Consumer Council Submission to the Food and Health Bureau on Voluntary Health Insurance Scheme
1. The Consumer Council (the Council) is pleased to submit its views concerning the Voluntary Health Insurance Scheme (VHIS) proposed by the Food and Health Bureau (FHB) in a consultation document.
2. The VHIS is proposed with 12 Minimum Requirements to ensure accessibility to and continuity of coverage, and to enhance the benefits to cover hospitalization and prescribed ambulatory procedures, prescribed advanced diagnostic imaging tests and non-surgical cancer treatments, and to improve budget certainty and price transparency.
3. After the implementation of the VHIS, all individual indemnity hospital insurance products must comply with the Minimum Requirements, except for existing policies renewed by policyholders under grandfathering arrangements. The Government offers tax incentives to entice individuals to subscribe or migrate to policies compliant with the Minimum Requirements.
4. The Council appreciates the FHB's laudable effort in proposing essential protection to consumers by means of regulating healthcare insurance plans. The Minimum Requirements are proposed with good intentions. In response, the Council structures its views around the pros and cons of the Minimum Requirements, and seeks to assess the feasibility of the proposals within the context of affordability and sustainability of the VHIS.
THE COUNCIL'S RESPONSE
5. In considering whether the proposed Minimum Requirements are essential for inclusion in a health insurance policy, the Council looks into a consumer's perception about whether the provisions can offer better protection and are value for money. Indeed, what is value for money is subjective and includes value judgment that varies among individuals. Not all policyholders accord great value to expensive treatment that may or may not extend life by a few months, or new drugs with more convenient dosing schedules and better side-effect profiles, when these come with extra costs in form of out-of-pocket or premium payments. Some budget-conscious individuals maintaining a healthy life-style may wish to subscribe to an insurance policy with lower coverage than the Standard Plan. As such, the Standard Plan may price them out of the market. On the other hand, some consumers may look for better plans with better protection in terms of scope and amount, when there is a need to make a claim.
6. There is no one-size-fits-all policy that meets the demand of all policyholders. The Council puts high value on consumer choice. But in the event of health insurance, the products have to be well designed to offer meaningful choice to consumers. A Standard Plan with Minimum Requirements that are considered non-essential for a discretionary consumer in fact deprives him of the choice for lower coverage at a reduced premium. However, in the absence of Minimum Requirements that are standardized in the insurance industry, another consumer could be overwhelmed by the broad range of products and sales tactics that finds it difficult to make a rational choice.
7. The Council urges that the Government address the pricing-out issue by finding means (e.g. offer of attractive economic incentives) to make it more affordable to the young and healthy segment.
8. Outlined below are some specific requirements with a discussion of their pros and cons for the FHB's consideration.
Benefit Limits Meeting Prescribed Levels
9. Below is the itemized benefit limits extracted from the illustrative outline of benefit schedule of Standard Plan (the basic plan that meets but not exceeds the Minimum Requirements) in the consultation document.
(A) Itemised benefit limits (for hospitalisation only)
(1) Room and board (daily), maximum 180 days
(2) Attending physician's visit (daily), maximum 180 days
(3) Specialist's visit (per admission)
(4) Surgical limit (including surgeon, anaesthetist, operating theatre) (per surgery)
Maximum $58,000 (varies by surgery type)
(5) Miscellaneous hospital expenses (per admission)
10. Notwithstanding that "all dollar figures in the benefit schedule and in all examples in this chapter [table] are indicative and are for illustration purposes only", the Council considers it important for the FHB to design a benefit schedule which should be informative, comprehensive without ambiguity.
11. In the benefit schedule as proposed, it is unclear whether the indicative surgical limit cap of $58,000 is an average of all surgery types, or represents the highest claimable per surgery. The Council considers the amount of $58,000 too low to cover most surgeries, major or semi-major. The modest surgical limit, when viewed against the average standard premium of $3,600, may not be regarded as value-for-money to many intended subscribers. The Council suggests that the surgical limit be increased, and that this limit be uniform across all surgery types.
