Description of the condition

The basic function of health insurance is to provide access to care with financial risk protection (Kutzin 2001). Private health insurance (PHI) is defined as insurance taken up voluntarily and paid for privately, either by individuals or by employers on behalf of individuals (Mossialos 2002). It may be sold by a wide range of entities, both public and private in nature, which may include statutory ‘sickness funds,’ non‐profit mutual or provident associations and commercial for‐profit insurance companies (Thomson 2009). For the purpose of this review, we shall define PHI schemes as those wholly or partially financed and managed by an entity (organisation/institution/company) that is not state‐owned, irrespective of whether it is a for‐profit or a not‐for‐profit entity.

Heath insurance comprises three components (Sekhri 2005b): collection of funds, pooling of funds and purchasing of services. To achieve the objectives of PHI schemes, governments have to establish a number of interventions. Private health insurance in advanced market economies is regulated by a government agency that implements statutory requirements, which include establishing administrative rules and procedures (Harrington 2007). Most countries that have well‐established PHI markets intervene in the market to protect consumers and to promote the public health objectives of equity, affordability and access to health services through policies, incentives and regulations that "conscript private insurance to serve the public goal of equitable access" (Jost 2001). For instance, in the United States of America (USA), every state has adopted certain basic standards for health insurance that apply to all types of health insurance products (Kofman 2006). All states require insurers to be financially solvent and capable of prompt payment of claims and to employ fair claims handling practices. 

Within the health insurance literature, PHI has been used interchangeably with 'private medical insurance' and 'voluntary health insurance.' For the purpose of this review, we will use the term 'private health insurance.'

Description of the intervention

To effectively implement interventions targeted at fulfilling the goals of PHI, states have to develop a number of oversight and enforcement tools (Kofman 2006). An approach that policy makers can use in developing a regulatory scheme for PHI has been proposed by Sekhri and consists of addressing five key questions on interactions between key actors in the health insurance market: the insurers, the consumers and the providers (Sekhri 2005b).

• Who can sell insurance? Governments have to ensure that only appropriate institutions get involved in the PHI sector. These institutions should have sufficient financial means and should possess adequate human and technical resources to provide optimal services to users. The policies of these institutions benefit both patients and firms, as they offer consumer protection and ensure a viable insurance market.

• Who should be covered? Regulation of who should be covered enables policy makers to guide the breadth and depth of coverage. 'Breadth of coverage' refers to the proportion of the total population covered by health insurance; 'depth of coverage' refers to the composition of the health insurance benefit package – the more comprehensive the package, the greater the depth of coverage (McIntyre 2007). Regulating who should be covered involves adverse selection and risk selection. 'Adverse selection' is the likelihood that a person with high risk of illness and a greater need for frequent health care will be more likely to enrol in a health insurance scheme than a person with low risk of illness and less need for frequent use of health care (McIntyre 2007). If the proportion of high‐risk individuals insured is too high, this will lead to high expenditures for PHI firms and collapse of the market. When insurers have limited information about an individual's health status, they try to protect themselves from this unknown risk by setting insurance premiums above what they otherwise might (Sekhri 2005b). Policy regulation thus has to address these issues to prevent adverse selection and to allow the PHI market to thrive. 'Risk selection' (also referred to as 'cream‐skimming' or 'cherry‐picking') is the practice whereby an insurance firm enrols a disproportionate percentage of individuals (e.g. young people) who present a lower than average risk of ill health (McIntyre 2007). This occurs when insurers try to counter adverse selection or to maximise profit by discouraging sicker individuals from purchasing insurance, or by finding ways to insure only lower‐risk individuals (Sekhri 2005b). Regulatory policies therefore have to ensure that individuals can be enrolled regardless of their health risk, so as to counter risk selection. One way in which governments can reduce risk selection is by implementing a risk adjustment mechanism. Risk adjustment or risk equalisation enables enrolment of high‐risk and low‐risk individuals in insurance schemes that charge the same average premium (Kautter 2014). This is done by setting up a fund to pay participating insurance schemes so that they set their premiums based on the benefits offered, not on the health status of the individual.

