IPs: We Need A “Policy Reset” Here Too….

Recently, the Health Minister described the intense competition that exists between Integrated Plan (IP) insurers as “a race to the bottom”.

He was speaking at the Securities Investors Association (Singapore) or SIAS’ 25^th Anniversary Members’ Night on 12 July 24. This was extensively reported in the press. https://www.straitstimes.com/singapore/ip-insurers-risk-a-race-to-the-bottom-as-they-compete-to-win-market-share-says-ong-ye-kung

The context of this race to the bottom analogy is that IP insurers “have been offering very attractive terms to encourage sign-ups and win market share. This includes IPs that promise no claim limits, and riders to protect policyholders from co-payment” which contributes to the buffet syndrome occurring downstream. The outcome for IP insurers is that  “with escalating claims, insurance companies are hardly making profits on their health insurance portfolios”

The minister further opined that “we may be in a health insurance vicious cycle, of overly generous insurance policy design, buffet syndrome leading to more non-critical or even unnecessary tests and treatments being prescribed, which in turn leads to bigger bills and higher premiums for all. We are chasing our own tail, and everyone is just getting worse off eventually”.

This hobbit largely agrees with what the Minister has said. However, this race to the bottom is largely of the IP insurers’ own making. Nobody asked them to offer as-charged plans or first-dollar coverage riders. You made the bed you now lie in.

While it is easy to blame doctors and patients for the buffet syndrome (the more “professional” term for this in health economics is “moral hazard”), it should be stated here that the Minister himself has said this is “human nature”. With the exception of this mythical hobbit, doctors and patients are humans. Can we change human nature resolutely and permanently? Probably only with great and sustained effort. If it were not so, there will be world peace and everyone will have a healthy lifestyle.  But instead, we have to wage war against diabetes and now against instant noodles as well.

More importantly, doctors’ professional fees as a component of the total hospital bill have been decreasing over the years. In other words, in terms of dollars and cents, the doctor is NOT the main beneficiary of this buffet syndrome. Private sector specialists who have been out there for some time now often remarked that their professional fees have fallen from about one-third of total hospital bills 15 years ago to about 25% or even 20%. Hospital component of bills have increased significantly. But since there are so few private hospitals out there, they have pricing power and IP insurers cannot or aren’t willing to pressurise them to lower their charges. Hence, IP insurers continue to pay for lobsters and steaks found in inpatient bills while they hire armies of case managers to ask doctors stupid questions and deny insurance claims from policyholders.

But these are at best peripheral questions. Ultimately, the Minister’s observation that “with escalating claims, insurance companies are hardly making profits on their health insurance portfolio” needs to be reflected upon. Against this backdrop, there are a few noteworthy points that bears highlighting:

The implementation of the MOH fee benchmarks a few years ago means it is very difficult for private specialists to overcharge. There are a several imaginative ones that over-service and multi-code. But with MOH Claims Management Office now in place, it will be even harder for these shenanigans to occur going forward. And as aforesaid, with doctors’ professional fees becoming a smaller and smaller component of total bill size, the key factor responsible for growth in total bill size must lie elsewhere. This is borne out by statistics released by MOH: the Compounded Annual Growth Rate (CAGR) for Median Total Private Bill Sizes from 2007 to 2021 was 4.3%. The CAGR for median private hospital bill size was 4.5% for the same period while the CAGR for Median Total Private Doctors’ Professional Fee was only 2.7% (as reported in The Straits Times on 14 June 2023). This is a point that no IP insurer or facility operator mentions, much less acknowledge.

The claims ratio in Singapore was 73% during the Covid years of 2019 to 2022. In the few years preceding this period it was 75% (2016 to 2019).

The claims ratio is the percentage of insurance premiums that is actually paid out to healthcare providers when claims are made. In USA, Obamacare demands that the claims ratio must be at least 80 to 85%. If IP insurers cannot make money with a claims ratio that is only 75% or less, then it stands to reason that the other costs are too high. Other costs would include distribution costs (i.e. commissions etc.) and management costs. Another factor could be too much of the premiums collected are parked in reserves. Some IP insurers also made large investment losses. https://hobbitsma.blog/2024/04/26/the-quest-for-value-based-insurance/

And here’s the rub – it was observed that “about half of holders of IP and riders actually end up using subsidised healthcare in public hospitals”. In other words, half of the IP policyholders did not utilize the IP benefits they paid for but instead went back to subsidised healthcare so as to be subsidised by the government (which in the end means largely subsidised by taxpayers).

So, this hobbit asked an old friend who has migrated to Australia a long time ago and is now involved in insurance oversight and regulation work Down Under. He was very absolutely floored when he found out that IP insurers cannot make money when only half of those who are insured actually make claims when they require healthcare that is insured by the policies they had bought.

He remarked wryly that any commercial insurer in the real world would love to be an IP insurer where only half of the entitled policyholders actually made a claim and the claims ratio was around 75% – This is the closest to “insurance heaven” one can get. But that is the “real world” we are talking about, not the world or narrative that IP insurers would like the public and the government to believe – which is it is very difficult to make money when claims ratio is 75% and only half of the entitled policyholders actually make claims.

The numbers speak for themselves: A 75% claims ratio implies there is a lot of headroom for the insurers to manage the issue of increasing bill sizes and the insurers are getting a free lunch out of half of their policyholders since only the other half make claims that they are entitled to with their IP policies.

This race to the bottom is therefore really a well-cushioned race for the insurers. The proof is in the pudding in that no one has dropped out of the race yet. If we are to believe that capitalism still works, (i.e. the efficient deployment of capital) there should have been some blood on the streets by now with insurers exiting this race amid this vicious cycle. But we haven’t even seen a bruised buttock yet in this well-cushioned race, let alone any IP insurer packing their bags.

But in the larger scheme of things and policy intent, we must still return to the original purpose of having an IP industry. Letting and having IP insurers remain viable as a business is not an end in itself from the national perspective. The whole purpose of the IP industry is that IPs is a health financing tool for the majority of Singaporeans, based on the principle of risk-pooling. The whole idea of the IP industry is to serve the public, not the insurers or healthcare providers.

From the looks of things, the conclusion must be that the IP framework has failed as a risk pooling and healthcare financing tool when IP insurers find it hard to make money even with such odds stacked in their favour. (i.e. Only half of entitled policyholders actually make IP claims and the claims ratio is at best 75%)

Maybe it is time this sector undergoes a big “policy reset” as well, to borrow and paraphrase a term that was used by our new Prime Minister in his first National Day Rally.