Many European countries have adopted public health insurance to fund health care. However, there is increasing interest on private health insurance to relieve fiscal pressure on public budgets and strengthen the performance of the health system.
Discussions in favor of introducing an option to "opt-out" into a private insurance argue that it will:
- Increase Efficiency; additional options will stimulate competition between public and private insurers, leading to greater responsiveness and increased efficiency.
- Enhance Equity; the opting out of the relatively wealthy will ease the pressure on government budgets and enable them to spend on providing services to the rather poor (as long as those who opt out continue to contribute to public resources through taxation etc.).
However, markets for health insurance need certain conditions to be met to operate efficiently. These may be:
- Probabilities of ill health must be independent, less than 1 and known about.
- No adverse selection
- No moral hazard
- No monopoly
Moral hazard and monopoly can be an issue in both public and private health insurance, so in this case, the main focus would be on "adverse selection".
The problem with adverse selection is that it makes the market inefficient. It prevents low risk populations from purchasing full cover, or cover at an actuarially fair price. A generous insurance plan will attract high risk populations, while the raise in premiums will provoke low risk populations to switch to a cheaper plan. Ultimately, this cycle due to adverse selection can lead the whole market to a collapse. This creates a strong incentives for insurers to engage in risk selection; to attract low risks and deter high risks.
Germany and Netherlands are the only countries in Europe in which choice of public and private health insurance is applicable. Their experience suggest that increased efficiency and enhanced equity might not be the likely course private insurance will lead us to.
- Efficiency
- Levels of competition among private insurers were low, possibly because those who have been privately insured for some time are likely to find it difficult to change from one insurer to another.
- Rather than competing on their ability to operate more efficiently than their rivals, private insurers were more likely to compete on their ability to select risks and attract new entrants.
- As a consequence, private insurances were slow to adopt strategies to contain costs, and had higher administrative costs than public insurances.
- Equity
- Private insurance tend to be expensive for older people, larger families and those in poor health.
- The public pool was predominantly funded by lower earners and covers a disproportionate concentration of high risk populations.
- Taking into account that private premiums are also cheaper than public contributions, the introduction of private insurance is more likely to breach equity.
The extent of these effects may differ by regulatory responses, but the possibility of adverse selection against the public scheme makes the prospect of lower per capita public expenditure less likely. Total levels of public expenditure might fall if governments exclude higher earners (rather than gave them choice to opt out) from public coverage like the Dutch model, but the high administration costs of the private insurers might be a barrier.
Thomson, S., & Mossialos, E. (2006). Choice of public or private health insurance: Learning from the experience of Germany and the Netherlands. Journal of European Social Policy, 16(4), 315–327.