Supplementary Private Health Insurance in National Health Insurance Systems

This article explores the economic theory and evidence regarding supplementary private health insurance in countries with national health insurance systems. It defines voluntary health insurance for the purpose of the article, and classifies the different roles played by voluntary private health insurance. It will then examine the economic literature on voluntary private health insurance, beginning with the theoretical literature before turning to the empirical evidence.

Defining Supplementary Private Health Insurance

Although private health insurance is available in all countries in the European Union, North America, Australia, and New Zealand, private insurance plays significantly different roles depending on the jurisdiction. Almost all the countries included above provide near universal statutory health insurance coverage for their citizens. The dynamics and scope of this statutory health insurance often influence the nature of private supplemental insurance in these jurisdictions. Thomson and Mossialos (2009) provide a useful classification for the role of private health insurance: supplementary, complementary, or substitutive. Their classification is adopted here.

Supplementary insurance generally provides access to services that are already available within the publicly financed health insurance scheme (presumably affording faster access, greater choice, or other amenities). Example jurisdictions include the UK, Australia, and Sweden. Supplemental private insurance markets tend to have small market shares. For example, the UK market covers approximately 10% of the population.

Complementary insurance generally offers services that are not covered under the statutory scheme such as prescription drugs. Example jurisdictions include Canada and Denmark. Some systems also allow for complementary private insurance to cover costs that are typically left outside the public system (e.g., insurance to cover the cost of user fees). Example jurisdictions include France. Market share for complementary insurance is generally higher given the nature of the insurance. In France, more than 90% of individuals have complementary insurance of some form.

Substitutive insurance generally covers people who are not covered under the statutory scheme. Example jurisdictions include Germany. Market share for substitutive insurance is generally smaller (in Germany the market share for private insurance is approximately 10%).

This article focuses on private insurance that is either supplementary or complementary as defined above. Further, the authors focus on private insurance that is voluntary and not statutory (as in the Netherlands) given that many of the potential market failures that occur do so in voluntary markets. It examines both the theoretical and empirical roles that supplementary private insurance can play and the interaction between public and private insurance within this context.

Theoretical Effects Of Supplementary Private Health Insurance In National Health Insurance Systems

This section briefly reviews the theoretical effects of a parallel, privately financed system on the performance of the publicly financed system. It focuses on exploring the existing research on the relationship between supplementary private insurance (either as a substitute or complement as described above) and the national public insurance system. It is reasonable to assume that a privately financed system improves the welfare of those who use it as only those forms of private insurance that are voluntary are being considered. It is therefore possible that even if the effects on the public system are negative the overall welfare effects could be positive. However, because this is not a Pareto improvement, and the empirical evidence cited above suggests that the take up of privately financed care is generally small and concentrated among higher income individuals, the focus here will be on whether supplementary private insurance for health services can exist without harming the public system.

Economic theory regarding the effect of introducing a private alternative for publicly financed services is ambiguous. Models of the interaction between private and public insurance systems approach the problem along various population dimensions. For example, previous theoretical literature reviewed in Zweifel (2011) suggests that Pareto improvements are possible in models of differentiated risk types (high and low). Smith (2007) suggests in a two-income type model (rich and poor) that a first best solution is also feasible with supplementary private insurance but that political economy considerations and tax base erosion generally prevent the implementation of such a model.

Depending on assumptions regarding supply of physicians, demand for services, and the magnitude of the effects of conflicting incentives on providers, the theoretical effects of private insurance suggest several possibilities. It is possible that allowing patients to seek health care outside the public system would release public resources and lead to shorter waiting times both for users of the public and the private sector. Further, it is possible that a parallel private system could serve as a benchmark against which the public system could be compared, allowing health care administrators and political leaders to evaluate the efficiency of the public system meaningfully. However, a parallel private health care system may adversely affect the public system, resulting in, at best, no decline in public waiting lists and, at worst, substantial increases. Under certain assumptions, allowing private health care would induce a shift in health care resources from the public to the private sectors resulting in the crowding out of public provision. Theoretically, physicians may have an incentive to increase waiting lists within the public system in order to encourage patients to switch to the private system, where they can bill more than in the public sector. The existence of a private system with deregulated prices can also reduce the monopsony power enjoyed by the public system and result in upward pressure on the prices in the public system. Cream skimming and dumping of risks by the private system can further increase the perpatient cost of the cases remaining in the public system.

Under other assumptions, an increase in supply afforded by a supplemental private system could be offset by an increase in demand for publicly funded health care, so that waiting lists could be relatively unchanged. In addition, introducing private health care may reduce political support for the public health care system by reducing the size of the coalition that uses the public system.

Models examining the effects of wait lists on the demand for private insurance suggest that longer waiting times for care in the public sector may in some cases increase demand for supplemental private insurance. The methods used to ration care within the public system can also have differing effects on the demand for supplemental private insurance. Private supplemental health insurance markets may be smaller when the public sector rations according to need versus random allocation of public resources. Income gradients caused by the introduction of private supplemental health insurance may also be larger under random rationing of care versus rationing according to need (Cuff et al., 2012).

