The Arkansas proposal has various financial implications, especially with regard to provider reimbursement levels and various aspects of the Affordable Care Act, including the minimum medical loss ratio requirement and the “3Rs” (reinsurance, risk corridors, and risk adjustment). This healthcare reform briefing paper by Rob Damler, “Considerations for Medicaid expansion through health insurance exchange coverage,” examines these key considerations for a state contemplating this approach.

Health insurance models vary from country to country. As highlighted in our first series of articles on international health markets, governments often dictate the role of private and public health insurance within any country. Milliman has produced a new series of blogs focused on the medical underwriting and risk adjustment practices of eight countries: Australia, Ghana, Ireland, New Zealand, Saudi Arabia, South Africa, Spain, and United Arab Emirates. This is the eighth article in our series.

Background to healthcare in the Middle East
The Middle East is going through rapid health reform with the transformation of a historical publicly funded health system into a hybrid public-private insurance model. The governments in these countries are facilitating the development of the provider community through the legislation of compulsory health insurance coverage, thus shifting the onus of the development of healthcare from the public sector to a public-private partnership, with the help of the private provider community and insurance industry.

Though no more than 10% of the population of any one Gulf Cooperation Council (GCC) country is currently covered by insurance, this is expected to change quickly. Workers covered under these plans can choose care at either public or private institutions, a system that has the benefit of ensuring that public providers must learn to generate claims in order to be reimbursed by the government. Once private health insurance takes hold, patient volumes for private providers will rapidly increase, as patients are allowed to pursue reimbursed care at private institutions.

Depending on the country, the health insurance opportunity could either be to enter as a stand-alone private player, or to form a joint venture with the government to establish and manage a national insurer.

United Arab Emirates (UAE)
UAE is a typical hybrid public-private insurance model. By regulation, UAE nationals and citizens of other GCC countries receive free inpatient and outpatient healthcare at government hospitals and clinics, fully funded by the state. However, UAE nationals can also opt to purchase private medical insurance coverage through state-subsidized premiums.

The leading health insurance company in Abu Dhabi is Daman National Health Insurance Company, owned by the government, offering health insurance to expatriates and their families. Daman commenced writing business on May 1, 2006, and has a cooperation agreement with Munich Re, which provides reinsurance and direct underwriting and claims expertise. Daman will provide insurance services for all government expatriate employees for a period of 10 years from July 1, 2006.

Daman also provides private medical insurance for all UAE nationals through its Thiqa plan. As of April 2009 there were about 500,000 members in the Thiqa plan. Members receive a Thiqa card with which they can obtain private medical treatment within the Daman preferred provider network, subject only to on-the-spot cash payment at the clinic or hospital by the individual in respect of member coinsurance. Otherwise the services are paid for directly by Daman, subject to production of the Thiqa card at clinics and hospitals.

A change to the Thiqa plan was announced in 2009 by Daman, which introduced a 50% coinsurance payment for all dental treatment and for pharmaceuticals sourced in the private sector. Pharmaceuticals sourced in the public sector remain free of charge for all UAE nationals. Salamat, an extended plan similar to Thiqa, is now also available for UAE nationals, providing medical expenses coverage on an optional regional or worldwide basis.

Resident expatriates, who received free healthcare in the past, now have to pay for treatment at government medical facilities, albeit at a subsidized rate. However, compulsory health insurance for expatriates is now fully implemented in Abu Dhabi, under Law No 23 of 2005.

The standard compulsory health policy for expatriates and their families resident in Abu Dhabi covers the employee, spouse, and up to three dependent children under the age of 18. The onus to purchase compulsory insurance for expatriate employees and their families lies with the employer. No expatriate work permits are issued or renewed without proof of insurance and proof of premium payment. The scheme has been a success, with the insured population exceeding 1 million in 2009.

There are four basic policies under the compulsory law as described below:

• A basic policy at a subsidized rate of AED 600 (USD 163) per annum for workers paid less than AED 3,000 (USD 817) per month, plus housing allowance, or AED 4,000 (USD 1,090) with no housing allowance
• A basic product policy, for members whose salary is over or equal to AED 3,000 (USD 817) per month, plus housing allowance, or AED 4,000 (USD 1,090) with no housing allowance
• An emergency policy for visitors
• Enhanced policies for higher earners, including all basic product coverage plus additional coverage over and above the legal compulsory minimum

The law does not cover members for chronic diseases unless they have been in Abu Dhabi for six months or more. A member can shift from the basic product to an enhanced product at any time, subject to payment of an additional premium.

