Medical underwriting and risk adjustment practices: Ireland

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 sixth article in our series.

The national public health system in Ireland provides access to health services to all people ordinarily resident in Ireland. The extent to which public health services are subsidized depends primarily on the means of the individual involved. Income limits are defined, varying by age category (higher limits apply for individuals over age 70 with some phasing in for the 66-69 age category). In addition, investments and other assets are notionally converted to income using predetermined income factors.

Individuals with total notional income below the relevant limits are entitled to a “medical card.” Medical card holders are entitled to free GP (family doctor) visits, prescribed drugs and medicines (with a nominal charge of 50 cents per prescribed item), public hospital services, dental services, maternity and infant health services, and a range of other services.

Individuals with total notional income above the relevant medical card limits, but below a defined higher limit, may be entitled to a “GP visit card.” The GP visit card is valid for a defined period of time and entitles the holder to free GP visits.

Individuals with weekly income exceeding the GP visit card threshold are not entitled to free GP visits and must pay for many of the services that are provided free to medical card holders, but many significant subsidies apply.

One such subsidy relates to the costs of approved prescribed drugs and medicines. The Drugs Payment Scheme limits the out-of-pocket expenditure for approved prescribed drugs and medicines to €132 for a family in a calendar month1 where a family broadly covers an individual, his or her spouse or partner, and their children (under 18, or under 23 if in full-time education).

Considerable subsidies also exist within the public hospital system. In particular, the extent to which an individual can be charged for in-patient treatment in a public hospital is limited to €75 each day up to a maximum of €750 each year. Accident and emergency (A&E) charges are limited to €100 (for each visit) and are waived if the A&E visit follows referral from a GP.

Some beds in public hospitals are designated as “private beds” and the charges for those beds are considerably higher. In addition, individuals occupying “private beds” must cover the costs of any hospital consultants attending them. Private accommodation is typically chosen by individuals with private health insurance cover.

The public health system is run by a national agency called the Health Service Executive (HSE). The HSE’s expenditure for 2011 was just under €13.6 billion.2

Private health insurance (PHI) is optional but encouraged primarily through the use of tax relief on premium payments. The market is community rated, and a number of regulatory requirements are imposed on insurers (through the Health Insurance Act, 1994) to ensure that the operation of the market accords with government policy in this area. The Health Insurance Authority (HIA) is the regulatory body charged with monitoring the extent to which insurers comply with the requirements set out under the law.

There are four key requirements that support the government’s objective that individuals should not be charged higher premiums for a health insurance product because of age, gender, or health status. These are:

• Open enrolment: Insurers must accept all applications for health insurance regardless of age or health status (subject to insured lives undergoing waiting periods that increase with age, and subject to exclusions in respect of existing conditions of up to 10 years).
• Lifetime coverage: Insurers cannot terminate or fail to renew a health insurance contract without the consent of the insured person.
• Community rating: The insurer must charge the same rate for a given level of benefit (i.e., product), regardless of the age, gender, or health status of the applicant (subject to limited exceptions).
• Minimum benefit: PHI contracts must provide benefits at least equal to a prescribed minimum benefit.

While the public health system does effectively provide universal access to hospital services (subject to limited copayments), the take-up rate for PHI has been high in Ireland relative to many other PHI markets, and 46% of the total population was covered on PHI contracts in Ireland at the end of September 2012. We estimate that total PHI premium income for 2012 is approximately €2 billion.

Having PHI coverage can allow people access to a wider range of hospitals and quicker access to hospital consultants and can provide for better accommodation in public hospitals. Different benefit levels apply across a range of products, with some products simply providing better accommodation in public hospitals, while other products can provide coverage for private hospitals and some hospitals that are regarded as “high tech.”

In addition to in-patient hospital benefits, most PHI contracts provide a range of additional benefits that can include out-patient, maternity, dental, GP, and psychiatric benefits.

Underwriting, risk selection, and risk adjustment
The four key requirements imposed on PHI insurance providers and described above mean that insurers cannot refuse to insure anyone, even people who are old or chronically ill, that they must accept any applicant regardless of the person’s age, health status, or claim history and that they must also charge the same premium for the same insurance policy.

A form of risk equalization (RE) exists to support the community rating principle. RE has been a controversial topic in Ireland and a previously introduced RE scheme was struck down by the Irish Supreme Court after a lengthy legal battle.

The RE scheme that has been operating in recent years (operational in respect of policies coming into effect up to the end of 2012) has been based primarily on the tax system. For policies that commenced before January 1, 2013, additional age-related tax credits are paid to individuals in older age groups. The effect of the tax credits allows insurers to charge higher gross premiums for older lives with the additional premium payments covered by the tax credit. The premiums, net of any tax credits, are community rated, so the individual does not end up paying more for insurance, but the insurer receives a higher premium through the payment of the credit. For policies commencing after January 1, 2013, the credits are paid from a risk equalization fund rather than through the tax system, but otherwise the mechanics of the scheme are broadly unchanged.

To fund the additional credit payments, a stamp duty is levied on insurers, with a flat stamp duty payable for each adult insured person (with a lower level payable for children). The net effect is that insurers with older-than-average portfolios of insured lives will typically receive more in RE credits than they will pay in stamp duties. For insurers with younger-than-average portfolios of insured lives the opposite is the case.

The rates of RE credits and stamp duties are set by legislation. The HIA has a statutory responsibility to analyze information returns provided by insurers with a view to making a recommendation to the Minister for Health of the RE credit levels that it believes would be necessary to meet the objectives of the Health Insurance Act, and the levels of stamp duty it believes would cover the costs of the credits.

The current system partly compensates insurers that have a riskier demographic profile by redistributing funds from those with less risky demographic profiles. In particular this helps protect the interests of older insured people by reducing the incentive for insurers to avoid those customers (for example through product design or marketing). However, the system is currently based only on age-related factors and therefore is limited in the extent to which it can fully address differences in risk profiles.

From March 31, 2013, the RE scheme will include additional payment criteria of gender and a measure of health status. In addition, the payments (of credits and stamp duties) under the new scheme will vary depending on the benefit level of the product held.

Comment
The current risk equalization scheme in Ireland is a prospective one with rates of credits and stamp duties set in advance. In that context, the scheme avoids a major criticism of retrospective RE schemes, which can significantly reduce the incentive for insurers to reduce claims costs through innovation and efficiency.

The current scheme reduces the incentive that currently exists for insurers to target younger and typically more profitable lives. However, the scheme does not currently reduce the incentive to target healthier lives, which can have a detrimental effect on the ability of less healthy individuals to source suitable and competitively priced insurance coverage. The introduction of additional risk factors such as gender and health status is likely to therefore improve the scheme’s ability to support government policy in this area.

1Note that monetary rates are changed from time to time. Rates quoted in this article are correct as of October 1, 2012.
2Source: HSE Annual Report and Financial Statements 2011.