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date: 05 December 2019

Supplementary Health Insurance and Regulation of Healthcare Systems

Summary and Keywords

Most developed nations provide generous coverage of care services, using either a tax financed healthcare system or social health insurance. Such systems pursue efficiency and equity in care provision. Efficiency means that expenditures are minimized for a given level of care services. Equity means that individuals with equal needs have equal access to the benefit package. In order to limit expenditures, social health insurance systems explicitly limit their benefit package. Moreover, most such systems have introduced cost sharing so that beneficiaries bear some cost when using care services. These limits on coverage create room for private insurance that complements or supplements social health insurance. Everywhere, social health insurance coexists along with voluntarily purchased supplementary private insurance. While the latter generally covers a small portion of health expenditures, it can interfere with the functioning of social health insurance. Supplementary health insurance can be detrimental to efficiency through several mechanisms. It limits competition in managed competition settings. It favors excessive care consumption through coverage of cost sharing and of services that are complementary to those included in social insurance benefits. It can also hinder achievement of the equity goals inherent to social insurance. Supplementary insurance creates inequality in access to services included in the social benefits package. Individuals with high incomes are more likely to buy supplementary insurance, and the additional care consumption resulting from better coverage creates additional costs that are borne by social health insurance. In addition, there are other anti-redistributive mechanisms from high to low risks. Social health insurance should be designed, not as an isolated institution, but with an awareness of the existence—and the possible expansion—of supplementary health insurance.

Keywords: social health insurance, supplementary health insurance, efficiency in care provision, equity in care provision, cost sharing, social benefit package, health economics

The Possible Expansion of Supplementary Health Insurance

In most developed nations, generous coverage of care services is organized either through a tax financed healthcare system or through social health insurance. Such systems pursue efficiency and equity in care provision. Efficiency means that expenditures are minimized for a given level of care services. Equity means that individuals with equal needs have equal access to the benefit package.

In these systems, individuals have the option to buy additional coverage from private insurers. So far, not much attention has been devoted to possible interactions between supplementary health insurance and social health insurance. The economic literature has focused mostly on the general design of health insurance (Cutler & Zeckhauser, 2000; McGuire, 2011). Questions have been asked about: the functioning of a market for health insurance in the presence of adverse selection; the viability of long-term contracts that protect individuals from the risk of becoming bad risks; the possibility that generous coverage may encourage patients to use more care than necessary (moral hazard) and physicians to supply more care than necessary (supply induced demand). The corresponding policy questions have been about the appropriateness of making health insurance mandatory, the design of insurance (the introduction, or not, of cost sharing with deductibles and copayments), the design of physician payments, and the desirability of contracting with doctors to manage care. As stated by Rutten et al. (2001), mandatory social health insurance solves the problems of adverse selection and of the nonexistence of long-term contracts.

Regarding the impact of supplementary health insurance, theoretical papers have questioned the relevance of systems that combine public and private insurance (Pauly, 2000) and investigated the possible welfare effects of supplementary insurance (Danzon, 2002; Kifmann, 2002; Hansen & Keiding, 2002). Other papers have focused on specific instances where an influence of supplementary insurance on the performance of healthcare systems can be observed.1 Recently, Stabile and Townsend (2014) and Atherly (2014) have reviewed the role of supplementary health insurance in national systems and in the United States.

The process of extension of mandatory health insurance now seems to be close to completion. Most OECD countries have achieved mandatory coverage for more than 99% of their population for a core set of services (OECD, 2017). For example, the Netherlands and Germany decided in 2006 and in 2009 to oblige people with high incomes to be insured; they were formerly exempted. In 2010, the Affordable Care Act in the United States introduced an individual mandate on health insurance to take effect in 2014.

The existence of voluntary supplementary insurance results from the fact that the benefit package covered by mandatory insurance is necessarily limited in order to contain taxes. Because individuals have heterogeneous preferences, some people are willing to pay for access to additional care services that the majority of citizens do not consider fundamental.

Future expansion of supplementary health insurance can be expected. Indeed, the steady increase in health expenditures is likely to continue because it is mostly driven by medical technological progress (de Meijer, O’Donnell, Koopmanschap, & van Doorslaer, 2013). This will happen in the context of pressures observed in many countries in favor of reducing public expenditures.

The purpose of this article is to examine the issues raised by the inevitable existence of voluntary supplementary insurance at the frontier of mandatory health insurance. The optimal design of health insurance is not examined, nor is the functioning of the private health insurance market. The article focuses on the relationships between supplementary insurance and social insurance. Healthcare systems of different countries are examined to illustrate the questions under study, but we do not provide an exhaustive international review.

The article is organized as follows. The possible roles and the quantitative importance of supplementary health insurance are first presented. The following sections examine the influence of supplementary health insurance on the efficiency of social health insurance and on the performance of social health insurance regarding equity in care provision. The final remarks draw the lessons for the design of social health insurance and the general organization of supplementary and social health insurance.

The Multiple Forms of Social and Supplementary Health Insurance

The main objective of public healthcare system or social health insurance is to provide equal access to care to all individuals, independently of their income and risk levels. In other words, the goal is to introduce solidarity between healthy people and ill people and between people with high and low incomes. This is possible only if social insurance is made mandatory (Kifmann, 2014) and financed by taxes or income-related contributions or compulsory premiums.

