Chapter 7: Healthcare products Flashcards
What is the legislation attached to healthcare products?
Legislation:
- Healthcare often highly regulated legislation covering provision of healthcare services and nature of health insurance
- In SA, legislation states that medical expense cover on indemnity basis only permitted to be provided by medical scheme which are mutual funds
- Long-term and short-term insurers are permitted to offer certain healthcare products but on a stated sum basis
What are the key features of short and long term healthcare contracts?
Key features of short-term contracts are:
- Cover usually provided for a single year and then can be renewed
- Can be multiple claims
- Claim amounts are generally unknown and volatile
- Delays in reporting and settling claims
Key features of long-terms contracts are:
- Long-term , 20 years
- Cover ceases on claim
- Claim amount may be known with certainty- fixed sum assured
- Used for protection against ill health/ death and savings
- Group version typically only for 1 or 2 years and then renewed
Discuss the process of underwriting, contract design, setting contribution rates or premium rates and provisioning for healthcare contracts.
Underwriting:
- Different for short and long-term insurance policies
- Extent of underwriting also affected by size of premium
- Most common form for long-term insurance is medical underwriting—asking questions such as gender, age, smoker status, weight, height, existing health conditions and family history
- Different types of underwriting for short-term contracts:
o Full medical underwriting - Exclusion of pre-existing conditions o Moratorium underwriting o Medical history disregard o No worse terms o Continued personal medical exclusion
Contract design:
- Iterative process—consider costumer acceptability, regulatory requirements, price competitiveness, system capabilities
- Consider design of benefit structure and structure of premiums
Setting contribution or premium rates:
- Calculation of prems based on principle of income must equal outgo or income must exceed outgo
- Surplus belonging to capital provider or reserve fund
- Pricing will require sensitivity testing and long-term projection to asses sustainability
Provisioning:
- Main type of reserve required in healthcare is the incurred but not yet reported
What are the main types of healthcare products?
Main types of healthcare products:
- Private medical insurance- benefits provide for cover of medical expenses incurred or access to healthcare benefits
- Critical illness – benefits provide sum assured paid on diagnosis of a specified list of conditions
- Long-term care – benefits provide custodial care where policyholder has diminished capacity, measured with reference to ADL
- Other products – offer some benefit contingent on occurrence of health event
What is the principle of mutuality and solidarity?
Mutuality, solidarity and community rating:
Mutuality:
- Follow principle of mutuality
- Pooled fund is created, and premiums paid into fund by policyholders
- Premium paid determined by risk presented at the time of taking out contract
- Disadvantage: high-risk lives will not have access due to affordability
Solidarity:
- Similar in that both involve concept of sharing losses, main differences are:o Premiums are not based on risk but the ability to pay or are set equallyo Losses are paid according to need e.g. those who are sick need more healthcare resources and claim more than healthy lives, but both contribute the same amount into pool
- Example of principles of solidarity in SA is open enrolment policy for medical schemes.
- Open medical schemes are obliged to accept anyone at standard contribution rates and a min benefit package is prescribed under current legislation
What reinsurance is needed by short-term insurers and long-term insurers?
Reinsurance:
- Help manage some risks insurance companies are exposed to
- Either proportional reinsurance contracts or non-proportional
- Under proportional reinsurance, the reinsurer’s share of the risk is defined for each separate policy, while under non-proportional reinsurance the reinsurer’s liability is based on the aggregate claims incurred by the ceding office.
- Short-term insurers need for reinsurance:
o Protection against large claims
o Able to take on larger risks and more risks that they otherwise could not (due to capital constraints)
o Reduce impact of accumulations of risk and catastrophes
- Long-term insurance need for reinsurance:
o To cope with claim payout fluctuations
o Finance new business strain
o To obtain technical assistance and data for pricing new contracts
What is the investment strategy applied for healthcare contracts?
Investment strategy:
- Consider characteristics of liabilities mainly currency, nature, term and level of uncertainty
- Consider regulatory restrictions
- Most healthcare liabilities are short-term
- Largely guaranteed in money term or are indemnity products
- Timing and number of claims is where most uncertainty lies
Which entities provide healthcare cover?
Types of entities providing cover:
- State provision and national health insurance
- Subsidised healthcare through donor organisations
- Mutual organisations-medical schemes in SA
- Insurance companies
What are the hey risks under healthcare products?
Key risks under healthcare products (depend on nature of product):
- Claim frequency, benefit amount, volatility and settlement delays
- Accumulations of risk, catastrophes and large number of large claims
- Investment risks – poor or volatile returns, falls in asset values and default risk
- Expenses being higher than expected
- Poor persistency – high lapses and low renewals
- Poor plan mix due to upgrades, downgrade and anti-selection
- Underwriting risk – failure to properly disclose pre-existing conditions
- Credit risk
- Operational risk
- Availability of claims data
What are the aspect of the healthcare market that distinguish it from other markets?
