Compulsory Medical Insurance: Talk of the Town
The compulsory health insurance initiative in the Dubai is currently the talk of the town. And, this is not without reason. The concept of having medical insurance widely available to all Dubai residents and their dependents, at the expense of one’s employer, ensures access to at least a basic level of healthcare to all.
Needless to say, there are other reasons, in addition to the above, behind the compulsory medical insurance motive. For example, as residents increase the medical cost burden on state coffers also increases. The introduction of a cost notion – even if nominal – in principle should reduce frivolous spending or wastage. Empirical evidence from Abu Dhabi, a precursor in compulsory health insurance, suggests that medical providers (i.e. hospitals and clinics) are generally one step ahead of the game and therefore it is unlikely that spending – even proportionately – will not reduce.
The Dubai Health Authority has put significant efforts into this project which is years in the making. Needless to say, their efforts are to be lauded. The end result of their fieldwork can be summed up into the following main deliverables:
- A list of just over 40 insurers authorized as Health Insurance Providers (HIP). These insurers are authorized to sell enhanced medical insurance products to Dubai residents. By ‘Enhanced’ DHA means any product that is not targeted for residents below a certain salary threshold, say AED 4,000. Among these there is also a much smaller list of insurers who have also been selected to provide the ‘Basic’ product. By “Basic” product. These insurers are known as the PI panel;
- A “Basic” product which would be available through the PI panel consisting of a pre-agreed table of benefits with a restricted local network, subject to significant coinsurance deductibles and with a fixed price range of, say, between AED 500 and AED 700 per person per annum. There is some possibility of marginal movement on this pricing. The Dubai Health Authority is, to date, signalling that the client demographic earning less than the predetermined threshold can only be serviced by the PI panel even if their employer wishes to purchase enhanced insurance for his employees. Although from an actuarial perspective this may seem to make sense in order to ‘preserve the pool’, from an economic and commercial perspective it does not. In addition, this move will also introduce protectionist practices into an a free market of insurers that has – to date – efficiently delivered on its promises in medical insurance within Dubai.
It is evident that the project involved significant number crunching with the help of actuaries to arrive at the model from which demographics, benefits, claims and pricing are being inferred. However, financial modelling suggests (i.e. 9/11, New Orleans hurricanes, New Zealand earthquakes, SARs in Asia etc.) that numbers draw justification only in hindsight. Unless significant economic thought goes into the process of relying on numbers, Dubai will later be faced with significant ‘re-calibration’ and adjustment while, in the meantime, the UAE insurance industry (and also, to some extent, the intended beneficiaries) would be the victims.
Economic behaviour suggests that any commodity (and the basic medical plan is a commodity) will always have various determinants of demand. Admittedly, the strongest among them is price. But this is not the only one. There will be consumers who will purchase enhanced products for their staff (irrespective of their salary) and there will be consumers who will purchase the essential product even if they earn more than AED 4,000 a month.
Therefore DHA’s restriction on from whom buyers can buy enhanced insurance plans will not substantially regulate buyer behaviour. There is sufficient empirical evidence from previous command economies, for example, the former Eastern Bloc in Europe, suggesting that central authority may marginally influence but not significantly direct consumer behaviour. The main result of this will be to stifle competition and increase market aggression. Why? Competition is made up of:
- Ease of entry / exit to the market: Insurers with a PI status are being given a ‘preferred (or greater ease of)’ entry to the consumers. This can be a more important factor than pricing especially since time is always of the essence and insurance is becoming driven more by legal compulsion rather than consumer discretion (this is inevitable since medical insurance is becoming compulsory);
- Consumer knowledge of the market / product: With PI panel being a ‘definite’ point of contact and HIP being a ‘maybe’, consumer knowledge will inevitably be skewed in favour of PI insurers even for enhanced products;
- Government acting as a ‘hands off’ regulator: By mandating who customers go to, DHA is overstepping the boundaries of market regulator and becoming more of a demand ‘gate-keeper’. This may be DHA’s intention but respectfully, when it ‘directs demand’ then by default it stifles competition.
Therefore, even the ‘Insurance Pool’ of consumers that is being labelled as the larger (enhanced) pool will, because of the above, be pushed towards the smaller PI panel of insurers.
Restricting the insurance pool: Does it make economic sense?
One of DHA’s stated objectives is to reduce the pool in order to maintain economic sustainability. In theory this sounds good but in practice it does not work like that because:
- Whether HIP or PI, most of these insurers are going back to the same third party administrators all of whom have been selected as part of the 7 PI successful applications. For the basic plan in particular, whether PI or HIP, most claims would be handled entirely by the TPAs with very little interaction by the insurer. Therefore whether a plan is managed by a PI or HIP is really of no consequence at the end of the day and does nothing to support the pool concept.
- Irrespective whether an insurer is a HIP or PI, the reinsurance security behind them goes back to the same pool of international reinsurers active in the region. Therefore, the quality of their ultimate capacity, whether a PI or HIP is also the same.
- There are already on-going discussions between PI and HIP insurers to ‘share’ existing basic business of HIP insurers. Therefore, it is already clear that this objective is not going to be realized although on the face of it DHA would be lead to believe that they have. In short, DHA are not going to have a large pool with few players, DHA is going to have a large pseudo pool made up of the current smaller / fragmented pools.
The Principle of Insurance?
A smaller panel of insurers also goes against the objective of long, term economic sustainability. A smaller panel means that if one reinsurer who is currently backing, say, two PI insurers deciding to exit the market, this would result in almost 30% withdrawal of reinsurance capacity (which would be a risky upheaval). But the same scenario of the same reinsurer backing say 5 (not 2) of the HIP panel, withdrawing would result in a 10% withdrawal of overall capacity.
The larger your pool the less dependency a market would have on a single player and, consequently, the less volatility the market would have on pricing and availability. For example, the failure of ONIC (the largest insurer in Oman until some ten years ago) created a substantial vacuum until other insurers filled that gap. This was in a market and at a time where insurance activity was significantly lower than what we are currently experiencing in UAE thanks to its overall economic development. The withdrawal of one reinsurer (or insurer) from the PI pool is a significant risk as long as the pool remains concentrated.
Consultation and consensus are the foundation stones of long term socio-economic sustainable growth. There are still a few months to go until the first wave of compulsory health insurance implementation. There is still time for much needed fine tuning from which all parties would benefit. We are currently at a stage where an employer, by virtue of the various regulation, may need three or four types of medical insurance cover for his, one, work-force i.e. a basic policy for low salary earners, an enhanced policy for the higher salary earners (or an enhanced policy for the low salary earners but specifically purchased from the restricted PI panel) plus a separate policy for their employees resident in Abu Dhabi because these fall under a separate set of regulations. DHA and HAAD have not, to date, agreed on mutual accreditation of their schemes for the benefit of pan-UAE employers.
If I were an employer I would probably opt for the path of least resistance, i.e. one policy with one insurance provider who is Abu Dhabi (HAAD) and Dubai (DHA) accredited and also on the Dubai restricted PI panel. Oops, the already restricted panel has suddenly become even smaller. How is this imposition on consumer choice possibly to the benefit of the employer and their employees? What happened to free market competition where the health authority regulates health providers and the insurance authority regulates insurance?
A Chartered Insurance Practitioner by profession James Portelli has spent the last 15 years of his almost 25 year insurance career in the Middle East. He is currently the General Manager of publicly listed insurance company in the UAE. James has been described in the Top 50 MENA Insurance Power list as, “Portelli’s incisive and thought provoking analysis is exactly the type of thinking needed by the Mena Insurance Industry, if it is to continuing innovating.”
Views expressed are his own.