Avoiding risk selection in competitive health insurance markets. Abstract

Transcription

1 Markus Jankowski and Anne Zimmermann Avoiding risk selection in competitive health insurance markets Abstract In most countries health insurance is organized within a community-rated framework in order to ensure universal access to health services. Health insurance companies can quite easily identify different risks but are not allowed to use this information to riskadjust premiums. The optimal strategy for profit-maximizing insurers is to compete for good risks only, i.e., insured with (a present value of) expected annual costs lower than (the present value of) annual insurance premiums. Resources are used to develop successful selection mechanisms in order to identify and attract good risks. Such a selection process violates the requirement of universal access at identical prices and leads to waste of scarce resources and welfare losses. Several countries have developed risk-adjustment schemes in order to avoid this undesirable competition for good risks. But all known risk-adjustment schemes still leave at least some incentives to skim the cream of the insured. The main reason is that administrations running risk-adjustment schemes have much less information about profitability of risk-selection strategies than insurers themselves. Even morbidity-related risk-adjustment schemes leave space for identification of good risks. Good risks in this context are those whose risk-adjusted per-capita payments received from the regulatory authority are higher than expected costs. As long as the cost of developing new selection strategies is lower than the benefits of successful selection of good risks, insurers have an incentive to develop new selection strategies, i.e. to search for new diagnosis that can easily be identified and selected. The administration of a risk-adjustment scheme lacks this incentive and will therefore be less inventive in identifying potential selection strategies used by insurers. Thus, they fail to separate insurers profit from morbidityrelated factors entirely. On the private health insurance market in Germany ageing provisions are built into the system in order to avoid age-related premium increases. Combining this concept of ageing provisions with Cochranes (995) premium insurance theory we will show that it is possible to prevent risk selection in a competitive health insurance market with actuarily fair premiums. To achieve this, it is essential to require insurers to accumulate ageing provisions sufficiently high to insure the entire risk-pool against age-related premium increases and to force them to transfer risk-adjusted ageing provisions for each insured who changes the insurance company.

2 I. Introduction It is quite clear that health care and health insurance markets work much less efficiently in a solely competitive environment than markets for other goods and services. Most health economists have accepted that the solution of the problem associated with health care and health care insurance is not public provision but rather competition in regulated markets. An effic ient framework with appropriate incentives for insurers in health care markets needs to be carefully designed. This paper takes up the problem of risk selection in competitive health insurance markets once again. In most countries with public health insurance systems (instead of tax-based public provision like the National Health Service in the United Kingdom), health insurance is organized within a community-rated framework to assure universal access to health services (e.g. the Netherlands and Germany). This levelling of insurance premiums for all customers of one insurer leads to adverse incentives in competition. Insurers can identify different risk classes in health insurance most obviously with respect to age and gender of the insured but are not allowed to use this information to risk-adjust premiums. Thus, it is the optimal strategy for profit-maximizing insurers to compete for good risks only, i.e., insured with (a present value of) expected annual costs lower than (the present value of) annual insurance premiums. Resources are dedicated to the development of successful selection mechanisms to identify and attract good risks instead of the improvement of efficiency and of quality of health services provided to all customers. This adverse selection leads to waste of scarce resources in health care and to welfare losses. Different approaches to avoid risk selection in competitive health insurance markets have been discussed in the literature and tested in actual health insurance systems. Riskadjustment schemes are designed to convert community-rated premiums into risk-adjusted payments. A regulatory authority calculates the expected costs for the respective riskpools of all insurers. Then it collects the difference between this expected costs and the sum of insured contributions from insurance companies with a relatively good risk-pool and redistributes it to those insurance companies with a relatively bad risk-pool. But all known risk-adjustment schemes have proved to leave incentives for selection. The main reason is that administrations managing risk-adjustment schemes have less information about profitability of risk-selection strategies than private insurance companies. Even morbidity-related risk-adjustment schemes leave room for the identification of good risks. As long as the implementation of selection strategies is less expensive than the advantage achieved by successful risk-selection insurers have a strong incentive to search for good risks. The administration of a risk-adjustment scheme falls short of this incentive and will therefore be less creative in identifying potential selection strategies. Thus they fail to separate insurers profit from morbidity-related factors entirely. Enhancing the concept of ageing provisions in the private health insurance market in Germany we will show that it is possible to reach the goal of universal access to health care and health insurance relying on individually equivalent insurance premiums, i.e., premiums that are actuarially fair plus a loading for overhead and capital costs. The only necessities are a) to implement a compulsory health insurance with a carefully defined benefit package and b) to require insurers to accumulate ageing provisions sufficiently high to insure against age-related premium increases and to force them to transfer riskadjusted ageing provisions in case of customers changing the insurance company. The paper is organized as follows: The following section illustrates the necessity of a compulsory health insurance (Chapter 2). The third part depicts the problem of risk- 2

