Good morning. Welcome to Taking the pulse of NZ’s health insurance industry
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Today’s presentation will largely follow structure of the paper. I’ll start off with a bit of background on NZ health insurance.
Then I will discuss the key issues facing health insurers – many of which will be well know n to you
John will then follow on from this by discussing a selection of responses from insurers both locally and internationally to the issues.
Then John will finish with some discussion on current topical issues 2
Before I start, I’d like to note that…
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First up
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Funded by taxation, ACC levies, and privately, through health insurance and individual contributions. There are 3 sectors deliver a broad range of essential health care services
So how is this health system doing?
Well, like many countries, NZ has challenges in managing health expenditure now and in the future. Across the OECD, health care spending per capita has risen by over 70% in real terms since the early 1990s.
Total public health expenditure in New Zealand was $13.7 billion at 30 June 2012, which is 7% of GDP and 15% of general government spending.
In the long term, pressure on health spending will continue to rise.
Treasury forecasts that Government health spending as a proportion of GDP will grow from 7% to 11% by 2050.
The biggest challenges in containing spending growth and anticipated to be changes in technology, rising wage costs, capital availability and increasing public expectation.
it is unlikely that demand of health services will be met by the public health system.
One way Governments can controlling healthcare costs is by limiting public coverage, for example rationing non‐urgent or elective procedures. The cost of these will fall back onto the private market.
The health insurance market emerged due to the gaps in public coverage
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The New Zealand health insurance market is unlike many overseas health insurance markets. It is a largely free market, with no specific health insurance regulation or restrictions, and similarly no incentives for individuals or employers purchasing health insurance. This is in marked contrast to health insurance markets in a number of countries including Australia, the United States, Switzerland, or Slovakia, where the government recently announced plans to nationalise private health insurance and where one‐third of the population of 5.4 million people have private health insurance.
As a consequence of this free market, New Zealand insurers are largely able to design and price insurance products to as they wish, in order to meet the requirements of policyholders. The principle exceptions to this are:
The Human Rights Act limits the ability to price on every possible risk factor, for example ethnicity, but does allow distinction on the basis of age, gender and health status, subject to the existence of supporting actuarial, statistical or medical evidence.
Certain medical services can only be provided by the public health system, including acute accident and emergency treatment and maternity care.
As a result of the second of these exceptions health insurance typically covers elective surgery, as well as specialist consultations and tests, and in some cases day‐to‐day doctors’ and pharmacy costs. 6
It is also useful to note that the underlying nature of the cover provided by health insurance is different to other insurance. An insurer is not liable for the health of the insured, but rather is liable for reimbursement of the medical treatment costs incurred, subject to any policy limits or insured co‐payments. This greatly simplifies the assessment of a health insurer’s liabilities as they have no liability on the incidence or diagnosis of a medical condition until treatment is provided and insured costs are incurred. 6
Despite the lack of any incentives to encourage consumers to purchase health insurance, over 1.3 million New Zealanders (30%) have health insurance and total premiums have over doubled from June 2000 to June 2012, increasing from $490 million to over $1.07 billion. The average annual rate of increase in earned premium is 6.7%. By way of comparison, as at June 2012 in force life insurance premiums are $1.9 billion and general insurance gross premiums are $4.5 billion.
However, “real” health insurance market growth is not as strong as the growth in premium might suggest. A significant portion of this growth is a result of an increase in average premiums, with lives covered increasing over the same period by 6% (less than 0.5% per annum). Over this time consumers have “downgraded” their cover by switching from “comprehensive” cover to “major medical” and increasing co‐payments or excesses.
Breaking down premium and lives insured as shown in Figure 1 above we can observe:
Comprehensive premium has increased marginally over the period from 2000 to 2012, while the number of lives has reduced by 42%
Major Medical premium has increased by approximately 400%, and the number of lives has increased by 75%.
On a per life basis premiums have increased on average by 6.0% per annum, with the average increase for Comprehensive policies 5.2% p.a. and for Major Medical 8.4% p.a.
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Using company accounts where available and Health Funds Association data, we have estimated the industry profitability for the 4 years 2008 – 2011. The overall picture is complicated by some composite life and health insurers that publish combined accounts only, and hence some estimation has been required. These insurers comprise less than 10% of the market premium.
