Academic journal article Journal of Risk and Insurance

The Valuation of Lifetime Health Insurance Policies with Limited Coverage

Academic journal article Journal of Risk and Insurance

The Valuation of Lifetime Health Insurance Policies with Limited Coverage

Article excerpt

INTRODUCTION

The populations of many developed countries are aging significantly, due to lower mortality and fertility rates. Continued increases in longevity contribute to rising medical costs and greater demand in health insurance markets. Health insurance reduces individual financial burdens in the event of an illness or injury that requires hospitalization or results in the loss of income. For countries without National Health Insurance (NHI), such as the United States, the private health insurance market provides most coverage of medical expenses. The U.S. Health Insurance Portability and Accountability Act (HIPAA) of 1996 also mandates guaranteed renewability for almost all individual insurance policies (Herring and Pauly, 2006; see also Cochrane, 1995; Pauly, Kunreuther, and Hirth, 1995).

In contrast, in countries with NHI, private health insurance products differ, depending on whether they adopt partial or full NHI systems, that is, on how many citizens join the systems. For example, Germany is a partial NHI country, (1) and citizens choose between NHI or private health insurance systems. (2) If they choose the latter, they receive a comprehensive plan that is similar to those provided by insurance industries in non-NHI countries. For full NHI countries such as Japan, Korea, and Taiwan, NHI compensates for some portion of medical costs, such as 75 percent, and commercial health insurance exists mainly to reimburse customers whose expenses exceed these limits. Payments for these medical insurance policies can be categorized into two types: those in excess of NHI payments and fixed hospitalization payments. Although the former tend to invoke much smaller claim amounts than the latter, they can grow higher than the fixed payments, such as if patients receive new and expensive medicines or treatments not covered by NHI. A fixed hospitalization benefit instead pays a particular amount for each day of a hospital stay, rather than depending on the actual costs incurred. The fixed amount can be spent freely by the insured patient, such as for extra nursing care or the family's everyday living expenses.

Taiwan has been ranked as one of the healthiest countries in the world, largely due to its implementation of NHI in 1995. Taiwan's NHI covers almost 100 percent of the population and has attracted worldwide attention for its low, stable costs (from 5.1 to 6.3 percent of gross national product over 14 years) and short patient waiting times. The NHI's benefit package is comprehensive, including inpatient and outpatient care, dental care, traditional Chinese medicine, and prescription drugs, though not long-term care. National Long-Term Care Insurance is poised to be implemented. In addition, the NHI features a cost-sharing system, with co-insurance and co-payments for covered services. These co-payments, as well as income-based individual premiums, are waived for some people, such as the very poor, veterans, and natives of the region. Out-of-pocket payments are required for services not covered by the NHI, such as prosthodontics, orthodontics, extra charges for private and semiprivate rooms, and special nurses. Under the current NHI plan, patients generally pay NT$100-$200 (about US$3-$6) out of pocket for a physician visit. There is a 10 percent co-payment for inpatient services and 20 percent for outpatient services. On average, out-of-pocket spending by households accounts for 25-30 percent of total health care spending in Taiwan. Consequently, Taiwan's commercial health insurance market mainly serves to reimburse customers whose expenses exceed the NHI limits. A fixed hospitalization benefit is particularly popular.

Taiwanese insurance companies offer a variety of medical insurance plans to suit the needs of individual customers; hospitalization insurance (3) gives policyholders hospitalization benefits, which provide fixed cash benefits for each day of their stay in a hospital. Policyholders can spend the daily cash benefits freely, such as to cover their family's everyday living expenses or to obtain extra nursing care. …

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