It is difficult to give a single name to such systems, because institutional forms vary greatly across countries. For the sake of simplicity, such a compulsory system will be referred to hereafter as “social health insurance,” even if this name is not totally appropriate for every organization observed across the world.2 Social health insurance is put in place for the whole population (or a subset of the population) and covers a specified package of benefits (i.e., a list of care services for given diagnoses and for specific prices). There are three forms of “social health insurance”: (1) A single insurer acts as the only payer, which is the case in France and in the United States (in the traditional form of the Medicare program that covers those aged 65 and over or the disabled); (2) countries such as Switzerland, The Netherlands and Germany have implemented a “managed competition” scheme: social health insurance is provided by several private insurers or sickness funds, with strict regulation to ensure that competition between insurers encourages consumer choice and efficiency rather than risk selection; and (3) healthcare is a public service, and there is no insurance. This is the case, for instance, in Norway and in the United Kingdom (with the National Health Service), and also in other countries in the north and south of Europe.

The U.S. healthcare system is particularly complicated. Traditional Medicare is a classic single-payer program. Nevertheless, 34% of Medicare beneficiaries are enrolled in so-called “Medicare Advantage” plans: that is, managed care plans run by private companies (Medpac, 2018). Medicare Advantage plans have expanded since the mid-2000s and are close to a managed competition system. Apart from Medicare, there was until recently no health insurance mandate for people under age 65. In 2010 the Affordable Care Act introduced an individual mandate to take effect in 2014, and the market for health insurance was organized following the principles of managed competition. So, the U.S. system is a complex mixture of single payer and managed competition schemes. In any case, two-thirds of the 53.9 million American Medicare beneficiaries are covered by single payer social health insurance, which is similar to the French system.

Social health insurance schemes raise tax rates because they are mandatory and financed through taxes or contributions. To limit fiscal pressure, they must pursue efficiency in care provision and in the use of health services. For that purpose, the benefit package must be limited, and most social health insurance schemes have introduced cost sharing: copayments and deductibles ensure that beneficiaries bear some costs when using care services.

These limits on coverage create room for private health insurance that complements or supplements social health insurance. Everywhere, social health insurance coexists with voluntary purchases of supplementary private insurance. As shown below, supplementary private insurance generally covers a limited portion of health expenditures. However, it can interfere significantly with the functioning of social health insurance.

The Roles of Supplementary Health Insurance

Supplementary health insurance can interact in several ways with social health insurance. Figure 1 shows two dimensions of coverage: the extent of the benefit package and the rate of coverage. (The third dimension is the share of population covered.)

Supplementary Health Insurance and Regulation of Healthcare SystemsClick to view larger

Figure 1. The roles of supplementary health insurance.

Private health insurance acts as complementary insurance when it offers coverage for cost sharing (i.e., for the deductibles and co-payments defined for the social insurance benefit package).

Private health insurance acts as supplementary insurance when it covers additional services that are not included in the social insurance benefit package. This can be access to more expensive services or doctors, dental care, comfort at hospital, private beds, the option of choosing a specific doctor, or faster access to care. More precisely, supplementary coverage concerns services other than those included in social insurance benefits but also the same services at higher prices, which suggests a better level of quality. Some of the services included in supplementary insurance benefits are substitutes for the care services of social insurance (e.g., alternative medicine), but many services covered by supplementary health insurance are complementary to social insurance benefits. This is the case for coverage of more expensive services or faster access to care, and this can have significant consequences on the performance of a healthcare system. Here “complementary” means that their use is not separable from the use of corresponding services included in social insurance benefits. For instance, coverage of balance billing charged by some physicians in addition to the regular fee facilitates consultations that are covered by social health insurance.

In some countries, there is duplicate health insurance, which does not exempt individuals from contributing to social health insurance but offers access to different providers and different quality of services. Actually, duplicate health insurance is not very different in nature from supplementary health insurance, except that there is a greater separation between public and private care providers in duplicate systems. Duplicate insurance covers a sizeable population share in Australia and Ireland (about 40%), and a significant share (10%) in the United Kingdom (Colombo & Tapay, 2004).

To sum up, supplementary health insurance is private health insurance that operates in healthcare systems where social health insurance provides coverage for most care services. It can offer complementary, supplementary, or duplicate coverage. For the sake of simplicity, we will use the name “supplementary health insurance” to refer to all forms of supplementary health insurance. However, it is important to understand that these three forms have different implications for the achievement of the goals of social health insurance.

Our classification and terminology are similar to the one used by the Colombo and Tapay (2004).3 In their study of private health insurance they also consider substitutive health insurance, which is not a form of supplementary health insurance. It is private health insurance that substitutes for social health insurance in systems where some people, generally those with high incomes, are allowed to opt out of social health insurance. This is the case in Germany, where 25% of the population with income above a certain threshold can opt out of social insurance to subscribe to private health insurance. Until recently, these people were also allowed to choose to remain uninsured, but a reform imposed a health insurance mandate in 2009, and so there are no more uninsured individuals in Germany. There was also substitutive private health insurance in the Netherlands until 2006. Before that year, high-income individuals (30% of the Dutch population) were excluded from social coverage and had access only to substitutive private health insurance on a voluntary basis. In 2006, the Dutch government did away with substitutive private health insurance, making social health insurance compulsory (Gress, Manouguian, & Wasem, 2007). This Dutch reform increased the population covered by social health insurance. Substitutive health insurance is beyond the scope of this study because it replaces social health insurance rather than interacting with it.4

What Is the Quantitative Importance of Supplementary Health Insurance?

Data from the OECD provide measures of health expenditures that are comparable across countries (OECD, 2017). Unfortunately, no comparable information is available on the share of health expenditures covered by supplementary health insurance. However, it is possible to examine the share of health expenditures covered by optional—or voluntary—private insurance. Optional private insurance encompasses supplementary health insurance and primary private insurance. It does not include mandatory health insurance in managed competition settings as in Germany, Switzerland, or the Netherlands, even though it is provided by private insurers.5 Figure 2 displays the coverage of health expenditures by optional private insurance for several countries between 2000 and 2016.

