ReviewWhat characterises the privately insured in universal health care systems? A review of the empirical evidence
Introduction
In one third of all OECD countries, 30% of the population or more are covered by some sort of voluntary private health insurance (VPHI) in addition to the coverage provided by the universal health care system [1]. Hence, knowledge on this type of private health insurance is of widespread relevance.
The VPHI schemes have largely developed around the universal health care systems and as a consequence, they are rather heterogeneous across countries. In settings where the privately insured remain to be covered by and contribute towards the financing of the universal health care system, the coverage provided by VPHI may be classified as complementary, supplementary or duplicate in relation to the universal health care system [1], [2]. Complementary and supplementary VPHI cover out-of-pocket payments for health care services that are only partly financed by or excluded from the universal health care system, respectively. Duplicate VPHI provides preferential access to treatments that are also available free of charge within the universal health care system, although often with some waiting time. VPHI is purchased directly by individuals or by employers on behalf of their employees, either at the employers’ initiative or in consequence of collective agreements [3].
This paper reviews the empirical literature on what characterises the privately insured in universal health care systems under different institutional and regulatory settings and assesses how well the empirical evidence corresponds with the theoretical predictions. This information is useful in itself, as well as in order to guide the selection of covariates in subsequent empirical analyses. Moreover, it may be used to qualify a discussion of the equity implications of VPHI. Particular attention is paid to the role of socioeconomic characteristics, risk preferences, and health. Along a similar line, the theoretical predictions of individuals selecting themselves into duplicate VPHI based on income and the quality of care available within the universal health care system are assessed. The review is restricted to consider individually purchased policies, given that the theoretical frameworks for analysing individually purchased and employment-based VPHI differ markedly, and that the latter has only been sparsely analysed in a non-US context.1
The paper is structured as follows. Section 1.1 briefly accounts for the theoretical framework. Section 2 describes the search strategy used to identify the empirical literature to be included in the review and the criteria for inclusion. Section 3 reviews the results of the identified studies. Section 4 discusses how well the empirical evidence corresponds with the theoretical framework and accounts for the equity implications of the findings. Moreover, the methodological challenges of the literature are identified. Finally, Section 5 concludes with policy implications and suggestions for future research.
The individual demand for private health insurance is usually modelled within the framework of expected utility theory. More precisely, individuals are assumed to decide whether to insure by comparing the scenarios with and without private health insurance, respectively, and choose the option that yields the higher expected utility subject to a budget constraint. Within this framework, the demand for private health insurance has been shown to increase with the degree of risk aversion, assuming symmetric information between the insurer and the insurance holder which is manifested in risk rated premiums [5], [6]. Assuming that individuals are risk averse and know more about their risk of falling ill than the insurers (or that the insurers are not allowed to use this information to risk rate premiums), it has been shown that individuals adversely select themselves into private health insurance based on their risk of falling ill [7], [8], [9]. This mechanism, which is termed adverse selection, implies that individuals with a high risk of falling ill are more likely to demand insurance or demand more comprehensive coverage compared to those with a lower risk of falling ill. On the contrary, when insurance premiums are risk-rated, higher premiums reflect higher prices but also higher expected expenditure. Perfect risk-rating thus neutralises the effect of health risk on private health insurance demand. Besides risk rating the premiums, insurers may counter adverse selection through eligibility requirements and restrictions in coverage, and by targeting insurance policies to low risk individuals.
Another branch of the theoretical literature has predicted the opposite of adverse selection, namely advantageous selection. Advantageous selection implies that the demand for private health insurance and the risk of falling ill may be negatively correlated if individuals select themselves into private health insurance based on both their risk type and some other characteristic that is positively correlated with insurance coverage and at the same time negatively correlated with the risk of falling ill [10], [11], [12], [13]. The literature has suggested risk preferences [10], [11], [12], financial means [11], and cognitive ability [13] as potential sources of advantageous selection into private health insurance.
The theoretical predictions discussed above are derived in an institutional setting without tax-financed health care or social insurance, i.e. where private health insurance provides the primary source of coverage. They may be generalised to complementary and supplementary VPHI by replacing the risk of falling ill in general with the risk of falling ill and needing medical care which is subject to out-of-pocket payment in the universal health care system, assuming that the coverage of the universal health care system is fixed and exogenously determined.2 The demand for duplicate VPHI is, however, less straight forward to model, given that this type of VPHI does not cover forced financial losses, but rather treatments at private facilities that are also available free of charge within the universal health care system. Theoretical contribution that specifically models the demand for duplicate VPHI have emphasised the importance of the relative quality of care delivered by the tax-financed and the private health care sectors, respectively [14], [15]. Assuming that quality of care is a normal good, this literature has also shown that individuals select themselves into duplicate VPHI based on their income, because the universal health care system limits the quality of health care available. Moreover, the theoretical finding of adverse selection has been replicated for the different types of VPHI that may exist alongside a universal health care system [16]. Finally, Propper [17] has argued that some individuals may not consider duplicate VPHI to be within their choice set for ideological or political reasons. Such individuals are said to have preferences that are captive to the universal health care system.3
Section snippets
Search strategy
The reviewed literature was identified by electronic searches in EconLit and PubMed. The searches were restricted to words included in the title. The search terms used were [health insurance or medical insurance or insurance] and [private or supplementary or duplicate] and [determinants or demand or selection]. In addition to the electronic searches, the New Economic Papers mailing list and weekly reports on the latest working papers from the National Bureau of Economic Research within the
Results
The electronic search identified 61 journal publications, chapters in books, and working papers, of which 21 met the criteria for inclusion outlined in Section 2.2. After adding the literature identified through other sources, the final review includes 24 articles published in peer-reviewed journals and 15 working papers published by different research institutions. The identified studies are reviewed as follows. Section 3.1 describes the relevant features of the institutional and regulatory
Discussion
This section discusses possible interpretations and implications of the results outlined in the previous section. Section 4.1 assesses how well the empirical evidence corresponds with the theoretical predictions. Moreover, given that equity may reasonably be considered a fundamental value in societies with a universal health care system in place, Section 4.2 accounts for the equity implications of the empirical findings. Section 4.3 reviews and discusses the methodological challenges of the
Policy implications and suggestions for future research
In addition to the equity issues discussed in Section 4.2, the association between duplicate VPHI and the quality of the universal health care system should be of relevance to policy makers. This association implies that policy makers may indirectly affect the prevalence of duplicate VPHI by improving the quality of the universal health care system, e.g. through waiting time guarantees. Another channel through which policy makers may affect the prevalence of VPHI is through tax-incentives,
Acknowledgements
The paper has benefited greatly from discussions with Kjeld Møller Pedersen, Jacob Nielsen Arendt, Jes Søgaard, Terkel Christiansen, Lars Peter Østerdal, Kristian Bolin, and Mickael Bech, as well as comments from two anonymous reviewers. Any errors are the responsibility of the author.
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