How are public and private insurance used in the real-world? The answer to this question varies across countries, however, there are generally 3 ways in which public and private health insurance systems interact.
First, private insurance may substitute for public insurance. That is, people are either covered privately or publicly. This is the case in Australia, Ireland, Spain and used to be the case in the Netherlands before 2006…Second, private insurance is bought in addition to public insurance to get faster access (i.e. shorter waiting lists), have a broader choice of providers and treatments for a given condition. Examples include Austria, Denmark and Finland…Third, private insurance is bought to cover treatment for conditions that are not covered by public insurance. One can think of dental care, physiotherapy and prescription glasses that are not covered by the public insurance system. But also, the public system may not fully cover the costs of a treatment and people can insure the public co-payment on the private market. Example shere include the Netherlands (after 2006), France and Luxembourg.
In the U.S. the interaction typically occurs along dimensions #1 and #3. Working age individuals may be covered by private insurance (often through their employer) or by a government program such as Medicaid. For the elderly, they are generally covered by they publicly-funded Medicare program. Medicare, however, often requires beneficiaries to make large co-payments. Private Medigap insurance, however, covers many of these copayments.
A recent paper by Boone et al. (2018) notes two commonly cited market imperfections that would justify government provided health insurance but then also adds a third. Namely, there is the issue of adverse selection. In the private market, the sickest individuals may have trouble buying insurance if healthy individuals drop out of the market (even though they themselves would prefer insurance if provided at rates reasonable to their risk). If there is public insurance where everyone gets insurance, this solves the adverse selection issue. The second market imperfection–moral hazard–affects both public and private insurance. When insurance is provided, people will be more likely to request expensive medicines than are needed since they are not bearing the full cost of the medication. A third and final market imperfection is liquidity constraints. In many economic models, there is a high demand for insurance because patients are risk averse. It could be the case, however, that individuals may not have access to sufficient capital to fund the purchase of a treatment that they value highly. Financial institutions may be wary of lending large sums to individuals with very serious disease.
In a standard model with adverse selection and moral hazard (but no liquidity constraints), other studies have found that government insurance should cover treatments likely to induce adverse selection and that cost-effectiveness does not influence whether government or private sector should cover a treatment.
In the Boone model with liquidity constraints, however, the results change along five dimensions.
First, CE scores do play a role in prioritizing which treatments should be insured. Because of limited budgets, money should be spent on treatments with a high health return per euro spent.Second, treatments with serious moral hazard issues should not be covered at all by (any) insurance. Third, relatively cheap treatments should not be covered by either basic or supplementary insurance. Fourth, basic insurance should cover treatments that are predominantly used by people who at the margin buy the most valuable treatments. The importance of disease (and treatment) prevalence to determine which treatments should be covered by basic insurance appears to be new. We derive sufficient conditions under which basic insurance should target treatments used especially by vulnerable people with high risk and low income. Finally, the welfare effects of government intervention in health insurance are magnitudes higher in an access to care model.
The paper is interesting and the key issue is to what extent are liquidity constraints binding in the real world. Some have called for health mortgages to allow liquidity constrained individuals to afford expensive treatments. Other individuals can receive loans from family or friends to afford needed treatments. However, with the cost of some novel treatments reaching six figures in cost per year, liquidity constraints are clearly an issue for many individuals.
- Boone, Jan. “Basic versus supplementary health insurance: access to care and the role of cost effectiveness.” Journal of health economics (2018).
Here is another perspective. I have spent 30 years in the insurance business, so that will be the focus of my comments.
Private insurance is a decent product but it is not universal. This is true for life insurance, disability, long term care and health insurance.
It is not universal because of underwriting exclusions, procrastination by buyers, misinformation, and just plain attrition where people fail to pay premiums as years go by.
In the USA, we provide some backup for those who lose or cannot get private insurance. Social Security provides some death benefits and some disability benefits. Medicaid provides some long term care benefits.
The ACA has been an awkward merger of social insurance and private insurance. Our idiotic federalism gave states the power to limit Medicaid, which has compromised the social insurance aspect.
Right now we have a left wing which is totally in favor of social insurance, and a right wing which keeps the flame alive that private insurance will work for all. We will have to stumble along.
Another major difference between government and private insurance is this:
Private insurance is experience rated. If claims exceed premiums, then either premiums go up or the carrier leaves the market. (sometime both happen over a couple of years.)
Government insurance is much gentler. Premiums to the public may not go up at all. Instead the taxpayers are effectively the reserve.
In health care, that is why Medicare is so popular. The payroll tax for Part A has not gone up in its percentage for 30 years (except for high income earners. The income tax contribution to Part B is completely invisible to the public. Medicare Advantage and Part D drug plans are cushioned by massive federal reinsurance.