Medical Trends:
Aspects of healthcare market that distinguish it from other markets
- Public good characteristics
Access to some form of healthcare service regarded as basic human right
Volume and quality lacks due to budgetary constraints—thus drives demand for private healthcare solutions
- Information asymmetry, over-supply and demand
- Information about range and quality of healthcare services relative to cost is difficult for consumers to obtain
Introduces issue of providers inducing unnecessary services causing over supply
And individuals unable to make own informed decision leading to excess demand
- Rapidly increasing costs of healthcare services
Technological advances in medical field are likely to influence demand for better treatment and cost of healthcare
- Importance of health insurance
High level of uncertainty surrounding future health and so uncertainty around timing and nature of healthcare service needed.
Healthcare needs increase with age
Although people budget for retirement often underestimate the need for planning financially for healthcare needs
Add extra pressure to employer-funded or state-funded systems
Types of healthcare products: Private medical insurance definition, how it meets customers’ needs and existence of group cover.
Private medical insurance (PMI):
Definition:
- Usually indemnity-based products that seeks to provide compensation for cost of private medical treatment
- Indemnity basis can cause exposure to fraud and moral hazard-claim for more expensive benefits than necessary and more often—selective lapses, increase burden on risk pool
- In SA known as medical aid or medical scheme cover
Use to meet costumers’ needs:
- If no state-funded care, then PMI usually provide for all from of healthcare needs
- If state provides some level of healthcare, then PMI bought when individual requires higher level of care:
o Medical attention without waiting, with higher standard of accommodation, with doctor of choice and in local or private hospital
Existence of group version:
- Employers often use them to cover several employees
- Pre-existing conditions are more likely to be covered under group due to lower degree of anti-selection—especially if cover for group is on compulsory basis
Types of healthcare products: Private medical insurance definition, how it meets customers’ needs and existence of group cover.
Private medical insurance (PMI):
Definition:
- Usually indemnity-based products that seeks to provide compensation for cost of private medical treatment
- Indemnity basis can cause exposure to fraud and moral hazard-claim for more expensive benefits than necessary and more often—selective lapses, increase burden on risk pool
- In SA known as medical aid or medical scheme cover
Use to meet costumers’ needs:
- If no state-funded care, then PMI usually provide for all from of healthcare needs
- If state provides some level of healthcare, then PMI bought when individual requires higher level of care:
o Medical attention without waiting, with higher standard of accommodation, with doctor of choice and in local or private hospital
Existence of group version:
- Employers often use them to cover several employees
- Pre-existing conditions are more likely to be covered under group due to lower degree of anti-selection—especially if cover for group is on compulsory basis
Types of healthcare products: Critical illness cover definition, how it meets customers’ needs and existence of group cover.
Critical illness cover:
Definition:
- Known as dread disease, serious illness, crisis cash, living assurance, or critical illness cover
- Benefit is usually a lump sum, but can be regular income, payable is policyholder suffers one of the defined conditions.
- Characteristics of illness/condition that lead to inclusion in critical illness product:
o Perceived by public to be serious and to occur often
o Each condition covered defined clearly so no ambiguity at time of claim
o Sufficient data available to price benefit
Use to meet customers’ needs:
- Not designed to indemnify policyholder
- Needs met by critical illness cover include:
o Provide source of income if policyholder unable to work
o Assist with repaying mortgage or loan when policyholder’s health is in question
o Medical costs funded when critical illness requires surgery or expensive treatment
o Used by business partners to buy out partnership stake in the business when critical illness arises
o Assist with funding change in lifestyle required
o Provide for recuperation after illness
Existence of a group version:
- Key requirements to establish a group scheme:
o Definition of who is eligible for benefits under scheme
o Benefits under the scheme are clearly defined by:
Size
Definition of valid claim
Period of benefit
o Other factors considered in good scheme design for group products:
Applying exclusions
Setting free cover limits
Ensuring members are actively working when cover begins
Setting take-up dates on voluntary schemes
Laying down take-over terms where insurer accepts scheme previously insured elsewhere
Types of healthcare products: Cash benefits definition, how it meets customers’ needs and existence of group cover.
Cash benefits:
Definition:
- Major medical expenses
o Provides lump sum when policyholder undergoes surgery
o Size of lump sum may vary by class or severity of procedure
- Hospital cash plans
o Provides defined benefit for a defined premium
o Usually pay pre-stated lump sum per day in hospital
o Often there is minimum length of stay required
- Medical shortfall (gap) cover
o Designed to cover the difference between cost of medical treatment and amount covered by conventional PMI products
o Differences arise due to benefit limits or doctors charging higher fees than covered by PMI benefits
- Personal accident
o Provides lump sum benefit to compensate for bodily injury suffered as a result of accident
o Sometimes policy have rider benefit that pays additional benefits if insured’s children suffer an accident or covers some of medical expenses
Use to meet customers’ needs:
- Major medical expenses
o Aims to meet the in-patient cost associated with surgery and provide for a balance to fund incidental or recuperation costs
- Hospital cash plans
o Not designed to indemnify for actually medical expenses but provide cash for other expenses that arise due to policyholder being hospitalised
- Medical shortfall (gap) cover
o Aims to help policyholder not having to pay out their pocket for medical expenses not covered by their PMI benefits
- Personal accident
o Aims to assist with meeting financial outgo when policyholder is disabled or receiving treatment due to an accident
Existence of a group version:
- Group versions of hospital cash and personal accident and disability products may be specifically designed for employer groups or affinity groups – group of people with common interest, background or goal and are linked by being members of same organisation