• What should be covered? In settings in which health is considered a merit good, provision of health care ought to be based on people's need, not on their capacity to pay. As a result, a minimum health package has to be covered by PHI institutions. This set of regulations defines the basic benefits that must be provided to those insured while addressing societal values on health. These requirements are intended to protect consumers from unreasonable exclusions and to address adverse selection and risk selection.

• How can prices be set? Regulating how private companies can price their products is a significant governmental intervention that can lead to unintended consequences because of competing objectives such as affordability, equity, viability and avoidance of adverse selection, risk selection and moral hazard. Moral hazard is the tendency toward entitlement to the benefits of health insurance to act as a strong incentive for people to consume more and "better" health care, and as a weak incentive for them to maintain a healthy lifestyle (McIntyre 2007). This can increase both appropriate and inappropriate use of services, as well as the cost of coverage.

• How should providers be paid? Regulating provider payment methods can address the problems of supplier‐induced demand (when fee‐for‐service payments are used). With unregulated fee‐for‐service payments, consumers may tend to demand increased healthcare services and providers may induce inappropriate use of healthcare services.

Addressing the above regulatory issues in private insurance markets involves different tasks and an appropriate mix of skilled people, functioning institutions and good governance. Sekhri et al (Sekhri 2005b) have proposed policy tools that can be grouped into four general categories: legislation and licencing, monitoring, auditing and intelligence.

• Legislation and licencing focuses on setting up the legal framework for health insurance and verifies that new insurers entering the market comply with regulatory requirements.

• Monitoring includes procedures that insurance firms use to report financial status, health services utilised by clients and grievances or conflicts. At a minimum, a regulatory entity will require financial information from insurers regarding their reserves, risk categories of their investments and cash flow. Information on utilisation patterns, enrolment, claims experience and administrative costs is also important and can be used to forecast whether an insurance company might be at risk for failure, so that early actions can be taken. Health services information is also required and includes provider lists, licences and accreditation certificates to ensure quality, as well as the locations of all providers to verify geographic access. Grievances and conflicts will arise and proper procedures must be established, such as arbitration boards, regulatory review or as a last resort legal actions. Grievance procedures should include some recourse for outside agencies such as the regulator or a separate medical body to ensure adequate consumer protection. All grievances should be acknowledged and reported on a standard basis, and this information should be made publicly available.

• Auditing is necessary because insurance markets are decentralised and the steward institutions must rely heavily on compliance with specified reporting requirements. The degree of compliance will vary among countries. One way to maintain or improve compliance is to ensure that non‐compliance is detected and punished. Two complementary auditing processes may be used: automatic and randomised. The former focuses on cases that surpass established limits (e.g. requiring detailed audits of the largest insurers on a rotating basis or of particularly large financial transactions). The latter ensures that every insurer has some chance of being audited and facing potential consequences.

• Intelligence entails assimilating information obtained through monitoring and auditing activities of the insurance market and combining this 'internal' information with 'external' data on the overall condition of financial markets, the degree of insurance market concentration, insurance coverage in the population and health outcomes. A specialised government institution with access to relevant data sources can be in charge of this role. Information gathered in this manner can be used to inform interventions that fall within the scope of legislation and licencing, monitoring and auditing.

How the intervention might work

Specific goals have to be set in assessing the impact of policies that regulate PHI. Three main policy goals have been identified by Sekhri, each having a number of objectives that can be attained using well‐designed instruments: to protect consumers, to promote equity and to promote cost containment (Sekhri 2005b).

To protect consumers, five objectives are proposed.

• To ensure financial solvency of the insurers. This can be achieved by establishing sufficient minimum capital/reserve requirements and financial reporting requirements for greater transparency.

• To promote a competitive market to encourage affordability and consumer choice. This can be achieved by establishing reserve requirements that allow different types of insurers to enter the market and by putting in place rules against monopolistic pricing.

• To promote transparency and fairness in transactions between consumers and insurers. This is done by establishing disclosure requirements for policies and ensuring that their content is understandable to consumers, and by monitoring advertising and sales practices to ensure consumer protection and provision of independent mechanisms to resolve consumer grievances.