Supplementary Health Insurance and Regulation of Healthcare SystemsClick to view larger

Figure 2. Optional private coverage. Share of total health expenditure covered by optional private insurance (%).

Source: OECD (2017). Reading: In 2000 in France, optional private insurance covered 13.8% of total health expenditures.

At the end of the period, the share of optional private health insurance is due to supplementary health insurance, except for the United States. Note that there is a debate on the effectiveness of the health insurance mandate put in place in the United States in 2014 by the Affordable Care Act. Owing to the weakness of the financial penalty for not having coverage, most observers consider that the decision to purchase private insurance remains optional. Following this interpretation, the figures used for the graph do not exclude health expenditures covered by private insurance made mandatory by the Affordable Care Act. Nevertheless, in its last release, the OECD (2018) classifies private insurance mandated by the ACA as mandatory. This induces a considerable drop in the share of optional private insurance in the United States, from 39.2% to 7.2% in 2014, and from 39.6% to 6.9% in 2015 (not represented in Figure 2).

There is a rather high rate of optional private coverage in the United States (40%), due to the absence of a mandate for health insurance before the Affordable Care Act.6 The Dutch reform appears clearly with a drop in private coverage in 2006, when all citizens were included in social health insurance. There is also a drop for Germany in 2009, when health insurance was made mandatory for people previously allowed to opt out of social health insurance. In France, too, a reform implemented in 2016 obliged private firms to provide complementary insurance to their employees (not yet included in our data). So, the period under review is mostly characterized by a reduction of optional private insurance.

At the end of the period, private coverage rates observed in Graph 2 mainly reflect coverage by supplementary health insurance. These rates are rather low, under 10%, except for France where it is close to 15%. To give more precise figures, in 2015 the optional private coverage rate was 0.3% in Norway, 3% in Germany, 5% in the United Kingdom, 7% in the Netherlands, 7.7% in Switzerland, and 14% in France. In its last release, the OECD (2018) classified a part of optional private insurance in the United States as mandatory because of the Affordable Care Act. This leads to a proportion of optional private insurance of only 6.9% in 2015, which can be considered an assessment of the extent of supplementary health insurance in the United States.

So, the role of supplementary insurance in the coverage of health expenditure appears generally limited. This is compatible with high subscription rates: in France 95.5% of the population has a supplementary contract. It is the case for 84% of Dutch people, 80% of Swiss people, and 86% of Medicare enrollees in the United States (Medpac, 2018).7 In Germany the subscription rate is much smaller at 23%.

Given the low coverage rates observed in many countries, the importance of supplementary health insurance seems quite limited, at least quantitatively. Why then is it important to study this type of insurance? There are two reasons: (1) its share in health expenditures may grow in the future; (2) even with its current limited share of health expenditures, supplementary health insurance has a significant impact on the performance of social health insurance. This impact will be examined in the following sections.

Future expansion of supplementary health insurance can be expected from the growing pressures observed in many countries, especially in the European Union, in favor of reducing public expenditures and limiting taxes. After the crisis of 2008, constraints on public budgets were reinforced by the subsequent recession. Some countries have decided to limit social coverage by introducing copayments or by eliminating some care services from the social insurance benefit package. Most countries have increased cost sharing, but restrictions in social insurance benefits have been observed, for instance, in Germany, the Netherlands, and Switzerland for services such as dental care, physiotherapy, psychological care, and optical care (Auraaen et al., 2016). These changes will give room to voluntary private health insurance that complements or supplements social coverage.

At this point, it is important to come back to the meaning of a mandate for health insurance. The first rationale is to avoid free riding. Since it is unthinkable in modern societies to refuse to treat somebody in danger of death because they are uninsured, it is important to oblige all citizens to contribute to healthcare financing ex ante by a purchase of insurance. In addition, a mandate is a necessary condition to introduce solidarity mechanisms between people with different levels of health or income (Kifmann, 2014). However, it is not sufficient: Mandatory health insurance does not necessarily offer a great deal of solidarity. In the context of mandatory health insurance, premiums can be defined independently of income level, and they can be risk adjusted. In particular, the mandate imposed in 2009 on health insurance for top-income people in Germany does not imply that private health insurance is organized to create cross subsidies between low and high risks (Grunow & Nuscheler, 2014). Similarly, in France, the mandate on employer provided complementary health insurance has introduced inequality between people of different ages, health statuses, and occupations. Social health insurance systems are necessarily mandatory, but regulations are added to ensure solidarity.

How does supplementary health insurance combine with social health insurance? It is interesting to consider the two main forms: public insurance with a single payer and managed competition between private health insurers.

The Case of Social Health Insurance With a Single Payer

Examples of single payer systems can be found in France and in the United States. In France, mandatory universal health insurance, the Sécurité sociale, is financed by income-related contributions and acts as a single payer. The U.S. Medicare program is similar, except that it is limited to people aged 65 or older or with disabilities. More exactly, two-thirds of the 53.9 million Medicare beneficiaries are covered by single payer health insurance that is similar to the French system.8 These two systems have many traits in common: coverage is partial, with large copayments; annual out-of-pocket spending is not capped; and supplementary health insurance is allowed to cover cost sharing.9

In these two systems, beneficiaries without supplementary coverage face a risk of catastrophic spending. As a result, most people have supplementary health insurance: 94% of the population in France in 2014 (Célant, Guillaume, & Rochereau, 2017) and 86% of Medicare beneficiaries in the United States in 2015 (Medpac, 2018). Means-tested free supplementary health insurance is provided to the poor in both countries to make access to care easier for low-income people. In France, this free coverage is called CMU-C.10 It covers 7% of the population (Célant et al., 2017). In the United States, 12% of Medicare beneficiaries benefit from supplementary coverage provided by Medicaid (Medpac, 2018). Another feature that the French system and Medicare have in common is that many supplementary health insurance contracts offer complementary and supplementary coverage as joint products. For instance, the same policy offers coverage for co-payments (complementary) and coverage for balance billing (supplementary).