The law sets out the healthcare services that are covered under the basic health insurance policy. The annual upper limit for the basic healthcare services is AED 250,000 for every person.

A compulsory health system is currently only effective for residents of Abu Dhabi, the capital city. For all residents in Dubai, including expatriates, the compulsory law was due to commence its first phase on January 1, 2009, continuing over several phases until 2015. Implementation has been delayed, however and it is not known when the matter will be resuscitated.

Underwriting, risk selection, and risk adjustment
For citizens whose healthcare is provided free, coverage is provided by the state without any underwriting or limits.

For private medical insurance (group health insurance for expatriates), it is usual for underwriters to offer a number of plans, which are based upon geographic coverage with limits per person per year that vary from AED 50,000 (USD 13,624) to AED 1.5 million (USD 408,720). It is not usual for deductibles to be applied to inpatient treatment, but it is standard procedure to apply a combination of copayments and deductibles to outpatient benefits, in order to curb abuse. Copayments may be as high as 20% and deductibles range from a minimum of AED 50 to AED 150 per claim (USD 14 to USD 41).

Sub-limits are applied when granting cover for maternity, dental, and optical benefits. Some underwriters also apply sub-limits for medicine, diagnostic services, and doctor consultations. Doctor consultations may also be subject to a utilization limit, for example 15 visits per annum.

Companies allow elective treatment subject to prior approval. However, where procedures are carried out by nonnetwork providers, whether inside UAE or overseas, it is standard practice for there to be a copayment of at least 20% of network rates. In some cases payment may be limited to 80% of 80% of normal network rates (that is, 64% of costs can be recouped).

A similar underwriting approach is adopted for emergency inpatient treatment at nonnetwork providers in the UAE and overseas. Cover for such elective and emergency treatment is also on a reimbursement basis.

Contracts are annual, and contain no cancellation provisions. They are renewable at the invitation and discretion of the insurer subject to agreement over terms.

Some leading insurers and third-party administrators provide an automated underwriting rules tool that allows the insurer to define proposed risk units, set parameters for coverage eligibility per plan, fix corresponding premium tables, and choose from an additional range of optional automated features to assign other eventual specific restrictions.

There is an extensive standard list of exclusions applying to the compulsory health policy for expatriates, spouses, and dependents resident in Abu Dhabi.

Private Medical Insurance (PMI)
For individual private medical insurance (PMI), most insurance companies restrict their acceptances to group PMI (compulsory in Abu Dhabi or voluntary in other states of UAE) and do not underwrite individual coverages unless written as a rider to a life insurance policy. PMI business is written by nonlife insurers and by life insurance companies as a rider to life contracts.

All leading companies operating in the Abu Dhabi market (including all of the major national insurers, the head offices of which are in Abu Dhabi, Dubai, and other emirates) are now licensed by the General Authority of Health Services (GAHS) to transact this business in Abu Dhabi. Several branches of foreign companies also have licenses.

For medical coverage riders to life policies, the two global life insurance companies in the UAE market are both branches of foreign companies, ALICO and Zurich Life. Premiums are not separately identified in official statistics.

Major writers of group PMI in UAE include Abu Dhabi National, Al Ain Ahlia, Emirates, Al Dhafra, Al Khazna, Oman Insurance Company, AXA, and Arab Orient. Several of these companies write individual medical business, but Abu Dhabi National and Emirates only write group medical business. The major international PMI insurers include InterGlobal, AXA-PPP, Good Health, William Russell (through Dubai Insurance Company), and BUPA International.

