Fee-for-service plans offered by private health insurance companies are also referred to as

Abstract

Background

Employer-sponsored health insurance, particularly for retirees with limited incomes, plays a major funding role in Canadian health care, including prescription drugs and dental services. We aimed to investigate the changes in retiree health insurance availability over time.

Methods

We performed a secondary analysis of data from the 2005 and 2013–2014 cycles of the Canadian Community Health Survey using multivariate logistic regression to study changes in retiree coverage availability over time in Ontario. We estimated the adjusted odds ratios of having employer coverage for likely retirees (people over age 65 yr who reported not working and those over age 75 yr), adjusting for a number of potential confounders. Sensitivity analysis was also performed for coverage of different treatments separately.

Results

The response rate was 76% for the 2005 cycle and 66% for 2013–2014 for the entire survey. The characteristics of respondents in the 2 survey cycles were similar, except respondents in 2013–2014 were wealthier. In our adjusted model, respondents in 2013–2014 had lower odds of reporting retiree coverage than respondents in 2005 (adjusted odds ratio 0.87; 95% confidence interval 0.77–0.99). This represents an absolute reduction in the probability of receiving retiree coverage of up to 3.4%.

Interpretation

Our analysis suggests that the rate of retiree health insurance has declined for Canadians with similar characteristics over the past decade. As we know insurance coverage has a strong association with use of treatments such as prescription drugs and dental care, this decline may result in decreased access to treatment and is an issue that warrants further investigation.

Functions of Private Health Insurance Programs

PHI programs cover a wide range of arrangements. PHI programs are supplied by commercial insurance firms (both stockholder and mutual; among them also plans owned by the state) as well as not-for-profit agencies. Insurance business can be run by conventional indemnity plans, which only reimburse costs, as well as by more innovative plans, which provide some form of managed care. On the demand side of PHI markets, individuals as well as groups or corporate actors (e.g., employers, professional organizations) may ask for insurance. In general, contracts between insurer and enrollee are voluntary for both sides. However, mandatory contracts (for one or both sides) are realized in some countries (and discussed in others) as well. Risk spreading between the parties involved (insurer, insured, health-care providers, and employers) varies considerably.

Regulation of PHI programs in different countries results from specific historical national as well as international developments. In the past, international developments have been of minor importance for PHI regulation. However, in Europe European Union regulation is of increasing importance. The third EU directive on Non-Life Insurance has forced several member states to adapt their regulatory framework for PHI programs. However, they also reflect the particular function of PHI programs. Basically three functions of PHI in health-care systems can be observed in international comparisons.

PHI programs may be the only system of coverage available for some part of the population, because these people are not included in public schemes. PHI programs thus perform the function of an alternative to public arrangements. This is the case particularly in countries with means-tested public health benefit schemes (Medicaid in the United States) or if eligibility to social health insurance programs depends on income and/or employment status (Germany) or age (Medicare in the United States). The need for regulation of alternative PHI programs is particularly high, because an unregulated market does not guarantee that people who are not entitled to the public system will receive adequate insurance coverage (see section Adverse Selection in Competitive Health Insurance Markets).

The second function of PHI programs is to supplement public schemes. Supplementary PHI programs can offer coverage for services not covered in the public system (e.g., dental care for adults in the Netherlands as well as dental care and pharmaceuticals in Canada but also upgraded hospital services such as private or semiprivate rooms in almost every country). Supplementary PHI programs also offer coverage for services not completely covered by public schemes and thus reduces co-payments and deductibles (e.g., Medigap insurance in the United States, coverage for co-payments in France, dental care in Germany). If benefit schemes of the public system are rather comprehensive and of good quality, supplementary PHI programs basically cover luxury goods (e.g., more comfortable board and lodging in hospitals in Belgium). As a consequence, a smaller degree of regulation for supplementary PHI programs than for alternative PHI programs is more justifiable in terms of social acceptability.

