How does a health insurance company make money?
Its rather simple – the company collects more premiums than the pay-outs it makes to policyholders after accounting for business costs. If the pay-outs are more than the premiums collected, the company loses money. Plain and simple.
What is the usual narrative by the health insurance companies when they lose money?
They blame the doctors. Doctors overcharge and over-service. Sometimes they also blame the hospitals and facility operators, e.g. day surgeries for over-charging. They also may blame the patients.
What is the health insurance companies’ biggest bargaining chip against politicians and patients to get them to cooperate and support their practices?
The threat of higher insurance premiums.
Current Situation for Integrated Shield Plans (IPs)
The performance of IP insurers for 2019 has just been released. Two IP insurers are now making money: Prudential and Income. Prudential for the 2nd year running, making $51.99M, while Income made a modest $4.21M for 20191. The remaining 5 insurers made a combined loss of $99.31M.
For 2018, only one out of six IP insurers made money (results from the latest IP insurer, Raffles Health, was not available yet) . Prudential made $42.73M while the other five insurers lost a total of $80.49M. In 2017, All six IP insurers lost a total of $145.88M. For 2016, combined losses from the same six insurers was $98.59M
And so, we are told that unless doctors don’t charge less or do less, premiums have to go up. This is taken almost as received wisdom and cardinal truth. Doctors earn a fair bit and are often seen as fat cats. It’s easy to lay the blame on them. No one doubts this ‘blame the fat cat’ logic.
This hobbit does.
Under-utilisation and Structural Under-capacity
Let’s look at how health insurance really works. It works by pooling of risk. In any given year, the people that don’t fall sick don’t make claims. Their premiums are used to subsidise those people who do fall sick and make claims.
There is no carry over beyond the same year. It is a pay-as-you-go system, year by year accounting. This is opposed to Medishield Life (MSL) where because it is compulsory and life-long, there can be “front-loading” of premiums. In other words, MSL collects more premiums from us when we are young, so that they can collect relatively less when we are old, even though we consume more health services as we get older.
Front-loading of premiums is not possible in IPs, because they are voluntary and commercial, there is no guarantee that a person will sign up again the following year when the current contract expires with the same IP insurer. Even though in most cases, the policyholders almost invariably sign up again. That’s because as you get older, you can’t change insurer as you develop more medical problems because these problems will be excluded from coverage when you sign up with a new IP insurer. In other words, you are stuck.
So in the usual case, a commercial health insurance company has to balance the books and hopefully make a profit by collecting enough premiums from healthy people to subsidise those who make claims. Nothing with wrong that. This is how health insurance is supposed to work.
In almost all other developed countries, a health insurance policyholder will exercise the full benefits of his policy. But in Singapore with regard to IPs, they don’t. This is very peculiar to Singapore.
For the purposes of this discussion, private healthcare is considered to be private hospitals plus A class and B1 class beds in restructured hospitals (RHs). MSL and IPs are mainly concerned with bigger bills generated by private healthcare as well as expensive outpatient treatment such as chemotherapy and day surgeries. B1 beds actually receive some subsidy, at about 20% of costs. But again for the purposes of this blogpost, we will consider them as unsubsidised.
The Life Insurance Association (LIA) reported that two-thirds of Singaporeans have bought IPs. In an article in Business Times dated 1 Oct 2020 by Ms Genevieve Cua, it was stated “An estimated 70% of Singaporeans subscribe to an IP plan, to complement their MSL cover”.
According to MOH website2, in 2019, there are 11,321 acute hospital beds in Singapore. There are 1,629 beds in private hospitals and 288 beds in not-for-profit hospital (probably Mount Alvernia?), making a total of 1,917 beds.
It was also reported that 81% of RH beds are B2 and C class3. Therefore the remaining 19% or 1,787 beds of the total number of 9,404 beds in RHs are B1 and A Class beds.
Total number of private healthcare beds (private hospital and A1 + B1) = 1,917+1,787=3,704 beds.
Therefore, private healthcare market share = 3704/11321 x100 = 32.7% or ~33%.
This is a very interesting statistic. It shows that despite 70% of Singapore residents buying IPs, the entire healthcare system is structured such that only ~33% of beds are private. There is obviously a structural mismatch between demand for IPs and supply of private healthcare beds.
The private healthcare market share for day surgeries and certain expensive outpatient treatment that are covered by IPs may differ from the figure of 33%, but probably not by very much.
In other words, in the case of Singapore, IP insurers have a second source of policyholders to balance the books in addition to healthy people – IP policyholders who choose subsidised healthcare in RHs, even though they are entitled to private healthcare. This is self-evident because there won’t be enough capacity in the private sector if all 70% of IP policyholders really exercised what they are entitled to. This “under-utilisation” of IP benefits is very interesting and needs to be studied further. Hopefully MOH or MAS has the data on how many IP policyholders do not utilise their IP benefits fully but instead opt for B2 and C class services in RHs and this data can be made public for all to study.