Comment
The GCC countries will face an unparalleled and unprecedented rise in demand for healthcare over the future decades. According to an estimate by McKinsey & Company, the total healthcare spending in the region will increase from over USD 12 billion today to USD 60 billion in 2025. Going forward, some of the key factors and trends we expect to see in the UAE market include:

• Prevalence of lifestyle diseases
• Prospering middle-class population
• Continuous influx of expatriates in this region and government’s requirements for mandatory medical healthcare for expatriates in UAE
• Shortage of all kinds of healthcare professionals, including physicians, dentists, nurses, and midwives

Health insurance models vary from country to country. As highlighted in our first series of articles on international health markets, governments often dictate the role of private and public health insurance within any country. Milliman has produced a new series of blogs focused on the medical underwriting and risk adjustment practices of eight countries: Australia, Ghana, Ireland, New Zealand, Saudi Arabia, South Africa, Spain, and United Arab Emirates. This is the seventh article in our series.

Background to healthcare in the Middle East
The Middle East is going through rapid health reform with the transformation of a historical publicly funded health system into a hybrid public-private insurance model. The governments in these countries are facilitating the development of the provider community through the legislation of compulsory health insurance coverage, thus shifting the onus of the development of healthcare from the public sector to a public-private partnership, with the help of the private provider community and insurance industry.

Though no more than 10% of the population of any one Gulf Cooperation Council (GCC) country is currently covered by insurance, this is expected to change quickly. Workers covered under these plans can choose care at either public or private institutions, a system that has the benefit of ensuring that public providers must learn to generate claims in order to be reimbursed by the government. Once private health insurance takes hold, patient volumes for private providers will rapidly increase, as patients are allowed to pursue reimbursed care at private institutions.

Depending on the country, the health insurance opportunity could either be to enter as a stand-alone private player, or to form a joint venture with the government to establish and manage a national insurer.

Saudi Arabia
The healthcare network within the Kingdom of Saudi Arabia compares well with its counterparts in the West, and its health systems have been ranked in the top 30 in recent World Health Reports from the World Health Organization. Moreover, Saudi Arabia has been ranked as the largest among 17 healthcare markets across the Middle East and Africa, establishing it as one of the most valuable healthcare markets in the region.

Health services in the Kingdom are delivered through both the public (approximately 80%) and private (approximately 20%) sectors.

Public healthcare system
The provision of free healthcare is enshrined in the constitution of Saudi Arabia. Free healthcare is provided to all nationals and expatriates working in the public sector and to all pilgrim visitors (two million to three million pilgrims, or more, visit the Kingdom every year from all over the world). These services are delivered through the Ministry of Health (MOH) and other government agencies.

The healthcare system has two tiers. The first is a network of primary healthcare centers and clinics that provide preventive, prenatal, emergency, and basic services. These are supplemented by mobile clinics that visit remote rural areas dispensing vaccines and performing basic medical services. The second tier comprises the hospitals and specialized treatment facilities that are located in major urban areas throughout the country so as to be accessible to all.

Funding the free public healthcare services is an ever increasing challenge faced by the government, driven in particular by the rapid growth in population, the high price of new technology, and the growing awareness about health and disease among the community. Many large employers are already purchasing group medical expenses insurance for both their Saudi and expatriate staff, in order to avoid discontent among the Saudi staff members when only expatriate staff have access to private treatment.

Private healthcare system
The rapidly growing private sector accounts for approximately 20% of health services delivered in the Kingdom. The private sector provides health services through its health facilities, including hospitals, dispensaries, laboratories, pharmacies, and physiotherapy centers throughout the Kingdom. Expatriates are not permitted access to government hospitals or clinics.

The private health sector is supervised and regulated by the Council for Cooperative Health Insurance (CCHI), which was established in 1991 to meet the challenges of the Kingdom’s rapidly rising health costs and to introduce a health insurance strategy for the Kingdom. Supervision of insurers transacting medical expenses insurance is the responsibility of the Saudi Arabian Monetary Agency (SAMA) within the framework of the Cooperative Insurance Companies Control Law.

The implementation of a cooperative health insurance scheme was planned over three stages, with only the first stage having been implemented to date:

• Stage one: Employers have to pay for health coverage costs for expatriates and Saudi nationals working in the private sector, as well as their spouses and children (usually between the ages of 10 days and 18 years), as long as the employee is resident on married status. This was introduced in 1999 but did not come into force until 2006. Currently there are approximately 9 million expatriates in the Kingdom and residence permits (iqamas) are no longer issued to expatriates without proof of the requisite medical insurance.
• Stage two: Government to fund cooperative health insurance for Saudis and non-Saudis working in the government sector. No firm dates, deadlines, or details have yet been published, but the scheme and the methods of implementation may be similar to the existing expatriate insurance provisions.
• Stage three: Cooperative health insurance to be applied to other groups, e.g., a seasonal health insurance for all international pilgrims. This also has not yet been implemented.

