5 Concepts of Health Insurance Oct 18 2018

Concepts of Health Insurance
HCM 742: Financing and Insurance Schemes

Spring 2018 – Fourth Semester, Second Quarter – Week Ends
Isaac El-Mankabadi; BSc, MPH
Overview
• Main Concepts of Insurance
• Types of Health Insurance
– Private
– Social
– Community Health Financing CHF
• Validity of SHI to achieve objectives of health
systems
• How to implement SHI?
HCM 742: Financing & Insurance Schemes
Suhag, 18/10/2018 2
Spring 2018 - 4th Semester, Q2 - Week Ends
Insurance
“Insurance is a way to make an individuals
financial losses more affordable by transferring
them to a large group of people through an
intermediary called an insurance company and a
legal contract called a policy”

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Insurance
Insurance is a process of risk transfer

from the insured to the insurer.

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Concepts of Insurance
1. Risk Pooling

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Risk Pooling
In insurance, the term "risk pooling" refers to the
spreading of financial risks evenly among a large
number of contributors to the program. Insurance is
the transference of risks from individuals or
corporations who cannot bear a possible unplanned
financial catastrophe to the capital markets, which can
bear them easily -- at least in theory. The capital
markets, meanwhile, are generally happy to take on
risk from individuals and corporations -- in exchange
for a premium they believe is sufficient to cover the
risk.
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2. Adverse Selection

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Adverse Selection
• Insurance firm's acceptance of applicants who
are uninsurable (or at a greater than normal
risk), but conceal or falsify information about
their actual condition or situation. Approval of
their application has an 'adverse' effect on
insurance companies, because normal
insurance premiums are computed on the
basis of policyholders being in average good
health and employed in non-hazardous
environment. Also called antiselection.
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3. Probability of events
FREQUENCY
Low High
Low
Low Frequency High Frequency

Low Severity Low Severity
SEVERITY
High
Low Frequency High Frequency

High Severity High Severity

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4. Insurable Events
FREQUENCY
Low High
Low
PREPAYMENT PREVENTION
SEVERITY
High
Risk Transfer Adverse Selection

INSURANCE AVOIDANCE

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Insurable vs. Uninsurable Risks
Not every negative economic event is insurable. For risk
pooling to be effective, the risk should be unforeseen and
infrequent. If a negative event can be predicted in a certain
case, it's not a risk, but certainty -- and certainties are not
insurable (with the possible exception of death, which is
insurable because its timing is uncertain). Furthermore, if a
risk is too frequent, it cannot meaningfully be transferred to
an insurance company, since the insurance company would
only pass on the cost of the negative occurrence to the pool
of insureds, along with their expenses and profits. If nearly
everyone in a risk pool is filing a claim, then they are likely
better off not attempting to pool their risks at all but setting
aside sufficient reserves to pay for them themselves.
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5. Pre-existing conditions
• In the context of healthcare, a pre-existing condition
is a medical condition that started before a person's
health insurance went in to effect.
• A pre-existing condition can be something as
common and as serious as heart disease, high blood
pressure, cancer, type 2 diabetes, and asthma –
chronic health problems that affect a large portion
of the population. Even if you have a relatively minor
condition such as hay fever or a previous accidental
injury, a health plan can deny coverage.
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Pre-existing conditions
• Insurance companies and health plans are
concerned about their financial bottom line –
it’s in their best interest, therefore, to exclude
people with a pre-existing condition, impose a
waiting period before coverage starts, or
charge higher premiums and out-of-pocket
expenses.

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Some Insurance Terms
• Co-Insurance
Insured pays a percentage of the cost of any
treatment.
• Deductible
Insured pays a fixed amount of the cost. If costs are
more than this amount the insurer pays the rest.
• Pay-out limit
Insurance company pays out no more than an
established amount.

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Some Insurance Terms (cont.)
• No-claims bonus
No (or small number of) claims in a year results in a
reduction on the costs of next years’ policy.
These methods may be combined to restrain

demand.

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Health Insurance
• Mechanism for collecting more resources for
funding health systems.
• Shares the risk among beneficiaries.
• Resources are not related to certain
beneficiary. It allow:
– Cross subsidy between rich and poor, Healthy and
sick
– Protects against “Catastrophic Health
Expenditure”

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Health Insurance functions
• Collection
Collection of insurance premiums from beneficiaries
(employees) and employers
• Pooling
Risk sharing among insured populations and various
insurance schemes
• Purchasing
Purchasing of health care services to fulfill health
needs of insured population

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Health Insurance
RISK POOLING
SOCIAL SOLIDARITY

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Health Insurance
• Premiums
For sustaining the system
• Co-payments/Direct payments
To avoid moral hazards from beneficiary side and to
rationalize service utilization

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Health Insurance (Cont.)
• Others !!!!
Ear marked taxes – Examine its validity as a concept
and for implementation.
Example from Egypt.

