.jpg){kind=logo}
- Introduction
- The Market
- Market Structure
- Challenges
- Industry Regulation
- The Future
- Conclusion
- Acknowledgements
- References
Introduction
Health insurance has been an established feature of New Zealand’s health scene for many years. Current media coverage, however, suggests that the industry is struggling to cope with changing market conditions. A recent newspaper story, 2 under the headline "Thousands quit health cover: Premiums rise steeply, especially for those aged over 65", quoted the former Minister of Health as stating that premiums "are clearly too high". At the same time the Ministry of Health reports 3 that the proportion of the population covered by health insurance fell from 41% in 1994/95 to 37% in 1996/97.
This paper seeks to provide a brief overview of health insurance in New Zealand and to highlight some of the regulatory and commercial issues facing the industry. The paper also aims to highlight some significant differences between the regulatory regimes applying to health insurance in Australia and New Zealand.
Health insurance has been an established feature of New Zealand’s health scene for many years. Current media coverage, however, suggests that the industry is struggling to cope with changing market conditions. A recent newspaper story, 2 under the headline "Thousands quit health cover: Premiums rise steeply, especially for those aged over 65", quoted the former Minister of Health as stating that premiums "are clearly too high". At the same time the Ministry of Health reports 3 that the proportion of the population covered by health insurance fell from 41% in 1994/95 to 37% in 1996/97.
This paper seeks to provide a brief overview of health insurance in New Zealand and to highlight some of the regulatory and commercial issues facing the industry. The paper also aims to highlight some significant differences between the regulatory regimes applying to health insurance in Australia and New Zealand.
The Market
Typically, health insurance in New Zealand is purchased to cover the cost of services delivered outside the taxpayer-funded health system. People choose to use such services for various reasons including shorter waiting times for treatment (which may be actual or perceived), greater choice of treatment provider, access to better quality treatment facilities and the ability to decide when treatment will be carried out.
Many privately provided health services are costly relative to average incomes, and they are generally consumed infrequently and unpredictably. Consequently they exhibit the characteristics that are typical of an insurable risk. No one, however, is required to purchase health insurance and people who choose to do so are able to access taxpayer-funded services on equal terms with those who do not.
Most health insurance policies in New Zealand offer relatively straightforward indemnity cover and simply pay all or some of the costs of services used (sometimes up to a maximum amount per year or per treatment episode). Policyholders, typically, can choose to be covered for primary and secondary care, or to restrict coverage solely to the latter.
According to Ministry of Health estimates, 37% of New Zealand’s population (or approximately 1.35 million people) were covered by private health insurance in 1996/97 (the most recent year for which data are available). As Figure 1 shows, coverage was highest among those aged 40–59 and lowest among children, young adults and those aged 60 and over.
Typically, health insurance in New Zealand is purchased to cover the cost of services delivered outside the taxpayer-funded health system. People choose to use such services for various reasons including shorter waiting times for treatment (which may be actual or perceived), greater choice of treatment provider, access to better quality treatment facilities and the ability to decide when treatment will be carried out.
Many privately provided health services are costly relative to average incomes, and they are generally consumed infrequently and unpredictably. Consequently they exhibit the characteristics that are typical of an insurable risk. No one, however, is required to purchase health insurance and people who choose to do so are able to access taxpayer-funded services on equal terms with those who do not.
Most health insurance policies in New Zealand offer relatively straightforward indemnity cover and simply pay all or some of the costs of services used (sometimes up to a maximum amount per year or per treatment episode). Policyholders, typically, can choose to be covered for primary and secondary care, or to restrict coverage solely to the latter.
According to Ministry of Health estimates, 37% of New Zealand’s population (or approximately 1.35 million people) were covered by private health insurance in 1996/97 (the most recent year for which data are available). As Figure 1 shows, coverage was highest among those aged 40–59 and lowest among children, young adults and those aged 60 and over.
by health insurance (1996/97)
Source: Adapted from Ministry of Health. April 1998.
Health Expenditure Trends in New Zealand 1980-97.
Wellington, Ministry of Health. Table 4.12
The proportion of the population covered has fallen in recent years. Indeed, there is evidence that this is a longer-term trend as coverage in 1993 is estimated to have been 45%. 4
Of course, the number of people covered by insurance policies is not in itself a reliable indicator of how much those policies pay out. The amount of health spending attributable to health insurance is also influenced by factors such as how often insured people make claims and the sums they are paid when they do so. Figure 2 shows that the proportion of health spending attributable to health insurance has increased more than six-fold since 1979. Set in the context of falling coverage, this suggests that policyholders are claiming more (or more often) against their policies.