3 selection on competitive health insurance markets. Part four gives a short review of the two-folded German health insurance market. The fifth part demonstrates that the concept of risk-adjusted ageing provisions meets the goal of universal access to health care in an individually equivalent framework for compulsory health insurance. Concluding remarks follow in section six. II. A rationale for compulsory health insurance In most societies it is taken for granted that life saving or prolonging medical treatments are provided independently of the patients willingness or ability to pay. In absence of any kind of health insurance the costs of such urgent treatments would have to be reimbursed by society i.e. by the health service provider or through institutions of social assistance. Without compulsory insurance, citizens rationally resign from health insurance if they are not sufficiently risk averse or if the expected income throughout the lifecycle would not change substantially in case of expensive health services. Compulsory health insurance avoids socializing of costs which could have been insured privately and, thus, it can be assumed to be unanimously approved by society (Hayek 960, 286). Expected health care expenditures depend not only on random variables. They are also determined by observable indicators. For example, on average they increase with the age of the insured. Therefore, an actuarially fair premium in annually renewed contracts would increase over time. In addition observable individual characteristics like certain acute or chronical diseases imply a higher risk of getting ill in the future. An actuarially fair premium in annually renewed contracts would change with the revealing of information about the risk type of the insured. Most people would like to avoid a substantial decline in quality of life at higher age through a loss of net income. They would therefore prefer to be insured against increasing health insurance premiums, i.e. they choose a contract with constant premiums over their whole life regardless of their age. The present value of total lifetime health expenses depends to a high degree on the life expectancy of the insured. Relying on saving accounts to prepare against higher insurance premiums at old age imply the danger of wrong estimation of the remaining life expectancy: Savings could be too small to smooth premiums if the insured live longer than expected or they could be too high and individual utility could have been raised by a higher consumption in younger days if life is shorter than expected. Health insurance thus implies a kind of pension system. Of course, it is also possible that some people would prefer increasing premiums because they expect increasing income and wealth in old age while consumptive needs are higher in younger days say, for children s education or in order to finance housing etc. Compulsory insurance thus burdens this group of insured with welfare losses. But levelling premiums has to be compulsory because one must avoid that increasing health insurance premiums lead to dependency on social assistance in old age because income and assets are insufficient to cover costs. Thus compulsory levelling of insurance premiums is an approach to avoid free-riding in social assistance harming among others those who have voluntarily provided for costs of ageing. The ex post-equalization between those who proved to be high risks and those who proved to be low risks is the fundamental characteristic of insurance. Expenses directly Health insurance premiums still might change in case of an increasing life expectancy or technological progress. 3

4 related to a certain illness are reimbursed without any influence on the contract. However, a problem arises if insurance companies offer short-term contracts. Insured might face substantial increases in premiums if diseases occur that influence the expected health expenditures in the future, i.e. chronical diseases, as renewed short term contracts have to be adjusted to the new information. The implicit insurance against this risk through constant premiums regardless of any new information should meet with unanimous approval if nobody knows his own risk of getting ill and becoming a high risk for the insurance company at the beginning of the contract (Pauly 994). This would be the case if insurance starts at the date of birth. Furthermore, people would also like to insure the risks of hereditary diseases and of congenital defects. Compulsory insurance against morbidity-related increases in expected costs should avoid that citizens who become high risks over time will be dependent on social assistance because income and assets are insufficient to cover costs or higher insurance premiums. Ruling out the free-rider position is again the motivation for this limitation in consumer choice, especially in countries with a high level of transfers compared to earnings of low-income groups. III. Risk selection in compulsory health insurance Insuring against increasing expected costs leads to a levelling of premiums over the life-cycle and over different states of health. In the wrong regulatory framework, i.e. with imperfect mechanisms of risk adjustment, risk selection might occur because premiums do not exactly cover the annual health care expenses of an individual (Pauly 984). Insurance premiums of young or relatively healthy insured are higher than their expected costs. The premiums of elderly people and relatively ill insured are lower than the expected costs. Young and healthy people are good risks for the insurance company. By attracting those insured the insurer can realize an advantage in comparison to other insurers simply by optimizing its risk pool. Thus, as long as costs of identifying and running successful selection strategies are lower than achieved gains, risk selection is an advantageous strategy and will be applied by health insurers. The gains from risk selection are competitive advantages that arise because successfully selecting insurers can charge lower premiums but have to work more efficiently or because they can conceal inefficiencies which would have been sanctioned in a functioning competitive environment. There are different strategies to select good risks from a risk pool. Without an obligation to contract companies can simply refuse to contract with bad risks. As it becomes difficult for high risks to find any insurance contract, obligation to contract is a reasonable regulation of markets that leave room for risk selection. But even if insurance companies are forced by law to contract with every citizen demanding insurance coverage risk selection still occurs as evidence from various health insurance systems in Europe shows. Marketing strategies as well as the choice of certain levels of quality of the provided health services in a managed care environment can be used to attract low risk insured and to deter high risks. Successful risk selection protects inefficient insurance companies against competitors or allows to charge lower premiums in order to (over-) compensate for inferior quality in certain treatments. The latter might be seen as a common market segmentation in competitive markets. But in the same way efficient working insurance companies might An overview over different risk selection strategies is provided by van de Ven and van Vliet (992), pp. 29. Evidence on risk-selection in the german sickness funds markets is shown by Cassel et. al. (200). 4