It could be that Singaporeans are by nature very conservative and prudent and hence will choose subsidised care even when they have IPs. Moreover, this 33% capacity figure is actually a conservative one because it ignores capacity taken by foreigners who came to Singapore for healthcare in pre-Covid-19 days. If you take into the capacity taken up by foreigners, the figure is probably below 30% and the structural mismatch is even more pronounced.
The nett effect is that when these IP policyholders choose subsidised care, the government is actually subsidising the IP system in the form of B2 and C subsidises given to these patients who otherwise could have chosen care that could have been paid by IP funds instead.
Young Policyholder Pool
The next thing we have to note is that currently, IP policyholders are generally a younger lot. The first provider was IncomeShield in the late 90s. This was followed by AIA and Great Eastern in 2002 (please see previous posting). It was only in 2005 that IP formally came into being. So The history of IP is about 20 years or so, give or take a few years.
In other words, we can generalise that the oldest IP policyholders are probably only in their early or mid-50s, while the bulk of IP policyholders are younger, probably in their 30s and 40s. People fall sick and make big claims usually when they older, in their 60s and 70s or even older. But in all likelihood, these older people are NOT IP policyholders now.
Of course, there will be a day of reckoning when the bulk of IP policyholders get older and sicker and make more claims from their IPs.
In summary, to stay profitable, IP insurers have two big advantages when compared to private health insurance companies in other developed countries, e.g USA:
- Many Singaporeans under-utilise their IP entitlement and choose subsidised care.
- Most IP policyholders are young and therefore relatively healthy.
Yet, at last count, five out of seven IP insurers are losing money.
Incredible, isn’t it?
Yes, some doctors may over-service. A few doctors may even overcharge (which is unlikely as long as they adhere to MOH Fee Benchmarks). But surely these factors are more than adequately compensated by the IP policyholder pool being younger and government subsidies to policyholders who under-utilise their IP benefits?
So why are IP insurers losing money?
What Can “Affordable” IPs Really Afford?
The answer goes back to the adage by Deming: – Every system is perfectly designed to get the results it gets.
To understand this, we have to get back to the basics – The Golden Triangle of Healthcare: Affordability, Accessibility and Quality.
The lesson here is that because of limited resources, no healthcare system can achieve all three. A system can at most achieve two and compromise on the third.
A health insurance agent or company is incentivised to sell more policies and collect more premiums. The easiest way to sell more policies is to price these policy premiums as cheaply as possible. Which is probably what has happened as all IP insurers compete for market share. But these premiums cannot really pay for what the IPs purports to cover, even with the two advantages described above. So to balance the books, you compromise on accessibility- Small panels of doctors, pre-authorisation forms etc. Quality, too, can be compromised, e.g. by telling gastroenterologists they have to provide sedation themselves and not use an anaesthetist. These are all measures that can be considered to bring friction and obstacles into the system by limiting accessibility and quality, so as to balance the books.
All these may work in the short term. But in the long term, all serious stakeholders must ask the tough questions that include:
- Do we really believe 70% of Singapore residents can afford private (especially) inpatient care? If so, what do we build so many subsidised beds in RHs?
- Why are we selling so many IP policies to so many people, many of whom will probably either won’t or can’t use their policy entitlement, but instead seek subsidised care in RHs?
- Is the current IP market really a sustainable one when it has to depend on policyholders under-utilising their IP benefits (and consuming government subsidies in the process)?
- What will happen if all 70% of Singapore residents exercise their full IP benefits?
- Should we private healthcare acute hospital beds only amount to 33% of all beds, when 70% of Singapore residents have IPs?
- What happens when the bulk of IP policyholders grow old and need more care? Will premiums shoot up then and many will have to give up their IPs just when they need IPs most?
- How fast will IP premiums go up? Already the MSL proration percentage for private hospitals has been cut from 35% to 25% which means IP premiums has to go up very soon.
- Going forward, what can “affordable” IPs really afford?
Yes, we can still continue with the tired narrative that doctors are mainly to be blamed for IP insurers losing money. But as this post has clearly shown, while doctors do make decisions that impact cost of healthcare, the long-term problems facing the IP industry in terms of sustainability are:
- A structural mismatch between private healthcare bed capacity and number of IP policyholders
- Misplaced incentives leading to unrealistically low premiums, i.e. IPs insurers are incentivised to sell as many IPs as possible to gain market share
- A possibly misplaced belief by many IP policyholders that their “affordable” IPs will give easy and wide access to quality private healthcare when the reality is much less exuberant.
- An IP industry that is indirectly dependent on government subsidies, i.e. IP policyholders under-utilising their IP benefits and getting subsidised care in the RHs.
Clearly, these icebergs are already visible now in the IP industry. In order to avoid ending up like the Titanic, we have to face the hard truths and make some painful adjustments now.
Unlike what Rose and Jack said in the movie, we have to let some things go. Because the disappointment and pain that will happen down the road will be much worse and widespread if we don’t make the right but difficult decisions today.
1Business Times: Most Integrated Shield insurers improve underwriting results in 2019, 5 Oct 2020.