As can be seen from Figure 2, the industry has been profitable for the years 2008 – 2011:
Loss ratio has ranged between 82% and 87% of premium.
Expense ratio has reduced from 18% to 14%.
The combined ratio exceeded 100% in each of 2008, 2009 and 2010.
Profitability is dependent on investment income, with net profit 4% to 7% of premium.
Using the Health Funds Association solvency standard profits over 2008 to 2011 represent a return on minimum solvency capital of 5% to 10%. We note that this solvency standard has been subsequently replaced by the Reserve Bank solvency standard for non‐life insurers. Insurer solvency requirements on this new standard have not been published, however we expect the minimum solvency requirements to be lower on the Reserve Bank non‐life standard. We also note that this is a regulatory minimum and insurers are therefore likely to hold capital in substantially in excess of the minimum requirement. Overall we expect the total level of capital (and assets) employed in the industry to be largely unchanged following the introduction of the Reserve Bank standard.
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The low profit margin and low return on capital is reflective of the not‐for‐profit nature of much of the market, approximately 75% by premium income. It is expected that this also constrains the premium that can be charged by for‐profit insurers, and thus limits profit margins for all market participants. Having said this, for‐profit and not‐for‐profit insurers tend to operate in different market segments and utilise different distribution strategies and channels. Whilst generalising, for‐profit insurers tend to distribute through life insurance brokers/agents and banks, while the not‐for‐profit insurers are either small with specific constituents (such as the Police Association or Education Benevolent Society), or are focused on group sales or direct distribution (Southern Cross or Unimed).
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and resulting issues of premium affordability. Between 2005 and 2011 Southern Cross’ claims per member grew by 46%, approx 6.5% per annum, CPI was 3.1% p.a., and the Labour Cost Index 2.7% p.a. over the same period
Claims costs are volatile and can be hard to predict.
Between 2007 and 2011, the claims costs per Southern Cross member, standardised and adjusted for working days, ranged between 2.3% p.a. and 11.1% p.a.
And between each successive calendar year, the difference in claims paid varied between $17.5m and $61.0m. 11
In order to better understanding volatility in this period, Southern Cross claims data was analysed by the: Number of claims submitted by claiming members (claims per member).
Number of members who submitted at least one claim compared with total membership (claims frequency).
Average claim size.
Change in membership.
Some interesting things,
In 2011, the total change in claims paid compared with the previous year was the lowest in the four year period. However, the increase in the average size of a claim was the highest of the four year period.
In the 2009 year, claim cost escalation increased by more than 11% over the previous year. The majority of the increase was also due to an increase in the average claim size, with some of the increase was due to an increase in membership over the period.
When you look across this four year period, it looks like there was a reduction in both the number of members claiming and the number of claims submitted by members. However, the continuing shift from comprehensive to major medical product is 12
impacting the results.
And then within comprehensive plans, there has been some downgrading of cover by members to keep premiums affordable. In 2010 for example, on comprehensive plans, there was an increase in both the average claims cost and number of claims per member. Some of this increase was offset by a reduction in membership in comprehensive plans. In the same year, for major medical plans, there was an increase in average claims size, the number of members making a claim, the number of claims per member and the number of members on major medical plans
I.e. more members, more members claiming, making more claims per member and higher average claim.
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Second key issue
Retaining better priced risks as high levels of premium increase result in selective lapsation. Policyholders who have recently claimed tend to exhibit higher levels of retention, and those that haven’t claimed higher levels of cancellation.
We have looked at this effect by considering members of Southern Cross as at June 2000 and analysing their subsequent claims experience.
In June 2000, the total membership of Southern Cross and Aetna was approximately 966,900.
Approximately 43% are still members of Southern Cross in June 2012. You can see that as selective withdrawals take place, the claims cost per member of this group increases.
Non‐standardised this was an increase of over 220%. Even after taking into account claims cost escalation of the total portfolio and ageing of this cohort, there is still a clear effective of selective lapsation
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This is another graph on the June 2000 cohort comparing their claims per member with the total portfolio over time.
The Southern Cross Member Tenure project was undertaken following a request from members concerned about the impact of rising healthcare costs on premiums for older policy holders. One of the finding of the project was that longer duration members receive greater value on average than members of the same age who have been with the Society for a shorter duration, because they tend to claim significantly more.