5 fail in competition only because of an inferior risk pool. The same quality of services accompanied with a less successful selection strategy leads to higher premiums and thus to a disadvantage in competition. With the possibility of risk selection insurers therefore compete for good risks only. Competition is no longer a mechanism to identify the most efficient suppliers of health services and health insurance and thus risk-selection induces a loss in welfare through the waste of productive resources. Another source for inefficiencies is the segregation of risk pools that takes place due to a process similar to that of adverse selection (Akerlof 970). Successful risk-selectors can attract good risks and deter high risks. Good risks will concentrate on this insurance while bad risks will concentrate at less successful risk-selectors. It follows that good risks will have to pay a relatively low premium while bad risks will have to pay a higher premium. Insurance against increasing expected annual costs is ruled out. The attempt to avoid the dependence on social assistance will fail. However, it will have caused high costs of running risk selection strategies and the same result might have been achieved at lower costs: As Pauly (984) pointed out annually risk-adjusted premiums might avoid risk selection. But those premiums are not feasible in a compulsory health insurance system as shown above. Hence, it is necessary to implement an efficient regulatory framework that makes the profitability of insurance contracts independent of age-related and morbidity-related factors. IV. Attempts to avoid Risk Selection in German Health Insurance Markets The German health insurance market is split into two different branches. Most employees and their families are insured in one of about 300 sickness funds belonging to the compulsory social insurance system. Employees exceeding a certain income as well as self-employed are allowed to seek insurance on the private health insurance market. a) Community-rating and risk-selection in the German social insurance system Premiums in the compulsory social insurance system are community-rated and income-related. Low-income workers or retirees pay a smaller premium than high-income members. Spouse and children without own income are insured in the same sickness funds as the sole earner. Thus, apart from the usual redistribution from the healthy to the sick there are three additional redistributive effects: from high-income to low-income (not necessarily from rich to poor, as redistribution in compulsory social insurance in Germany is not means-tested), from singles or the so-called double-income-no-kids to families with only one earner and from young to old insured. This easily leads to adverse distributive outcomes, as for example young average-income singles might subsidize high-income families with only one income. Funding is as follows: Sickness funds charge an income-related premium that is directly paid by the employer of the insured. Community-rating as well as income dependency of premiums make it necessary to run a risk-adjustment scheme. Otherwise risk selection could take place in order to attract relatively young, healthy and highincome individuals. The risk structure adjustment attempts to equalize the risk structure among the different sickness funds. Differences in the payroll basis are adjusted as well as See van de Ven/van Vliet (992), pp

6 differences in age, gender, and disability. This adjustment scheme has proved to be insufficient to avoid risk-selection because it leaves room for selection of relatively healthy insured. Therefore, it has been decided to improve the risk adjustment scheme by adding morbidity-related adjustment factors like diagnostic findings. But this adjustment scheme still leads to inefficiencies. Efficiency in risk-adjustment requires equalizing of marginal costs of a further differentiation of risk classes in the adjustment scheme and marginal costs of remaining risk selection for the competing funds. However, facing substantial information asymmetries to the advantage of the sickness funds, it might be difficult for the regulator to implement a perfectly efficient risk adjustment scheme. Insurers will hold back information about cost and yields of risk-selection. Therefore, the regulator has to decide: If he wants to prevent insurers from risk-selection effectively, he has to implement a risk-adjustment scheme that is as much differentiated as possible. Or he might choose a less differentiated system in order to meet the efficient degree of differentiation. By choosing the first alternative he will cause high administrative costs, possibly costs that are higher than welfare gains that result from effective prevention of risk-selection. The second alternative leads to segregation of risk-pools and to welfare losses because compulsory insurance against increasing expected costs will be undermined in the same manner as shown above (Chp. III). In both cases insurance markets work inefficiently. Furthermore, this kind of risk adjustment abolishes incentives for high-quality care because increasing quality of care through preventive medicine leads to higher costs in the present without future compensation. The reason is that risk adjustment with morbidity related adjustment schemes require permanent reclassification of insured. If an insured proves to be a high risk in one period, he will be classified into the according risk class in the following period. Payments out of the risk-adjustment-scheme are higher in this class according to the higher average risk of the respective insured. Conversely, preventive measures or high-quality treatment within disease management programs induce costs in the present but lead to no future advantage if the insured will stay healthier than those of other insurance companies. The reason is that payments out of the adjustment scheme remain the same and, thus, the yields of the preventive measure lower costs due to the better health state are distributed over the whole society. The result is that a better (worse) state of health of the insured does not lead to an advantage (disadvantage) in competition. But bearing the costs of prevention will lead to a competitive disadvantage. Thus, no insurer will offer preventive measures voluntarily. Thus, risk adjustment schemes in community-rated health insurance fail to avoid risk selection in an efficient way because of remaining inefficiencies, cost-inducement, and distortions of incentives for high-quality care. b) Ageing provisions and the lock-in effect on the private health-insurance market in Germany On the private health insurance market premiums are calculated on an individually equivalent basis for long-term contracts. That means the premium apart from bureaucratic costs is calculated actuarially fair, i.e. the expected costs of sickness in a certain period of time is mirrored in the premium. However, increasing premiums due to morbidity changes are prohibited. Premiums which would normally rise because expected annual costs increase over time are evened out through ageing provisions for the insured. Premiums that are to be paid in younger days contain a share for building up these 6