The third function of PHI programs is to complement public schemes. Thus PHI programs provide double cover: people who are entitled to benefits of the public system might buy private insurance that covers at least partly the same benefits as the public system. People purchase complementary PHI programs for a variety of reasons: they want to get services quicker than in the public system (queue jumping), they want to get better or more comfortable services, or they want to contact health-care providers who are excluded from delivering services within the public system. Complementary PHI programs seem to occur primarily in tax-financed health-care systems – for example, in the United Kingdom, Australia, and Canada (Flood et al., 2005) – but play a role in systems with mandatory social health insurance programs as well, for example, in the Netherlands (Brouwer et al., 2003). Regulation of complementary PHI programs primarily concerns the question whether it may be supplied at all. In Canada, 100% of the population is covered by the public health insurance scheme, which is run by the provinces. Most provinces prohibit the supply of complementary PHI programs. However, this regulation was challenged by the Supreme Court in June 2005. In a narrow 4:3 decision, the Supreme Court of Canada struck down Quebec laws prohibiting the sale of complementary PHI on the basis that they violate Quebec's Charter of Human Rights and Freedoms. The result makes further Charter challenges to similar laws in other provinces inevitable, but the question of whether they will succeed remains unanswered for the time being (Flood et al., 2005).

The Rise of Private Health Insurance

The current system of employer-based health insurance, while accidental in its conception, has become entrenched as the primary way by which health care is financed in this country. Until the 1930s, private individuals paid out-of-pocket for health care services on a fee-for-service basis.6 During the 1930s, non-profit Blue Cross/Blue Shield (BCBS) health insurance plans were developed and, despite skepticism as to their viability, were successful. Once health insurance was shown by the BCBS plans to be a financially-feasible endeavor, a number of private for-profit health insurance companies were founded. During World War II, when the government allowed employers to offer health insurance in lieu of wage increases, private health insurers grew in both size and number, with the number of covered individuals rising from 20.6 million to 142 million between 1940 and 1950.6 Coverage expanded even further and became more tightly linked to employment contracts when, in 1954, the Internal Revenue Service (IRS) ruled that employer-based health insurance should not be considered as taxable income. While coverage was expanded for general medical care, MHC coverage was substantially more limited. Insurance policies did not include mental health services until after World War II, when insurers began covering some hospital-based psychiatric care. Before the deinstitutionalization movement (discussed in the next section), there was little incentive for private insurers to cover services that were already paid for through the public sector.7

Private Health Insurance Programs

Compared to other sources of health-care finance, private health insurance programs are of minor importance in most OECD countries. Within the OECD, it is only in the United States that private health insurance programs account for more than 30% of health spending. Still, adequately regulated private health insurance programs are attractive alternatives to so-called socialized medicine for proponents of market-oriented reforms not only in the United States (Pauly and Herring, 1999) but also in Western Europe (Henke, 1999). What are then the problems of adequate regulation of private health insurance programs? The next section briefly describes the various functions private health insurance programs can perform in health-care systems. The section titled ‘Regulation of private health insurance programs’ analyzes regulation of private health insurance programs. Finally, we will discuss the relationship of private health insurance programs with health-care providers (‘Provision of health-care services’).

Private Funding

Defining Supplementary Private Health Insurance

Although private health insurance is available in all countries in the European Union, North America, Australia, and New Zealand, private insurance plays significantly different roles depending on the jurisdiction. Almost all the countries included above provide near universal statutory health insurance coverage for their citizens. The dynamics and scope of this statutory health insurance often influence the nature of private supplemental insurance in these jurisdictions. Thomson and Mossialos (2009) provide a useful classification for the role of private health insurance: supplementary, complementary, or substitutive. Their classification is adopted here.

Supplementary insurance generally provides access to services that are already available within the publicly financed health insurance scheme (presumably affording faster access, greater choice, or other amenities). Example jurisdictions include the UK, Australia, and Sweden. Supplemental private insurance markets tend to have small market shares. For example, the UK market covers approximately 10% of the population.