Guaranteed Acceptance with Premium Loading Cap
12. Acceptance of subscription to the Standard Plan is guaranteed for all ages regardless of health condition during the first year of implementation of the VHIS, with premium loading capped at 200% of standard premium. From the second year onwards, the guarantee is only available to those aged 40 or below. The guarantee is made possible by the high risk pool (HRP), to which the policies of high risk individuals are transferred upon policy inception.
13. The high risk pool. The separation of the HRP from the other policies will ensure that the underwriting of risks for non-high risk individuals will not be adversely affected. Because of adverse selection, high risk individuals who can afford the premium will undoubtedly be attracted to the HRP. Also, in borderline cases where the insurer finds it difficult to assess the risk premium of an individual, whether below or beyond 200% premium loading, the insurer may be inclined to transfer the policy to the HRP with a premium loading of 200%, because it does not stand a second chance to make a transfer other than upon the policy inception.
14. The HRP will therefore consist of policies of the obviously high risk and the potentially high risk. This may lessen the financial burden on the Government in making up the shortfall, but will be unfair to borderline case individuals of potentially high risk to pay threefold of the standard premium. The Council suggests the FHB devise appropriate mechanism for the borderline case individuals to be relieved from the HRP after some years of no claim record, for example by their voluntarily submitting themselves to re-underwriting after two or three years' clean record.
15. Window period and early-bird incentives. For most consumers other than the obviously high risk, they need time to see how the VHIS works before making a long-term commitment. The window period of one year is short in terms of the time required for making an informed decision on a new and perpetual scheme. The Council suggests the window period be extended to 3 years. As added incentives to entice individuals to join the VHIS within the first two-year window period, the Council suggests the Government to offer early-bird sign-up bonuses of, say 20% and 10% premium rebates for individuals (excluding those transferred to the HRP) enrolling within the first and second year respectively, and a perpetual  reduced premium loading cap of 150% for policyholders enrolling within the first two-year window period. For individuals who join from the third year onwards, the regular premium loading cap of 200% applies. The early-bird incentives must be attractive to kick off the new scheme.
16. The declining scales of premium rebates will encourage healthy individuals to sign up early. The perpetual reduced premium loading cap of 150% will attract those borderline case individuals who will otherwise risk paying threefold of the standard premium for life. Both incentives will expand the number of subscribers and improve the quality of the pools, whether the insurer's pool or the HRP.
17. The proposed extension of window period and early-bird incentives will have implications on the Government's funding. However, for the sake of operational viability, it is worth the Government's careful consideration to inject additional funds to the VHIS upon its inception, if necessary. In the 2008-2009 Budget, the Financial Secretary has earmarked $50 billion to support healthcare reform. Subsequent to the Financial Secretary's release of the 2015-2016 Budget, the Secretary for Food and Health is quoted as saying that HK$10 billion will be used to inject funds to the HRP and to provide tax concessions for VHIS subscribers.
Portable Insurance Policy with No Re-Underwriting
18. VHIS policyholders can switch insurers without re-underwriting on the basis of no claim record in a certain period immediately before the transfer of policy. Without re-underwriting, the prevailing premium loading and exclusion (if applicable), and the served waiting period for pre-existing conditions will also be ported along.
19. There is no discussion in the VHIS consultation document if portability will involve transfer of policyholder's sensitive information among insurers, within strict protocols to be prescribed. The Council cautions that the related issue of privacy of information be handled with care. In some jurisdictions, information is passed to the new insurer by transfer certificate issued by the former insurer within a prescribed period. The certificate confirms the no claim record (if valid), and include information about the existing premium loading and exclusion and the waiting period that the policyholder has served for pre-existing conditions (if applicable). Another alternative to facilitate portability is by means of centralised electronic clearing, given that the insurers are obliged to supply some information to the new dedicated regulatory agency (to be established under the VHIS).
20. Portability with no re-underwriting facilitates consumer choice and mobility and the overall competitiveness of the market. A potential issue in portability is that the acquiring insurer may be financially prejudiced by its predecessor's over-aggressiveness in client acquisition that leads to a relaxed assessment of underwriting class. The acquiring insurer also has no alternative even if being obliged to succeed a policy at a time when the policyholder's health condition may have deteriorated. This is met with resistance, as the insurance industry foresee the implicit opportunity for arbitrage and 'hit and run'  by policyholders, even if there could be legitimate reasons for switching. 