If private insurance complements the public system by covering costs or services not covered publicly such as user charges on the one hand, or additional health care services on the other, it may result in an inefficient level of utilization. In the case where the user charges are meant to help achieve the efficient level of utilization, it may undo these incentives, and may also result in cross subsidization from the tax payer to the user of private insurance. In the case where private coverage insures health care items not covered under the public system, an increase in utilization of privately financed care may increase the use of publicly financed care.

Empirical Evidence On The Effects Of Supplementary Private Health Insurance In National Health Insurance Systems

Empirically evaluating the effects of a supplemental privately financed system is difficult due to the lack of counterfactuals and the multitude of differences in the interaction between publicly and privately financed systems across jurisdictions. Because identification is difficult, some of the evidence presented below is correlational evidence. This supports theoretical predictions. Other papers are able to use a variety of microeconomic strategies to tease out some causal relationships. Overall, what evidence there is suggests that there are some potentially negative consequences of privately financed systems on the public system. Evidence on those theoretical considerations with empirical support are presented below.

Public Sector Waiting Times And Demand For Care

Evidence using pooled cross sectional data from the UK suggests a positive relationship between public waiting lists and private insurance (Besley et al., 1999). The positive correlation could be in response to long wait lists or because there is less attention paid to public lists in areas with higher levels of private insurance. Research from Australia examines the relationship between waiting times for care among patients waiting for elective care and the demand for private insurance using data on individual-specific (vs. average) expected wait times. The findings suggest that on average there is little relationship between expected wait times and the demand for private insurance but that for particular subpopulations, who have high probabilities of long waits, there is an increase in the probability of buying private insurance (Johar et al., 2011).

A significant body of evidence reviewed in Thomson and Mossialos (2009) suggests that, in jurisdictions with both private and publicly financed treatment, patients in the private sector wait less than equivalent patients in the publicly financed sector. In those systems where doctors are able to operate in both public and private sectors (e.g., UK, Ireland, and Austria) evidence suggests that doctors give priority to private sector patients.

Evidence from the UK in the 1990s suggests that physicians who operate in both the public and private systems reduce their hours in the public system significantly and do not heed the requirement that publicly employed physicians only dedicate 10% of their earnings to private practice. Physicians who had dual practices earned on average 70% from the National Health Service (NHS) and 30% from private practice (Morris et al., 2008). These authors also find a positive association between mean private income and waiting lists. They note, as above, that this relationship is not necessarily causal and that the causal relationship between wait times and physician effort in the private sector could run in either direction. Evidence from other jurisdictions is consistent with that of the UK, in that, dual practice physicians often do not work all of the contracted hours in the public sector in order to fulfill private sector demand. Evidence on the overall welfare implications of dual practice in developed health care systems is, however, still incomplete and is an area for further future research.

The evidence relating to how changes in public sector wait times impact on the demand for publicly financed service is inconclusive. For example, McAvinchey and Yannopoulos (1993) found that the long run elasticity of demand for NHS acute care with respect to the cost of waiting (a function of time and forgone income) were quite large. Their results suggest that a 1% decline in waiting times lead to a 4.79% increase in the demand for NHS acute care. This evidence implies that introducing a private system that reduces waiting times in the public sector may result in an increase in demand for care in the public sector. However, Francis and Frost (1979) examined the relationship between the number of hospital beds and the magnitude of waiting lists in the UK and concluded that the elasticity of the number of people on the wait list with respect to beds is 1, suggesting that if the number of hospital beds in the public system remains constant waiting lists do not decline regardless of private sector supply.

Evidence from Germany suggests that individuals with private insurance use more pharmaceuticals than individuals in the statutory social health insurance plans (Krobot et al., 2004). However, Hullegie and Klein (2010) find a negative relationship between private insurance and visits to the doctor in Germany among those patients that have at least one doctor visit. They do not find significant differences in hospital stays. The authors suggest ‘‘private health insurance either has a positive effect on investment in prevention, because of the monetary incentives provided to the insured, or that privately insured patients receive more intense or better treatment each time they visit a doctor.’’

Costs

The theoretical evidence reviewed above suggests that supplemental private insurance may either increase or reduce overall public health care costs depending on the interaction between public and private financing. Evidence from Australia, which has promoted voluntary private health insurance along with the public system through the use of tax subsidies, finds that the combination of tax subsidies and the effects of private systems on the health care input costs (both in the short and long run) limit the potential cost savings for the public sector (Hurley et al., 2002). The authors note that there is no conclusive evidence from Australia that shows a decline in public waiting times following the introduction of a parallel private system, nor that public costs were reduced when the overall cost of the policies are taken into account.

Hopkins and Zweifel (2005) note that an additional effect of subsidizing private insurance is that it encouraged policy holders to use more public hospital services and contributed to the government failing to meet its objective to relieve pressure on the public system. The evidence suggests that subsidized private supplemental insurance is a costly way to relieve public sector pressure.