Source: Adapted from Ministry of Health. April 1998.
Health Expenditure Trends in New Zealand 1980–97.
Wellington, Ministry of Health. Table 4.13
In 1996/97 total payments from health insurance were estimated to total some $503 million. 5 Almost one-half of that sum was spent on surgical and medical treatment in private hospitals with payments for GP services accounting for 15% of the total ($77million). Figure 3 shows the main services purchased using private insurance.
NB: Percentages do not add to 100% due to rounding
Source: Adapted from Ministry of Health. April 1998.
Health Expenditure Trends in New Zealand 1980–97.
Wellington, Ministry of Health. Appendix 6
Data on individual players in the health insurance market are not routinely collected and, for obvious reasons of commercial sensitivity, are not easy to obtain. Figure 4 summarises data on five key players from a recent press report. Other players include AA, AIA, Bank of New Zealand, Farmers’ Mutual Group, National Bank of New Zealand, PSIS and State Insurance. 6
Figure 4: Key players in the health insurance market
| Name | Estimated number of policyholders | Estimated revenues ($millions) |
| Southern Cross | 900,000 | 432* |
| Aetna | 88,000 | N/A |
| Unimed | N/A | 16 |
| National Mutual Health | 24,000 | N/A |
| National Insurance Life & Health | N/A | N/A |
Source: National Business Review, 25 September 1998, p76
*Note: This figure represents revenue from all sources. Health insurance revenues in 1997/98 were $338million.
Market Structure
Increasing competition and a shrinking market are forcing insurers to look again at their product offerings. For example:
Increasing competition and a shrinking market are forcing insurers to look again at their product offerings. For example:
- Southern Cross recently introduced "Star Advantage", which provides discounts on future premiums for policyholders who make few or no claims (similar to a form of "no claims bonus")
- Aetna (through its First Health subsidiary) is offering a new product called "Active Care", which offers an annual "wellness check" combined with premium discounts of up to 25% for "healthy members"
- National Mutual offers "wellness benefits" to policyholders.
These developments suggest that some of the key players are seeking to move away from being mere passive payers of claims and instead are looking to become more actively involved in offering both incentives and assistance for policyholders to remain healthy. In this respect, the New Zealand market is mirroring many of the changes that have taken place in the US health insurance industry over the last 10–15 years.
At the same time, some players are also seeking to extend their role in the broader health sector. Aetna, through First Health, has provided management services for GPs and Independent Practice Associations (IPAs) for several years while both Aetna and Southern Cross, respectively, were recently involved in developing proposals for comprehensive integrated care schemes in the Western Bay of Plenty and Marlborough.
A further recent development has seen insurers (notably Aetna and Southern Cross) seeking to develop stronger and more enduring commercial relationships with service providers. Thus, in December 1997 Southern Cross launched an "Affiliated Provider Programme" and, at the same time, Aetna began to negotiate "all inclusive" contracts with elective surgery providers. These arrangements (which are still relatively few in number) seek to establish agreed prices and quality standards for services. They may eventually enable insurers to offer lower premiums to policyholders who are prepared to accept some limitations on their choice of provider.
At the same time, some players are also seeking to extend their role in the broader health sector. Aetna, through First Health, has provided management services for GPs and Independent Practice Associations (IPAs) for several years while both Aetna and Southern Cross, respectively, were recently involved in developing proposals for comprehensive integrated care schemes in the Western Bay of Plenty and Marlborough.
A further recent development has seen insurers (notably Aetna and Southern Cross) seeking to develop stronger and more enduring commercial relationships with service providers. Thus, in December 1997 Southern Cross launched an "Affiliated Provider Programme" and, at the same time, Aetna began to negotiate "all inclusive" contracts with elective surgery providers. These arrangements (which are still relatively few in number) seek to establish agreed prices and quality standards for services. They may eventually enable insurers to offer lower premiums to policyholders who are prepared to accept some limitations on their choice of provider.
Challenges
The health insurance industry in New Zealand (and elsewhere) is facing a number of challenges, many of which may be seen as stemming from the twin phenomena of moral hazard and adverse selection that are common to any insurance market.
The health insurance industry in New Zealand (and elsewhere) is facing a number of challenges, many of which may be seen as stemming from the twin phenomena of moral hazard and adverse selection that are common to any insurance market.