This durational effect has been used as a pricing tool by some insurers who run a series of different product “generations”. In this approach, after a period of perhaps five years an existing product line is closed to new members and a new product line is opened.
A consequence of this approach is that the first generation product continues to increase in average duration while the second generation product that has just been launched has very low average duration.
This allows premiums to be kept lower for new policies being sold, however the ageing of the closed portfolio can result in very rapid premium increases following closure. As a result healthier lives are then likely to switch to the new product resulting in further claims deterioration in the closed portfolio and resulting increases in premium. All other things being equal, a portfolio with an average duration of 3 years can 14
be priced at a discount of approximately 25% when compared to a “mature” portfolio. Such an approach therefore improves new business affordability however it does little to address long term affordability.
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As discussed in section 2 above, the overall health insurance market is profitable but profit margins are low, with the combined ratio approximately 100% in each of the years 2008 – 2011. Investment income has been a significant contributor to achieving a profitable outcome. A reduction in future investment returns will adversely impact profitability.
In the Reserve Bank November 2012 Financial Stability Review, it is noted that “Yields in Germany and some other countries, including New Zealand, remain very low by historical standards”. This can be seen in the graph, with yields on New Zealand 10 year bonds falling from 6.9% in 2007 to a low of 3.2% this year.
An number of analysts and commentators are expecting interest rates to remain low for a prolonged period. Most health insurers have conservative investment allocations, heavily weighted toward fixed assets. They may alternatively adopt less conservative asset allocations, with a result increase in both return and risk, and potentially greater volatility profits.
Thus lower claims or expenses, or higher premium are required to maintain profit. 15
Increasing premiums and affordability will adversely impact the volume of new sales as well as retention in both the individual and group markets.
A reduction in sales volumes has two impacts:
A lower volume of sales over which to recoup fixed acquisition costs, thereby impacting profitability.
As the volume of sales reduces, the duration in‐force of a health insurance portfolio will increase.
Which as I discussed earlier will lead to increased claims costs.
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There has been a significant reduction in costs for people to get genetic information about themselves. The cost of mapping an individual human genome may break the $1,000 barrier by the end of the year.
If genetic testing is carried out, an insurer will want to minimise their risk by taking the information from the test into account. However, in New Zealand an insurer cannot require genetic testing to be done. With the reduction in costs, increased prevalence of genetic testing is expected. This will potentially increase the risk of non‐disclosure and increase the information imbalance between insurer and insured. A principle of insurance is that risks are pooled. Those fortunate enough not to claim effectively fund those that do. The risk of “everyday” genetic testing is that fewer of those with low risk of claiming will purchase insurance and more of those with higher risk profiles will.
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Like all health insurers, Southern Health is vulnerable to changes in the marketplace that could unexpectedly affect claims costs.
Examples of changes include an increase in waiting lists, significant changes or “cost shifting” from the public health system, a tightening of legislation or regulations related to ACC cover or pay‐outs and rapid increases in health providers’ charges.
Based on total public health expenditure of $13.7b, if there is a 1% shift in health services from public to private, this would result in approx. $137m of additional expenditure in the private sector which would need to be funded through private health insurance or absorbed by individuals (either self‐funded or as a reduction in treatment).
30% of New Zealand’s population has health insurance and in the year ending 30 June 2012 $854m was paid in claims. Assuming the insured portion of the population remains unchanged this would result in an increase in claims for the health insurance market of approximately $41m. Effectively a 1% switch in public health expenditure results in a 5% increase in claims for private health insurance. In 2008, the first Zealand’s first private radiation therapy clinic, Auckland Radiation Oncology, opened and then a couple of years later another facility offering radio therapy opened in Christchurch.
Changes were made to benefit under Southern Cross’ health insurance plans to 18
offer coverage for this treatment. Southern Cross Medical Care Society CEO, Dr Ian McPherson warned this good news comes with a caveat. "Every time a treatment is introduced into and funded by the private system it is a new cost all of our 840,000 members have to bear. Radiotherapy is expensive, it costs between $15,000 ‐ $30,000 per patient depending on the treatment type.”
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As the New Zealand population ages, there will be further increased pressure on health budgets. The latest projections by Statistics New Zealand indicate that:
Population growth will slow as New Zealand’s population ages
There is roughly a 1 in 3 chance that deaths could exceed births in 2061. The proportion of the population aged 65+ (13 percent in 2011) will increase to 23 percent in 2041.
