How fair are Integrated Shield Plans’ pro-ration factors?
The public’s concerns about IPs shows that an expectation gap clearly exists
RECENT changes to how Integrated Shield Plan (IP) insurers pro-rate private hospital bills for policyholders who hold Class A or B1 public hospital IPs have caused much public anxiety. Some policyholders felt that the change is unfair after they have honoured their disclosure and premium obligations. These sentiments are understandable.
When a policyholder consumes care at a setting that is costlier than what an insurance plan is designed for – for instance, someone with a Class A plan seeks care at a private hospital – pro-ration kicks in to try to scale the healthcare bill back to the costs of the ward class that the insurance plan is designed for.
Both IPs and MediShield Life have this feature. When pro-ration is not properly calibrated to reflect the prevailing differentials in bill size between settings, policyholders consuming care at the appropriate ward class for their plan will end up cross-subsidising those who consume at costlier ward classes. This runs against usual social redistribution logic.
The MediShield Life review last year recommended a revision in the pro-ration factors for private unsubsidised bills, to prevent such cross-subsidisation. IPs typically have their own set of pro-ration factors among ward classes. An IP insurer recently reduced the pro-ration factors for those who seek care at higher ward classes than their plan entitlement, in order to keep plans aligned to the ward classes they are designed for.
Let us examine the issue of fairness from the perspective of two policyholders with identical health conditions, who each purchased a Class A plan. For simplicity, let us assume that a deductible of S$3,500 applies with no other sub-limits or co-insurance.
Policyholder X believes that Class A ward matches his expected lifestyle and expects that the premiums charged will reflect the cost of Class A wards. Policyholder Y is keen to use private hospitals, but was advised that the premium of Class A plan is half of a private plan, and comes with a generous 80 per cent pro-ration for stays in private hospitals.
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Assume that a hip replacement costs S$28,000 in Class A ward, and S$42,000 in a private hospital. X will be reimbursed S$24,500; and Y will receive $30,100, or 23 per cent more than X.
If it were a simple screw removal procedure that costs S$4,200 in Class A ward and S$12,000 in private hospital, reimbursement for Y would be close to ninefold that of X’s. These costs to the insurance risk pool will drive the future years’ premium rates.
If the pro-ration factor for use of private hospital stays high, X will end up paying a premium higher than the usual cost of Class A wards. Affordability issues may kick in, and he may need to drop the coverage. If the pro-ration factor falls significantly to align with Class A costs, Y will find it unfair as the plan has moved away from his original expectation. It is difficult to keep both X and Y happy at the same time.
Even if the pro-ration factors were calibrated well originally, regular adjustments are needed when Class A and private hospital bills increase at different paces. The gap between Class A and private hospital bills has indeed widened in the past decade.
We expect our doctors to tell us the truth about our conditions and treatment options, even when some are hard truths. We should expect the same when it comes to advice on our purchase of IPs to set our expectations right. There are two hard truths illustrated by the example:
- Aside from insurability guarantees, IPs are essentially one-year contracts where terms can change from time to time. What is out of line with the plan’s intent will eventually be corrected.
- Expectations and behaviours of others in the plan affect how much premiums we pay. Observing how people around us use their IPs will give a hint of where our premiums are heading.
The public’s concerns about IPs shows that an expectation gap clearly exists. Insurers and financial advisers should proactively reach out to policyholders to improve their understanding of how IPs are supposed to work, and the objectives that key features such as pro-ration aim to achieve.
Do not avoid the difficult conversations. Insurers should also actively fine-tune their IPs to keep each plan aligned with its intent. Large changes are disruptive to policyholders’ financial planning.
The writer is president of the Singapore Actuarial Society
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