It’s time we indexed health insurance
[Opinion] Steve Wright argues it's time that health insurance claim benefits are indexed.
Friday, September 6th 2024, 11:45AM 
8 Comments
by Steve Wright
Inflation destroys the value of money, we know this, that’s why we index life insurance sums insured and monthly claims benefits.
At an annual consumer price index (CPI) inflation rate of 3%, the value of a dollar will halve in roughly 24 years. Put another way, prices will double. Just a few years at 5 or 6%, as we recently experienced, makes the problem significantly worse.
Naturally a reduction in purchasing power of their claim dollars can be a very bad outcome for disabled people on a long-term income protection claim, particularly when considering their claim is already likely to be 75% or less of their pre-disability income. Indexing claims benefits to counter the effects of inflation is a no brainer for most clients.
So why don’t we index health insurance?
The annual increase in medical treatment costs (medical inflation) has been significantly higher than the CPI for decades, some estimates put annual medical inflation closer to 10%. That’s why insurance companies typically increase health insurance premium rates very regularly and by significant amounts.
So here is the problem, health insurance policies typically have annual claim limits on most if not all claim benefits. Claims limits need indexing because they are also eroded over time by inflation, not by the CPI, but by the much higher medical inflation
I’ve never seen a health insurance policy that guarantees to increase these claim limits – they are not contractually indexed for medical inflation.
If annual claims limits are not contractually indexed, there is no contractual compulsion on insurers to increase them. At an annual rate of 10%, medical treatment costs will double roughly every seven years.
If health policy claim limits are not regularly increased for medical inflation, they will no longer provide the same level of cover as they did when the policy was issued. Inflation will cause clients to become underinsured and then severely underinsured.
With life products, clients can ensure that doesn’t happen by selecting indexing of benefits, but there is no such protection on health insurance.
Are Kiwis entitled to expect that the health insurance they pay a premium for, which is intended to protect them for decades, will maintain benefits and remain suitable for their long-term needs? I think they are!
I’m calling on all health insurers to fix this problem.
Claim limits need increasing for medical inflation, especially those products lagging behind on relatively low limits. Failure to do so is arguably not fair for loyal clients, will soon produce poor and then very bad client outcomes and will likely erode trust and confidence in the insurer and the life and health insurance industry in general.
Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.
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Comments from our readers
We have an aging population and medical technology being the 2 key drivers.
Some tax relief for those who choose medical insurance could help. We are paying twice, once through tax and also through premiums for cover. We are potentially taking pressure away from the public system and could or perhaps should get some relief for that.
Enormous estimations of future treatments and other waffle is fruitless. Insurers attempt to negotiate with suppliers, this is good. They underwrite, this is good. Some help clients with wellness offers. Indexation is as attractive as another TAX!
Some examples from real clients of mine:
Client 1
Accuro Real Value - $150,000 claim limit for $532/mth
Vs.
Accuro SmartCare+ - $500,000 claim limit and $500k non-pharmac for $506/Mth
Clients 2
AIA MajorCare 2001 – $150,000 claim limit for $1,130/mth
Vs.
AIA Private Health – Unlimited claim limit and $500k non-pharmac for $976/mth *
*also included $200 excess increase but no Vitality
Insurers will come back with the “each product line has to stand on its own two feet, and so as policyholders exit, the remaining members have to share more of the cost” argument. However, this issue could be very easily corrected with a change in insurers' accounting practices.
It doesn’t stand up to scrutiny when a company like AIA allows a transfer to the better policy without underwriting. Other insurers like nib and Accuro create an unnecessary barrier to the new product by requiring full health evidence.
I suspect the obstacles are more ‘profit’ related than insurers let on.
Perhaps COFI and some more regulatory scrutiny will resolve this problem.
The more permissive new policy on the back of less stringent old underwriting is a significant concern and one that is part of the reason for the higer premiums on the older products.
However, you do need to review the approach with AIA as that has had both some benefits passed back and updated over the years and the MajorCare policy was per admission or per surgery not per annum for the surgery benefit. (There is an excellent tool AIA has in their library on this difference between medical policy versions)
Making MajorCare substantially better than a modern policy in some of the more expensive surgical situations.
The non-surgical admission is limited to an annual limit, and this is where unfunded meds are usually paid from but would be under the surgery benefit if there was surgery at the time, and is low against the rest. Superior Health is another in the AIA stable that is substantially worse (but much cheaper than P/Health) that needs higher limits applied.