The purchase of supplementary health insurance is generally subsidized. In France, in 2011, public subsidies to encourage purchases of insurance (payroll tax deductions as well as income tax deductions) amounted to 5.6 billion euros for a total amount of benefits equal to 25 billion euros (Dormont, Geoffard, & Tirole, 2014). In the United States, premiums to buy supplemental coverage to Medicare are subject to tax deductions. Another example is Canada, where tax expenditures are used to subsidize the purchase of supplementary insurance (Stabile & Townsend, 2014). In any case, high-income people are more likely to buy supplementary coverage, and the coverage they buy is more comprehensive.

One issue is the regulation of the market for supplementary health insurance. Since it is voluntary, it is necessarily less regulated than social health insurance. In France, despite limits on risk-rated premiums on the supplementary insurance market, there is de facto risk rating because insurers are free to define plans with a list of benefits that enable them to target segments of the population with specific risk levels. Regulations are more constraining for “Medigap” plans (insurance supplementary to Medicare), which have been standardized since 1992 (Atherly, 2014). There are currently 11 Medigap standardized plan types (Medpac, 2018).

The Case of Social Health Insurance With Managed Competition Between Private Insurers

Switzerland, Germany, and the Netherlands are examples of countries where social health insurance is organized through managed competition. In the United States, some health insurance is regulated through managed competition. The Affordable Care Act makes use of managed competition to regulate mandatory health insurance for people younger than 65, and the non-traditional part of Medicare—Medicare Advantage plans—is close to a managed competition system.

In managed competition, insurance plans are standardized, with cost sharing that generally combines a deductible and co-payments. In Switzerland, annual cost sharing is capped. Beyond a given level of out-of-pocket payments, the individual is fully covered (100%). There is no complementary coverage: Supplementary insurance is not allowed to cover cost sharing. Nevertheless, a large proportion of Swiss people take out supplementary insurance: 80% according to a survey carried out in Switzerland.11 Risk-rated premiums and risk selection are allowed on the supplementary insurance market.

In Switzerland, the supplementary insurance market is separated by law from the market for social health insurance. Indeed, the latter is regulated in order to induce solidarity among people of different income and risk levels. In particular, it is mandatory, there is open enrollment, and premiums are community rated. Yet, surveys carried out in Switzerland show that 91% of policyholders take out their supplementary insurance contract with the same insurer as for their basic insurance, suggesting that the two markets are not truly separated (Dormont, Geoffard, & Lamiraud, 2013).

In Germany, there is a two-tier system. High-income people can opt out of social health insurance to subscribe to substitutive private insurance. Eleven percent of the population subscribes to substitutive insurance: that is, around one-fourth of eligible people (Sagan & Thompson, 2016). In the social health insurance system, the annual level of out-of-pocket expenditures due to cost sharing is capped. Yet, contrary to Switzerland, supplementary health insurance is allowed to cover cost sharing. The rate of subscription to supplementary health insurance was rather low until the 2000s. Thereafter, there was a rise from 9.6% in 2000 to 21.6% in 2012 (Grabka, 2014). The OECD (2017) cites a proportion of 23.1% for 2015.

In the Netherlands, social health insurance has become universal with the removal of substitutive health insurance in 2006. In social health insurance, cost sharing is capped, and supplementary insurance is allowed to cover cost sharing. A large proportion of the Dutch population, 84%, has subscribed to supplementary insurance. 99% of subscribers took out supplementary and basic health insurance from the same insurer.

The Impact of Supplementary Health Insurance on Efficiency in Social Health Insurance

Social health insurance pursues efficiency and equity in care provision. Efficiency means that expenditures are minimized for a given level of care services. Equity means that individuals with equal needs have equal access to the services included in the benefit package.

How does supplementary health insurance interact with the mechanisms put in place for social health insurance to achieve these objectives? This article focuses on efficiency and equity regarding social insurance benefits only. By definition, inequality in access to health services outside the social insurance benefit package is deemed acceptable. This section deals with the issue of efficiency. It shows how supplementary health insurance can be detrimental to efficiency in care provision.

Cost Sharing Coverage Cancels out Incentives Designed to Limit Excessive Care Consumption

In most countries the design of social health insurance includes cost sharing to limit healthcare consumption. But as described previously, supplementary insurers are generally allowed to offer complementary coverage (i.e., coverage for deductibles and copayments defined for social insurance benefits). These rules are contradictory. If cost sharing is efficient in limiting care use, full coverage should conversely encourage higher spending. Indeed, there is plentiful empirical evidence showing that individuals with supplementary insurance covering cost sharing consume more healthcare for a given health status. For France, see Buchmueller, Couffinhal, Grignon, and Perronnin (2004). And for Medigap and other supplementary coverage in the United States, see Hurd and McGarry (1997), Fang, Keane, and Silverman (2008), Golberstein, Walsh, He, and Chernew (2013), and Keane and Stavrunova (2016).12

This additional care consumption results in higher costs for social health insurance, which bears most of the additional expenditure. According to Pauly (2000), this amounts to a cross subsidy to supplementary insurance and may cause excessive purchases of supplemental coverage. Incidentally, some proposals regarding Medicare ask for restrictions on “first dollar coverage” (where cost sharing is fully covered) “either by banning it or by imposing a surcharge on plans that provide it” (Baicker & Levy, 2012).

