For profit, for everyone

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By Ji Kwen Ng, Roeleke Uildriks | 19 September 2008

The Dutch healthcare system is the world's only private system of basic healthcare insurance operated by insurance companies for profit.

We asked Dutch healthcare actuaries Roeleke Uildriks and Ji Kwen Ng to explain.

Q: Can you explain the change that took place to the Dutch system in 2006?

Uildriks: What was to a large extent a public system has transformed into a managed competition system with multiple insurers competing for business. As a Dutch citizen you’re obliged to have health insurance, but you get a choice of which private company to sign up with. Everybody has to be enrolled with one of the insurers, who are all required to offer a similar basic package. There's an open enrollment system (i.e., insurers cannot turn people down). There is no underwriting or risk selection on the basic package. People have the option to buy supplementary coverage from their insurer to cover care outside the scope of the basic coverage.

Ng: The basic coverage includes general practitioner visits, hospital (inpatient and outpatient), medical devices, and most drug costs. It pays for catastrophic insurance and for other necessary procedures. The supplementary coverage is required for physiotherapy (the first nine visits are not covered in the basic package), dental care for adults, homeopathic/ alternative treatment, glasses, and complementary medicine.

Q: What is the basis of competition among insurers? How do insurers attract consumers?

Uildriks: There are several competitive factors. First, insurers can compete on price. While everyone receives the same basic coverage, insurers can undercut each other on the price of that basic coverage. Therefore, competition depends largely on the insurer's cost base. This can be based in the insurer’s efficiency but also depends on an insurer's capability to negotiate a good price and quality from healthcare providers. Insurers can further attract consumers with their supplementary insurance, which is available as an option on top of the basic package. Contrary to the basic coverage, insurers are allowed to underwrite the supplementary insurance.

Q: Who pays the premium?

Uildriks: The premium is segmented into multiple layers. Fifty percent is paid for by the insured individual (i.e., the nominal portion) and is paid directly to the insurance company by the consumer. The other half is collected by the government through a percentage of wages.

For the employed, there is a 6% or 7% (up to a maximum of €30,000) payroll deduction tax that goes directly to the government and is distributed using a complex risk-equalization process. The payroll deduction is reimbursed by the employer (or government body that provides unemployment benefits). Employees or unemployed people pay taxes on the reimbursed payroll deduction.

For the self-employed the income-related contribution is collected through taxes.

Q: How does the risk-equalization system work?

Ng: Because underwriting is not allowed on the basic package, insurers get compensated through a risk-equalization system to cover the predictably high medical expenses of certain members. The system is quite complex. A massive statistical model weighs different risk factors: age, gender, employment status, other demographics, whether the insured uses high-cost drugs, or has a history of heart failure or other chronic/high-cost acute conditions. The system assigns diagnostic cost groups to individuals who pose a particular risk, and the cost group determines the payment level from the government to the insurer. This is called ex-ante risk equalization.

At year end, there is another process, called ex-post risk equalization, which compensates for the shortcomings in the ex-ante equalization contribution. The ex-post corrections are based on the actual population and realized medical expenses during the year. These ex-post corrections are determined by a government body. Corrections and adjustments to the corrections can, in theory, be made as long as two years afterwards. In practice the ex-post corrections for the year 2006 are still not finalized. Therefore it is hard to determine the actual result for a health insurer.

Now that the system has been in place for almost three years, the risk equalization system utilizes data from almost 100% of the population. This is a great step forward compared to 2005, when the system only used compulsory insured claim costs and only utilized data for 60% to 70% of the population. The predictive power of the risk equalization model is only now beginning to show its potential. So far the ex-ante risk equalization has a low predictive power on the hospital costs, which cover around 60% of the total expenses.

Q: How do insurers compete in the presence of this risk-equalization system?

Uildriks: Insurers can try to outperform the risk-equalization system, but because it changes every year and assigns new costs to different conditions, there is no lasting incentive to try to make money off certain segments of the population. The self-improving nature of the risk-equalization system creates a disincentive for risk selection on the basic coverage, because this year’s profitable business can easily become next year’s unprofitable business. There is a risk to suddenly rush out and enroll 5,000 diabetics if you think you're making money on diabetics because A) you might lose that money anyway in the ex post experience-rated reconciliation, and B) they'll change the system to take any profit into account that next year and therefore you might suddenly find you've got 5,000 very expensive diabetics. Because insurers can't select the most profitable part of the population, they might as well just try to get as many people as possible.

