# Views on risk equalisation for Health Insurers



## CCOVICH (1 Apr 2005)

Just read an opinion by Bill Murdoch in the Irish Times where he states that risk equalisation is fair.  Generally I find his opinions to be fairly balanced, but this one just seems like a rant against BUPA and the fact that they do not disclose figures for the Irish market unless they have to.  To me, risk equalisation seems unfair, but I maybe I need more information.  

The basic principle seems to be that VHI is less profitable than BUPA because the risk profile of its members is higher due to the fact that they are older (on average), and therefore the risk profiles should be equalised through a subsidy payment from BUPA to VHI.  (This is where I may be mistaken)-is this because the government/EU have taken the view that private health insurance is a 'public good' and should be made available to the largest number of he population who can reasonably afford it?  Or is it to keep the costs of healthcare for the governments of Europe down to a 'manageable' level?  

I am a VHI customer (largely by choice, even though my group scheme is VHI, so it is cheaper than BUPA for me), so this isn't necessarily a rant against the VHI, but I would be interested in hearing views/arguments for/against risk equalisation.


----------



## d53 (1 Apr 2005)

*Risk equalisation for Health Insurers*

The justification for risk equalisation is that by law, health insurers such as BUPA and VHI are not allowed to charged different premiums for different ages.  Because the claims for older people are higher, a company with a higher proportion of older members will be less profitable.

The purpose of risk equalisation is to make sure that companies don't exclude older members or purposely target younger people, for instance by specific targeted advertising or similar.  If for whatever reason a company ended up with a preponderance of younger members and there was no equalisation, they could charge lower premiums and so have an advantage over other companies.

BUPA obviously don't like paying money to VHI.  However, I think their objection is to the whole risk equalisation concept as much as to the specific payment.

BTW I have no connection with VHI or BUPA.

d


----------



## RainyDay (1 Apr 2005)

Funny how risk equalisation doesn't apply to car insurance, ain't it?


----------



## ClubMan (1 Apr 2005)

But neither does community rating.


----------



## CCOVICH (1 Apr 2005)

ClubMan said:
			
		

> But neither does community rating.


 
What is community rating?


----------



## ClubMan (1 Apr 2005)

See the [broken link removed]. [broken link removed] and [broken link removed] have set out their respective stalls on the issues of community rating and risk equalisation.


----------



## CCOVICH (1 Apr 2005)

So the PHI 'market' in Ireland is an economic oddity.  I reckon the BUPA argument against risk equalisation is stronger than the VHI argument for risk equalisation, but then the VHI has their major shareholder setting the rules,so they don't necessarily have to present a strong case.


----------



## ClubMan (1 Apr 2005)

Don't mean to be unnecessarily pedantic but _PHI_ usually refers to _Permanent Health Insurance_ as opposed to _Private Health Insurance_, two very different things, just in case of any confusion.


----------



## CCOVICH (2 Apr 2005)

Schoolboy error.......especially since in work in FS/Insurance!!!


----------



## Duke of Marmalade (5 Apr 2005)

There is no especial reason why community rating should apply to HI and not to MI nor whether competitive underwriting/pricing should apply to MI and not to HI.

The reason we have community rating for HI is historic. Whilst it was a State monopoly community rating was operated as a matter of public policy. Intrinsically this means young people pay more each year than they are at risk for and vice versa older people pay less. Presuming this all balances out then what this implies is that for an older person who was paying all their working lives into VHI they had implicitly built up a significant asset, an asset which would now be enjoyed by getting the insurance "cheap" for the rest of their lives.

When EU rules required HI to be open to competition, it would have been grossly unfair to have introduced competitive underwriting. Premiums would soar for the older persons and their "asset" would in effect have been stolen.

There was no choice but to introduce community rating, and that implied risk equalisation - they are two sides of the same coin. Competition is instead, not on underwriting, but on administrative efficiency. In the end of the day underwriting is a cost so its abolition should reduce the overall price of insurance.

The system could be operated for MI and I think it does in New Zealand. There is a lot to be said for it. The competitive underwriting system can be seen to operate quite unfairly at times with perfectly "harmless" young people paying through the nose just because the system is not precise enough to distingush them from their tearaway contemporaries.


----------



## CCOVICH (5 Apr 2005)

Harchibald said:
			
		

> There was no choice but to introduce community rating, and that implied risk equalisation - they are two sides of the same coin.


 
I think that BUPA are arguing that community rating and risk equalisation are mutually exclusive, i.e. they agree with the principle of community rating, but do not believe that it requires risk equalisation to work in practice.  Presumably you are disagreeing?

Does anyone believe that BUPA will leave the market if this is implemented (they appear to be making veiled threats to do so)?  In today's Irish Times I read that Mary Harney can veto the proposal to impose risk equalisation, but this is considered unlikely.