Supplementary Coverage Can Trigger Additional Care Consumption Borne Partly by Social Health Insurance

Beyond the impact of cost-sharing coverage considered above, supplementary coverage has an impact on the expenditures borne by social health insurance. Even if supplementary coverage reimburses care services that are not included in the social insurance benefit package, these services can be complementary to services that are in the social insurance benefit package. One example is coverage for balance billing (not covered by social health insurance) that speeds up access to a specialist. Econometric results show that supplementary health insurance increases the use of specialists in many countries (Jones, Koolman, & van Doorslaer, 2006; Dormont & Péron, 2016).

Of course, an opposite—and virtuous—impact is possible when services covered by supplementary insurance substitute for services in the social insurance benefit package. For instance, the use of alternative medicine may reduce the use of physicians. However, it is doubtful that the resulting alleviation of social expenditures could counterbalance the other increases in costs due to supplementary coverage.

Coverage by Supplementary Insurance Can Have an Inflationary Effect on Medical Prices

The coverage provided by social health insurance is effective only if the regulator is able to control medical prices. In other words, reimbursement rates are defined conditionally on price levels that have been fixed by the regulator (or by an agreement between medical professions and the social health insurance system).

When balance billing is authorized, physicians can charge their patients more than the regulated fee. In such a context, supplementary coverage can favor demand for expensive physicians who can increase their fees in turn. This can encourage demand for more supplementary coverage and hence fuel an inflationary spiral.

Empirical evidence supports this scenario. Estimations show that in France, supplementary insurance coverage increases the use of specialists who balance bill (Dormont & Péron, 2016), with two consequences: an increase in specialists’ fees and an increase in premiums for supplementary insurance subscribers. This affects individuals who are not covered by supplementary insurance; they may have higher out-of-pocket payments or problems in gaining access to specialist care.

Supplementary Health Insurance Undermines Competition in Managed Competition Systems

Competition in health insurance markets promotes efficiency in insurance and care delivery, but it creates incentives for risk selection. It is much easier for an insurer to lower premiums by selecting young and healthy enrollees with low predictable health expenditures than through contracting with care providers to ensure efficiency. In a managed competition scheme, social health insurance is provided by private companies, and regulation is implemented to avoid risk selection and to ensure solidarity between low and high risks.

The main regulatory features are the following: health insurance is mandatory, contracts are standardized with a single social insurance benefit package, and premiums are community rated.13 Premiums can differ between health plans, but an insurer must offer uniform premiums for people in the same age groups. Health insurers must accept every applicant (open enrollment). A risk-adjustment mechanism is put in place to deter risk selection; it consists of money transfers between insurance companies to adjust for the more or less advantageous characteristics of their enrollees.14 In other words, they must compete on a level playing field (i.e., as if they had the same proportions of good and bad risks).

The aim of defining standardized contracts is to avoid competition on coverage and foster competition based on price only. The gains in efficiency expected from managed competition rely precisely on this price-competition between insurers.

These systems have led to rather disappointing results. There is little evidence of reduction in premium variability between insurers, which remains large. In many countries, it seems that there is great inertia among consumers, who seem reluctant to leave their insurer to switch to a less expensive one (Colombo, 2001). One explanation is that supplementary health insurance can be a tool for risk selection in basic health insurance (Wasem, Greb, & Okma, 2004; Paolucci et al., 2007; Duijmelinck & van de Ven, 2014). Indeed, supplementary insurers are not subject to the rules put in place for managed competition in social health insurance: They are generally allowed to use questionnaires to select their enrollees or set risk-rated premiums. And this occurs in a context where supplementary insurance is generally purchased from the same company as social health insurance. As mentioned above, this is true for more than 90% of supplementary insurance policyholders in Switzerland and in the Netherlands; having social and supplementary health insurance with the same insurer enables the enrollee to limit administrative costs and reimbursement delays.

Empirical evidence of the mechanisms at play has been given for Switzerland by Dormont et al. (2009, 2013). Two surveys were used. Individuals were questioned about their decision to switch insurers in years 1997 to 2000 and 2003 to 2007. Estimations show that holding a supplementary insurance contract has a negative impact on the decision to switch insurers, except for people who self-assessed their health as “very good.” So, given selection practices on the supplementary insurance market, individuals who think they are bad risks will refrain from switching for the basic insurance in order to keep basic and supplementary health insurance with the same company.

These results have two consequences. First, they show that supplementary health insurance discourages switching, hence limiting competition and efficiency gains that could be expected from managed competition. Second, given that only people in good health are prone to switch, insurers will compete solely for low-risk customers and will not try and improve care for high risks.

The Impact of Supplementary Health Insurance on Equity in Social Health Insurance

Social health insurance is designed to promote equal access to care for people with equal needs, irrespective of their income levels. Of course, this objective concerns only the care services included in social health insurance benefits.

One question is the extent of the latter. What is the optimal proportion of health expenditures that should be financed through solidarity? How should the scope of social health insurance be designed in order to take individual preferences into account, hence guaranteeing allocative efficiency? This social choice issue lies beyond the scope of this article.15 Current practice consists in gradual inclusion in social benefits of new drugs or innovative procedures, based on the relation between their cost and the health improvement they bring.16 As shown by Samson et al. (2018), this raises ethical concerns because individual preferences regarding the tradeoff between income and health are not considered, and the distributional effects of a reimbursement decision are also not considered.