Complementary insurance generally offers services that are not covered under the statutory scheme such as prescription drugs. Example jurisdictions include Canada and Denmark. Some systems also allow for complementary private insurance to cover costs that are typically left outside the public system (e.g., insurance to cover the cost of user fees). Example jurisdictions include France. Market share for complementary insurance is generally higher given the nature of the insurance. In France, more than 90% of individuals have complementary insurance of some form.

Substitutive insurance generally covers people who are not covered under the statutory scheme. Example jurisdictions include Germany. Market share for substitutive insurance is generally smaller (in Germany the market share for private insurance is approximately 10%).

This article focuses on private insurance that is either supplementary or complementary as defined above. Further, the authors focus on private insurance that is voluntary and not statutory (as in the Netherlands) given that many of the potential market failures that occur do so in voluntary markets. It examines both the theoretical and empirical roles that supplementary private insurance can play and the interaction between public and private insurance within this context.

Introduction

The existence of duplicate private health insurance (DPHI), which is observed in many countries with a National Health Service (NHS), is paradoxical at first sight. NHSs are usually characterized by universal coverage of every resident, large and comprehensive benefit packages, very low copayments or free care at the point of delivery, progressive tax financing, and are strongly guided by principles of equity in access to health care. Additionally, residents cannot opt out of the NHS, meaning that they are not given the option of not contributing to the NHSs' financing and relying exclusively on other forms of health care. Why then would people be willing to pay for private health insurance (PHI) covering roughly the same services as the NHS? This is even more surprising because NHSs have been generally performing quite well over the last decades. This paradox is a major issue in health economics, which health economists have been trying to understand theoretically and to document through empirical work. This article presents these findings.

Before going further, it is important to define the concept of DPHI, often called also double coverage or substitutive PHI. Under DPHI, private insurers offer coverage for health care already available under public delivery systems. Note that DPHI differs from supplementary PHI (SPHI). Under SPHI, patients access additional health services not covered by the public scheme such as luxury care, elective care, long-term care, dental care, pharmaceuticals, rehabilitation, alternative or complementary medicine, or superior hotel and amenity hospital services. Also worthy of remark is that DPHI is distinct from complementary PHI, which complements the coverage of publicly insured services by covering all or part of the residual costs not otherwise reimbursed (e.g., copayments). It is worth noting that there is no full consensus as regards this terminology, as some authors use the concepts of SPHI and DPHI indifferently. DPHI should also be distinguished from ‘parallel private health insurance’ where individuals are covered by one among several parallel insurance systems. These roughly insure for the same health care but an individual is entitled to only one of the insurance systems' benefits. For example, in the US, an individual in need of health care as a consequence of a workplace accident is covered by the Workers' Compensation Board and not by Medicare.

Finally, note that an NHS is a necessary but not sufficient condition to observe the emergence of DPHI. According to a large review of health systems in Organization for Economic Cooperation and Development (OECD) countries, DPHI exists to different extents in the following countries with an NHS (percentages in parentheses indicate the percentage of people enjoying double coverage): Australia (43.5%), Ireland (51.2%), Italy (15.6%), New Zealand (32.8%), Portugal (17.9%), Spain (10.3%), and the UK (11.1%) (Paris et al., 2010). At the same time, double coverage is absent in other NHS-type health systems like Denmark, Norway, and Sweden.

In Section ‘Stylized Facts and Preliminary Insights,’ some stylized facts that allow a preliminary overview about health systems' performance in the presence of double coverage are presented. Then, the main theoretical concepts that are indispensable to analyze this question are presented in Section ‘Theoretical Concerns: Uncertainty and Information.’ In the Section ‘Empirical Evidence of Uncertainty and Informational Problems: Who Buys Duplicate Private Health Insurance?’, the main results from empirical analyses that have tested several aspects of double coverage, in particular, who is more likely to purchase duplicate private insurance and why is displayed. Finally, Section ‘Political and Financial Sustainability of a DHPI Health Sector’ focuses on the political and financial sustainability of a system with duplicate private insurance.