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Premiums
• Reasonable:
– Affordable
– Enough to sustain the system
• Income related or progressive “who earns
more pays more”. Fixed percentage
considered regressive.
• Paid regularly regardless health status

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Premiums
• Paid by employee and employer or any of
them according to the type of insurance
• Determined through actuarial studies
– Social Health Insurance SHI
Cost of expected health services (Income
based) + Overhead costs + reserves
– Private Health Insurance
Cost of expected health services (Risk based)
+ Overhead costs + profit margin
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HCM 742: Financing & Insurance Schemes Spring
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2018 - 4th Semester, Q2 - Week Ends
Actuarial studies
• Actuarial science is the discipline that applies
mathematical and statistical methods to
assess risk in insurance, finance and other
industries and professions. Actuaries are
professionals who are qualified in this field
through education and experience
Wikipedia

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Actuarial studies
• Studies that aim at pledging financial
sustainability of insurance industry including
health insurance.
• It accomplishes financial sustainability
through achieving balance between Revenues
and Expenditures of insurance schemes.
• It is essential for any viable insurance system.
• Ignoring actuarial studies in many SHI systems
produce crippled health insurance schemes.
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Actuarial studies – Expenditure side
• Determine all possible risk factors as age, gender,
exposure to certain risk factors, …etc.
• Measure the magnitude (cost) of each risk factor
• Determine probability of occurrence of each
factor in regular circumstances
• In health insurance it requires
– Cost per intervention
– Utilization rates of all interventions by gender and age
group
– Epidemiological data (disease pattern in the country)
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Actuarial studies – Revenue side
In case of SHI:
• Income data – (tax system)
• Demographic structure
• Workforce data
• Environmental data
In case of Private health insurance:
• Cost of treatment at certain level(s) of quality

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Co-Payments
• Reasonable
– HIGH Ban service utilization
– LOW Useless (no rationalization)
• Exemption policies for underprivileged

persons

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Role of Co-payments in Financing
Expected Av. Percentages by Source of Revenue After Full
Implementation of MD 147 in ALL Facilities (FHUs & FHCs)
in Three Governorates
Tickets
Exp. HIO
6%
24%
Drugs Dental
4% 1%
Radiology
1%
Lab
2%
Exp. Roster Other
Fees61% 1%

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Co-payments and Catastrophic Health
Spending
• Co-payments may lead to Catastrophic Health

Spending or it may become an obstacle towards
offering health services (accessibility) to
underprivileged persons
• It SHOULD be associated with:
– Effective exemption policies
– Exemption for certain interventions
– Have a ceiling

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Moral Hazards
Two major types associated with any insurance
schemes:
• Beneficiary/Demand side
Over utilization of services which is controlled by co-
payments
• Provider/Supply side
Provider Induced Demand PID which is controlled by
provider payment mechanisms, technical audit and
others

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Types of Health Insurance Organizations
“Insurance is a highly profitable industry while

health insurance is a trailing industry”
• Two main types of Health Insurance
Organizations
– Social Organizations (Governmental / Civil Society)
– Profitable Organizations (Private)

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Social Health Insurance
• Premiums are based on ability to pay or
“income compatible”
• Obligatory
• Mainly directed to Formal Sector
• Easy to collect premiums
• Accepts pre-existing conditions without
restrictions
• Covers large risk pool
• Co-payments are used for rationalization and
not for financing
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Social Health Insurance (Cont.)
• Sometime there is a need for governmental
intervention to support its financial situation
• Usually it is Personal schemes
• Quality of care is questionable
• Sometimes there is no freedom of choice of
providers
• Implemented in ~ 30 countries all over the
world

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Common Drawbacks of SHI
• Financial Issues
– Insufficient Funding
– Moral Hazards
– Quality of Care???
• Coverage Issues
– Personal schemes till now in Egypt

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Options for Expanding Coverage in
Egypt
• Geographic expansion
Expansion to certain governorates
• Professional expansion
Expansion to certain professions
• Familial Schemes (Nucleus expansion)

Expansion through inclusion of other family members
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Social Health Insurance Law
Any SHI law has to include three main elements:
• Target population/Beneficiaries
– Who is covered by the law? Clear definition of
target groups as employee, school children,
infants, widows, pensioners,…etc.
– How to identify target groups?
• Premiums and Co-payments
– Premium paid by the employee and employer
– Other payments
– Level of co-payments for each service
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Social Health Insurance Law (cont.)
• Entitlement or Package(s) of Services
– Which services are covered by the insurance
scheme? Preventive, curative, level of luxury,
…etc.
– Who is eligible for what services?

