Competition in Private Health Insurance in Germany: Models for Transferable Ageing Provisions

1 FINANCIAL SBILITY AT ION NEWSLETTER HEALTH AND AGEING No. 33 October 2015 Competition in Private Health Insurance in Germany: Models for Transferable Ageing Provisions by Anke Walendzik,+ Florian Buchner++ and Jürgen Wasem+ Background Premiums paid by the insured have various functions and components in health insurance (Cochrane, 1995). They should cover short-term health costs, but also the risk of worsening health conditions. And they should be embedded in a system which allows switching of insurers to allow for competition. In this short article we focus on the last issue with regard to the private health insurance system in Germany. Compared to other European health insurance systems, the German dual system is unique: while basic health insurance is compulsory, it is implemented via two different systems based on distinct ‘construction principles’ and predominantly addressing different parts of the population. The statutory health insurance system is financed mainly by income-related contributions using the pay-as-you-go financing mechanism; the health funds have an obligation to contract, and risks are balanced by a morbidity-based risk adjustment scheme. Private health insurance, on the other hand, is financed by risk-related premiums mainly without an obligation to contract and uses a front- loaded financing system, which saves part of the premium in younger ages for building an ageing provision in order to keep premiums constant in old age. While the statutory health insurance system is compulsory for employed inhabitants below certain income limits, employees receiving higher wages may choose their insurance system, and the self-employed and civil servants are mainly privately insured. The existence of the dual system has led to various discussions about the conditions of competition between and within the two insurance systems and their effects and to propositions including more or less fundamental changes concerning their financing (e.g. Buchner and Wasem, 2006; Sehlen et al., 2006; Kifmann and Nell, 2014). This article focuses on the conditions of competition within the private health insurance system and their potential adjustment. Here, the front-loaded insurance plans aim at steady lifelong premiums independent of changes in health risks after contracting using ageing provisions calculated on average risk. Up to 2009, in case of change of health insurance provider by an insuree, there was no transfer of any ageing provision, which lead to very strong incentives to stay with the initial insurance company. For new contracts concluded from 2009, ageing provisions for a limited insurance package are transferred within the private health insurance system in case of change of insurer. But these transferable ageing provisions are also calculated on community-based risk, not according to the individual actual risk of the insuree at the time of changing insurer. So, change of private health insurer is mainly attractive for healthy insurees with small insurance packages. As a systematic effect, the deficiencies in the transferability of ageing provisions lead to a very limited competition on already privately insured persons. Is it possible to implement an economically consistent system of transferability of ageing provisions to enhance competition within the private health insurance system, and how can this be done? This is the question we focus on in this article. + University of Duisburg-Essen, Faculty of Business and Economics. ++ Carinthia University of Applied Sciences. @TheGenevaAssoc HEALTH AND AGEING