Turning back to the equity concerns raised by supplementary health insurance, note that some are linked to efficiency problems discussed previously. A prerequisite to analyzing the impact of supplementary insurance on equity is to examine who buys supplementary insurance.

Who Buys Supplementary Health Insurance?

Under general conditions, the theory of decision under risk predicts that high risks should buy more insurance and that wealthier individuals should have lower risk aversion (Eeckhoudt, Gollier, & Schlesinger, 2005). Does this apply to supplementary health insurance? Empirical studies show for European countries, the United States, and Australia that behaviors run in the opposite direction: High-income and low-risk individuals are more likely to buy supplementary health insurance (Hurd & McGarry, 1997; Jones et al., 2006; Schokkaert et al., 2010, Fang et al., 2008, Buchmueller, Fiebig, Jones, & Savage, 2013; Sagan & Thompson, 2016).

Using Swiss data, it is possible to examine behaviors regarding the demand for social and supplementary health insurance. As explained before, a managed competition scheme has been put in place in Switzerland for the provision of social health insurance. Individuals are obliged to buy social health insurance, but they have a choice between several insurance companies and between plans with different levels of deductibles. The “menu” of deductibles is defined by the regulator. It is identical for all insurers who compete in price only. An individual who purchases a plan with a high deductible chooses to have less coverage and is likely to be less risk adverse than others.

Dormont et al. (2009, 2013) have found that for social insurance the level of deductible chosen increases with income and that rich and healthy individuals are more likely to buy supplementary insurance. These findings show opposite effects of income on the amounts of coverage expected from social and supplementary insurance. The demand for social health insurance appears to be in line with insurance theory, with an absolute risk aversion that decreases with income. Demand for supplementary health insurance is different: It covers costs associated with ex post consumption of luxury care services that are superior goods: a private room at the hospital or faster access to a specialist.17

These findings rely strongly on the content of the social insurance benefit package and on which benefits are covered by supplementary insurance. In Switzerland, the situation is particularly clear-cut because supplementary insurers are not allowed to offer complementary coverage (i.e., reimbursement of cost sharing). The mechanisms are more difficult to analyze in other countries where supplementary insurance offers a mix of supplementary and complementary coverage. In any case, if we focus on the supplementary part of the coverage offered by supplementary insurance, the package covered corresponds to luxury care services in most countries, and it is mostly demanded by high-income people. This is because social insurance benefits are quite comprehensive. This feature of demand for supplementary coverage has consequences for equity.

Inequality in Access to Care

The question of access to care interacts with the question of physician payments. Social health insurance sets regulated fees that are used as reference prices to calculate reimbursements. The coverage commitment is based on these regulated fees. For cost containment purposes, the regulator cannot generally allow fees to increase as much as demanded by doctors. In such a context, the solution adopted in many countries is to authorize some doctors to charge more than the regulated fee.

For policymakers, balance billing has the advantage of permitting an increase in physicians’ earnings with no additional burden on social health insurance. However, it raises out-of-pocket payments and can lead to a two-tier healthcare system where only rich people can afford to see certain doctors. Indeed, physicians have patients with different capacities to pay, and they are generally free to allocate their working time between them.

Balance billing became a political issue in the United States in the late 1980s. Physicians were allowed to charge Medicare patients more than the copayment set by Medicare. Concerns about possible degradation of healthcare coverage led to restrictions legislated in 1989 (Medicare’s balance billing reform is described in McKnight, 2007).

In France, 46% of specialists are currently allowed to charge balance billing, which adds 48% to their annual earnings (DREES, 2018). Yet, the share of people with no coverage for balance billing is assessed at 60%.18

In many countries, supplementary insurance provides coverage for balance billing (Sagan & Thompson, 2016). As might be expected, this leads to inequality in out-of-pocket payments or in waiting times. Indeed, there is generally a prohibition against balance billing for some categories of patients in order to protect access to care for those with low incomes. This leads doctors to discriminate between patients, with more waiting time for poor people. (As stated above, one benefit of supplementary health insurance is to offer swifter access to care.) Consequently, there is inequality in access to care, with the rich having greater access to specialists in many European countries (Van Doorslaer, Koolman, & Jones, 2004a; Van Doorslaer, Masseria, & OECD Health Equity Group, 2004b; Schokkaert et al., 2010; Jones et al., 2006).

In different types of health systems, there are similar problems of time allocation by physicians between patients who are more or less profitable. Many results for the United Kingdom show that dual practice physicians tend to give priority to patients with private insurance (Stabile & Townsend, 2014). The situation is comparable in Germany with substitutive insurance. In Germany, balance billing is forbidden for patients covered by social health insurance, but doctors are allowed to charge higher fees to substitutive health insurance enrollees (“private patients”). For Australia, Johar et al. (2011) showed that a high probability of a long waiting time is a motivation for buying private health insurance.

Unfair Cross Subsidies

In managed competition settings, Kifmann (2002) shows that when insurers are allowed to sell social and supplementary health insurance as a joint product, they can select risks by selling supplementary insurance to low-risk clients at a discount. This creates cross-subsidies from high to low risks that counteract the cross subsidies in the reverse direction that social health insurance is supposed to implement. This mechanism comes on top of the consequences of switching behaviors described previously, namely that insurers compete mostly to hold low-risk enrollees because only people in good health are prone to switch.

