Singapore Angle
Tan Tock Seng Hospital, Singapore
The topic of healthcare insurance is an interesting issue. Health insurance is something that few would argue against but based on my knowledge of economics, I believe there is an inherent conundrum in the health insurance industry that makes health insurance unable to meet the rising healthcare costs for the individual.
Tim Hartford, in his book, The Undercover Economist, uses the logic behind the 1970 paper by economist George Akelof, “The Market for Lemons: Quality Uncertainty and the Market Mechanism”[1] to explain that in order for health insurance to properly serve its purpose, both the insurer and the insured must be relatively ignorant on the probability of whether an illness that is expensive to treat is going to occur. This may seem like a strange argument at first but if we examine the issue carefully from the perspectives of both the insurer and the insured, it will appear more logical.
From the perspective of the insured, if a person knows that he/she is always of ill-health or have certain diseases running in the family that are expensive to treat, rationally, the person will seek to buy as much insurance cover as possible because that person would not want to caught in a situation where he/she is burdened by the illness but yet have to endure an agonizing death because of lack of money to pay for treatment. If the insurer happens not to know that this person that is going to be insured has such a poor medical history, the insurer will happily sell insurance and end up being bankrupted by the claims.
On the other hand, if the insurer knows the medical history and condition of the insured very well, the insurer can do some form of “price-targeting”. Those with very clean medical history and in good health will definitely be insured at a low premium, since it is quite unlikely that the insured will make expensive claims. Those in poor health or with poor medical history will either be rejected insurance by the insurer, or the insurer will demand a very high premium to offset the high probability of this sickly person making huge claims. From the perspective of efficiency, it makes sense that the healthy pay low premiums and the sick pay high premiums. Unfortunately, those who are more prone to falling sick and thus badly need insurance cover, more often than not, are unable to pay high premiums, such as the elderly.
The government, in encouraging people to increase the cover for health insurance, isn’t exactly doing the wrong thing. What the government should do in tandem with encouraging people to buy more health insurance is to regulate the insurance industry. Advances in medical technology have enabled people to live longer, but it has also enabled insurers to become better at “price-targeting”. With better understanding of genetics, insurance companies can probably use the information to deny insurance to certain groups of people. The question of how far should insurance companies be allowed to go in assessing whether to cover a person or not is something policy makers have to think about.
Of course, it is not entirely fair to deal with the issue of rising healthcare costs from only the insurer end. The insured should also be encouraged to take proactive steps to lower their own health risk factors. Looking at the top 10 principal causes of death in Singapore[2], certain illnesses can certainly be prevented, such as heart diseases, diabetes and cancer. Regular exercise and watching one’s weight can also help prevent heart diseases[3] and diabetes[4]. The risk factor of certain forms of cancer can also be reduced with a proper diet and active lifestyle[5]. Policy makers can therefore attempt to persuade insurers to lower premiums if the insured makes an effort to mitigate the risk of making expensive claims. This is a win-win situation because the insured is more likely to enjoy better health by taking preventive measures and insurers, by virtue of the fact that less of the insured are likely to make huge claims due to preventive actions by the insured to reduce their risk factors, can then offer lower premiums.
It appears that the Ministry of Health is already thinking about this. According to a Straits Times article on 2 Aug 2007[6],
“Another possible next step: Getting insurers to encourage policy-holders to stay healthy with ‘no-claim bonuses, premium discounts for non-smokers and discounted or complimentary health screenings’, said Mr Khaw.”
With rising healthcare costs, something has to be done. Some people have suggested that health insurance doesn’t work but I beg to differ. It’s not that health insurance cannot work but rather, it is the ignorance of the economics of health insurance that leads one to conclude that health insurance is not a workable solution.
Certainly, the ideal condition for the health insurance industry would be mutual ignorance on both the insured and the insurer but in reality, the prospect of mutual ignorance is getting less and less possible with better and better medical technology. The next best step would be what the Health Ministry is contemplating, i.e. turn to private health insurance and make the “price-targeting” effect of the insurers work in favour of the common folk by attempting to encourage Singaporeans to take proactive action to take care of their health, thereby lowering claims across the board through the elimination of expensive but preventable illnesses so that premiums can get lowered as a result. Then, those who really need health insurance will not have to pay through the nose to be insured.
References:
[1] George Akelof, “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, http://en.wikipedia.org/wiki/The_Market_for_Lemons
[2]Ministry of Health, Singapore, Principal Causes of Death, http://www.moh.gov.sg/mohcorp/statistics.aspx?id=5526
[3] American Heart Association, Risk Factors and Coronary Heart Diseases, http://www.americanheart.org/presenter.jhtml?identifier=235
[4] BBC, About Diabetes, http://www.bbc.co.uk/health/conditions/diabetes/aboutdiabetes_causes.shtml
[5] American Cancer Society, The Link Between Lifestyle and Cancer, http://www.cancer.org/docroot/PED/content/PED_3_1x_Link_Between_Lifestyle_and_CancerMarch03.asp
[6]Straits Times, Medical insurance for all babies from Dec, http://www.straitstimes.com/Free/Story/STIStory_144636.html
