The role of private health insurance differs significantly from one country to another. A key reason for this relates to the availability and the delivery of public healthcare within each country. Private health insurance usually fulfills one of three roles, each role being inextricably linked to the underlying features of the public health insurance system that operates within the country concerned.

These three roles are:

1. Provision of primary care, for example where public health insurance is not available, or where private health insurance is mandatory for all or much of the population.
2. Provision of supplementary care, for example where the public healthcare system either charges for, or excludes access to, certain services.
3. Provision of duplicate care, enabling the insured to receive care that is also available within the public system, but usually with quicker access and/or with a higher quality of care.

Governments therefore often shape the role of private health insurance within any particular country. This is particularly true where private health insurance is used to address certain challenges within the public health delivery system, most notably those related to financing and capacity.

The spending on private health insurance as a proportion of total health expenditure varies considerably from one country to another, as the chart below, which is based on OECD data, demonstrates.

Out-of-Pocket and Private Health Insurance as a Share of Total Health Expenditure

Source: OECD Health Data 2011

Medical underwriting

The use of medical underwriting within private health insurance also varies widely. The key purpose of medical underwriting is to avoid (or reduce) the risk of adverse selection against the insurance company and its potential impact and consequences on insurance premiums and market efficiency. But the ability to medically underwrite applicants for health insurance, and the methods by which the underwriting is performed, are often also determined and constrained by factors such as regulation (by governments and/or consumer-led insurance associations), market forces (particularly the relative power of the insurance buyers such as employers), practicality, and certain cost-benefit considerations.

In the United States, the country where voluntary health insurance makes up the greatest proportion of total health expenditure (35% in 2007), medical underwriting on application is currently used in a number of states, and especially for individual and small group applicants. However, through the reforms proposed under the Patient Protection and Affordable Care Act (PPACA) insurers will have to guarantee issue of insurance to applicants from 2014 onwards.

Risk adjustment

The use of risk adjustment within health systems ensures a fair allocation of financial resources, accounts for adverse selection, and ensures healthier market competition (where relevant). It has many purposes, both within public and private health systems, including:

• Budget allocation
• Provider selection and profiling
• Risk equalisation in insurance markets
• Predictive modelling within medical and disease management programs
• Quality/performance assessment

Therefore risk adjustment models often have a role within the underwriting process in terms of predicting the likely future utilisation and cost of health insurance applicants.

Where health insurers are competing, but cannot risk-select by underwriting, declining, or risk-rating applicants, risk equalisation systems try to replicate the risk-pooling in tax-funded systems and ensure a level playing field. The basic premise of a risk equalisation system is that insurers with a high proportion of 'good' risks, i.e., a below-average age or high proportion of healthy people, must compensate those insurers that have a high proportion of 'bad' risks.

Because each insurer must charge all applicants the same premium, it does not have the opportunity to control the average risk of its portfolio and therefore the risk equalisation system is designed to reduce the incentive to risk-select via other means, such as product designs or marketing campaigns targeted at specific sub-populations.

The global underwriting series

Milliman has produced a number of papers relating to the ongoing health reforms in the United States and the implications for underwriting practice there. Therefore this series of blog entries focuses on certain other international health markets, namely Brazil, Germany, Hong Kong, China, Singapore, Malaysia, India, Mexico, Netherlands, and the UK.

The purpose is to compare and contrast the key elements of risk selection practice in the public and private health insurance markets within these countries. We first provide a high-level summary of healthcare provision for each of the countries considered within our research, including the respective roles of public and private health insurance in each country. This helps explain why some of the differences exist. Then, for each of the countries we reviewed, we comment on the common underwriting practices and how risk adjustment methodologies are presently used. We also provide a few thoughts on the some of the opportunities for increased and/or alternative utilisation of underwriting and risk adjustment tools in the future in the countries included in this series."