Another concern for equity comes from the moral hazard effect of supplementary coverage. Low-risk individuals who buy supplementary coverage are responsible for additional use of care. Yet for services that are complementary to services included in social insurance benefits, the additional costs are borne by social health insurance, which is financed by everyone. This negative effect on equity with respect to income and to health risk can be reinforced if, as found by Keane and Stavrunova (2016), the increase in healthcare use due to supplementary coverage is larger for relatively healthy individuals.

Private Insurers and Public Policy

As stated above, in some single payer systems such as social insurance in France and traditional Medicare in the United States, there is heavy cost sharing and out-of-pocket spending is not capped.19

In these systems, average copayments are low, but there is no protection for catastrophic out-of-pocket spending. Huge out-of-pocket payments are possible in the context of partial coverage because the distribution of individual health expenditure is so concentrated: A minority of beneficiaries is responsible for a large proportion of total expenditure. This concentration of expenditure distribution is observed in every society. It is due solely to the cost of care services and to the distribution of needs among the population.

In France, after reimbursement by social health insurance, annual individual liability is equal to €507 on average, but for the top percentile (top 1%) of care users average annual liability is equal to €5,095 (Hcaam, 2013). These liabilities can be paid out of pocket or by supplementary insurance. Comparable values, with slightly different statistics, are given for Medicare in Baicker and Levy (2012). In 2009, average liability was $1,279, but for 0.9% of Medicare beneficiaries the liability was greater than $10,000!20

These figures show that people with no coverage other than social health insurance are not protected from catastrophic expenditures. Several proposals have been made in the United States for Medicare, and in France as well, for a reform introducing a cap on cost sharing (Health Policy Brief, 2013; Baicker & Levy, 2012; Dormont et al., 2014). The idea is to introduce this cap along with low deductibles and low copayments that private insurance would not be allowed to cover.

Such proposals aim at creating real protection against risk, together with good incentives, since supplementary insurers would not be allowed to cover cost sharing anymore. This reform could be designed at no additional cost for social health insurance, since the costs due to new coverage above the cap can be offset by the deductible. In addition, it would facilitate choice on the market for supplementary health insurance because complementary coverage would be forbidden.

Up until now, these proposals have been systematically rejected. One reason is that such a reform would result in more losers than winners. Indeed, all healthcare users would pay the deductible or the uncovered copayment, while only those who reach the out-of-pocket cap would benefit from the reform. In public debates, figures other than averages are difficult to explain, and so the risk of exorbitant out-of-pocket payments seems completely remote to most people and even to politicians. The second and foremost reason is that forbidding coverage of cost sharing runs against the interests of private insurers. Most customers would no longer buy supplementary insurance, since they use it principally for cost-sharing coverage. Even if cost-sharing coverage were still allowed, the cap put on it would reduce the risk enough to make the purchase of supplementary insurance less attractive.

The Consequences for the Design of Social Health Insurance

Because the benefit package of social health insurance is bounded by definition, there is always room for supplementary health insurance. We have shown that it can be detrimental to the efficiency of social health insurance through several mechanisms. It favors excessive care consumption through coverage of cost sharing and of services that are complementary to those included in social insurance benefits. It limits competition in managed competition settings. It can also hinder achievement of equity targets by social health insurance. Supplementary insurance creates inequality in access to services included in the social benefits package. Additional consumption due to moral hazard is beneficial to high-income individuals. In addition, there are other anti-redistributive effects from high to low risks.

These mechanisms depend on the demand for supplementary health insurance, and hence on the content of the social benefit package and on the benefits covered by supplementary health insurance.

In single payer systems, access to social insurance benefits should not depend on complementary coverage by private insurance. This is why cost sharing for the social package should be reduced and capped. The best solution would be to ban coverage of cost sharing. Prohibition of cost-sharing coverage is just as important in managed competition settings.21 As a consequence, policymakers who want to reduce the scope of social health insurance should do it through delisting—that is, removing coverage for some care services entirely—rather than through reducing reimbursement rates.

In managed competition systems, it is crucial to introduce an effective separation between insurers that offer social health insurance and insurers that supply supplementary health insurance.

Even if coverage of cost sharing is forbidden, excessive consumption of care services of the social benefit package is still possible when supplementary insurance covers services that are complementary to services included in social health insurance benefits. How can this be dealt with? One solution is to tax supplementary plans in order to compensate for the corresponding implicit subsidy from social to supplementary insurance. Such a tax would present the additional advantage of limiting excessive purchases of supplemental coverage.

In many countries, including in Europe, the scope of social health insurance is influenced by concerns about limiting public expenditures. For policymakers, the existence of private supplementary insurance makes reductions in the public benefit package more acceptable politically. In principle, decisions on the extent of social health insurance should take into consideration its impact on welfare, with social welfare functions based on various hypotheses relative to inequality aversion. Better yet, the social welfare function could integrate measures of individual preferences regarding the tradeoff between health and income (as in Samson et al., 2018). This article shows how important it is to design the social benefit package keeping in mind possible interference between supplementary health insurance and social health insurance. Social health insurance should be designed not as an isolated institution but should consider the existence, and possible development, of supplementary health insurance. This is particularly true for equity concerns. More research is needed to improve policy decisions regarding the design of social health insurance.

Acknowledgments

The analysis laid out in this article was first presented in a guest lecture at the European Health Economics Association conference in Hamburg in 2016. The author wishes to thank Mathias Kifmann and Valérie Paris for fruitful discussions, and also an anonymous reviewer for very useful remarks and suggestions.