In 1991, 7% of Southern Cross members were 65 or older, compared with 11.1% of the population in general. Today, partly as a result of the maturing of the Southern Cross portfolio, the proportion of Southern Cross members who are 65 or over is around 12%, compared with 13% of the population in general. And it’s likely that the proportion of Southern Cross members 65 years and over will continue to grow in line with the increasing size of this demographic group in the general population.
The impact on demand for health services due to increasing life expectancy is unclear (as people may be healthier at older ages). However, it is likely that the nature of required health services will move towards more emphasis on long‐
term conditions, the associated support services of these conditions. In addition, there will be increasing complexity as there will be higher likelihood of co‐
morbidities, which will require lengthier stays in hospital and more complex procedures. As a result, claims costs for health insurance is expected to increase
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There is an ongoing challenge for health insurer is achieving a balance between premium affordability and
access to services. If insurers provided cover for every new technology or drug that comes onto the market, costs incurred would be significant, and premiums would quickly become unaffordable.
The difficult is that it is not always clear that the new service has a clear and cost effective advantage.
For example, in 2009, Southern Cross reviewed coverage for robot‐assisted prostatectomy surgery.
Conventional prostatectomy methods tend to cost in the vicinity of $15,000‐
$20,000 per procedure.
The robot‐assisted version typically costs in excess of $30,000.
The available evidence does not demonstrate faster recovery times or better outcomes. In 2009, the difference in cost for one prostatectomy could pay for 10 colonoscopies, four cataract removals
or a hip replacement.
In the same way that general claims cost escalation can be broken down into price and utilisation increases, so can the increase in costs associated with new medical technologies.
Utilisation increases occur when the introduction of a new technology has 20
opened up surgery (for example) to people who would not have previously had treatment. An example of this is Transcatheter Aortic Valve Implantation (TAVI). TAVI's can be performed on people who would not survive open heart surgery
Why is the cost of these new technologies so high? Significant investment is needed in capital, R&D costs are high due to all the clinical trials that need to be completed before they are approved by the FDA.
In 2010, the first two private PET‐CT services opened. Ascot Radiology spent $5 million on the development of the centre, with the scanner itself costing just under $4 million, with scans costing in the vicinity of $2,600 a session.
As new technology develops, public expectations change. Insurers need to balance extending coverage to these new technologies and rising claims costs.
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The last key issue I want to discuss is the changing health infrastructre.
In recent years there has been a shift in the provision of some care out of traditional hospitals. An example of the shift is day case surgery or ambulatory surgery. This is an operation or investigation that can be done on a planned non‐inpatient basis, where the patient requires either full theatre facilities or facilities for recovery or most often both. Day surgery can be done at hospitals, or clinician offices or procedure rooms.
In the UK, the Department of Health’s target is for day surgery to account for 75% of all elective surgery. In the US, nearly 80% of all operative procedures are carried out on a day case basis.
This figure from the Ministry of Health show the shift in service delivery observable in many health systems. The solid red line represents current service configuration, and the dotted line represents future service configuration.
There is a clear shift to the right in managed specialisation and consolidation.
As new technology evolves, there will be an increase in the use of day stay facilities out of traditional hospitals for less complex procedures.
Why is this an issue? The productivity gains and cost savings are being largely captured by the specialists and non‐hospital facility.
Owners of traditional facilities are faced with lower volumes and an increase in the “average” level of complexity of procedures they perform, as they lose the 21
ability to cross‐subside. Both can lead to an increase in the total system costs, unless there is a reduction in day case prices or a constraint on capacity growth. The result is an increase is claims costs for health insurers.
As you can see, there are many challenges facing health insurer. I am now going to handover to John, to discuss some of the ways insurers are responding to these challenges.
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Insurer responses have been driven in 3 or 4 directions
1. Increase premiums – simplest option and effective to a point. “But you can’t just keep chunking up the premium for ever”
2. Consumer driven approaches designed to set incentives in place for policyholders to choose the “right thing”.
3. Finally Insurer Directed.
Going to look at each of these in some more detail…
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While the initial response to increasing claim costs was to increase premium, it eventually became apparent that even though some policyholders would stay regardless of the price, those most incented were those that needed the product most. Selective lapsation….