21. Risk management is foreseeably difficult for the acquiring insurer of a ported policy. However, the impact may not be large as long as switching is multi-directional such that no particular insurer is penalized to the extent of exiting the market. In case a particular insurer faces severe financial hardship serving a deteriorating pool of policies due to involuntary acquisition of inferior risks to the extent of exiting the market, harm will be caused to its pool of policyholders. The Council urges the FHB to devise safeguarding measures against this eventuality.
22. Indeed, the costs borne by an acquiring insurer to satisfy policyholders exercising arbitrage or 'hit and run' will be disproportionately shared by the insurer's long term policyholders. This may eventually result in higher premiums for all policyholders. This potential problem warrants the Government conducting further analysis, say by looking into the experience of overseas markets with portable health insurance policy, to formulate appropriate and fair portable rules for Hong Kong. Incidentally, the Council understands that Australia has conducted a study to find out if there is evidence that acquiring insurers are being unfairly disadvantaged by the applicable portability rules, and to assess if the preceding insurer should contribute to claims occasioned by the transfer. The Council is also aware that Australia has established a Risk Equalization Fund (REF)  to spread the claims burden of individual health insurers by pooling the claims experience of all insurers for policyholders above 55 years, where the expenses for the high-cost claimant pool are met though industry contributions.
Budget Certainty for Policyholders
23. The no-gap/known-gap arrangement ensures zero or pre-determined out-of-pocket payment for policyholders who elect to undergo prescribed treatment by a physician and at a hospital on the insurer's specified list. Policyholders will welcome budget certainty. For the sake of spending within budget, some policyholders may accept reduced choice for physicians and hospitals. For other policyholders who elect a particular physician or a hospital not on the insurer's specified list, budget certainty is available through written quotation prior to treatment.
24. The no-gap/known-gap arrangement pre-supposes that there is a sufficient number of physicians and hospitals offering all-inclusive packaged prices on certain common treatments. In reality, policyholders relying on packaged prices may find very limited choices in physicians and hospitals. The Council has reviewed some statistical figures of charges (for the 1st half-year of 2014) for common surgical and endoscopic procedures at a medium-priced private hospital in Hong Kong (with accommodation in standard wards), and found wide price dispersion with the same treatment and procedure. Take the total charge of colonoscopy as an example, the lower decile is $13,400 and the upper decile is $34,330, averaged at $21,140. Take another example of thyroidectomy, the lower decile is $39,000 and the upper decile is $76,570, averaged at $55,730.
25. To realize no-gap/known-gap arrangement, it is not very promising to rely on insurers alone to negotiate at least one packaged price with different healthcare providers. Wide price dispersion with the same treatment and procedure may impede the insurers' ability to negotiate packaged pricing. In fact, insurers of small-scale operations may not possess the bargaining power to negotiate packaged pricing with hospitals, for lack of the capacity to guarantee the requisite volume of policyholders' patronage.
26. To implement no-gap/known-gap arrangement, it would be more effective if the initiative for packaged pricing comes from the healthcare sector. But as proposed in the consultation document for the regulation of private healthcare facilities, the hospitals are only voluntarily required to provide recognized service packages. The Council suggests packaged pricing by hospitals be made mandatory for common treatments or procedures, so as to facilitate no-gap/known-gap arrangement by insurers for common illnesses.
27. When hospitals are required to offer packaged pricing on a portion of treatments or procedures, they may be induced to employ salaried doctors instead of relying mainly on visiting physicians. In the event of medical negligence, consumers could be protected not only by the physician's own indemnity insurance, but possibly also by the hospital's vicarious liabilities.
28. As proposed in the VHIS consultation document, the insurers are required to provide transparent information on age-banded premiums through accessible platform. The transparency on age-banded premiums undoubtedly reduces the consumers' search cost in selecting a plan. But if a factsheet on claims record is also available alongside the premium and benefits schedules, consumers will be better equipped to evaluate the approximate claims ratio of the insurer. This information will assist consumers to judge for themselves if the premiums are excessively priced. The Council recommends mandatory disclosure of claims record (claims ratio), premium and benefits schedules in the form of downloadable files or other means easily accessible online.