----------



## Duke of Marmalade (5 Apr 2005)

CCOVICH said:
			
		

> I think that BUPA are arguing that community rating and risk equalisation are mutually exclusive, i.e. they agree with the principle of community rating, but do not believe that it requires risk equalisation to work in practice. Presumably you are disagreeing?


BUPA are being disingenuous with this argument.  True, in the short run, RE only protects the VHI and those customers young and old whose inertia prevents them taking up any cheaper offer.  Older folk are perfectly free to get the cheapest rates on offer.

However, in the long run you can't operate CR in a free marketplace without the unprofitable sector either not being targetted or even worse being actively discouraged.  One could envisage companies trying to get a reputation for being anti old people.

RE takes risk out of the equation and makes all sections of the population equally profitable, if the company can get its act together on admin costs and other efficiencies.


----------



## CCOVICH (5 Apr 2005)

That's the sense I was getting, that all players in the marketplace compete on costs (and service standards), rather than price.  I read last week that VHI have the advantage in this respect as they have a large chunk of the group scheme business market, which is cheaper to manage.


----------



## cuchullain (6 Apr 2005)

I and my family were insured with vhi ( for at least 20s years and oddly enough in the period the costliest claim ( there was only 2 thank God) was for  a 3 month old who required an operation) anyway I received my quotation from VHI in Oct 2003 and as my daughter was now going to be over 21 in Jan 2004 she was classed as an adult. I rang the Vhi to change her to plan A and   to leave the rest of us on B options. To say vhi were intransigent on the matter would be a gross understatement. They informed me that they didnt allow two members on my policy to be on different rates. So I cancelled her vhi cover and moved her over to Bupa. Nothing to do with RE but Vhi LOST a 21  year old through their own stupitidy and damned if I would not agree to subsidise a company who refused to compromise their precious rules as they couldnt be bothered to keep records of invididual members on one policy. As a result my next to reach 21 will also be switched over. So vhi will be stuck with to old fogies and Bupa pick up two kids for absolutely no effort. As it transpired Bupa got caught as she had to have 4 wisdom teeth removed in Feby this year and it cost Bupa an overnight in the Bons in Glasnevin ( not cheap) and €400 towards her specialist. So Vhi won this round.  but on average they obviously lose.


----------



## cuchullain (6 Apr 2005)

that should read now and not  NOT.


----------



## redstar (7 Apr 2005)

I've never fully understood this risk equalisation business, but if health insurers are not allowed to cherry-pick young 'customers', doesn't this rule apply equally to BUPA and VHI ?

Why is BUPA the only one paying to VHI - Shouldn't VHI pay BUPA as well ?


----------



## CCOVICH (7 Apr 2005)

BUPA csutomers have a lower average age profile than VHI csutomers, therefore the business they underwrite is more risky, and hence BUPA are paying VHI a premium/contribution to equalise their respective risks.


----------



## _darag (8 Apr 2005)

No matter what sophistry you use, risk equalisation is deeply anti-competative and distorts the market.

As a relatively young, non-smoking, physically active person, the rules on risk equalisation mean that I would have to pay over the odds for insurance given my risk profile.  As a result I refuse to pay for health insurance;  not particularly because I want to expose myself to risk but because I refuse to pay perhaps 2 or 3 times the price for something.  (That is 2 or 3 times what the product would cost in a competitive market.)

On the other hand, the regulation prevents insurance companies from offering a competitive insurance product to me.  

If people don't want to pay more as they get older,  allow companies to offer (and people to purchase) 25 year policies with the payments spread evenly over the term.  

As it is,  my plan is to wait till I'm 50 or 60 and then buy health insurance at massive discount, allowing unfortunate 20 year olds to subsidise my regular visits to the Blackrock clinic.

Get rid of risk equalisation and I'll consider buying insurance again.


----------



## CCOVICH (8 Apr 2005)

_darag said:
			
		

> If people don't want to pay more as they get older, allow companies to offer (and people to purchase) 25 year policies with the payments spread evenly over the term.


 
Does this type of system operate in any other countries?  Just interested as to where you got the idea.


----------



## redstar (8 Apr 2005)

"BUPA csutomers have a lower average age profile than VHI csutomers, therefore the business they underwrite is more risky, and hence BUPA are paying VHI a premium/contribution to equalise their respective risks."

OK, but surely that is because there was no competition over the years so VHI built up a huge customer base, young and old. I think BUPA and any other newcomers are being unfairly asked to compensate VHI for their  loss of monopoly.  What happens in 20 or 30yrs time when BUPA and VHI should have similar customer-age profiles and hence similar risks ?


----------



## microsquidb4 (8 Apr 2005)

*Re: Risk equalisation across monopolies*

Again on the subsidising monopolies, but slightly off topic:
If BUPA have to pay VHI for being the new kid on the block (as it were) and having a different customer base, shouldn't O2 or Meteor have to pay Eircom (or better the state) for use of telecom masts originally subsidised by the taxpayer.
OK, maybe it's a lot off topic.