Ng: It is a bit like the Irish system; eventually it penalizes the insurer for being efficient. If you have a large proportion of the market and you create efficiencies, that will show up in the model the next year and then you'll get less money. Insurers constantly find new ways to beat the system, an exhausting position for any company and not one that is very economical. You cannot create a lasting competitive advantage with the basic coverage.

Q: How has this competitive environment affected the insurance market? Has it resulted in consolidation? Do multinational insurers do business in the Netherlands?

Uildriks: In the 1990s there were 90 to 100 health insurance companies. Now, 85% of the population is covered by four insurers. Some of that concentration occurred since the new system was implemented in 2006. Insurers are still making money off the supplementary insurance, so the more people an insurer has enrolled in basic coverage, the more opportunities it has to sell those supplemental policies to a captive audience. All companies are largely domestic.

Q: How have healthcare costs behaved in this new system?

Ng: Before 2006, costs had been decreasing, but now they are increasing again. There are some causes for the cost increase. In addition to the introduction of the new compulsory coverage, there's also a new hospital billing system based on diagnosis cost groups, called diagnosis treatment (in Dutch: (“behandel”) combinations (DBC). Hospitals now send their bills after they finish treatment, which has delayed payment and back-loaded expenses. At first inspection, this system seems like the Diagnosis-Related Group (DRG) system in the United States, but rather than a fee-for-service model it uses an episode-of-care model. In the DRG system, patients are assigned one of 600 DRGs and hospitals get a fixed payment attached to that DRG. The DRG only covers that visit to the hospital; if a patient needs follow up consultations or if a patient needs diagnostics before they go, hospitals receive a separate payment. The DBC works on an episode instead. It covers everything from the moment the insured is referred into secondary care, including all follow-up consultations. If it's a chronic DBC, it could even cover all its care for a year.

For example, for a hip replacement the DBC price accounts for an average length of stay of approximately seven days. So if your actual length of stay is shorter than that, then the hospital can make money on that episode.

It is not a perfect system though. Having more than 30,000 DBCs makes the system hard to administrate. Also, some episodes may be upcoded to account for greater expense. The DBCs are extremely complicated. This payment system was completely new in 2006 and probably is an important contributor to healthcare cost inflation.

Finally, we have seen an increase in capacity, which also contributes to the rising cost trend. But that rise was anticipated: a system with more universal coverage and shorter waiting lists—and without a budget cap—was the goal of the new system.

Q: Has the new system solved the problem of uninsured individuals?

Uildriks: There was never a large group of uninsured people in the Netherlands. Under the new system there is still an uninsured population but nothing like the United States. There are currently an estimated 240,000 uninsured among our 16 million people. The uninsured are sometimes unaware they are required to have coverage—this is often the case with expatriates—or sometimes there are religious reasons to not want insurance. Others cannot afford their parts of the premium. The premium has gone up for low-income groups with the introduction of the new system, and while they can receive some compensation for their share of the premium, it is not enough to fully compensate for the cost. Should the uninsured decide to enroll later on, they can do so without a penalty.

Also, hospitals in the Netherlands are required to care for those who don't have insurance if there is a medical necessity. I have never heard of someone being denied care.

Some have suggested that those who do not pay for insurance should only have access to acute care, but so far that penalty has not materialized. However, a new law in 2009 will allow for payroll deductions to pay the premium for those who go longer than six months without paying for care.

Q: Is the system likely to change at all moving forward?

Uildriks: Insurers are now investing money in all kinds of disease management programs. They don't currently earn money with these programs because of the ex-post equalization. Large Insurers are pushing politicians to get rid of the ex-post equalization on certain high-cost risks, to create an incentive to become more efficient in these areas.

The insurers have a good point. They say: "We're good at managing risk and you're not letting us do it." The system may evolve to allow for that. The original plan accommodated this possibility, so this idea may be implemented. However, small health insurers want to maintain the ex-post equalization because it reduces risk to a large extent.

Ng: In the beginning, when the new system was introduced, it led to a lot of commotion, with almost 20% of the population shifting to another insurer, trying to find the cheapest one. That has slowed down. Last year only 3%–4% of the population shifted, mostly due to the fact that premiums are not that different from one insurer to another. We may not see much movement between plans until the system becomes more transparent and people can better understand the quality and other differences between insurers and providers.