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 it are more complex

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 diagnosis 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 insurance.

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 organisations. Email: ichayward@hotmail.com

ate of upload: 18th Oct 2011


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