Private health insurance is set to be a key element in the future funding mix of healthcare costs, according to Dr Kai-Uwe Schanz, chairman, Dr. Schanz, Alms & Company.
In “Protection gaps in healthcare: A global view” written for Middle East Insurance Review, the sister publication of Asia Advisers Network and Asia Insurance Review, he shared:
Given the institutional complexity and heterogeneity of healthcare systems, it is difficult to come up with a generally accepted definition of the health protection gap, let alone an accurate quantification.
For people who are comfortable with the extent of (minimum) government-provided health and medical services, there is arguably no protection gap.
Others may require additional services funded through social health insurance and private health insurance.
In highly mature markets, some individuals seek healthcare services at an even higher standard that they have to fund out of their own pockets.
“In India,
out-of-pocket expenses
exceed 60% of
total healthcare expenditure”
In many developing and emerging markets, however, out-of-pocket expenses (OOP) play a dominant role (such as in India where they exceed 60% of total healthcare expenditure) because government and social insurance schemes provide only minimum coverage and private health insurance is at an embryonic stage.
The healthcare funding mix
Government provisions form the basis of most healthcare systems. Social health insurance schemes are a different way of financing state-sponsored healthcare systems, being based on individual salary or tax and employer contributions.
Private health insurance plans are pre-paid, usually voluntary schemes which are operated by private insurers. Government influence can be substantial, for example through regulations and subsidies.
Finally, there is out-of-pocket spending on healthcare, using private household income and wealth.
The differences in the healthcare funding mix are enormous, not only between mature and emerging markets, but also within the respective country income groups.
In South Africa, private insurance covers about 40% of total healthcare expenditure, while in the US, this share is about 30%.
On the other hand, private health insurance is almost irrelevant to total funding in countries such as India and Japan.
Out-of-pocket expenses as a gauge for health protection gap
When people incur co-payments or fees for healthcare services, the amount of such OOP in relation to income can reach financially catastrophic proportions for the individual or the household.
The WHO suggests that OOP health expenditure be viewed as catastrophic whenever it is equal to or greater than 40% of a household’s non-subsistence income, ie, income available after basic needs have been met.
Therefore, OOP can serve as a (necessarily imperfect) gauge for the health protection gap.
Importantly, OOP in mature economies frequently represent co-payments and non-catastrophic expenses that are not covered by insurance. Therefore, this measure is of limited value for determining underinsurance in high-income countries.
In emerging economies, however, OOP mostly represent medical expenses for families without any insurance and therefore provide a more applicable gauge of underinsurance. Insurance or other funding would increase the utilisation of health services, leading to better health outcomes.
In general, health systems that require lower OOP payments provide a higher level of protection to the poor against catastrophic spending. WHO research shows that catastrophic health expenditure remains low in countries where OOP represent less than 20% of total national health expenditure.
The macroeconomic proportions of OOP are enormous, ranging from 1.8% to 2.4% of GDP for low-income and high-income countries, respectively.
“Globally, people spend about
$1.5 trillion per annum
OOP on healthcare”
Globally, people spend about $1.5tn per annum OOP on healthcare. Even though the comparison is slightly flawed, the respective global amount of average uninsured natural disaster losses is less than $150bn per annum, ie, one tenth of the global ‘health protection gap’.
Prospects for private health insurance as a key element of the future funding mix
Healthcare costs are expected to continue rising faster than GDP and consumer price inflation.
Key reasons include: cost escalation as a result of medical innovation and the increasing use of new technologies in medicine and treatments; healthcare being highly labour-intensive with lower rates of productivity growth compared to other sectors of the economy; economic growth and rising incomes in emerging markets which will translate into additional demand for healthcare services; population growth and ageing which will require a broader healthcare infrastructure and increase the financial burden from healthcare services; and urbanisation and its drawbacks such as less healthy lifestyles, the re-emergence of communicable diseases and detrimental levels of air pollution.
In combination with rising concerns about fiscal sustainability, private health insurance is set to play a bigger role.
It offers individuals and households the option to pay for healthcare through regular premiums into prepaid plans and to reap the benefits of risk pooling while reducing the spectre of crippling healthcare expenses.
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