Further Reading

Auraaen, A. et al. (2016). How OECD health systems define the range of good and services to be financed collectively. OECD Health Working Papers, 90. Paris, France: OECD.Find this resource:

Atherly, A. J. (2014). Supplementary private insurance in national systems and the USA. In A. Culyer (Ed.), Encyclopedia of health economics (Vol. 3, pp. 366–370). San Diego: Elsevier.Find this resource:

Cutler, D. M., & Zeckhauser, R. J. (2000). The anatomy of health insurance. In A. J. Culyer & J. P. Newhouse (Eds.), Handbook of health economics (Vol. 1, pp. 564–643). Amsterdam: Elsevier.Find this resource:

Dormont, B., & Péron, M. (2016). Does health insurance encourage the rise in medical prices? A test on balance billing in France. Health Economics, 25(9), 1073–1089.Find this resource:

Eeckhoudt, L., Gollier, C., & Schlesinger, H. (2005). Economic and financial decisions under risk. Princeton, NJ: Princeton University Press.Find this resource:

Keane, M., & Stavrunova, O. (2016). Adverse selection, moral hazard and the demand for Medigap insurance. Journal of Econometrics, 190, 62–78.Find this resource:

Kifmann, M. (2014). Issues of mandatory systems. In A. Culyer (Ed.), Encyclopedia of health economics (Vol. 2, pp. 195–198). San Diego: Elsevier.Find this resource:

Pauly, M. V. (2000). The Medicare mix: Efficient and inefficient combinations of social and private health insurance for U.S. elderly. Journal of Health Care Finance, 26(3), 26–37.Find this resource:

Robert Wood Johnson Foundation. (2013). Health policy brief: Restructuring Medicare. Health Affairs.Find this resource:

Sagan, A., & Thompson, S. (2016). Voluntary health insurance in Europe: Role and regulation. Observatory Studies Series 43. Copenhagen: European Observatory on Health and Policies, WHO.Find this resource:

Samson, A.-L., Schokkaert, E., Thébaut, C., Dormont, B., Fleurbaey, M., Luchini, S., . . .Van de Voorde, C. (2018). Fairness in cost-benefit analysis: A methodology for health technology assessment. Health Economics, 27, 102–114.Find this resource:

Stabile, M., & Townsend, M. (2014). Supplementary private health insurance in national health insurance systems. In A. Culyer (Ed.), Encyclopedia of health economics (Vol. 3, 362–365). San Diego: Elsevier.Find this resource:

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Notes:

(1.) A review of some results can be found in Breyer, Bundorf, and Pauly (2011).

(2.) The term “public health insurance” would not be appropriate for managed competition schemes, which involve private insurers. On the other hand, the term “social health insurance” is not quite appropriate for national health services.

(3.) Note that some authors use the terms “complementary” and “supplementary” with different meanings. What is important is to identify the different forms of coverage and to understand their consequences.

(4.) Of course, it can interact with social insurance. Some examples concerning Germany will be mentioned below.

(5.) Indeed, these schemes are part of social health insurance: they are mandatory and highly regulated to ensure solidarity in financing and access to care.

(6.) In 2010, the Affordable Care Act (ACA) introduced an individual health insurance mandate for people under age 65 that took effect in 2014. This is not represented on Figure 2, but the caption gives the corrected proportions due to ACA.

(7.) As concerns Switzerland, figures for the proportion of the population covered by supplementary health insurance are not consistent across sources. OECD (2017) gives 27.9%; Sagan and Thompson (2016) gives 70%, and large surveys carried out in Switzerland in 2000 and 2007 give 75% and 80% (Dormont et al., 2009, 2013). We have chosen the last figure because it is found in two surveys implemented in Switzerland and because it is consistent with figures provided by the European Observatory of Health Systems and Policies (Sagan & Thompson, 2016). In addition, we refer to the results obtained by the Swiss surveys described in the following section.

(8.) As explained above, the remaining third of Medicare beneficiaries choose to enroll in Medicare Advantage plans supplied by private companies.

(9.) Conversely, Medicare Advantage plans provide a cap on annual out-of-pocket spending.

(10.) CMU-C stands for Couverture maladie universelle complémentaire (Universal complementary health coverage).

(11.) Dormont et al. (2013).

(12.) In addition to finding that Medigap coverage increases spending by 24%, Keane and Stavrunova (2016) showed that the effects on spending are larger for relatively healthy individuals.

(13.) There might be various levels of cost sharing (deductible and copayments). As in Switzerland, they can be defined by law and invariant across insurers.

(14.) See Van de Ven and Ellis (2000). There are some discussions about the respective advantages of ex ante or ex post risk adjustment.

(15.) This question is rather complex. It refers to the optimal level of public expenditures, the possible impacts of taxes levied for their financing, and the optimal allocation of public expenditures between different programs (education, lodging, environment, etc.).

(16.) The measure of health improvement is given by a Quality Adjusted Life Year (QALY).

(17.) By definition, the income elasticity of demand for a superior good is greater than 1 (i.e., the share in the individual’s budget of expenditures for that good is increasing with income).

(18.) This evaluation is based on figures given in Célant et al. (2017): 6% of French people have no supplementary insurance, and 57% of supplementary insurance policy holders state that they are not covered for balance billing. (Complementary coverage—coverage of cost sharing—is the main component of the benefits of supplementary health insurance in France.)

(19.) Some Medicare beneficiaries—one-third—have enrolled in Medicare Advantage plans, which are required to limit annual out-of-pocket spending. The value of the ceiling varies depending on the form of the managed care. It is over $5,000.

(20.) Such amounts are not observed in managed competition systems where annual cost sharing is capped.

(21.) With the notable exception of Switzerland, cost sharing can generally be covered by supplementary insurance, as in Germany and the Netherlands. The United States is planning to prohibit full coverage of Medicare cost sharing in new policies from 2020 onward (Medpac, 2018).