SINGAPOREANS should welcome MediShield Life, the updated universal health insurance plan being designed. It improves on the current Central Provident Fund (CPF) MediShield scheme by providing lower out-of-pocket medical expenses due to reduced co-payment rates. There are also higher benefits, higher annual claim limits, and an unlimited lifetime limit. There is even an extension of cover from the current maximum 90 years of age to lifetime.

In addition, those who opted out previously or have been excluded due to pre-existing conditions will be included in MediShield Life.

But as a finance professional, I have some longer-term policy concerns.

In my view, the Government should consider a more sustainable universal health insurance model where risks are pooled even more, in order to avoid “cherry-picking”. Cherry picking occurs when private insurers take on healthy individuals and leave the remainder in the underlying CPF MediShield pool.

This was happening prior to 2005. Those who signed up for private insurance plans were taken out of the MediShield risk pool. Their premiums also left the basic MediShield pool. Since many who took up these plans were younger or healthier, the basic MediShield pool was left with a large number of older, and sicker people, paying lower premiums.

In insurance parlance, the private insurers had the pick of the sweet “cherries”; MediShield was left with the sour “lemons”.

In 2005, reforms to MediShield put a stop to this by restoring a common national pool of lives to the underlying CPF MediShield layer. Rather than take these people out of the basic MediShield risk pool, they were left in the national risk pool.

Private health insurers would then come in to offer “enhanced benefits” such as higher class wards and increased benefits. Private insurers had to pay a basic premium to the CPF MediShield pool for every insured member taking on enhanced benefits.

After the 2005 reform, the so-called “private Integrated Shield” insurers began offering higher benefits and higher annual limits. They also extended the maximum age from 90 years to lifetime cover.

In this sense, MediShield Life today is only catching up with the private Integrated Shield insurers in terms of treatment at Class B2/C wards in public hospitals.

The really important policy change about MediShield Life is the costly inclusion of all uninsured and hitherto, uninsurable. I hope this point is not lost on Singaporeans.

This is a once-in-a-lifetime benefit that uninsured and uninsurable citizens of other developed economies such as the United States and Hong Kong can only look on with envy.

The US is struggling with Obamacare while the Hong Kong government is hesitant to act given the estimated HK$50 billion (S$8.1 billion) cost of bringing in the uninsured.

But my longer-term policy concern is that the overall MediShield structure will still offer “actuarial cherry-picking” opportunities to private Integrated Shield insurers.

Insure when young, push out when old?

THE problem arises from a structural policy anomaly.

To understand what I mean, it is necessary to take a look at how the system will work.

MediShield Life will cover treatment at government Class B2/C wards. Private Integrated Shield plans, on the other hand, will continue to allow treatment in higher class B1/A wards or private hospital wards.

As we know, medical expenses are correlated with age. Research suggests that half of one’s lifetime medical expenses accrue past 60 years of age. And more than one-third of lifetime medical expenses will accrue beyond 85 years of age.

With the expected tripling of the number of Singaporeans aged over 65 years to 900,000 by 2030, medical insurance claims will rise. Given the even higher medical inflation rates for better class wards, the cost of private Integrated Shield age-banded premiums will likely escalate over the next 10 to 15 years.

Private Integrated Shield insurers can simply entice healthy individuals to take on enhanced benefits and features at higher premiums than equivalent age-banded premiums for MediShield Life. Those attracted to these plans are likely to be young people with steady employment income.

However, as they age and retire with little or no income, they are likely to downgrade to lower ward class plans, or give up their private Shield plans and rely on MediShield Life alone.

In effect, this means private insurers stand to reap actuarial profits while policyholders are young and healthy, and can avoid or divert the older age groups simply by raising premiums as they age, to discourage them from continuing with their policies when they become more likely to make more claims.

If this happens, the burden of rising medical claims as policyholders age will shift from private insurers to MediShield Life.

This development will strain public health facilities; raise government budget spending on health subsidies and put upward pressure on MediShield Life premiums.

Pre-existing conditions

ANOTHER anomaly lies in the coverage of pre-existing conditions. MediShield Life will accept all with pre-existing conditions.

But will private Integrated Shield insurers have to accept those with pre-existing conditions for treatment at B1/A/P wards? If they have to, how will they price their premiums? If premiums are set at unduly high levels, they will be pushing such people to CPF MediShield Life at B2/C wards.

In order to create a truly national and universal risk pool for health care, and reduce the incentive for cherry-picking, I have two suggestions.

The first is to create a truly national single risk pool. This means merging back all private Integrated Shield plans into one national pot with MediShield Life.

Have a national insurance plan, with a single premium for a given class of treatment, regardless of age, to replace age-banded premiums. So anyone who wants treatment at Class A wards will pay higher premiums than those at B2 wards.

This may mean a hefty increase for those below 30 years of age, but can be phased in over time with government funding.

If doing away with private plans is too drastic, an alternative is for MediShield Life to extract a share of the actuarial profit enjoyed by private Integrated Shield insurers, in addition to the basic MediShield premium. This will mitigate a situation in which private insurers cherry-pick younger and healthy individuals while pushing these same people back to MediShield Life when they age and become riskier.

MediShield Life is a boon for Singaporeans who are uninsured, uninsurable or likely to live a long life. But thought must be given on how best to dovetail MediShield Life with private Shield plans, to prevent “actuarial cherry-picking”. Otherwise, private insurers may pass the “unhealthy” buck to healthy Singaporeans – for life.

Victor Lye
CEO of an insurance company

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