

Private coverage, when appropriately regulated, may be one way to move towards prepayment and risk-pooling until publicly funded coverage can expand sufficiently. It also allows policy-makers to aim limited public resources at the most vulnerable groups, while those who can afford to contribute towards their medical costs are required to do so.

Third, history shows that the social insurance systems in many developed countries evolved from voluntary private insurance schemes based on those of professional guilds or communities.

These historical lessons in the gradual expansion of financial protection and the development of institutions may be useful in informing policy debates in developing countries as they consider moving towards public insurance systems.

Finally, private health insurance continues to be important even in countries where universal coverage has been achieved. Policy-makers who plan ahead for this supplementary role will be better prepared to ensure that private coverage complements public systems as they develop.

This paper provides an overview of the extent of private coverage around the world. It is not intended as an analysis of how voluntary insurance markets function, their historical development or how they are regulated.

Rather, it highlights how widespread private insurance has become, and it is intended to encourage policy-makers and researchers to pay attention to private coverage and the role it can, and does, play in health-care systems.

Methods

Although most countries have some type of private health insurance market (8), only limited data are available on private insurance expenditure, populations covered, premiums charged and impact on the health-care system.

This study uses data on private insurance available through National Health Accounts (Appendix 1, web version only, available at: http://www.who. int/bulletin).

These data have several limitations: they are not available for all countries and may underestimate the role of private insurance, particularly in developing countries where the private market tends to be unregulated; trend data for private coverage is not reliable because reporting in this area began relatively recently; also, since little systematic data have been collected on insurance markets in developing countries, evidence tends to be anecdotal.

Because of these limitations, the topic needs greater attention and would also benefit from the collection of more reliable data.

What is private health insurance?

In this paper we adopt the taxonomy of the Organisation for Economic Co-operation and Development (OECD) that distinguishes public from private insurance on the basis of the source of funds.

Ultimately, all money comes from household or employer income, but in public insurance programmes this money is channelled through the state via a general or social insurance tax, whereas in private insurance the money is paid directly to the risk-pooling entity (Fig. 1).

Private health insurance is often characterized as voluntary, for-profit commercial coverage in contrast to mandatory, publicly financed and publicly managed insurance.

However, a review of insurance arrangements around the world shows that a wide variety of forms exist under the umbrella of private insurance and that the boundaries between public insurance and private insurance are becoming increasingly blurred.

The term public insurance is used here to encompass the full range of schemes that are variously described as “social insurance” or “national insurance”. Fig. 2 suggests a spectrum of arrangements classified along three key dimensions:

whether insurance is mandatory or voluntary;
whether contributions are risk-rated (minimal risk transfer), community-rated (transfers between healthy and sick), or income-based (transfers between higher income and lower income individuals);
whether management of the scheme is commercial forprofit, private non-profit, or public/quasi-public.

This spectrum should not be construed as a causal or developmental model but one that highlights the variety that exists. Although private and public insurance are often discussed in terms of extremes, the most common arrangements are actually found in the centre.

In the first dimension, as the spectrum in Fig. 2 shows, private insurance generally tends to be voluntary while public insurance tends to be mandatory, but this is not always the case. In Switzerland and Uruguay the purchase of private cover is mandatory (similar to public insurance systems), whereas in Mexico the new public insurance scheme (known as Seguro Popular) is voluntary.

In the dimension of contributions, private insurance premiums tend to be risk-rated or community-rated, while public insurance contributions tend to be income-based, but again there are exceptions, such as Chile where individuals can purchase private coverage with mandated income-based contributions.

Variations are even more pronounced in the management of insurance schemes. In Australia, India and Ireland for example, the largest “private” insurance companies are publicly owned, and in many social insurance systems private entities manage publicly financed sickness funds.

In addition to the three dimensions outlined above, private insurance can be classified by the different roles it has in the health-financing system. The OECD Adhoc Group on Private Insurance identifies four categories of private health insurance: primary, duplicate, complementary and supplementary.

For our purposes, we have chosen to emphasize the difference between systems in which private health insurance provides “primary coverage” (corresponding to the OECD’s category of “primary health insurance”) and those in which it provides “secondary coverage” (corresponding to the other three categories).

When it provides primary coverage, private insurance is the primary form of risk pooling for some portion of the population. For example, in the United States private insurance provides primary coverage for the non-poor who are younger than 65 years old, while in the Netherlands, households not eligible for public sickness funds purchase private coverage.

Primary insurance usually covers a broad package of health services, often mirroring those financed in a public system.

In secondary coverage, private insurance complements the coverage provided by a publicly funded system, often covering a limited set of interventions that address particular gaps in a country’s public coverage.

Insurance policies may cover residual health care costs, such as co-payments; services not included in the basic publicly funded package, such as outpatient drugs or dental care; or allow easier access to services offered by public and private providers, such as in Australia and the United Kingdom, where private policies enable subscribers to gain faster access to specialists and elective hospital care.

Location: Indonesia