Affordability and Sustainability
29. On the assumption that the indicative schedule of age-banded premiums is the market rate, it is observed that the progression is fast even for standard premium. Early subscription of the Standard Plan within the window period ensures locking in the underwriting class. However, the premium is still costly when one advances in age. The indicative "average" annual premium of $3,600 may not be useful enough for the public to determine whether or not to participate to the scheme.
30. Upon clarification with the FHB, the Council understands that it has accorded different weights to different age bands in calculating the average, with reference to statistics of health insurance coverage by age groups. However, further clarification is still needed. From an insurer's perspective, the age profile of its policyholders may vary from year to year, especially upon the implementation of the VHIS, depending on whether it is able to entice the young and healthy to enroll, or it attracts only those with pre-existing illnesses. From a consumer's perspective, one is only concerned with the present value (or better still the future value) of his premium payments accumulated over the entire period of subscription during his lifetime (on the assumption of continued renewal). Therefore, to offer meaningful choice and clear premium schedule for different age-band would be crucial to the success of the scheme.
31. The proposed tax incentives for taking up or migrating to the VHIS are in fact very small. The maximum tax deduction is $612 if one's incremental salary is attracting the highest tax band of 17% salaries tax. The tax deduction is on the basis of $3,600, which is the average premium on the indicative schedule. The tax allowance is not adjusted by age or premium loading.
32. There is no reason why the tax allowance should be based on the average standard premium but not on the actual premium payment. It is also not justifiable why the tax allowance should be limited to four insured (the taxpayer and a maximum of three dependants). The Council suggests calculating the tax allowance on the actual premium payment borne by the taxpayer on all the insured.
33. In fact, policyholders who are subsequently retired without taxable income will no longer enjoy any financial incentive for renewal of the VHIS policy. Another lacuna is that the tax incentive is too small to attract the young and healthy on a modest income. But these are the very people that will improve the quality of the insurance pool and drive down premium levels. The Council suggests the Government establish a Health Savings account (or whatever terminology) on application for non-taxpaying VHIS policyholders, and offer them a rebate, say 10% of the actual premium by means of deposit to the account. The Health Savings account is meant to be health-related, with funds designated for use on medical and dental treatments.
34. Group hospital insurance products are not required to be VHIS-compliant. The Government proposes to require insurers to offer employers an elective component, the Conversion Option, in the group hospital insurance products. An employer can elect to purchase the group policy together with the Conversion Option, to enable departing employees to switch to an individual Standard Plan at the same underwriting class without re-underwriting. This Conversion Option is particularly attractive to the soon-to-be-retired. However, this option depends entirely on whether the employer has purchased the Conversion Option with the group policy. For better protection of the departing employees, the Council suggests that the Conversion Option be bundled with all group policies.
Sustainability of the VHIS
35. Underlying the objective of readjusting the public-private balance, it firstly presupposes that there is little deliberate segmentation between the public and private healthcare sectors. Secondly, it presumes that the VHIS will shift certain demand from the public sector to the private sector, and that the shift will reduce the strain on public healthcare services.
36. For the public-private segmentation, the two sectors do not compete for patronage, given the economic interests in the private sector and the safety net obligation in the public sector. The private sector provides the majority of profitable out-patient care and certain profitable in-patient services, and the public sector offers unprofitable yet essential services such as emergency, catastrophic cases and chronic conditions, complex and high-risk surgery and intensive critical care. The public-private imbalance is likely to remain with or without the VHIS.
37. For the presumption of demand shift, the VHIS may trigger not only a demand shift, but also an escalation in healthcare expenses. Both supply-side price inflation and demand-side increase in utilisation will contribute to escalation in healthcare expenses: inflationary expenses in new drugs and advanced treatments, prescription of more diagnostic tests, expensive drugs and treatments, and charging of a higher fee.