Moral Hazard
Moral hazard (which has nothing to do with the morality or otherwise of individuals’ behaviour) describes the tendency of people who are insured to use more health care services than they would if they were obliged to pay its full cost. Empirical evidence such as the RAND study 7 suggests that utilisation of health services increases as the proportion of the actual cost faced by the consumer at the point of consumption falls. As a result, individuals who do not face the full cost of treatment may choose to access it more often (or at a lower level of need), may seek treatment that is more sophisticated or of a higher quality, and/or may make less effort to maintain a good state of health. Thus, there is a very real risk of over-utilisation among the insured.
Common sense might suggest that the incentives to stay healthy (eg, avoidance of pain, ability to earn, etc) are sufficient to outweigh any tendency for policyholders to be reckless with their health and knowingly to engage in unhealthy behaviours. The prevalence of "preventable" disease and the scale of health promotion activities in most societies suggest that this is not in fact the case.
Insurers typically respond to the risk of moral hazard by introducing restrictions on policyholders’ access to services or by providing them with some form of price signal. Both of these approaches can be observed in today’s health insurance market.
One way to restrict access to services is to introduce some form of "gatekeeping" to reduce the potentially open-ended risks caused by self-referral to services such as primary care. This can be seen in the case of insurers who offer policies that restrict cover to hospital and specialist services that can generally only be accessed following referral by a GP.
The growing appeal of such polices is shown by surveys carried out by the Consumers’ Institute. In July 1997 the Institute’s Consumer magazine reported the results of a survey 8 of more than 5,000 of its members who held health insurance policies. That survey revealed that approximately 80% had comprehensive cover. According to a more recent survey 9 that proportion had dropped to two-thirds over a period of some eighteen months. The latter survey also estimated that comprehensive cover for a hypothetical family of two adults and two children would cost $1,706 per year whereas the family’s annual premium for a hospital-only policy would be more than $1,000 lower.
Examples of efforts to enhance price signals to policyholders regarding the costs and benefits of private health insurance include:
- policies that impose annual caps on claims payable, deductibles (excesses) or co-payments (whereby the claimant is required to pay a defined proportion of any sum claimed) – these all seek to make policyholders more aware of the costs of treatment while still limiting their exposure to financial risk
- initiatives such as Southern Cross’s recently-introduced "Star Advantage" (and similar schemes offered by other insurers) reward policyholders who make few or no claims – this effectively means that future premiums will rise as a result of a claim being made and, thus, has a similar incentive effect to imposing a deductible.
Moral hazard can also affect service providers. People who are covered by health insurance might be more willing to use additional services that are of little or no marginal benefit, or to pay higher prices, than they would if they were required to meet the full cost of those services. Thus, a provider could stand to gain financially by exploiting the relative price insensitivity of insured patients; a risk that is increased when patients do not have the technical knowledge to make informed judgements about the treatment they are offered. (The analogy is the apocryphal car repairer who checks if a naïve customer will be claiming on his/her insurance before quoting a price for a job.) As well as having undesirable financial impacts, such behaviour may also expose the patient unnecessarily to additional clinical risks.
The strong ethical sense of most health professionals undoubtedly precludes them from providing services that are clearly unnecessary. The problem may, however, not be that insurance provides incentives for profligacy but rather that it weakens the incentives to be parsimonious when spending a third party’s money.
Current moves by insurers to negotiate "all-inclusive" prices with providers or to develop preferred provider arrangements can be seen as an attempt to mitigate this problem.
Adverse Selection
Adverse selection is the second major challenge in insurance markets. It reflects the fact that insurance offers the best value to those who are likely to claim more than the premium they pay. People whose expected level of claims is lower than the premium payable, in contrast, may consider that they would be better of to self-insure (ie, to meet any costs out of their own pocket).
Insurers typically respond to adverse selection by risk-rating premiums; that is, charging higher premiums to those who are considered more likely to claim. Thus, in the case of motor insurance, a combination of personal data (such as age and gender) and information that is considered to be a good predictor of future claims (eg, details of past claims, driving experience, convictions, etc) is typically used to determine an individual’s premium.
In the case of health insurance, information about an individual’s current health status and predictors of future utilisation of health services (eg, age, gender, past use of health services, blood pressure, family history of disease) could be used to attempt to assess the likely level of claims and to adjust premiums accordingly. This might be termed "individualised risk rating".
In practice, health insurers rarely risk-rate premiums on the basis of such detailed information. Instead, they typically rely on information about age and pre-existing conditions to predict the likely costs of future claims. This, of course, inevitably leads to higher premiums for older policyholders and people who are known to have pre-existing medical conditions at the time they take out insurance. Both of these groups can be expected, with a reasonably high level of confidence, to incur higher health costs.
Ultimately, this may mean that insurers will simply not be prepared to offer cover to high risk groups; or that members of such groups will face risk-rated premiums that are so high that they make insurance unaffordable. Affected people will then be obliged to withdraw from the market and fall back on taxpayer-funded services.
