Chapter 7: Healthcare Products

Question 1

Main types of healthcare products

Answer 1

1. Private medical insurance (PMI)
2. Critical illness (CI)
3. Long-term care (LTC)
4. Other products and cash benefits

Question 2

Aspects to consider in product design (Healthcare)

Answer 2

1. Customer acceptability
2. Regulatory requirements
3. Price competitiveness
4. System capabilities

Question 3

Types of underwriting for short-term contracts

Answer 3

1. Full medical underwriting - any pre-existing conditions will be excluded
2. Moratorium underwriting - Instead of medical underwriting at the time of application, the insurer states the cover will not cover any medical conditions that existed during a pre-specified period prior to the policy commencing
3. Medical History Disregard (MHD) - No exclusions for pre-existing conditions - more likely to apply on group policy offerings
4. No worse terms - The new insurer agrees to cover at least as comprehensive as the policyholder’s current policy, with no additional underwriting conditions
5. Continued personal medical exclusion (CPME) - The new insurer promises only to carry forward such cover for medical conditions sd existed under the previous insurance policy

Question 4

Explain how the benefits for medical expenses may vary under PMI cover

Answer 4

PMI products will vary according to:

1. Overall financial limits and/or sub-limits
2. The level of the reimbursement rate for specific healthcare services
3. Whether to limit covered services to a network of healthcare providers
4. Whether to provide out-of-hospital benefits such as hearing aids and over-the-counter medicine
5. Whether to include medical savings accounts (used for day-to-day medical expenses)
6. Benefits required by legislation
7. Risk transfer mechanisms

Question 5

Key features of short term contracts

Answer 5

1. Cover is typically provided for a single year and can then be renewed
2. There can be multiple claims
3. Claims are generally unknown and can be volatile
4. There can be delays in the reporting and settling of claims

Question 6

Key features of long term contracts

Answer 6

1. They are long term (ie cover may be provided for 20 years)
2. Cover usually ceases on a claim
3. The claim amount may be known with certainty (ie fixed SA)
4. They are used for protection against ill-health or death, as well as savings
5. Group versions are typically for 1 or 2 years, but can then be renewed

Question 7

Describe the principle of mutuality in healthcare

Answer 7

A pooled fund is created and premiums are paid into the fund by policyholders.

The premium paid by the policyholders is determined by the RISK presented by the policyholder at the time of taking out the contract.

Claims are paid out of the pooled funds in accordance with the policyholder agreement.

Disadvantage:
While the risk pool is not sensitive to policyholders entering and leaving since each is contributing to their risk, high-risk lives will not be able to access cover due to affordability and this could have adverse social implications

Question 8

Describe the principle of solidarity in healthcare

Answer 8

Solidarity is similar to mutuality in that they both involve the concept of sharing losses.

However, the main differences are:

1. Under solidarity principles, the premiums are not based on risk, but rather on the ability to pay, or are set equally.
2. Under solidarity principles, losses are paid according to need.

Question 9

Why may short-term insurers require reinsurance?

Answer 9

1. They need to protect against large claims
2. They will be able to take on larger risks and more risks than they otherwise could, due to capital constraints.
3. They can reduce the impact of accumulations of risk and catastrophes

Question 10

Why may long-term insurers require reinsurance?

Answer 10

1. They need to cope with claims fluctuations
2. They need to finance new business strain
3. They need to obtain technical assistance and data for pricing new contracts

Question 11

List the key risks under healthcare products

Answer 11

1. Claim frequency, benefit amount, volatility and settlement delays
2. Accumulations of risk, catastrophes, and a large number of large risks
3. Investment risk
4. Expenses being higher than expected
5. Poor persistency, i.e. high lapses and low renewals
6. Poor plan mix due to upgrades, downgrades and anti-selection
7. Underwriting risk ie failure to disclose pre-existing conditions
8. Credit risk
9. Operational risk
10. Availability of claims data

Question 12

Fee-for-service (reimbursement mechanics for healthcare providers)

Answer 12

Providers are reimbursed for each service provided.

No restrictions apply on the cost of the service.

Question 13

Negotiated fee-for-service (reimbursement mechanics for healthcare providers)

Answer 13

The tariff or remuneration rate for each type of service is defined through negotiations or being defined in advance.

This may lead to policyholders having to cover part of the costs through out-of-pocket payments.

Question 14

Global fee (reimbursement mechanics for healthcare providers)

Answer 14

There is a fixed tariff/fee per episode of care with the service provider assuming some risk for the level of services required per patient (eg maternity or a knee replacement)

Question 15

Capitation (reimbursement mechanics for healthcare providers)

Answer 15

A fixed amount is paid per policyholder/beneficiary who has the option to use the service.

The fee is paid regardless of whether the service is used or not.

This transfers the risk from the insurer to the provider of services

Question 16

Aspects of healthcare markets that distinguish it from other markets

Answer 16

1. Public good characteristics and universal access (in many communities access to some form of healthcare service is regarded as a basic human right)
2. Information asymmetry, over-supply and demand
3. Information about the range and quality of healthcare services relative to cost is difficult, if not impossible, for consumers to obtain.
4. Rapidly increasing costs of healthcare services
5. Importance of health insurance

Question 17

Describe the importance of health insurance

Answer 17

There is a high level of uncertainty surrounding future health, and thus uncertainty around the timing and nature of services needed.

Healthcare needs increase with age.

Individuals can provide for these costs through savings and insurance products. They are likely to underestimate the need to plan financially.

This adds extra pressure to employer-funded or state-funded systems.

Question 18

Private Medical Insurance (PMI)

Answer 18

PMI and related products are usually indemnity-based products that seek to provide compensation for the cost of private medical treatment.