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Is SHI valid option for a country?
• SHI is a financing tool;
• How much resources will be raised;
• Who will pay?
– Enrollees/beneficiaries
– Employers
– Community (ear marked taxes)
– Others (MoF, donors, etc…)

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Is SHI valid option for a country? (Cont.)
• How to identify target population?
– Female headed households
– Street children/homeless
• How premium will be collected from target
groups?
• What are other options for financing target
groups?
• Is SHI the best option and why? – Option
appraisal.
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Private Health Insurance
• Premiums based on actuarial studies and risk
probability regardless the ability to pay.
• Not Obligatory
• Covers wealthy and healthy groups “Cream
Skimming” that limits cross subsidy between
rich and poor
• Offered through For-Profit Organizations

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Private Health Insurance (Cont.)
• Don’t cover pre-existing conditions or covers it
with certain restrictions
• Premiums are much higher than the fair level
• High quality of services
• Small risk pool of wealthy people
• Allows freedom of choice among providers

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Social Vs. Private Health Insurance
SHI PHI
Organization Non-for-Profit For profit
Income based Risk based
Premiums
Fair High
Enrolment Obligatory Voluntary
Pool Large Small – Cream Skimming
Pre-existing conditions Accepted Excluded / Waived
Package of Services Comprehensive Limited
Adverse Selection Yes No
Financial position Fragile Sound

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Community Health Insurance or
Community Based Health Financing CBHF
• Risk pooling among certain group of
population (village, accountants, lawyers,
physicians…etc.)
• Response to failure of the national health
system in fulfilling community needs
especially in rural areas and informal sector
• Based on community participation
• Needs community awareness
• Voluntary (not obligatory)
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• Short or medium term solution for a long term
problem
• Easy to determine beneficiaries and to collect
premiums
• Good method for covering the informal sector
• Low overhead cost
• Modest coverage (Package)

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• Adverse selection is the main challenge to the
system
• High spending on few beneficiaries may lead
to exhausting all its resources.
• Should be connected with real health
insurance system to be able to cover
catastrophic events.

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Warnings & Counteractions
Warnings
• Community Health Insurance/CBHF
• High Out of Pocket Expenditure
Counteractions
• Increase Health Expenditure (Gov.)
• Social Health Insurance

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Cost of Health Care and Ability to Pay
Capacity to contribute
for the poor
Source: Baeza, C., Crocco, P., N ez, M. and Shaffer, M. 2002 “WB PER”
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Who are the non-insured?
In Egypt
• Non employed
• Informal sector
– Farmers
– Fishermen, etc.
• Women (house wives)
• Infants & Children till school age – currently
insured
• Children not enrolled in school
• University students
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How to Implement SHI? - Insurance
Functions
• Collection
• Pooling
• Purchasing

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MoF
Collection
MoSAL
Premiums Ear marked Taxes Subsidy for the Poor

Financing
Pooling
Premiums
National Health Insurance Fund NHIF Health Taxes
(Bismarkian) (Beveridgian)
Pooling & Allocation of Resources
(Money Follow the Patient)
Purchasing
Purch1 Purch 2
Contracting – Provider Payment Mechanisms

Provision
PO1 PO2 PO3 PO4 POx

Co-payment
Services
BENEFICIARIES
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Ends
What are Possible Role(s) of
Private Sector?
Discussions / Where Private Sector can Fit:
• Collection
• Pooling
• Purchasing as Third Party Administration TPA
• Service Provision
• Others (determine)

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Insurance Regulation
• Health Insurance is more than industry

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Two Tier System/Cream Skimming
$
Rich
5th
Socio economic quintile
4th
3rd
Social Health Insurance

2nd
1st
Poor
3ry Supplementary
PHC 2ry
Level of Services /
Packages

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Ends
Well Functioning System
$
Rich
5th

Socio economic quintile
4th
3rd Social Health Insurance
2nd
1st
Poor
PHC 2ry 3ry Supplementary
Level of Services

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THANK YOU

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5 Concepts of Health Insurance Oct 18 2018

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Concepts of Health Insurance

HCM 742: Financing and Insurance Schemes

HCM 742: Financing & Insurance Schemes

Insurance is a process of risk transfer

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

Low Frequency High Frequency

Low Frequency High Frequency

HCM 742: Financing & Insurance Schemes

Risk Transfer Adverse Selection

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

These methods may be combined to restrain

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

Example from Egypt.

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

• Exemption policies for underprivileged

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

• Co-payments may lead to Catastrophic Health

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

“Insurance is a highly profitable industry while

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

• Familial Schemes (Nucleus expansion)

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

Enrolment Obligatory Voluntary

Pool Large Small – Cream Skimming

Pre-existing conditions Accepted Excluded / Waived

Package of Services Comprehensive Limited

Adverse Selection Yes No

Financial position Fragile Sound

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

Premiums Ear marked Taxes Subsidy for the Poor

Contracting – Provider Payment Mechanisms

PO1 PO2 PO3 PO4 POx

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

Social Health Insurance

HCM 742: Financing & Insurance Schemes

Private Health Insurance

3rd Social Health Insurance

HCM 742: Financing & Insurance Schemes

HCM 742: Financing & Insurance Schemes

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