An alternative response to adverse selection is to charge "community-rated" premiums. These are the same for all policyholders and take no account of age or medical history. They too can create problems since the uniform premium may be unattractively high for those people who expect to use few services. Those people are, in effect, subsidising the costs of higher risk policyholders. Some low-risk people (typically those who are young and/or healthy) may decide that insurance represents poor value for money and choose not to purchase cover. The pool of insured people then becomes progressively smaller and contains a higher proportion of high-risk policyholders. Premiums thus need to rise and, as a result, still more low risk policyholders will be priced out of the market. The situation is likely to be unsustainable.
Risk rating is used to some extent by all New Zealand health insurers. Some (such as Southern Cross) rely on a few, broad age bands to determine premiums while others use smaller age bands (for example, five years). In addition, details of pre-existing conditions are generally taken into account to either adjust premiums or exclude particularly high-risk individuals from obtaining cover.
There is, in effect, a continuum between the extremes of community rating and individualised risk rating. The choice of approach is fundamentally a matter of weighing up the transaction costs involved in carrying-out sophisticated risk rating (and recognising that neither the policyholder nor the insurer has perfect information on future health care costs) against the financial and market implications of relying on progressively larger risk pools.
In this context it is interesting to note that Southern Cross, whose use of broad age bands places their premiums closer to the community-rated end of the continuum, has the largest share of the New Zealand health insurance market. In light of the issues surrounding community rating highlighted above, this might, at first, seem surprising. It may, however, simply indicate that:
- the costs of more sophisticated risk rating are indeed very high and Southern Cross is able to use the administrative savings attributable to community rating to subsidise premiums for higher risk policyholders
- low-risk policyholders are, in fact, willing to pay higher premiums and subsidise the premiums of higher risk policyholders
- prospective purchasers of health insurance lack either the knowledge or information to compare the costs and benefits of different insurers’ products 10
- Southern Cross, as a long-established insurer, enjoys significant advantages in terms of reputation in the marketplace and customer loyalty, and/or
- Southern Cross is, in effect, able to hold down premiums for all its policyholders by maintaining high levels of operational efficiency and/or passing on the benefits of its not-for-profit and tax-exempt status.
Industry Regulation
The health insurance industry in New Zealand currently operates under a relatively liberal regulatory regime. Health insurers must comply with normal commercial law and are subject to the Fair Trading Act 1986 and the Consumer Guarantees Act 1993. They must also work within the general regulatory framework of the wider insurance industry, including the Insurance Companies Deposits Act 1953, which requires most health insurers to lodge a deposit (currently $500,000), and must meet certain disclosure requirements.
Health insurers are not required to have an independent rating of their claims paying ability (from Standard & Poors, for example) although most major players do in fact obtain one.
Southern Cross operates as a not-for-profit (and tax-exempt) friendly society under the terms of the Friendly Societies and Credit Unions Act 1982, which requires that an actuarial valuation of assets and liabilities is carried out every five years and places restrictions on investments. The First Schedule of the Act defines the provision of health care as one of the purposes for which a friendly society can be established. The Act’s role in regulating Friendly Societies that offer health insurance is thus coincidental to its primary purpose. It is not a piece of legislation that is aimed specifically at regulating the health insurance industry.
Unimed is an industrial and provident society, established under the Industrial and Provident Societies Act 1908 which is legislation of a general nature and not focused specifically on regulation of health insurers.
A recent World Bank report 11 noted that "insurance regulation is more art than science". The same report suggests that government regulation of insurance typically seeks to:
The health insurance industry in New Zealand currently operates under a relatively liberal regulatory regime. Health insurers must comply with normal commercial law and are subject to the Fair Trading Act 1986 and the Consumer Guarantees Act 1993. They must also work within the general regulatory framework of the wider insurance industry, including the Insurance Companies Deposits Act 1953, which requires most health insurers to lodge a deposit (currently $500,000), and must meet certain disclosure requirements.
Health insurers are not required to have an independent rating of their claims paying ability (from Standard & Poors, for example) although most major players do in fact obtain one.
Southern Cross operates as a not-for-profit (and tax-exempt) friendly society under the terms of the Friendly Societies and Credit Unions Act 1982, which requires that an actuarial valuation of assets and liabilities is carried out every five years and places restrictions on investments. The First Schedule of the Act defines the provision of health care as one of the purposes for which a friendly society can be established. The Act’s role in regulating Friendly Societies that offer health insurance is thus coincidental to its primary purpose. It is not a piece of legislation that is aimed specifically at regulating the health insurance industry.