Underwriting, risk selection, and risk adjustment
The Saudi health insurance market is characterized by intense competition. Premium rates for employee group schemes have been declining on average in the market in the last two years. However, in October 2012, the Saudi Arabian Monetary Agency conducted an actuarial review of medical underwriting in the Kingdom, which resulted in a number of insurers being forced to raise their prices because they were not charging enough for their products.

The CCHI specifies a unified policy wording (without variation to group and individual business) with a standard minimum of SAR 250,000 (USD 66,667) annual coverage policy for expatriates with benefits including inpatient (hospitalization), outpatient (including prescription medicines and physician visits), maternity, dental, and optical benefits. Preexisting ailments are covered, but in cases of voluntary purchases the waiting period for preexisting ailment coverage can be 12 months.

Clients purchasing group or individual medical expenses insurance can choose to extend the unified policy by providing for larger coverage limits than the mandatory or by opting for medical, dental, or maternity coverage extensions.

Approval for treatment is usually required in respect of claims exceeding between SAR 500 and SAR 1,000 (USD 133 and USD 267). In most cases, approval can be made by insurance companies or their mandated third-party administrators (TPAs) within 15 minutes of receipt of a request, but standards of administration do vary. No prior approval is required for emergency cases, but insurance companies usually require notification within 24 hours of occurrence.

For groups, it is usual for a unified rate to be applied. Underwriters arrive at a group rate by considering size of group, loss experience, gender, nationality, age bands, scope of coverage, and limits and deductibles, among other factors.

For individuals, rating will take into consideration the age, gender, and medical history of the proposer together with the scope and limits of coverage required (including geographic area and deductible selected).

Managed healthcare
There are some companies that provide managed care programs for self-insured clients and third-party administration services, though they cannot own any hospitals in the Kingdom. Services these companies may provide include product design and support, underwriting, pricing, medical management, network management (policyholders may not go outside the network), reinsurance, and operations management (policy issue, claims, membership cards, directories, and membership package), among others.

Comment
Despite admirable progress in the healthcare sector, the Kingdom of Saudi Arabia faces numerous challenges to maintaining and developing its healthcare system. These include a shortage of local healthcare professionals, financing and expenditure demands resulting from the high provision of free services, changing patterns of disease, the absence of a national health information system, privatization of public hospitals, utilization of electronic health (e-health) strategies, and the poor coordination and communication between the various health service providers in the Kingdom, resulting in a waste of resources and duplication of effort. However, it has made significant progress over the past 10 years and continues to improve on the status quo.

Transitional Reinsurance Program
The purpose of a transitional reinsurance program is to help stabilize premiums for coverage in the individual market during the years 2014 through 2016. The PPACA Transitional Reinsurance Program is an important element in helping states to level the playing field across the non-group health insurance market, to moderate premium changes from the implementation of insurance reforms both inside and outside of exchanges, and to set the foundation for the establishment of the exchanges. Under this program, reinsurance would be based on high-cost enrollees’ claims, and not on a list of medical conditions. The data contained in APCDs can be utilized to establish the attachment points of the high-cost enrollees and help to better define the upper limits of the coinsurance amounts.

In a bulletin of May 31, 2012, entitled, “Transitional Reinsurance Program: Proposed Payment Operations by the Department of Health and Human Services,” the U.S. Department of Health and Human Services (HHS) suggested that, in order to derive the reinsurance payment calculations, a minimum amount of data is necessary, which would contain the following:

All of the data elements suggested by HHS reside in a typical APCD and would be available for most commercial healthcare payors operating in a state. To minimize the data collection burden, HHS would like to leverage commonly used data elements from existing claims data standards. This could be accomplished in a comprehensive cost-effective manner with data provided by an APCD.

