Hayward’s Insurance Brief
Health Insurance versus Health Treatment:
Why the nature of treatment should not change
I have a simple philosophy to life – I have
always been a believer in justice and fairness
for all. Perhaps this is a naïve
approach and one which can never be
achieved. But if no one dreams of that
world we will never achieve it
This philosophy continues with healthcare.
I believe in the same treatment for all.
State of wealth should not affect treatment;
state of health should. As health professionals
I am sure this is your ideal too. But
we live in a real world. Today hospitals are
run as businesses and some difficult
balances have to be achieved. Treatments
are expensive and we cannot all afford to
pay for it ourselves. Insurance is one way to
enable the less wealthy to gain access to
medical treatment should it become necessary.
However, in this article, I want to take
you out of your health professional shoes
and put you into the insurer’s, so you can see
the business angles from his perspective.
As a general principle, insurers expect
that when a patient is treated for an illness
that the treatment is the same whether he
has insurance or not. If someone is ill,
there will be standard tests and procedures
which will be followed, regardless of how
that treatment is paid for. But this principle
lies in an insurers ideal world! In
reality, this principle is not always adhered
to and this affects the PRICE.
The logic for this is simple, although the insurance principles which underlie
The first thing to remember is that
insurers are businesses and as a result want
to make profits. However, they are generally
fair and want customers to be happy.
With health insurance, customers are
happy when premiums are not too high
and medical treatment costs (the insurance
claims) are paid. They want to feel
they are getting value for money for the
protection and services they receive.
So how does an insurer ensure his
premiums are fair and yet still profitable?
Well, usually he will analyse data, lots of it.
He will apply statistical analysis and
project any trends into the future to estimate
likely medical treatment needs
(claims) for the people insured. He will
then set a premium that should cover
those claims and leave a little over for
operating costs and to generate modest
profits for his shareholders.
To estimate the number of claims, insurers
will want as much data as possible. This comes
in a number of forms, for example:
- WHO data for a population as a whole
- Government statistics on hospital
usage or morbidity trends
- Data from the insurer’s own records
- Specific data on claims history for a
group of people previously insured
When analysed together an insurer will
be able to predict the likely claims costs
and hence set an insurance premium for
his customers. Sounds simple.
However, in coming to such a conclusion
the insurer has to make a number of
assumptions in areas which are less scientific
– human behaviours:
- Firstly an insurer has to understand
whether customers are likely to seek
medical treatment more frequently just
because they now have insurance.
- He needs to understand whether a fair
cross section of the population has taken
out his insurance, and not just all of the
sick people. If this is not the case, it will
affect the insurer’s results. This is known
as an ‘anti-selection’ risk.
- Similarly, the insurer needs to assume that a doctor will not alter his
or treatment just because the patient
has insurance. This part of human behaviour is again understandable. A
doctor may perform an additional test
maybe ‘just to be sure’ especially since
the patient will not have to pay.
- Worse though, is when the remuneration
for a doctor is based (or partly
based) on the number of tests he does
or how many MRI scans he can
request. Some can see an insurance
policy as a means through which to
boost income by requesting additional
tests for which there is little or no
medical need. At its worst, this is fraud
against an insurer, and potentially
harmful or inconvenient to the patient.
This is by no means an exhaustive list of
the difficult assumptions which insurers
have to make when pricing an insurance
policy. And they cannot be ignored.
Regardless of how policy wordings might be
phrased to avoid such human influences,
such events will always occur to some
extent. This is natural human behaviour.
So what are the implications if the insurer
gets his assumptions wrong? Well, when
human behaviour results in increased treatment
and treatment costs, the insurer needs
to build this trend into his pricing. Hence, if
an insurer cannot control such trends, either
with his terms or his pricing, then his price
will rise. This will be bad for customers and
indeed may result in less people being able
to afford insurance, which in turn will affect
the business of the medical providers. It is in
everyone’s interest to contain costs and it is
the key reason why medical treatment
should not change because a patient has
|About the author
Ian Hayward is an independent insurance
consultant based in Dubai, specialising in life- and health-related
insurance. He offers consulting,
training and advisory services to the
regional insurance industry and associated
of upload: 18th Oct 2011