Unimed is an industrial and provident society, established under the Industrial and Provident Societies Act 1908 which is legislation of a general nature and not focused specifically on regulation of health insurers.
A recent World Bank report 11 noted that "insurance regulation is more art than science". The same report suggests that government regulation of insurance typically seeks to:
- stabilise the market by setting standards for market entry, ongoing operations, reporting requirements and conditions for insurer exit
- protect consumers through controls on both the marketing of insurance products and the relationships between insurers and service providers, and/or
- maximise participation in private insurance and promote "fairness" by guaranteeing the right of acceptance and renewal, enforcing community rating, and specifying premiums or benefits.
As far as New Zealand is concerned, the primary purpose of the current regulatory environment is to stabilise the market and, to a lesser degree, to protect consumers; and it does so through regulation aimed at insurance in general rather than health insurance in particular. There is, in fact, no regulation of premiums, benefits or the availability of cover in the health insurance industry. Given this relatively liberal environment it is, perhaps, not surprising that the Health Funds Association of New Zealand (the body representing the country’s main health insurers) recently established a code of practice for the industry. 12
This contrasts markedly with the situation in Australia where health insurers are subject to a wide range of highly specific industry regulation.
Australian health insurers are required to register as "health funds" under the terms of the National Health Act 1953. Registered organisations must comply with a wide range of conditions in areas such as:
This contrasts markedly with the situation in Australia where health insurers are subject to a wide range of highly specific industry regulation.
Australian health insurers are required to register as "health funds" under the terms of the National Health Act 1953. Registered organisations must comply with a wide range of conditions in areas such as:
- maintenance (unless exempted) of minimum reserves (net assets) equivalent to A$1million or the amount necessary to operate for two months at break-even rate, whichever is greater
- participation in industry-wide reinsurance arrangements to share the costs of paying benefits to elderly and chronically ill policyholders
- providing quarterly reports to the Private Health Insurance Administration Council detailing benefits paid and size of membership
- adopting community rating, which prohibits insurers from taking age or health status into account when setting premiums or delivering benefits.
A review of private health insurance was undertaken by Australia’s Industry Commission, which reported in February 1997. 13 The review concluded that the health insurance industry occupied "a significant but ambiguous position within Australia’s health care system" being, on the one hand, "a voluntary facility for private funding of hospital care and ancillaries" and, on the other, "constrained by regulation designed to pursue similar . . . objectives to those in the public system". It cited, as signs that the system was "in trouble":
- rising premiums
- falling membership
- growing demands on the public system.
In July 1997, the Commonwealth Government introduced a package of incentives to encourage the uptake of private health insurance. The system now provides rebates on insurance premiums for low-income people and imposes a 1% surcharge on income tax ("Medicare levy") for those people who are better off but who choose not to purchase insurance cover.
The contrast between the Australian and New Zealand regulatory environments is stark. It can perhaps be best explained by recognising that Australia only introduced universal taxpayer-funded health services in 1975 (much later than New Zealand) and that the continuing role of private insurance in health care appears to be more widely acknowledged. New Zealand, in contrast, maintains a policy under which the State offers comprehensive and affordable health services to all citizens according to their ability to benefit (albeit subject historically to implicit rationing by queuing and, more recently, to explicit rationing through the booking system).
Against this background of universality in taxpayer-funded health services in New Zealand, private health insurance remains a discretionary purchase. It is available for those who can afford it and who wish to have more timely access to health care, to utilise perceived "higher quality" facilities, to decide when services are delivered or to have a greater choice of service provider.
Government, by its words and deeds, continues to signal that private insurance in New Zealand is a complement, rather than an alternative, to the tax-funded system. As such, it is not seen as an area in which government should intervene (beyond enforcing prudent consumer protection requirements).
New Zealand’s current government has not indicated that it plans to change the regulatory framework for private health insurance. The fact that the Australian market, which has been more tightly regulated for at least 35 years, is facing many of the same challenges suggests that regulation will not in itself guarantee a better functioning market.
In this context, of course, tax relief for private health insurance can be viewed as a particular form of regulatory intervention. It is also one that has recently attracted attention and has been advocated by some commentators including the CEO of a major private hospital who stated "It is in the taxpayers’ best interest if the government could provide an incentive to get more people to take out private insurance". Money spent on private health insurance is seen as reducing the demand on taxpayer-funded services. 14
From a broader economic perspective, however, such a policy might be viewed as having several flaws including:
The contrast between the Australian and New Zealand regulatory environments is stark. It can perhaps be best explained by recognising that Australia only introduced universal taxpayer-funded health services in 1975 (much later than New Zealand) and that the continuing role of private insurance in health care appears to be more widely acknowledged. New Zealand, in contrast, maintains a policy under which the State offers comprehensive and affordable health services to all citizens according to their ability to benefit (albeit subject historically to implicit rationing by queuing and, more recently, to explicit rationing through the booking system).