Permanent risk adjustment program
Another component of PPACA critical to the successful establishment of exchanges is the establishment of a permanent risk adjustment program, which will be used to adjust premium rates for differences in the underlying morbidity of a health plan’s membership. Morbidity can be measured using risk adjustment software. These tools use some combination of information including diagnosis data, demographic (age and gender) information, and the types of prescription drugs that someone may be taking to estimate the morbidity of that person. Data availability and quality are of critical importance to the successful utilization of these tools. Actual costs are not used to measure or predict morbidity although they are used to develop relative payment weights for severity of illness (“case mix”) calculations. All of these data are commonly found in APCDs.

Additionally, on March 23, 2012, HHS published a final rule entitled “Standards Related to Reinsurance, Risk Corridors and Risk Adjustment Final Rule” (45 CFR Part 153), which requires a state to collect risk adjustment data if it is operating a risk adjustment program (specifically, § 153.340). The original draft of these rules specifically allowed a state to seek an exemption if it had an APCD in place by January 1. 2013. This language was removed because it was believed to be too restrictive. A state can now utilize data from an APCD at any time in the future as long as there are sufficient data collected to calculate individual risk scores generated by the risk adjustment model in the applicable federally certified risk adjustment methodology. This requirement can be met by the data collected for a typical APCD.

The HHS approach to calculate payments and charges for the risk adjustment program includes the development of plan average actuarial risk factors. The creation of the risk factors depends upon comprehensive and accurate data from all health plans and is best carried out in a consolidated manner, which is what an APCD can provide.

In an effort to support the establishment of exchanges and to provide for more accurate transitional reinsurance programs and a permanent risk adjustment program, HHS has approved significant funds as part of its exchange planning grants for states to establish APCDs. The funding has covered the costs of the APCD IT infrastructure (facility, maintenance, and operation), and the development costs to accept and process commercial claims and Medicaid data, build master provider and patient indexes, and link data across payor sources.

Many states that elect state risk adjustment will elect to outsource portions of the risk adjustment program, including the hosting and maintenance of the data warehouse, ongoing reporting, and analytics, as well as the development and ongoing updates of risk adjustment. All of these services can be provided by Milliman MedInsight.

This article first appeared at Milliman MedInsight.

This Client Action Bulletin discusses Patient-Centered Outcomes Research Institute (PCORI) funding, a Medicare Part A payroll tax increase, guidance on transitional reinsurance fees and wellness programs, as well as other regulations related to healthcare reform. The bulletin also provides guidance on actions employers should undertake.

PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.

Want more information? Here are good resources about risk adjustment and reinsurance.

“Risk mitigation programs appear to reduce financial risks to health plans,” the actuaries write. “At the same time, overly restrictive premium rate limitations can lead to high federal risk corridor payments.”

If plans do not charge premiums that are high enough to meet claims and expenses, “federal payments under the risk corridor programs will be high to compensate partially for the inadequate premiums,” the actuaries say.

“The impact of inadequate rates on a health plan’s financial viability should also be considered. This result stresses the need for the rate review process to not only guard against unduly high premiums, but also to ensure that premiums are not set too low. This is especially important in 2017 and beyond, after the expiration of the risk corridor program.”

Plans in states with fewer coverage rules today might need bigger increases than plans in other states, the actuaries say.”

The study, commissioned by the Society of Actuaries (SOA), can be found here.

The role of private health insurance differs significantly from one country to another. A key reason for this relates to the availability and the delivery of public healthcare within each country. In addition, governments often dictate the role of private health insurance within any particular country. This eight-part series focuses on international health markets, comparing and contrasting the key elements of risk selection practice in the public and private health insurance markets in each region.

Health insurance market summary
In India, health insurance is a young and growing phenomenon. Private health insurance covers only 2%-3% of the Indian population. There are some other government, employer, and social schemes that cover about 12%-13% of the market. The healthcare for the poor is available either through social schemes or government-owned hospitals and dispensaries. The government clinics and hospitals are available for everyone and offer almost free services.

The Indian health insurance industry was opened to private insurers in 1999. Currently there are 18 private non-life insurance companies in the market, including three stand-alone health insurance companies and four public sector insurers. In 2003, third-party administrators (TPAs) were established and insurers outsourced claim management and administration to them. The introduction of TPAs facilitated the start of ‘cashless claims,’ where hospitals were paid directly by the TPAs for their services.