So companies tried other things, and in essence the objective is to create incentives in the products for policyholders to change their claiming behaviour, or to manage the affordability of premium.
It’s interesting to note that claims experience on policies with co‐payments (eg 80% benefits) really is different to extensive plans with 100% reimbursement (even with an excess). While excesses work well to reduce small claims, the co‐payment appears to be a much stronger disincentive for claiming, particularly larger claims. However, there is then the question of value to the customer – the very time they need the policy they can’t afford the co‐payment for the treatment. It can be difficult for policyholders to find say $4,000 to $5,000 co‐payment for a $20,000 ‐ $25,000 procedure.
Downgrade paths typically involve “budget” policies with an excess and various limits in the policy to reduce the scope of the cover and hence the premium. An example might be a high level surgical plan – limited cover for imaging or tests, but if something is really wrong, there is still cover for the surgery.
These had the effect of reducing the cost as a 1‐off, but ultimately premium continues to increase as it was before.
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So not effective at addressing the long term issue, but still where much of the market in NZ sits.
So looking more broadly at the problem which is fundamentally about premium affordability, a number of other responses have been tried, which are driven much more by the insurer, rather than trying to incentivise the policyholder.
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The first three measure here are similar – effectively the insurer is directing the policyholder in someway to preferred provider. Variety of reasons for this related to either quality or cost or both. The outcome though is a reduction of the average cost of claim from what might have otherwise occurred.
Narrow Network Plans ‐ the cover is only provided if policyholders use medical providers from the agreed “panel”, or in some cases have higher co‐payments if policyholders elect to us a provider outside the preferred network. ‐ These are increasing in popularity with United States employers given the lower premium costs (in a weak economy). An issue for the insurer can be getting coverage in all areas, particular rural areas where there may be limited options.
Contracting ‐ directing clients to approved providers with whom the price has been negotiated. Either no cover or capped reimbursement if policyholders use a provider who is not on the approved list. Requires insurers to have sufficient volume to make contracting worthwhile – smaller health insurers in Australia formed the Health Alliance that contracted on their behalf. Can be a source of conflict between insurer and providers. Southern Cross has started on this path in an attempt to influence price but has also sought to ensure close to 100% coverage where procedures are AP only.
Open Referral ‐ GP’s provide an open referral to specialists and the insurer provides the policyholder with a selection of two to three to choose from. Insurers in the UK have argued that they have access to better data re specialist than GP’s do.
Wellness – targets utilisation rather than average cost of claims. In contrast to preceding measures.
– comes in a variety of guises.
‐ for example utilising preventative measures and Chronic Disease Management programmes (coronary artery disease/diabetes), and Wellness programmes. Over a 5 year period there were ~300 policyholders who claimed more than $50k for cardiac services, totalling $17m.
‐ An issue can be who pays for this in the individual market. “Healthier” policyholders have limited incentive to participate in preventative programmes while “unhealthy” policyholders have a strong incentive. This anti‐selective behaviour can make the cost prohibitive. ‐ In the group market the employer is rewarded for a healthier overall workforce with improved productivity.
Low Claim Discount ‐ Rewarding no or low claimers to encourage loyalty and improved retention, thereby improving the overall health status of the portfolio and lowering the average cost for all policyholders
• 80% of Claims ($) are from 8% of members
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30% of Claims ($) are from 2.2% of members
Small proportion of members consuming disproportionate level of benefit High claimers skewed towards older age groups. High Loss Ratio for these members There’s a distinction to think about between employer sponsored and subsidised plans and individual plans purchased by the consumer. Different value propositions. 26
Reasonable Charges – most insurers have determined what is fair and reasonable and have policy terms that allow reimbursement to be limited to these amounts. Usually involves discussion with the health provider rather than the policyholder.
Some Southern Cross plans have a benefit schedule that sets out the maximum (possibly also subject to a co‐payment) that SC will reimburse. Some suggestion that this sets the fee rates for some providers. But large overhead to maintain it, and can lead to member dissatisfaction if provider fees are well in excess of the schedule amount.
Contracting through the Affiliated Provider network – last year 25% of claims cost were paid to contracted providers. This is growing, but potentially battles to come with Orthopaedic surgeons.
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A couple of quotations to leave you with.
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