Against this background of universality in taxpayer-funded health services in New Zealand, private health insurance remains a discretionary purchase. It is available for those who can afford it and who wish to have more timely access to health care, to utilise perceived "higher quality" facilities, to decide when services are delivered or to have a greater choice of service provider.
Government, by its words and deeds, continues to signal that private insurance in New Zealand is a complement, rather than an alternative, to the tax-funded system. As such, it is not seen as an area in which government should intervene (beyond enforcing prudent consumer protection requirements).
New Zealand’s current government has not indicated that it plans to change the regulatory framework for private health insurance. The fact that the Australian market, which has been more tightly regulated for at least 35 years, is facing many of the same challenges suggests that regulation will not in itself guarantee a better functioning market.
In this context, of course, tax relief for private health insurance can be viewed as a particular form of regulatory intervention. It is also one that has recently attracted attention and has been advocated by some commentators including the CEO of a major private hospital who stated "It is in the taxpayers’ best interest if the government could provide an incentive to get more people to take out private insurance". Money spent on private health insurance is seen as reducing the demand on taxpayer-funded services. 14
From a broader economic perspective, however, such a policy might be viewed as having several flaws including:
- it is a government subsidy to people who purchase private health insurance; those people are, generally, likely to be among the better-off
- it is regressive in tax policy terms – the value of the benefit is greater to those who are subject to a higher marginal tax rate
- it is administratively complex and, hence, generates additional transaction costs for both taxpayers and tax collection agencies
- it creates opportunities for fraud and tax evasion
- it distorts the price signals surrounding the costs and benefits of private health insurance – in simplistic terms, it makes spending on health insurance artificially more attractive to individuals than other expenditure (including other expenditure aimed at maintaining or improving health such as, say, gym membership).
Therefore, it is perhaps questionable whether Australia’s recent introduction of tax-based incentives to purchase health insurance will yield significant benefits; and whether it is a move that New Zealand should seek to copy.
The Future
The health care environment is not static. The impacts of various social and technological trends on the wider health sector have been widely discussed. 15 Their implications for the private health insurance market may be no less significant.
Already, the impacts of an ageing population are becoming apparent as the growing and increasingly vociferous "grey" lobby feels the impact of risk-rated premiums. The Human Rights Commission recently asked the High Court to rule on "whether increases in health insurance premiums at age 65 are consistent with the Human Rights Act". 16 While the Act allows insurers to base premiums on actuarially determined risk, it is unclear to what extent age alone is acceptable as a proxy for such risk, and whether the size and structure of the age bands used by insurers are appropriate. 17
Changes in the taxpayer-funded health system are also set to affect insurers. The implementation of the booking system for elective surgery in New Zealand will, over time, make the boundaries of public sector health care much more explicit. This could increase confidence in the public system’s ability to meet genuine need and thus lead to further falls in the numbers of people taking out private health insurance. Alternatively, by indicating more precisely the levels of service that the taxpayer-funded system can deliver, it may persuade more people to insure for those services that fall into any "gap" between what patients and their doctors want and what the Government is prepared to pay for.
While the booking system is making the boundary between publicly funded and privately funded elective surgery clearer, developments in the private provider market may well begin to blur the boundary in respect of acute services. In the past, inpatient acute treatment was almost exclusively provided in publicly owned hospitals and, as such, was effectively excluded from private health insurance cover. The emergence of new private-sector facilities that are staffed and equipped to deliver acute inpatient services may, however, oblige insurers to explicitly include or exclude acute services when they define the cover offered by their various policies. In this context, the definition of acute health services contained in the Accident Insurance Act 1998 18 may prove to be particularly relevant.
Looking further into the future, the industry will also have to consider the implications of genetic screening for health insurance; an issue that is already attracting media attention in New Zealand. 19
Genetic information can provide a basis for predicting a person’s health, and hence for determining insurance risk. As the US Office of Technology Assessment pointed out as early as 1992, "Health insurers do not need genetic tests to find out genetic information. Currently, it is less expensive to ask a question or request medical records, and applicants disclose genetic information as part of the battery of questions they respond to in personal and family history inquiries". 20
As the costs of genetic testing fall and its predictive power improves, it will offer a new means to address adverse selection issues. Insurers will be able more accurately to identify high-risk applicants and hence to target higher premiums or exclusions. The corollary will be lower premiums for policyholders who have no genetic predisposition to significant conditions.
