19 May 2008, Authors Dr. Ingrid Königbauer and Derek Proff
Health market – Managing market participants intelligently
Healthcare is a growth market par excellence. The fact that health expenditures worldwide are growing much faster than GDP is testimony to this fact. This is not only true of highly developed economies. Emerging markets are also spending an increasing proportion of their national product on healthcare.
Unlike most economic sectors today, healthcare is not left entirely to the forces of the free market, as various state regulations eliminate many of these. However, this is by no means the only reason for the rapid increase in healthcare expenditure. The other reasons are found throughout the world: on the demand side, growing affluence and ageing populations; on the supply side, scientific and technological advances which permit new and possibly more expensive methods of treatment to be developed. The situation is compounded by an uneven spread of information among market participants, whereby frequency and duration of treatment can be increased artificially as patients cannot properly assess whether treatment is medically necessary. This is known as "supplier-induced demand". And for their part, patients often request too much treatment simply because they do not have to pay the full price for it. This behaviour is known as "moral hazard".
The problem
State-run health insurance systems can no longer support these rising burdens and have set about gradually reducing their basic level of healthcare. This means that insureds now have to finance more and more services themselves or take out private health insurance to make up the shortfalls in cover. Clearly, this opens up enormous opportunities for private health insurers – but significant risks as well.
To prevent services and costs mushrooming, they have to be controlled and actively managed. Consequently, the overriding trend today is towards greater specialisation. Insurers are having to expand their role from risk carrier to active risk manager, even to the point of vertical integration of clinics and other service providers. Strategies designed to ensure the profitability and sustainability of business are needed more than ever before.
Using new products for effective control
A critical factor for the success of the business are instruments that can have a positive influence on the participants involved. For example, these might include products that allow policyholders to play an active and intelligent part in the costs, such as a "health premium fund". This product concept is made up of two components: classic health insurance to cover predefined major losses and an individual fund to finance remaining healthcare services. Clients are rewarded for cost-conscious behaviour by way of a refund of the premiums that have been paid into the fund. Alternatively, they can leave this money to be invested in the fund and use it to build up capital. The conditions of insurance can be designed in such a way that clients actually have a financial incentive for leaving the money with the company. This aspect also makes health premium funds an ideal vehicle for client retention. State subsidies in the form of taxexempt premiums and investment profits can add further appeal to this concept.
Such products come under the category of "consumer-driven health plans". As a recent study by CIGNA (Choice Fund Experience Study, 2007) shows, such concepts have been able to reduce the increase in healthcare costs by half compared with traditional managed care products in the USA. These products can be designed very flexibly to suit individual market and client requirements.
Prevention and disease management
A major portion of healthcare expenditure today goes on so-called "civilisation diseases" such as diabetes and cardiovascular disease, which are frequently caused by an unhealthy lifestyle. By deploying suitable programmes, health insurers can avoid or at least reduce the costs of many chronic diseases. The Munich Re Group has developed a new concept for the German market, which combines health programmes with a reinsured performance guarantee.
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