Introduction

In most countries, private health care insurance is provided by managed care organizations (MCOs). They appeared in the late 1990s as an alternative to the traditional fee-for-service health insurance contract. Their main role is to administer and manage the provision of health care services to their clients within a general objective of cost containment in the health care sector. In this sense, an MCO is a middleman contracting with health care providers on the one side and with enrollees on the other. The latter obtain advantageous fees when visiting in-plan providers and the former guarantee a larger base of clients. The most common types of these organizations are preferred provider organizations (PPOs) and health maintenance organizations (HMOs).

An HMO offers health care insurance to individuals as a liaison with providers (hospitals, doctors, etc.) on a prepaid basis. HMOs require members to select a primary care physician, a doctor who acts as a gatekeeper to direct access to specialized medical services whenever the guidelines of the HMO recommend it.

A PPO offers private health insurance to its members (health benefits and medical coverage) from a network of health care providers contracted by the PPO. The main characteristics of a PPO are:

health care providers contracted with the PPO are reimbursed on a fee-for-service basis;

enrollees in a PPO do not require referral from a primary care physician to access specialized care;

enrollees sign a contract defined by a fixed premium, a co-payment on the health care services received, and possibly, a deductible;

enrollees have freedom to visit out-of-plan providers (with a possible penalty in the form of the payment of a greater share of the provider's fees);

drug prescription may be covered as well when enrollees patronize participating pharmacies; and

preventive care procedures (check ups, cancer screenings, prenatal care, and other services) may also be available.

To summarize, a PPO is a particular instance of integration between upstream providers and downstream third-party payers. The aim of this article is to describe how providers compete to become preferred providers.

Competition in Social Health Insurance

In an unregulated PHI market, high risks pay higher premiums for the same level of coverage than do low risks. Community rating in SHI prevents this, making ‘cream skimming’ attractive, which in turn runs counter to the aim of open enrollment.

Risk selection can take different forms. Health insurers perform direct risk selection if they influence directly who signs a contract. For example, insurers may ‘lose’ the contract form handed in by a person deemed expensive. Individuals who can be expected to be profitable for the insurer can be encouraged to sign a contract by offering them supplementary services at a discount or, in the extreme case, outright payments.

Indirect risk selection, however, consists in designing benefit packages or by contracting with service providers who are attractive for low risks but unattractive for high risks. In particular, insurers may design their benefit package to attract low but not high risk. An example is a contract with a deductible. This is more appealing for low than for high risks as they face a lower probability of becoming ill and, therefore, of having to pay the deductible. The same reasoning applies to the design of the benefit package in general. For instance, an insurer who covers only few services for patients suffering from diabetes can expect these high risks to prefer another insurer. A straightforward counterstrategy is to impose a maximum deductible and a minimum benefit package. This may not be sufficient, however, because insurers can still try to attract low risks by writing policies with ample coverage of athletic medicine and well-baby care. If these benefits are included in the mandatory package, they will also have to be financed by high risks who have no interest in them (Kifmann, 2002). It may therefore be necessary to specify a maximum benefit package as well.

There are a number of options for complementary regulation designed to limit risk selection. The first is a central fund running an RAS, which pays to the insurer the difference between the expected healthcare cost of the insured and of the average of the respective population. Ex ante equalization of expected healthcare expenditures has the crucial advantage of preserving incentives for cost control but is restricted by the availability of data needed to determine payments from the fund. An alternative are cost-reimbursement schemes. These can be based on total cost, costs by service type, and individual healthcare expenditure. In the latter case, the individuals whose healthcare expenditure is reimbursed can be determined prospectively or retrospectively. Various functional forms of reimbursement can be employed. For example, regulation may prescribe a high-risk pool, in which expenditures of the x% most expensive insured (which are identified on the basis of past experience) are covered by the central fund (Van Barneveld et al., 1996). By contrast, Kifmann and Lorenz (2011) found with data of a Swiss health insurer risk selection can most effectively be prevented if costs are reimbursed only up to a limit.