The prospect of an uninsurable "underclass" whose members are unable to obtain health insurance because of their genetic inheritance may be disturbing. In reality, though, it simply represents a natural (and arguably more reliable) development of risk rating by reference to factors such as age and medical history. Insurance aims to protect against the consequences of uncertain risks. Other forms of support and assistance are arguably more appropriate in cases where specific aspects of an individual’s future health status are wholly predictable.
Genetic testing also raises a number of broader privacy and human rights issues, especially in respect of insurers disclosing genetic information to applicants or sharing such information with third parties.
Governments in Norway, Belgium and Austria already prohibit insurers from using information derived from genetic testing. In France the industry has adopted a voluntary moratorium, the Association of British Insurers is undertaking public consultation on a possible code of practice and several US states have legislated to limit insurers’ use of genetic information. 21
In keeping with New Zealand’s light-handed regulation of the health insurance industry, specific regulation of the use of genetic information by health insurers may not be considered necessary or appropriate here. Any concerns about human rights and privacy are probably best addressed by existing legislation.
The health care environment is not static. The impacts of various social and technological trends on the wider health sector have been widely discussed. 15 Their implications for the private health insurance market may be no less significant.
Already, the impacts of an ageing population are becoming apparent as the growing and increasingly vociferous "grey" lobby feels the impact of risk-rated premiums. The Human Rights Commission recently asked the High Court to rule on "whether increases in health insurance premiums at age 65 are consistent with the Human Rights Act". 16 While the Act allows insurers to base premiums on actuarially determined risk, it is unclear to what extent age alone is acceptable as a proxy for such risk, and whether the size and structure of the age bands used by insurers are appropriate. 17
Changes in the taxpayer-funded health system are also set to affect insurers. The implementation of the booking system for elective surgery in New Zealand will, over time, make the boundaries of public sector health care much more explicit. This could increase confidence in the public system’s ability to meet genuine need and thus lead to further falls in the numbers of people taking out private health insurance. Alternatively, by indicating more precisely the levels of service that the taxpayer-funded system can deliver, it may persuade more people to insure for those services that fall into any "gap" between what patients and their doctors want and what the Government is prepared to pay for.
While the booking system is making the boundary between publicly funded and privately funded elective surgery clearer, developments in the private provider market may well begin to blur the boundary in respect of acute services. In the past, inpatient acute treatment was almost exclusively provided in publicly owned hospitals and, as such, was effectively excluded from private health insurance cover. The emergence of new private-sector facilities that are staffed and equipped to deliver acute inpatient services may, however, oblige insurers to explicitly include or exclude acute services when they define the cover offered by their various policies. In this context, the definition of acute health services contained in the Accident Insurance Act 1998 18 may prove to be particularly relevant.
Looking further into the future, the industry will also have to consider the implications of genetic screening for health insurance; an issue that is already attracting media attention in New Zealand. 19
Genetic information can provide a basis for predicting a person’s health, and hence for determining insurance risk. As the US Office of Technology Assessment pointed out as early as 1992, "Health insurers do not need genetic tests to find out genetic information. Currently, it is less expensive to ask a question or request medical records, and applicants disclose genetic information as part of the battery of questions they respond to in personal and family history inquiries". 20
As the costs of genetic testing fall and its predictive power improves, it will offer a new means to address adverse selection issues. Insurers will be able more accurately to identify high-risk applicants and hence to target higher premiums or exclusions. The corollary will be lower premiums for policyholders who have no genetic predisposition to significant conditions.
The prospect of an uninsurable "underclass" whose members are unable to obtain health insurance because of their genetic inheritance may be disturbing. In reality, though, it simply represents a natural (and arguably more reliable) development of risk rating by reference to factors such as age and medical history. Insurance aims to protect against the consequences of uncertain risks. Other forms of support and assistance are arguably more appropriate in cases where specific aspects of an individual’s future health status are wholly predictable.
Genetic testing also raises a number of broader privacy and human rights issues, especially in respect of insurers disclosing genetic information to applicants or sharing such information with third parties.
Governments in Norway, Belgium and Austria already prohibit insurers from using information derived from genetic testing. In France the industry has adopted a voluntary moratorium, the Association of British Insurers is undertaking public consultation on a possible code of practice and several US states have legislated to limit insurers’ use of genetic information. 21
In keeping with New Zealand’s light-handed regulation of the health insurance industry, specific regulation of the use of genetic information by health insurers may not be considered necessary or appropriate here. Any concerns about human rights and privacy are probably best addressed by existing legislation.