Retail products include Mediclaim, a simple inpatient-only product with fixed sum insured. Offered as individual or family, it covers inpatient benefits for illness, diseases, or accidents that require at least one night of hospitalisation. Many insurers cover a limited list of day/outpatient procedures. Products do not cover preexisting diseases for a defined duration and may have a list of permanent exclusions. In addition, various benefit sub-limits are applicable in room rent, professional fee, or cost of surgery, etc.

Group products are also based on Mediclaim but have more generous benefits with minimal exclusions, waiting periods, etc., as compared to individual products. Preexisting diseases and maternity are generally covered. Many group products cover the parents of the employee as well.

Some product innovation is emerging with larger sum assured limits, limited outpatient services coverage, etc., although the majority of products are ‘Mediclaim’ types of inpatient products with limited sum assured.

The government offers tax incentives for health insurance premiums. The government-appointed regulator has an additional development role, facilitating and creating a conducive environment for standardisation and transparency across insurers. The government’s role in healthcare provision has seen a trend where strategically the government is moving from being a healthcare provider to a healthcare financer. A large social insurance scheme, Rashtriya Swasthya Bima Yojna (RSBY), is primarily for people below the poverty line. It has seen significant expansion, where over 50 million people are covered under this scheme and 500 million are targeted by 2015. The coverage in this scheme is limited to surgical procedures up to a total of $700 per year for a family of five.

The other government, employer, and social schemes that exist are:

• Government-based employer schemes: Employees State Insurance Scheme (ESIS) provides coverage for low-income employees of the organised industrial sector. Central Government Health Scheme (CGHS) provides coverage for central government employees.
• Public- and private-sector-based employer insurance: The organisations may offer health benefits to current and retired employees in the form of reimbursement of employees’ healthcare expenditures or treatments at a facility owned by the organisation. Major public sector undertakings such as Defense and Railways provide a large healthcare system. Smaller local services such as police services or a transport department are also provided similar coverage by state organisations. Many large private sector companies run their own clinics and hospitals for their employees, usually at locations where they have large manufacturing facilities.
• Not-for-profit schemes: These are implemented by trusts, self-help groups, or non-governmental organisations. Generally they cover urban and semi-urban workers in an unorganised sector and are usually regional.

Government-sponsored social insurance schemes for the poor: Many such schemes primarily targeting people below the poverty line have emerged in the last few years and are expanding. These include schemes offered by the central government and some state governments. The government pays the premiums and insurance companies bear the risks for the covered populations.

Underwriting practice
Minimal underwriting is done, mainly in the retail segment for people above a certain age or with medical disclosures. Insurers do not define their risk appetite or use risk classification. No formal underwriting is done for group insurance.

Retail products are subject to much greater regulatory oversight than group products. Currently there are no restrictions on underwriting, but the regulator has been progressively working towards restricting the freedom of insurers to reject applications based on age, past claim experience, etc. Products in retail segments are usually medically underwritten for ages above 45, though now this age limit is increasing to 55.

The individuals are subjected to medical tests referred to as pre-policy checks (PPCs). These are tests such as complete blood count (CBC), routine urine analysis, blood sugar, etc. Costs of such checkups are usually borne by the insurer in case the applicant is accepted for insurance. However, generally insurers have not evaluated cost, accuracy, and reliability of tests in identifying an existing medical condition. Insurers can apply exclusions or deny the policy. A deferment option is available though seldom used. Some companies have started loading for existing conditions, however proposers are mostly either accepted on standard rates with exclusions or are declined.

Some insurance companies employ underwriting guidelines provided by the reinsurance companies and the ones typically in use are adaptations of life insurance underwriting guidelines developed for another country. These are usually declinature-based.

The policies are renewed based on the age and sum-insured-based rate table of the insurer. This rate table is approved by the regulator every few years. ‘No claim benefits’ are often provided with an increase in the sum assured amount. Premium loading on individual policyholders based on their claim experience is allowed in products which were approved earlier; however, in newer products it is not permissible. Post-claim underwriting is common. Thus far a policy issued in the past can be denied or re-underwritten only for applying exclusions.

