Ireland: The actuarial future of Obamacare

The state-owned insurer, VHI, is on the market, FT.com reports (reg. req.). The story is interesting in its own right, but the government’s struggle to mix private and public health insurance schemes has a lot of the elements that we in the U.S. grappled with in the abstract as Obamacare passed. And our government will soon enough face what the Irish face today.

In Ireland, the state provides a minimal package – hospitalization, maternity and infant care, outpatient services – which half the population thinks is just fine. However there can be problems with waits, so the other half of the population gets private insurance.

VHI is the largest private insurer, run by the government. It’s not subject to the solvency laws that other private insurers are, as the state’s financial backing stands in for surplus. It will need €300 million pumped into it before it’s healthy enough to stand on its own. But there are other headaches, too.

In an editorial, Ireland’s Sunday Times ties the proposed sale to the big elephant in all Ireland’s insurance woes, Quinn Insurance:

This grand plan is really an attempt to deal with a pressing priority — the need to prop up competition by finding a buyer for another insurer, Quinn Healthcare. Last week’s blueprint is supposed to provide the transparency that Quinn’s suitors will expect before reaching for their chequebooks, setting out the type of regulation they can expect to find in Ireland.

Quinn Healthcare doesn’t have the problems I’ve laid out regarding Quinn’s P&C business. The business was built up by another party, Bupa, before being sold to Quinn, so it doesn’t have the pricing and reserving lunacy, nor does it have the big guarantees of other Quinn business that ultimately dragged that insurer under.

From an actuarial viewpoint and from a public policy viewpoint the VHI sale is interesting because it can’t happen without risk equalization – the shifting of money from profitable companies to money losers. VHI loses money because its policyholders tend to be older, and old people are expensive risks. The older folks lose money because of community rating: the state forbids rates to vary adequately by the age of insured.

Quinn and Aviva, the other major Irish health insurer, make money in part because they’ve skimmed the cream: They insure younger risks, who use doctors and hospitals less. Those who skim the cream are winners. The rest are adversely selected against and enter the death spiral. That spiral is where VHI is now, without risk equalization. Risk equalization just says the insurers that skim the cream have to subsidize those who cannot.

Now the Irish politicians realize that – risk equalization is fairly common in EU countries with private insurance – so they passed a risk equalization law a few years ago, but the Supreme Court ruled it unconstitutional. Anybody who wants to buy VHI, and anyone who wants to buy Quinn Healthcare, will be very interested in both the new equalization plan and the plan’s ability to please the Supreme Court.

It will be interesting to see how the U.S. handles the equalization problem when it arrives. And with Obamacare’s promise of community rating, cream-skimming and the adverse selection death spiral become inevitable. Insurers will become remarkably sophisticated at finding ways to look both appealing to young, healthy consumers and unappealing to older people. (Picture Cigna sponsoring Lady Gaga’s tour. Or more prosaically, Humana marketing via Twitter.)

After all that marketing silliness, some companies will be rolling in profits and others will be in the death spiral. Enter Robin Hood.

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