Download The Shopping Problem An Economic View of Health Care

Premium Calculation in Health Insurances
Method of premium calculation in
health insurance
1. Community rated premiums.
2. Risk-related (Experience rated) premiums.
3. Income-related premiums.
Community Rated Premiums
• In community rating, premiums are adjusted
for the average risk of a group, so that all
insurees participating to the pool pay the
same premium.
Community Rated Premiums
• There may be instances of modified
community rating where certain factors are
permitted to affect the premium to a specified
degree, for example premium loading for late
entry into a health insurance scheme.
Community Rated Premiums
• While insurers can choose to apply
community rated premiums as a product
strategy, in some cases government
regulation mandate community rating (e.g.,
voluntary health insurance in Australia and
Ireland; mandatory private health insurance
in Switzerland).
Risk-related Premiums
• Premiums are related to individual risks and
calculated from actuarial principles on the
basis of expected medical claims.
Community rating achieves
redistribution in two ways:
1. Within each economic group, people who
become ill receive benefits in excess of
the premiums they pay, while people who
remain healthy pay premiums while
receiving few or no health benefits.
2. Among different economic groups, the
healthier rich, who use less health care
than their premiums are worth, help pay
for the diseased poor, who use more
health care than their premiums could
buy. (It may be reversed)
Experience rating is far less
redistributive
• Within each economic group, those who
become ill are subsidized by those who
remain well, but among the different
economic groups, healthier groups do not
subsidize poor high-risk groups.
• Thus, the principle of health insurance,
which is to distribute health care more in
accordance with human need rather than
exclusively on the ability to pay, is
weakened by experience rating.
Income-related premiums
• This is typically the case of social security
schemes, where contributions are calculated
as a share of earned income.
• It may be regressive, proportional,
progressive
The Burden of Financing Health
Care
• Different methods of financing health care place
different burdens on the various income levels of
society
• Payments are classified as progressive if they
take a rising percentage of income as income
increases, regressive if they take a falling
percentage of income as income increases, and
proportional if the ratio of payment to income is the
same for all income classes
• Burdening low-income families with high levels of
payments for health care (regressive payments)
reduces their disposable income, amplifies the ill
effects of poverty, and thereby worsen their health.
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