38. Advances in medical technology bring about benefits in terms of effectiveness of treatment. But if the improvement in effectiveness is only marginal with substantial increase in price, it is not cost-efficient. Yet a physician is motivated to reduce error of clinical judgment by prescribing a comprehensive set of diagnostic tests, and to improve effectiveness (even if marginally) by prescribing more expensive drugs and treatments. Patients will rely on the physician's recommendations, and are not cost-conscious if they are covered by insurance. As such, the VHIS will tend to exacerbate healthcare expenses to a larger extent than that without the VHIS.
39. Without simultaneous regulation of the healthcare expenses, it is questionable whether a demand shift can be sustainable by introducing the VHIS. Not only the insurer is presented with an increasingly higher bill, but also the policyholder finds the benefit limit inadequate, to be heavily supplemented by out-of-pocket payment. As there is a real risk that VHIS will exacerbate healthcare expenses, thereby driving up insurance premium generally in the health insurance market, there can be detrimental effect of opportunistic premium inflation on consumers (including those outside VHIS) generally. If premiums are escalated to a cost-prohibitive level, it would eventually become unaffordable to some VHIS subscribers and force them to revert to public healthcare. When the backward shift is large to a certain extent, it will put the sustainability of the VHIS at stake, and defeats its very objective of readjusting the public-private balance. The Council therefore sees it crucial for the Government to closely scrutinize healthcare expenses to contain increase in insurance premiums.
40. Alongside the proposed Standard Plan, regulation of the insurance industry will also be strengthened in price transparency and standardization of policy terms and conditions. However, these are not sufficient to drive cost efficiency. There is especially room for improvement in terms of reduction in administrative costs.
41. It is mentioned in the VHIS consultation document that the average expense loading of the Hong Kong individual health insurance market is 36% in 2013. In other words, 36% of premium payments are allocated for commissions and broker fees, profit margins and other overhead expenses. How the expense loading can be reduced is in the hands of the insurance industry and this has policy implications in regulation. At a minimum, the Council suggests mandating the insurance industry to disclose relevant schedule of policy commissions and broker fees relating to the individual health insurance. It is expected that better disclosure will drive the industry towards price competition and cost efficiency.
42. Should information disclosure and competitive pressure turn out to be ineffective in bringing down prices, the Government may intervene further to monitor the process of premium increases, say by subjecting premium increases to an approval process (with reference to the case of Australia).
43. The success of the proposed VHIS depends on whether it can attract and retain a sufficiently large pool of subscribers to spread the risks and ensure its sustainability over the long term. Eventualities may arise which are unpredictable. Without a periodic review mechanism, problems may remain undetected.
44. The Government is well advised to periodically review the VHIS mechanism and operation, say every two years to monitor its operations, keep an eye on potential problems, and devise countering measures as appropriate.
45. For the protection of consumers, a single claims dispute resolution channel will avoid confusion and improve administrative efficiency. But as regards the insurance intermediaries, the ultimate sanctioning power resides with the respective self-regulatory body (the Independent Insurance Authority after its inception) who issues licences and manages registration. This gives rise to separate but inter-related components within the regulatory framework.
46. It is understood that a new dedicated regulatory agency will be set up under the VHIS. As noted in the consultation document, one aspect of its functions is to handle non-claims related complaints by consumers. It may be implicit in such description that complaints involving sales practices fall within the ambit of the new regulatory agency. This must be expressly spelt out to avoid misunderstanding. Complaints about sales practices come in all shapes and sizes. The loophole can be large if the scope of handling complaints is confined to the Standard Plan alone. The regulatory agency must define its mandate to cover sales-related complaints involving individual healthcare policies, inclusive of grandfathered plans, Standard Plan, Flexi Plan and Top-up Plan.
47. In the VHIS consultation, it is proposed to set up the new regulatory agency as an administrative unit under the FHB. But it indicates also that the new regulatory agency could take the form of a statutory authority independent from the Government. Government-led or independent, it will have different implications on the roles, functions, impartiality or otherwise of the new regulatory agency. Clarification to this is required.