Cream Skimming

Evidence suggests that private and public providers differ not only in the type of services they provide but also in the types of patients treated. Martin and Smith (1996) examined the determinants in length of stay in the NHS in Britain. They found that patients in the NHS who had more access to NHS hospitals were on average likely to experience shorter lengths of stay. They also found that the level of private health care facilities in the area has a positive impact on local NHS costs, suggesting that private health care tends to take the less severe cases so that those who remain in the NHS tend to have higher average costs. This result is significant in that not only does it suggest that the private sector would not serve as an effective benchmark for the public sector but it also implies that, with the introduction of private health care, costs in the public sector would rise.

Demand For Private Insurance

As noted in the introduction, the demand for supplemental private health insurance in most countries is relatively small, of the order of 10–15%. Evidence on the distribution of the demand suggests that, as would be expected, there is a strong correlation between income and take up of private insurance.

Evidence from Spain suggests a positive correlation between the demand for private supplemental health insurance and both wealth and education. Improved coverage, quality, and timeliness were the main reasons cited in Spain for purchasing additional coverage (Costa and Rovira, 2005). In Australia before 1998, only 20% of people with an annual income of less than US$20 000 had private coverage, compared to percentage of people with an annual income of US$100 000 or more (Tuohy et al., 2004). In New Zealand, approximately 37% of the total population had private coverage. Approximately 60% of people with above-average incomes had private coverage, as compared to only 24% of people with below-average incomes. In the UK, individual private insurance is more prevalent among those with higher income and higher education. In the 1990s, 40% of people in the wealthiest 10% of the population were privately insured, whereas only 5% of people in the bottom 40% held private insurance (Tuohy et al., 2004). Evidence on the relationship between health and risky behaviors and the demand for insurance suggests that both poor self-assessed health and risky behaviors are negatively associated with purchasing private insurance (Doiron et al., 2008).

Evidence on the dynamics of using privately financed care suggests that there is considerable movement in and out of private care. Propper (2000) noted that although there is strong evidence of an association between past and current use of private care in the UK, there is also considerable crosssectoral flow with past use of the NHS associated with current use of private care.

Complementary Private Health Insurance

Evidence on the relationship between privately and publicly financed services, when private finance is complementary, suggests that private financing may increase costs in the public system. In Canada, private insurance complements the public system by covering items not covered publicly – the largest of these being pharmaceuticals. Stabile (2001) found that individuals with private insurance for pharmaceuticals not only used more drugs but also used more publicly financed services such as doctors visits. Part of this was due to selection into private drug insurance but a large component was also due to the reduction in the cost to the patient of using both private and public services. Costs to the public system are also increased through tax expenditures used to subsidize the purchase of complementary private insurance. For example, Canada exempts employer payments for employee health insurance from the taxable income of the employee. Tax deductions are also available in Canada for the cost of privately purchased complementary care. Research examining the effects of such policies suggests that they increase the quantity of insurance demanded on the extensive margin and result in considerable tax expenditures (Smart and Stabile, 2005).

Evidence from France, which allows for private health insurance to reimburse copayments and charges in the public system, suggests that the private voluntary insurance increases utilization and therefore publicly financed costs (Buchmueller et al., 2004). Moreover, concern over the inequitable distribution of private insurance in France has led to public subsidies for private insurance for lower income families, further increasing public costs. These measures have not reduced the strong relationship between income and private insurance take up.

Conclusions

In summation, private supplemental insurance plays a large role in supplementing and complementing national health services. The literature on the effects of a supplemental, privately financed alternative for services that are also insured publicly on the overall health care system is ambiguous both theoretically and empirically. That said, the weight of the limited evidence available suggests that introducing a private system may result in a decline in the supply of medical services in the public system partially through physician time shifting, and partially through reduced attention to public lists, further resulting in longer waiting lists for patients who remain in the public system. There also appears to be a fair degree of uncertainty surrounding the impact of private insurance through its affect on waiting times on the total demand for health care and hence public insurance. This is in part a result of the difficulty of modeling both the demand and the supply side responses to changes in waiting times as well as the difficulty of determining the causal relationship between private insurance and wait times in the public system. There is some evidence that introducing a private health care system may result in a more complex case-mix in the public sector, resulting in either higher public costs or longer public waiting lists. The evidence across most jurisdictions suggests wealthier and more educated individuals are more likely to take up private insurance and that this is a stronger predictor than health status. Finally, there is little evidence that supplemental private insurance is able to achieve an often-stated goal of reducing pressure on the public system and reducing public sector costs.

Evidence from jurisdictions that use private supplementary insurance to complement the public system by covering charges or services not covered by the public system also suggests that private insurance increases overall demand – not only for those services that are privately covered but for those that are publicly covered as well. In addition, it serves to increase costs in the public sector through additional utilization and a reduction in the incentives brought about through cost sharing.

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