Community rating within plans in the Irish context could be described as quite a pure form of community rating. However, it is not, to continue with such terminology, 100% pure, as it does allow for exceptions to the community rating rules, such as for children aged under-18, dependent full-time students aged 18-23 and members of group schemes.
A pure form of community rating across the market for health insurance cannot operate in the absence of some form of risk adjustment mechanism, as shown by the model in this chapter. However, the ‘impurities’ in community rating in Ireland mean that perhaps an ‘impure’ form of risk equalisation might suffice in the Irish context.
An example of a less-than-pure form of risk equalisation is that operating in The Health Insurance Plan of California (The HIPC), as described by Shewry, Hunt, Ramey & Bertko (1996). Within The HIPC a risk assessment value (RAV) is calculated for each health plan, based on its enrolee mix compared with the overall enrolee mix of The HIPC. The RAV of The HIPC as a whole is always 1.0. Risk adjustment is implemented when at least one health plan has an RAV that is at least 5% above or below that of The HIPC (i.e. below 0.95 or above 1.05) and adjusts until the RAV of the outlier plan returns to within the 5% threshold of the RAV of The HIPC. This suggests that some degree of risk profile difference is acceptable in
The HIPC, and this might be something that the Irish government might wish to consider in designing a new risk equalisation scheme for the Irish market.
Whether or not pure community rating across the market is required, or even desirable, in Ireland is a decision for the legislature, although Oireachtas (parliamentary) debates suggest that there is broad political support for the idea of community rating across the market. This has been reinforced in parliamentary debates that have taken place since the Supreme Court ruling on the Risk Equalisation Scheme, 2003, which highlights the need to have a precise definition in legislation of the type of community rating that is desired in the market. In the immediate aftermath of the Supreme Court judgment setting aside the Risk Equalisation Scheme, 2003, the Minister for Health and Children called for a period of reflection, although in November 2008, the Minister announced a number of interim measures to stabilise the market while work is carried out on another risk equalisation scheme (see Section 2.4). However, perhaps some reflection in relation to the type of community rating that is desired in the Irish private health insurance market might be useful at this juncture, particularly as this might have implications for the design of any new risk equalisation scheme.
In the meantime however, following the Supreme Court judgment, it is clear that community rating is not operating across the market for private health insurance in Ireland. Instead, it is only mandated to operate within plans, thus leading to a
situation that could be described as ‘communities rating’ rather than community rating – each plan being a distinct community.
Therefore, while high-risk consumers are paying the same as low-risk consumers for the same plan, on average high-risk consumers may be paying more than low-risk consumers for similar levels of cover. The Supreme Court judgment also increases the possibility of risk segmentation, which would be detrimental to community rating in the Irish market. This problem was alluded to by the Minister for Health and Children when introducing the interim measures discussed above.
This in itself raises another issue. Given the number of plans available in the market, with differing levels of cover, is it feasible to operate community rating across the market for health insurance? In response to a consultation paper by The Health Insurance Authority on lifetime community rating (HIA, 2002b), it was suggested by BUPA Ireland (BUPA Ireland, 2002) that the market might benefit from having one standardised, community-rated plan, providing minimum benefits, to be offered by all insurers as the cheapest plan available.
BUPA Ireland’s suggestion that a standardised plan should be the lowest-priced plan in the market has some merit, as if it were not the cheapest plan in the market then insurers could design other plans that were more attractive to low-risk lives and set the premiums of such plans at a lower level than the premium of the standardised
plan, potentially cream-skimming healthy lives away from the standardised community rated plan.
Another option would be to have a series of standardised plans at various cover levels, regulated by an independent body – perhaps The Health Insurance Authority – at standardised prices. However, this could be considered over-regulation of the market, which might make the market unattractive to potential new entrants, particularly if non-standardised plans were prohibited, although this is unlikely.
Such a standardised plan might however form the basis for a future solution to the problem of trying to effectively operate community rating across the market in the presence of multiple insurers offering multiple plans. However, this highlights a possible tension between achieving true community rating in the market and fostering consumer choice.
Another possible solution might be to have an element of plan premiums reflecting a community rate across the market for a standardised level of benefits and an element reflecting the community rate of that plan for all benefits above those standardised benefits (as well as a premium loading to reflect administrative expenses and a profit loading, as per Harrington & Niehaus, 2003). In other words, the premium would be expressed as
Premium = CRmarket + CRplan + Premium Loading
The element of premium comprising the community rate for the market could perhaps be tied to the anticipated revised minimum benefit regulations. In this way this element of the premium would reflect a community rate for the benefits to which everyone with qualifying health insurance plans would be entitled. The element of premium reflecting the community rate of the plan would be based on the risk profile of that particular plan, which might have subtle differences from other plans providing broadly similar levels of cover based on the level of hospital accommodation. It should be noted at this point that the Private Health Insurance Advisory Group (2007) made a similar recommendation – that community rating should only be applied to the level of benefits deemed adequate for the majority of the insured population, and not to benefits in excess of this level.
This potential solution raises a number of questions, however. The first is by whom the element of premiums reflecting the community rate for the market would be set.
It is possible that an independent body could set this, although it might not have detailed knowledge of payments provided for the standardised benefits. A possible way around this problem might be to have a panel consisting of actuaries from each of the insurers in the market plus one or more independent representatives, although this might lead to difficulties surrounding commercial sensitivity regarding payment rates. A possible middle-ground solution might be for an independent body with actuarial expertise to be given details of payment rates for the standard benefits –
most likely on a statutory basis – and then calculate the market community rate for those benefits.
The second question arising from this type of solution relates to whether it would facilitate – or even give incentives for – some form of risk selection or market segmentation. This could possibly be the case, as part of the premium would reflect the community rate of the plan membership, which in turn would reflect the risk profile of the plan. However, although risk selection might still be possible under this type of solution, the degree to which this would be effective would be reduced, as part of the premium would reflect the community rate of the market for the standardised level of benefits. This would reduce the potential degree of variation in plan premiums based on the benefits above this level.
Nevertheless, despite the ‘impurities’ in the system of community rating in Ireland, the conclusions of the model remain valid, including that differences in risk profiles between insurers, or indeed between plans, will, in the absence of some risk adjustment mechanism, lead to high-risk consumers paying more, on average, than low-risk consumers. Two possible reasons for differing risk profiles between insurers are adverse selection and risk selection, and these are examined in more detail in the next chapter.
CHAPTER 4
EVIDENCE OF SELECTION IN THE IRISH PRIVATE HEALTH