SUMMARY OF SUGGESTIONS
48. The following is a summary of the Council's suggestions for the FHB's consideration.
(1) Minimum requirements:
i. Benefit limits - Increasing the surgical limit, to be universally applied to all surgery types;
ii. Guaranteed acceptance
a. High risk pool - Devising a mechanism to relieve borderline case individuals from HRP after some years of no claim record;
b. Window period - Extending the window period from 1 year to 3 years and offering declining-scale early-bird bonuses and perpetual reduced premium loading cap for enrollment within the first 2 years;
iii. Portable insurance policy - Portability with no re-underwriting, subject to safeguarding measures against exposing particular insurers to market exit, causing detriments to policyholders;
iv. Budget certainty - Mandatory for hospitals to provide packaged pricing for common treatments/procedures, to facilitate no-gap/known gap arrangement by insurers;
v. Transparency - Mandatory disclosure of claims record (claims ratio) alongside premium and benefit schedules.
(2) Tax incentives: Calculation of tax allowance on the actual premium payment borne by a taxpayer on the Standard Plan on all the insured; 10% premium rebate to non-taxpaying VHIS policyholders by establishing Health Savings account.
(3) Conversion option: Bundling of conversion option with all group insurance policies.
(4) Sustainability of VHIS: Simultaneous scrutiny of healthcare expenses to contain increase in insurance premiums.
(5) Expense loading: Mandatory disclosure of relevant schedule of policy commissions and broker fees relating to the individual health insurance.
(6) Review mechanism: Periodic review, say every 2 years, on VHIS mechanism and operation.
(7) Regulatory framework: Clarification on the impartiality of the new regulatory agency, and this new agency's mandate to cover handling of sales-related complaints.
49. In response to the consultation, the Council seeks to assess the feasibility of the proposals within the context of affordability and sustainability of the VHIS, and appreciates if the FHB would take into account the Council's suggestions for the sake of consumer protection.
50. The Council firmly believes that regulation of the health insurance industry and the private healthcare sector has to be strengthened. This is to safeguard consumer interests in their acquisition of health insurance and private healthcare services. In this context, mechanism must be in place to standardize policy terms and conditions, to enable fair access, to improve handling of consumer complaints in relation to health insurance, and to enhance transparency of healthcare service fees, regardless of whether the VHIS is to be implemented.
1. The Council finds $58,000 barely adequate even for a laparoscopic appendicetomy. The total charge for which is averaged at $75,000, between lower decile $56,930 and upper decile $103,000, in a medium-priced private hospital in Hong Kong. The above statistical figure (for the 1st half-year of 2014) is accessible from the hospital's website.
2. In the first two-year window period, policies beyond 150% premium loading (not necessarily beyond 200%) will be transferred to the HRP, because insurers will rate an individual at a premium consistent with its assessment to avoid underwriting inferior risks at a discounted loading. Therefore, the reduced premium loading cap of 150% should be perpetual. This rewards the obviously high risk individual for making an early decision, and also ensures that a Type II error (false positive) assessment by an insurer will not overrate a potentially high risk individual to the degree of threefold premium. This 2-year premium loading cap also improves the quality of the high risk pool at the outset.
3. For example, an individual is obese with high cholesterol level, and is quick to take up a VHIS policy within the window period. Assuming he is assessed on a 30% premium loading by an insurer but on a 50% premium loading by a second more prudent insurer, he then takes up the plan with the first insurer. In case the premium schedule of the prudent insurer is lower than the first insurer, this individual can switch to the second prudent insurer and maintains 30% premium loading without re-underwriting after three years' clean record with the first insurer, even if by that time he is taking heavy medications against his high cholesterol level.
4. As a case of 'hit and run', a policyholder switches to another insurer with a wide choice of network physicians for a particular procedure for which he suspects himself as requiring (the 'hit') and then switches to another insurer offering lower premiums if the procedure turns out to be unnecessary (the 'run').
5. For instance, the transfer may well occur immediately prior to hospital treatment just by chance. There is also the possibility that a policyholder transfers his policy to a particular insurer prior to treatment in order to take advantage of a no-gap/known gap arrangement the new insurer has with a particular healthcare services provider.
6. The REF is set up to achieve community rating in the context of universal access to private health insurance in Australia. Still, the Council considers that reference can be drawn from the REF with a view to spreading the claims burden of acquiring insurers consequential to portability.