Medical progress and supplementary private health insurance

In many welfare states, tightening financial constraints suggest excluding some medical services, including new ones, from social security coverage. This may create opportunities for private health insurance. This study analyses the performance of supplementary private health insurance (SPHI) in markets for excluded services in terms of population covered, risk selection and insurer profits. Using a utility-based simulation model, the insurance market is described as a composite of sub-markets. The latter are defined by the key parameters of risk, risk aversion and information levels on the insurer and on the consumer side. Numbers of contracts, revenue, adverse selection, cream-skimming, and profits indicate market performance. The impact of key parameters as well as that of scenarios describing risk and information changes linked with exclusion strategies are analysed. Especially when information levels are low, insurer information must be at least as good as that of the consumer in order to avoid significant losses by adverse selection. Cream-skimming varies by information and risk aversion. Insurer profits increase with the degree of risk dispersion and the market share of low risks. Scenario analyses show that profits may be highly sensitive to changes in key parameters, especially to those affecting cream-skimming. The simulation model explains performance in a wide range of market types and allows the impact of interventions such as marketing campaigns to be analysed. Profit-oriented insurers should aim to empirically understand the key parameters in the SPHI-markets in which they wish to operate. Policymakers in social health insurance who develop exclusion strategies should consider the potential performance of private markets if they intend to rely on supplementary coverage.