The group insurance market is very competitive. Age band is the only underwriting consideration. Sometimes claim experience is used, where available, for rating-up or discounting. Very few of the insurers have a formula-based approach to pricing group covers. The prices are mostly driven by competition.

More recently, the regulator has mandated ‘guaranteed renewability’ and this has brought underwriting under focus, although regulatory mandates take their time to work through the system and may be modified with pressure from insurers. For any rate revision, companies require regulatory approval. Most companies do not use class rating or rating-up or discounting terms. In group products, often discounting or loading may be applied based on previous claim experience. Insurers will have to define their risk appetites and risk classifications to be able to load the premium based on risk classes at renewal. However, most insurers are yet to understand its implications and gear up to plan for this change. In the meantime, the basic rating tables are used for renewal.

As described above, underwriting is only now coming under focus, but both the industry and regulators are in a learning phase. A knowledge gap about the value and intricacies of underwriting exists. Most insurance companies employ formal proposal forms with medical declaration questions or mandated pre-policy checks based on age, body mass index (BMI), or sum assured. Much of this completion is done by the field agent and responses are biased to fast track policy issuance.

Social insurance schemes are blanket coverage for the eligible population and insurers are not allowed to underwrite. There is strong political thrust to promote utilisation rather than cost control. Renewals under these schemes are automatic, and premiums are paid by the government with a minimal contribution by the members.

Renewal premiums for social insurance schemes are primarily based on claim experience, subject to negotiation between the insurer and the government. As these are new initiatives, awareness and uptake of benefits are not stabilised, but many insurers are keen to gain this experience as valuable for future growth and development of this segment.

Business models and lack of data mean insurers do not consider using risk adjustment. The insurer does have historical data to generate trends and a few may explore predictive analysis options in the near future.

The hospital provider segment is generally unorganised with variable standards of documentation and poor data availability. Some data is published by the government based on statistics from the public healthcare system—which is not truly representative of the privately insured population. Insurers do not get detailed health status information as hospitals only provide basic information through discharge summaries and hospital bills and much of that in hard copy.

Health insurers have information about the inpatient admissions (that is what is covered). Data for all other services such as primary care, follow-up care, diagnostics, or pharmacy and community services are not available to the insurers.

Final thoughts
The recent regulator proposal for ‘guaranteed renewability,’ once implemented, would require insurers to redefine their underwriting focus. Insurers will have to define their risk appetites and risk classifications to be able to load the premium based on risk classes at renewal. However, most insurers are yet to understand its implications and gear up to plan for this change. Some sophisticated tools (primarily clinical rather than statistical) are emerging in the market and commercial players are exploring those options.

The second key stressor demanding change is the group insurance that continues to have very high claim ratios. The legacy of market-sensitive group premiums is not sustainable for long. The insurers are beginning to look at options for formula-based group underwriting.

The ‘portability’ of insurance is another agenda that the regulator has mandated. Portability will require insurers to review their underwriting practices and risk management. As they strive to capture larger market share, the likely demand for tools or underwriting approach will prosper.

Each insurer has to submit data to the insurance regulator regularly, although this data set was not available publicly. The regulator is currently setting up a data warehouse solution and looking to set up benchmarks and morbidity tables based on industry-aggregated data. Availability of this information is likely to give impetus to formula-driven pricing and availability of tools for underwriting and risk management.

What’s Happening Now: 2010 Changes

RDS Tax Exemption Eliminated – The tax exemption to employers who receive the Retiree Drug Subsidy (RDS) for providing qualifying prescription drug coverage for retirees eligible for Medicare has been eliminated. Even though this change does not occur until the beginning of 2013, if plans are currently receiving the RDS, it has the immediate accounting impact of creating a deferred tax liability for their other post-employment benefit (OPEB) obligations. Some analysts have estimated that S&P 500 companies will take a combined one-time hit of $4.5 billion to first quarter 2010 earnings as a result of this change. For example, AT&T has disclosed their estimate that the change will cost them $1 billion, Verizon reported $970 million, Deere & Co. reported $150 million, and Caterpillar Inc. reported $100 million. As a result, companies may consider alternate options for providing benefits or cut future benefits to offset some portion of the impact.

The Early Retiree Reinsurance Program (ERRP)