Health insurers ought to pay a price for IP rider debacle

The new requirement that Integrated Shield Plans (IPs) with riders have a co-payment portion of at least 5 per cent comes at a time of growing concern over the trajectory of healthcare costs.

The move is timely, given that, if healthcare costs continue to rise, a triple whammy could result: Both the insured and insurers would take a hit, as would taxpayers.

Much has been written about how the current situation came about, but a lot of attention thus far has been focused on the “buffet syndrome” of policyholders, and the aggressiveness of agents, many of whom have admitted that IP riders are the first things they would push to potential customers.

However, the role of insurers themselves in creating this particular “monster” deserves some examination. IP riders were created as a way for insurance companies to boost their profits, and it is a rich irony that the insurers themselves, after years of enjoying the spoils, appealed to the Ministry of Health to make co-payment compulsory.

This is the root cause of the problem, and it has broader implications which can be cast as dilemmas.

First, it is about the dilemma of free markets.

In the world of commerce, we extol the virtues of liberalisation and push hard for deregulation. Competition is good, and the more perfect it is, the better it is for consumers. It is also the most efficient social allocation mechanism. So goes the mantra of traditional economics.

Competition in the insurance industry has solved the problem of overcharging and has benefited policyholders. But it has created another problem: The over-provision of benefits, resulting in a financially unsustainable situation for the insurers and everyone else.

It is a paradox that insurers are now asking for more regulation. The profit-maximising equilibrium behaviour of companies resulted in the provision of full riders. This worked well for the insurers for a long time, but it eventually caught up with them.

In its report in 2016, the Health Insurance Task Force pointed out that, on average, policyholders with IP and IP riders incurred 20 to 25 per cent higher medical bill sizes compared to policyholders with IPs only.

Simply put, this means patients whose bills were paid for in full by insurers tended to rack up larger bills - “buffet syndrome”.

Senior Minister of State for Health Chee Hong Tat, in a speech to Parliament during the Committee of Supply debate for his ministry last week, gave several examples of this.

One was that of a full-rider policyholder who made claims for 12 nose scopes in a year when there was no clear medical need. Another policyholder underwent a surgical procedure amounting to S$70,000 to remove a small lump from her breast, when an equally effective alternative would have cost just S$5,000.

The takeaway from this is that free competition in the steady state seems to be lose-lose for both insurers and policyholders.

A second dilemma is that of policy intervention.

The Health Ministry, as Mr Chee stressed in Parliament, in not bailing out the insurance industry by requiring co-payment. The authorities know that they cannot be seen to be intervening in a market which has been undone by itself.

In normal times, regulators should intervene in markets only sparingly. The Health Ministry has bitten the bullet and taken a bold step to address a burgeoning problem. Its move was well considered and is a clear and timely intervention in the public interest.

Finally, there is the dilemma of company culpability.

This is probably the most contentious issue. Given that the present situation is the result of corporate actions, surely the companies must be held accountable. The honeymoon period of full riders is over. Consumers will eventually find out that they will have to foot the bill for these expensive honeymoons.

But should insurers have done better before we reached this juncture? How do we make them more answerable for their actions?

Corporate social responsibility has been talked about for a long time, but it is often ignored amid the siren call of profit.

Yet the full-rider predicament could have been prevented if the starting point of insurers was to act more responsibly. Responsible competition is the name of the game. There was no need to fight tooth and nail for the last policyholder and win the battle, only to realise belatedly that fighting among themselves has cost them the war.

The insurers must be made culpable for their actions, which have brought us to this undesirable state of affairs. They should not attribute the problem to the demands of free markets. Nor should they have appealed for regulatory intervention when things went astray.

Their actions seem to suggest that insurers did not act in their own best interests.

By chasing the short-term profit, they effectively mortgaged away their own future.

Most gallingly, however, they took risks with our future.

ABOUT THE AUTHOR:

Lawrence Loh is the director of the Centre for Governance, Institutions and Organisations at NUS Business School, National University of Singapore. He is also deputy head and associate professor of strategy and policy at the school.