----------



## darag (8 Apr 2005)

> Does this type of system operate in any other countries? Just interested as to where you got the idea.


I dunno, I just thought it up.  It would be simple for any life/insurance company to offer such a product 'though because the cost of health insurance increases with age.  So a large proportion of your initial payments would be saved/invested to cover the excess later when the cost of your health insurance eventually excedes that of your payments.


----------



## RainyDay (9 Apr 2005)

*Re: Risk equalisation across monopolies*



			
				microsquidb4 said:
			
		

> shouldn't O2 or Meteor have to pay Eircom (or better the state) for use of telecom masts originally subsidised by the taxpayer.


Do you reckon mobile phone service is as critical as hospital service?


----------



## CCOVICH (9 Apr 2005)

redstar said:
			
		

> "BUPA csutomers have a lower average age profile than VHI csutomers, therefore the business they underwrite is more risky, and hence BUPA are paying VHI a premium/contribution to equalise their respective risks."
> 
> OK, but surely that is because there was no competition over the years so VHI built up a huge customer base, young and old. I think BUPA and any other newcomers are being unfairly asked to compensate VHI for their loss of monopoly. What happens in 20 or 30yrs time when BUPA and VHI should have similar customer-age profiles and hence similar risks ?


 
Just to be clear, I am not necessarily for RE, I was just outlining my understanding of how it operates.

If the age profiles of VHI and BUPA customers were similar, there would be no contributions made to RE by either party, as risks would be equal.


----------



## Brendan Burgess (1 Aug 2005)

Jill Kerby attacks community rating in yesterday's Sunday Times. Quoting James Sheehan of the Blackrock Clinic:



> ...community rating is akin to someone starting up a pension fund in their sixties, paying the same rate as those who have contributed since they first started work, an receiving the same end product.



Jill suggests that an age-related premium should be introduced for anybody who joins over 35.( as a 1999 white paper suggested)

I was in the VHI for around 35 years subsidising older, sicker smokers. I quit around 10 years ago when I realised the extent to which I was subsidising people. Like darag, I resent the fact that I am not able to buy health insurance at the right market rate for my health and age. I will probably join BUPA or VHI soon as I get older.

Brendan


----------



## ubiquitous (1 Aug 2005)

Shane Ross said in the Sindo a number of weeks ago that Risk Equalisation exists NOWHERE in the world where the leading health insurance provider has more than a 30% share of the market. If this is true, then it knocks the VHI's argument on its head. Can anyone confirm whether it is true?


----------



## Purple (2 Aug 2005)

VHI had 100% of the market for decades. That should be a massive advantage when competition arrives. It's the ultimate first mover advantage. If anything VHI should be subsidising BUPA 'till they get a suitable market share. VHI only have to keep their existing customers, BUPA have to get new ones. Everyone in business knows that there is a world of a difference between the two. If VHI had been doing their job properly over the years BUPA would have found it impossible to get a market share.


----------



## sherib (3 Aug 2005)

Slightly off topic. Someone from Vivas (new player on the health insurance block) was interviewed on NewsTalk a few days ago. According to him, they would welcome the "older insured subscribers who VHI keep complaining about" saying Vivas would offer them _the same cover at less cost_. [broken link removed]

If it ever comes about that everyone in the state is covered by health insurance (not impossible in the future) the question of risk equalisation would become irrelevant. The current young and less costly Bupa members will grow older in time, so will Bupa then find itself in the same position as VHI now? It should be possible to devise a better system - I hesitate to say fairer since the current one patently is not for those who cannot afford private insurance. 

The fact is health care costs continue to rise exponentially due to technological and scientific advances so it is never going to be cheap but then neither is house or car insurance which all of us pay (mostly) without complaint. I'd still rather be ill in this country than in good old U.S. of A.

What would it be like if all of us became health policemen/women - noting down our neighbours life styles in order to detect any sign of over indulgence that might increase their health risks and therefore cost to the rest of us. Risk equalisation.......!


----------



## Budgie (15 Aug 2005)

Community rating = risk equalisation.  The two cannot be separated or the whole system collapsed.  As far as I am aware, Australia has a CR system but it was in trouble due to the fact RE was not introduced.  

If RE is not introduced, premiums will spiral as VHI will increase them faster to cover losses and the other two (BUPA, Vivas) will follow suit and collect the profits.  

Mary Harney should call BUPAs bluff.  They are making at least 20% margin on premiums, VHIs margin is now negative.  BUPA are not going to leave in a hurry even if margins are lower.  

In Mercer advise to the Dept of Health published on their website, it stated that Vivas never anticipated that RE would be introduced and it would be surprised if it was.  Mercer commented that this "was difficult to understand and believe".  Not sure what planet the Vivas boys are on!


----------