Private medical treatment refers to medical expenses that would otherwise be funded by individuals or employers outside of the state-funded services in a country.

The extent of the cover will depend on the level and quality of State services offered in a specific country.

Question 19

Difference between indemnity cover and stated benefit cover

Answer 19

Indemnity cover provides benefits related to the loss incurred on the occurrence of the health event.

For stated benefit cover, the policy document defines the benefit that is payable on the occurrence of a defined health event, regardless of the actual loss incurred.

Question 20

What customer needs does PMI meet?

Answer 20

If no state-funded care exists, then PMI will usually provide for all forms of healthcare needs on an indemnity basis.

If the State provides some level of healthcare to all, then PMI is usually bought when an individual requires care such as:

1. medical attention without waiting
2. medical attention in a higher standard of accommodation
3. medical attention with a doctor of choice
4. medical attention in a local or private hospital

Question 21

Does a group version of PMI exist?

Answer 21

Yes.

Employers often use them to cover several employees.

Benefits and exclusions are generally similar between group and individual contracts.

Pre-existing conditions are more likely to be covered under group business due to a lower degree of anti-selection.

This will especially hold if cover for the group is on a compulsory basis

Question 22

Explain why there would be a lower degree of anti-selection on group business

Answer 22

Membership of a group scheme is often compulsory, or a high proportion of those who are eligible to join opt to do so

Usually, all members of the scheme receive benefits that are the same or are determined by a fixed formula

Thus, group membership should consist of a mixture between good and bad risks

There is less opportunity for good risks to decide not to join, or for bad risks to buy more cover than good risks

Question 23

Critical Illness (CI) cover

Answer 23

AKA dread disease, serious illness, crisis cash or living assurance

The benefit under this policy is typically a lump sum but can be structured as regular income, payable if the policyholder suffers one of the defined conditions

The characteristics of an illness or condition that make it appropriate for inclusion in a critical illness product are:

• it is a condition perceived by the public to be serious and to occur frequently
• each condition covered can be defined clearly so that there is no ambiguity at the time of claim
• there is sufficient data available to price the benefit

Question 24

What customer need does CI cover meet?

Answer 24

NOTE: This product is not designed to indemnify the policyholder.

The needs met include:
1. To provide a source of income if unable to work

2. Can assist with repaying a loan or mortgage when the policyholder’s health is in question
3. Medical costs can be funded when surgery or expensive treatment is required
4. Could be used by business partners to buy out a partnership stake in a business when CI arises
5. Can be used to fund a change in lifestyle that is required
6. Can provide for recuperation after illness

Question 25

Does a group version of CI cover exist?

Answer 25

Yes.

The key requirements to establish a group scheme are:

1. There is a definition of who is eligible for the benefits under the scheme
2. The benefits under the scheme are clearly defined by:
   - size
   - definition of a valid claim
   - the period of the benefit

Question 26

Long-term care insurance (LTCI)

Answer 26

LTCI can be defined as all forms of continuing personal or nursing care and associated domestic services for people who are unable to look after themselves without some degree of support, whether provided in their own homes, at a day center, or in a state-sponsored care-home setting.

Can be provided either as pre-funded or immediate needs policy

Activities of Daily Living (ADL’s) include:

• washing
• dressing
• feeding
• toileting
• mobility
• transferring

Question 27

What need does LTCI insurance meet?

Answer 27

Usually aims to provide financial protection when a person becomes unable to look after themselves

Question 28

Does a group version of LTCI exist?

Answer 28

Not commonly.

Question 29

List 4 entities that may be involved in the provision of healthcare services and health insurance

Answer 29

1. State provision and national health insurance (NHI)
2. Subsidized healthcare through donor organizations
3. Mutual companies (medical schemes in SA)
4. Insurance companies

Question 30

Factors to consider in good scheme design for group products.

Answer 30

1. Applying exclusions
2. Setting free cover limits (can receive cover without providing evidence of health)
3. Ensuring members are actively involved at work when cover begins.
4. Setting take up rates on voluntary schemes
5. Laying down take over terms when the insurer accepts a scheme previously insured elsewhere

Question 31

What are open medical schemes?

Answer 31

Open medical schemes are obliged to accept anyone who wants to become a member at standard contribution rates, and a minimum benefit package is prescribed under legislation

Question 32

What values need to be determined when setting premium/contribution rates?

Answer 32

1. Claims
2. Expenses
3. Commission
4. Risk transfer arrangements
5. Non-premium income
6. Reserve loading requirements

Question 33

What is the main type of reserve required in healthcare?

Answer 33

Incurred but not yet reported (IBNR).

This is a reserve for claim events that have occurred but which the healthcare funder does not yet know about.

Question 34

What is an affinity group?

Answer 34

A group of people who share a common interest, background or goal and are linked together by being members of the same organization.

Question 35

List 4 other types of PMI-related products that also provide for healthcare expenditure (Cash Benefits)

Answer 35

1. Major medical expenses
   - Provides a lump sum when the policyholder undergoes surgery
2. Hospital cash plans
   - Provides a defined benefit for a defined premium. Usually pays a pre-stated lump sum per day in hospital, and is usually paid from the first or second day in hospital
3. Medical shortfall (gap) cover
   - Designed to cover the difference between the cost of medical treatment and the amount covered by PMI products. These differences arise due to benefit limits or healthcare professionals charging higher fees than are covered by PMI benefits
4. Personal accident
   - Provides a lump sum benefit to compensate for bodily injury suffered as a result of a accident

Group versions of hospital cash and personal accident and disability products may be specifically designed for employer groups or affinity groups