Much of the debate surrounding risk equalisation in Ireland has centred on qualitative arguments. Proponents of the scheme argue that a measure such as risk equalisation is necessary to support community rating, while opponents argue that risk equalisation is anti-competitive and a barrier to entry. Community rating in the private health insurance market in Ireland has broad cross-party support in the Oireachtas (parliament), as do the principles of open enrolment and lifetime cover, while risk equalisation was also broadly supported, though perhaps not as widely as the other principles.
The competition argument used against risk equalisation focuses on the low number of insurers operating in the Irish health insurance market. The dominant position of Vhi Healthcare has also been used by opponents of risk equalisation in Ireland to argue against the scheme. In particular, BUPA Ireland argued that risk equalisation would force smaller players in the market to subsidise the dominant player, a former State-backed monopoly.
Most of these arguments have been qualitative in nature, however (see, for example, DKM Economic Consultants, 2005; Goodbody Economic Consultants, 2007). There has been a relative shortage of quantitative research presented to support either side of the debate. That was the primary reasoning for the current study, which will add an empirical element to the debate surrounding risk equalisation in Ireland.
Most observers accept at least the possibility that some form of risk adjustment mechanism might be required in certain circumstances to support community rating, although the degree to which such a mechanism is required is the subject of some debate. The starting point of this study therefore is to examine the extent to which community rating could operate in the absence of some form or risk adjustment mechanism. The model presented in Chapter 3 offers a formulaic representation of the answer to this question.
Selection issues are often discussed in the context of insurance markets in general, and health insurance is no different. Selection can take the form of adverse selection, where consumers choose to insure or not insure, or choose the level of insurance, based on their own state of health; or risk selection, where insurers try to attract low-risk lives and avoid high-risk lives if possible. The combination of community rating and open enrolment accentuates the likelihood that consumers might engage in adverse selection. The presence of community rating, which means that insurers are not permitted to charge different rates to different consumers based on the level of risk those consumers represent to the insurers, also increases insurers’
incentives to engage in risk selection. Risk adjustment has been suggested as a means of combating either or both types of selection. However, despite the appearance of arguments in relation to risk selection in particular in the debate surrounding risk equalisation in Ireland, no empirical evidence has thus-far been
presented to confirm or refute the suggestion that it is present in the market. This study empirically tests for both adverse selection and risk selection.
The structure of the Irish market lends itself to an examination of whether either form of selection exists. Most plans available in the market are broadly similar in terms of the cover they provide for hospital treatment, with the main differences being on the basis of the level of hospital accommodation covered. This allows an examination of whether adverse selection is evident, as plans can be differentiated on the basis of the generosity of cover for hospital accommodation. There are also significant similarities between plans on offer between insurers covering similar levels of hospital accommodation, which facilitates an examination of whether risk selection is evident. If neither form of selection were evident then it would suggest that risk equalisation would be less likely to be triggered, while if one or both forms are present then it would suggest that risk equalisation would be more likely to be triggered. It should be noted however, that even if evidence of selection is not found, this would not suggest that risk equalisation is not needed. Rather, the possibility of selection, and its associated adverse effects, means that it might still be worthwhile to have a risk equalisation scheme in place in order to combat any selection that may occur in the future. Whether or not selection is found would be indicative of the likelihood of such a scheme being triggered.
One criticism that has been levelled against community rating is that it may perhaps entail an inherent instability, as it relies on intergenerational solidarity. This means
that a constant stream of younger, healthier, low-risk consumers is needed in order to keep insurance affordable for older, sicker, high-risk consumers. It has been suggested that the current form of community rating in operation in Ireland – single-rate community rating – is particularly vulnerable to this type of instability. A move to lifetime community rating, where age at entry has an impact on premiums, has been proposed and is anticipated in the near future. Such a change was implemented in Australia in 2000. If such a change were to improve the stability of community rating, then this could mitigate the need for a risk adjustment mechanism. The effect that the move to lifetime community rating had in Australia is therefore examined, and implications drawn for the Irish case.
If community rating were to fail altogether, due to the instability that it creates, or be abandoned (although this is unlikely given the widespread political support for it), then an alternative would be risk rating. Risk rating is applied in many other insurance markets in Ireland, such as the motor and home insurance markets, and it is also applied in health insurance markets in other countries, such as the UK. The differences between a community rated health insurance market and a risk rated one are therefore examined, using the examples of Ireland and Australia (community rated) versus the UK (risk rated).
Although it is unlikely that risk rating will be applied in the Irish private health insurance market, if risk segmentation by insurers were to become widespread then the net result would be similar. It is therefore instructive to examine what difference
community rating makes in the Irish context. An argument that has been used to justify the subsidisation of private health insurance in the Irish market is that it takes some of the pressure off the public healthcare system, by encouraging some patients to be treated privately. If community rating were to break down or be undermined then significant numbers of older consumers, facing substantially higher premiums, would likely discontinue cover and rely on the public healthcare system. Analysis is therefore carried out of the effect this might have on the public hospital system in Ireland. This is particularly relevant given the current deterioration of the public finances in Ireland.