Covering the Cost

In the United States, private health insurance pays for most patients, and physicians have been able to decide what tests and treatment were in the patient’s interest. Patients with good insurance would get whatever treatment or testing the doctor prescribed. Once patients turn 65, the government-run Medicare system takes over, but most people with private insurance also continue with Medicare supplemental insurance policies to cover what Medicare would not. As health care costs have increased, the insurance companies, whose business seeks profit over expanding medical care, have become more restrictive as to what they will pay for and what they will not. A physician can still order whatever test he or she feels is appropriate and whatever medications, whether on- or off-label, but when the tests and medications are expensive and the insurance companies deny coverage, >99% of patients cannot afford to pay or choose not to do so. Most patients are happy to get treatment that costs $20,000 per month, as long as someone else is paying the bill, but if they have to pay themselves, the situation is altogether different, even if the patients need the treatment to stay alive. The same situation exists with Medicare, where budget restrictions limit coverage. To make things worse, the supplemental private policies that used to cover costs not covered by Medicare now limit that coverage to charges approved by but not paid in full by Medicare. Off-label prescriptions are no longer covered because they are expensive, and the insurance companies’ profits go up when they do not have to pay.

When The University of Texas MD Anderson Hospital and Tumor Institute (it only later became The University of Texas MD Anderson Cancer Center) was formed, its charter stated that it would care for any patient from the state of Texas without regard to his or her ability to pay. For that indigent care, the institution received a small level of funding from the state legislature. The expenses of modern medical care today so far exceed those imagined by the founders of that institution that the institution has found it cost-effective to hire an extensive administrative staff to be sure that any patient afforded free care truly qualifies and that all efforts are pursued to collect as much as possible from other potentially responsible third-party payers. Unfortunately, during the time it takes to assure that the patient is financially appropriate for care, a potentially curable patient’s cancer may have progressed to the point of incurability. At what point does the general solution to providing financial stability of the institution fail the patient, by missing the chance for cure, and hurt the institution financially by making it responsible for the much more expensive chronic treatment of an incurable patient?

Since insurers may not pay for the tests or treatment physicians prescribe and patients cannot afford to pay without insurance, institutions and practices hire additional staff solely to assure that insurance authorization has been obtained prior to performing a service. That further increases the cost of health care. If the treatment cannot be pre-approved, it does not get done. If the physician thinks that the test or treatment is critical, he or she can appeal to the insurance company to authorize payment by what is referred to as a peer-to-peer appeal. In such an appeal, the primary physician is required to talk to a physician at the insurance company, taking the treating physician away from his or her patient care activities, thus creating both an inconvenience and a financial incentive for the treating physician simply to acquiesce to the insurance company’s demands. Furthermore, if the treating physician goes to the trouble of pursuing the peer-to-peer appeal, the physician at the insurance company may approve the diagnostic or therapeutic plan once the rationale has been explained, but the insurance company has rules for its physician to follow that often require the physician caring for the patient to perform unnecessary and inferior testing on the patient in order to justify the test he or she knew was needed in the first place. In that situation, there is still further increase in the cost of health care. As costs of health care increase, the cost of insurance increases, and as those costs increase, employers, who pay for the insurance of their workers, and the federal government, whose health care costs increase, complain and try to focus on cost containment rather than quality of care.

Insurance companies are no greedier than other large businesses, but somehow that greed raises greater ethical concern because insurance is supposed to provide benefits for its customers who are unfortunate enough to be severely ill. Although many previously uninsured patients have access to health care due to the Affordable Care Act, it is not necessarily true that medical care is better for most people. Many patients, whose private insurance used to cover their care at major cancer centers like MD Anderson, Memorial Sloan Kettering, or Dana Farber, are no longer covered at those centers of excellence because those centers are too expensive. Instead, they are directed to institutions that charge less. While the insurance carriers cannot require patients to use cheaper alternatives, their failure to cover the costs at the better but more expensive centers effectively does just that. Patients get inferior care and have inferior outcomes, and then are directed to the centers of excellence after it is too late for effective care.