Conclusion
Clearly the private health insurance market in New Zealand faces many challenges and will continue to evolve in response to those challenges.
Insurers are moving away from their traditional role of providing straightforward indemnity cover. They are seeking instead to provide a wider range of policy options, to offer incentives and assistance which limit their risk exposure (while at the same time enhancing their policyholders’ health status) and to develop new roles within the health sector.
Such developments are an inevitable response to a changing health care environment and to the business and financial pressures facing the industry. They are happening against the backdrop of a regulatory regime that, compared to that of our nearest neighbour, is liberal.
While New Zealand’s policy of using public funds to ensure access to affordable health care for those best able to benefit remains in place, the arguments for additional regulation of the private health insurance market will continue to be weak. If additional regulation were to be considered, however, it would be important to ensure that it neither constrained beneficial evolution nor "locked in" any weaknesses in the current market.
Clearly the private health insurance market in New Zealand faces many challenges and will continue to evolve in response to those challenges.
Insurers are moving away from their traditional role of providing straightforward indemnity cover. They are seeking instead to provide a wider range of policy options, to offer incentives and assistance which limit their risk exposure (while at the same time enhancing their policyholders’ health status) and to develop new roles within the health sector.
Such developments are an inevitable response to a changing health care environment and to the business and financial pressures facing the industry. They are happening against the backdrop of a regulatory regime that, compared to that of our nearest neighbour, is liberal.
While New Zealand’s policy of using public funds to ensure access to affordable health care for those best able to benefit remains in place, the arguments for additional regulation of the private health insurance market will continue to be weak. If additional regulation were to be considered, however, it would be important to ensure that it neither constrained beneficial evolution nor "locked in" any weaknesses in the current market.
Acknowledgements
The author is grateful to the following for their comments on an early draft of this paper:
The author is grateful to the following for their comments on an early draft of this paper:
- Roger Bowie, Southern Cross
- Andrea Pettet, Health Funds Association of New Zealand Inc
- John Brooker, Competition and Enterprise Branch, Ministry of Commerce; and
- Rienk Asscher, Policy Branch, Ministry of Health.
Any errors or omissions are the responsibility of the author.
References
- The author has written this paper in a personal capacity. It does not represent current or proposed policy of the Ministry of Health or the Minister of Health
- New Zealand Herald 1998 Sept 5; p5
- Ministry of Health (NZ). Health expenditure trends in New Zealand 1980–97. Wellington: Ministry of Health; April 1998. p23
- Muthumala D, Howard PS. Health expenditure trends in New Zealand 1980–1994. Wellington: Ministry of Health; 1995. p35
- Ministry of Health. Health expenditure trends in New Zealand 1980–97. Wellington: Ministry of Health; April 1998. App. 6.
- Consumer 1999 April; 380:27
- Newhouse J P. Free for all?: Lessons from the RAND Health Insurance Experiment. Cambridge MA: Harvard University Press; 1993
- Consumer 1997 July; 361:23
- Consumer 1999 April; 380:24–28
- This view may be borne out by the Australian Industry Commission’s report "Private health insurance" (Report No 57, 28 February 1997) which states that "Consumers and experts alike face a daunting task in deciding what level of cover to take up and in comparing the offerings of different funds"
- Chollet DJ, Lewis M. Private insurance: principles and practice. In Innovations in health care financing: proceedings of a World Bank conference, March 10–11, 1997. World Bank Discussion paper no 365. Washington, DC: World Bank
- Health insurers’ association takes on code of practice. NBR 1998 September 25;74
- Industry Commission. Private health insurance report no 57. 28 February 1997
- Dr J Bester, CEO, Mercy Hospital, Auckland. In Tax incentives recommended. Insurancealert 1999 March;7
- See, for example, Krieble T, Middleton L, editors. Health futures: 2020 visions. Wellington: Institute of Policy Studies; 1997
- Dominion 1999 April 9;1
- To date, debate appears to have focused on assertions that risk rating discriminates against older people. It may also be possible, however, to argue that community rating, which imposes higher premiums on younger and healthier people, is no less discriminatory
- Accident Insurance Act 1998, ss 14 (1) & (2)
- Gene "underclass" fear. New Zealand Herald 1999 March 6–7; 1
- US Congress, Office of Technology Assessment. Genetic tests and health insurance: results of a survey – background paper, OTA-BP-BA-98. Washington DC: US Government Printing Office; October 1992
- Broadbent HB. Genetic-based risk assessment by insurers. In Human rights law and practice June 1998;4:25–34.