• To ensure that insurance packages provide adequate financial protection to those insured. This can be achieved by defining at least one standard benefit package that all insurers must offer, and by getting insurers to set premiums for this package in similar ways.

• To address issues related to health as a merit good. This can be done by directly providing or purchasing healthcare interventions that are defined as public goods through public funds, ensuring that minimum benefit packages comprise those items and providing public subsidies to insurers for public goods.

To promote equity, three objectives are proposed.

• To minimize adverse selection and encourage broader risk pooling. This can be achieved by making insurance mandatory for certain categories of households, encouraging group enrolment (through employer groups, associations, co‐operatives and labour unions), by creating incentives for low‐risk individuals to join the insurance pool (e.g. tax incentives, rebates, life‐time rating methods), by permitting defined waiting periods for preexisting conditions and by permitting insurers to make enrolees disclose their medical history.

• To minimise risk selection or cream skimming and to encourage broader risk pooling. This can be achieved by covering high‐risk individuals through publicly funded programs, by providing mechanisms to protect insurers (such as high‐risk pools, reinsurance and risk equalisation schemes), by requiring guaranteed issue and renewal along with pricing guidelines that do not make premiums unaffordable for sicker individuals and by limiting exclusions and waiting periods to the first time that an individual purchases continuous insurance coverage.

• To establish premium setting guidelines that promote cross‐subsidies between healthy and sick and/or between income levels. This is achieved by requiring community rating to promote cross‐subsidies between healthy and sick and by encouraging income‐based contributions when feasible to promote cross‐subsidies between high‐ and low‐income individuals (most often done only in social insurance).

To promote cost containment, two objectives are proposed.

• To reduce supplier‐induced demand. This can be achieved by encouraging provider payment mechanisms that share risks and rewards with providers such as case rates (a predefined amount covering a specific group of procedures), per‐diems (predefined daily rates in case of hospitalisation, or number of days during which healthcare services are provided in case of outpatient visits) and capitation, which is a method of paying doctors a fixed fee per period per patient registered (sometimes differentiated according to age or sex of patients), regardless of the amount of service provided.

• To reduce consumer‐induced demand (moral hazard). Consumer cost sharing can be promoted through deductibles and co‐payments. Monitoring of cost‐sharing practices should be done to ensure that they do not limit access to needed services, and that they provide adequate financial protection.

Why it is important to do this review

With a growing global population and increasing strain on public resources to meet the healthcare needs of populations through state‐provided health insurance programmes, many governments have turned to PHI to ease the pressure on state budgets (OECD 2004). Reduction in direct payments for health care is a key indicator of progress towards universal coverage (WHO 2010). However, in a number of LMICs, the population remains largely dependent on state‐provided health insurance or poorly regulated PHI. Many advanced economies have long recognised the difficulties associated with solely public financing and provision of health care and have liberalised the health insurance market, with the goal, amongst others, to improve access to health care, while reducing direct state financing and provision of health care.

To cover more people, countries would need to ensure that a portion of healthcare costs is covered by funds from pooling institutions (WHO 2010); increasing enrolment in pooling institutions, such as PHI firms, is another of the political options for ensuring universal healthcare coverage. With the goal of improving access to basic health care for citizens through PHI programmes, state regulation of the market has been strongly incorporated into existing schemes in some countries. Low‐ and middle‐income countries now have the opportunity to learn from this experience to optimise PHI (Sekhri 2005b). If poorly regulated, PHI can hardly achieve an adequate quantity or quality of population coverage, as can be seen in the USA, where a third of adults younger than 65 years of age have no insurance, sporadic coverage or coverage that exposes them to high out‐of‐pocket healthcare costs.

This review seeks to gather evidence on the effects of government regulation of the PHI market. Governments have several options that they can consider when aiming for universal coverage; these include social health insurance and public, private and mixed insurance schemes (WHO 2005). This review will contribute to inform the choice of PHI or another alternative. We aim to inform elaboration of policies that result in achievement of desired objectives of PHI and implementation of the most effective regulatory mechanisms.