A few other features of the old MajorCare were prior to Nov 2001 preventative screening up to the policy limits is covered; want a colonoscopy or a full body MRI just because, the policy pays for that.
There is also an interesting one were some versions have picked up acute care some where in there and then passback of coverage in Aussie when they made changes after Private Health was released.
Making taking the old MajorCare to Aussie a possible option where the original cover was not portable and it picks up both emergency medicine costs as well as typical private medicine costs.
This old policy while being a bit pricy is still quite versatile in our present market. The annual cover level for non surgical and the S&T combined limit are getting close to not being enough, but that still applies to some of the onsale products too.
In terms of the last bit on profit drivers, absolutely. AIA is trying to extract people out of MajorCare, provided you were underwritten into the product with options to move to modern products. But group MajorCare is stuck where they are. (AIA Have a migrate kids coming of age into Private Health and limiting new borns on MajorCare, which is why they opened up Private Health to kids only)
nib in contrast is attempting to hold as many in Premier Health as they can to mitigate the toxic pool effect of healthy lives moving out. Making migration of kids to UHM limited to just ages 18-30 when it's often better for the kids to move as kids to a product that allows kids to be on their own...
Both have justificaiton but neither has it right from a customer perspective as some clients with AIA are far better to remain on the old product and plenty of nib clients are better off migrating.
Steve's comments have prompted me to pencil another missive into the weeds on this subject too, which should be with Philip in a week or so.
Shall I have IBM somehow upgrade me from my first computer I purchased which at the time functioned well. I mean they should have known about technology advancements?
Unfortunately, future proofing medical insurance so it will absolutely function in all circumstances forever is an hallucination. However I look forward to your thesis JP you should submit that for a PHD.
One day revenue and how to successfully build a practice will be back in the news!
The sale of a computer involves a single transaction between the buyer and seller. Health insurance is a long-term contract that involves other customers within the risk pool - i.e. via cross-subsidies between these customers. For example, when a new customer purchases a health policy, their claims experience is significantly lighter because they have recently been underwritten and their premium cross-subsidises the claims costs of the wider pool, including the cost of enhancements provided to customers within the pool. In turn, it is fair and reasonable for these customers to (eventually) have their claims costs subsidised and their product enhanced.
Every insurer will weigh and address these questions of customer fairness in their product strategy, pricing approach, and internal transfer rules - however, ring-fencing clients into a closed health product priced for experience with no opportunity for subsidisation from newer customers doesn't strike me as fair.
Maybe a more accurate analogy might be a Netflix subscription, but where older subscribers watch old content and potentially pay higher subscription fees than newer subscribers.
At that time it likely meets current costs and factors in some future situations. Premium is built and other factors like supplier arrangements are struck. I think the problem that was trying to be solved is keeping up with treatment costs and keeping premium affordable.
I appreciate your view of fair. Tax relief is my view of fair.
I have worked for 2 medical insurers in my life and understand these simplistic arguments and can assure you, this problem has been looked at from all angles already mentioned. Looked at with the intent of assisting clients.
I agree with you on the focus forward, legacy policies are a bit of a ‘mare and no one has the right answer despite the time spent looking for solutions.
The single-pool approach ends up being more expensive for everyone and the multiple-pool one results in hammering older lives as they need the cover. Both suck in their own special ways.
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I'm less concerned with retail products; they generally had competition, keeping them at higher cover levels to start with.
Where policy limits have been problematic is in the group space; in one case, one of my clients managed to spend $99,997 of their $100,000 annual policy benefit in the 3rd week after their anniversary on a single surgery, with prior approval before the anniversary.
Fortunately, in this case, the insurer also announced an increase in the policy coverage levels, at short notice, for that anniversary, meaning the client had scope for more treatment that year despite what had been advised with the prior approval and policy anniversary.
This isn't the same with most retail medical policies today; a couple have taken the approach of removing surgical limits and now state unlimited surgical cover, Southern Cross being one of them.
Something for covers that have been held for decades does need an answer; at the same time, most insurers have been mindful of this with their changes. Though they need to do it more often than 10-15 years in between!
With some products, we are getting to the upper limit of current benefit allowances, and I expect we will see a bump with these to limit the complaints that hitting limits will create for them.
End of the day, any answer that increases benefits is also going to open the door to increased premiums, something no one wants to hear about right at the moment.