7 provisions. By the time people grow older and initially agreed-on premiums can not cover expected annual costs anymore ageing provision are released to cover exceeding costs. Risk selection is not an issue on this market because every time a new contract is to be concluded insurers calculate equivalent premiums that will cover expected future costs. But an inefficient lock-in effect is prevalent which restricts competition to young and healthy insured and makes market access for new insurance companies difficult. This lock-in effect is the consequence of lacking portability of the ageing provisions. When changing the insurance the insured has no right to take the ageing provision that has been built through his premiums to the new insurance, it remains with the former one. Changing of the insurance provider is only an option for those who have not been insured for a long time and, thus, have not yet built up noteworthy provisions. Of course the insured is allowed to leave his old insurance. But as he cannot transfer the ageing provision he would have to pay a higher premium to the new insurance because of higher expected annual costs due to older age as well as the shorter time that remains to build up a new ageing provision. This kind of inheritance of ageing provisions to the former insurance is justified with the argument that otherwise risk selection would occur. Assume an insured who is willing to change the insurance company due to missing quality of services or dissatisfaction with the insurer for whatever reason. If the ageing provision that has to be transferred to the new company is calculated as an equal part of the entire risk pool s ageing provision, the insurance will have an incentive to contract only if the insured demanding coverage shows a low risk of getting ill. The insurance will then get a relatively high ageing provision compared to the insured s expected costs. This way insurances can attract insured from the competitors by offering lower premiums calculated as the difference of expected costs and the ageing provision transferred from the competitor. In this case the result will again be an inefficient separation of risks. By avoiding risk selection through prohibited portability of ageing provisions competition concerning long-time insured is reduced. Thus, in both segments of the health insurance market in Germany the regulatory framework to avoid risk selection in competition causes welfare losses. V. Competition through Portable Risk-adjusted Ageing Provisions 2 The dilemma of choosing between risk selection or cost-inducing adjustment schemes in community-rated systems on the one hand and constrained competition at the private insurance market on the other can be overcome by adjusting the ageing provisions when new information about the insured s health states arise. Assume a health insurance system as it is described in the previous section for the private health insurance market in Germany. If an insured is recognized as a higher risk than he has been classified as at first, say, due to an accident or a chronic disease, ageing provisions are not going to cover the higher expected costs of expenditures. This is no problem as long as the insured keeps his contract. Then the insured with lower risks will It will be more difficult to attract enough custumers to reach the number of insured necessary to pool risks in an efficient way. 2 In the current discussion on health politics usually the term individualized ageing provisions is used (see Donges et al. [2002] and Sachverständigenrat [2002]). The use of a different term in this paper is not meant to be confusing but aims at stating clearly that what is meant is not individual savings accounts but of course the risk compensation that is immanent to an insurance. This compensation now only takes place within a more differentiated risk class. 7

8 cover his higher expenditures within the risk pool. This is the original task of the insurance. Problems arise from the lack of transferable ageing provisions. A long-term insured who changes the insurance company has pay to higher premiums due to his higher age and according to revealed information about health state. Thus the insurance market does not perform its task, i.e. covering all the present and also the future costs of a damage event or, more precise, of an inferior health state. In order to insure people against all costs that are related to an inferior health state, the insured is supposed to be able to change the insurance without loss of ageing provisions. To avoid risk selection in this framework it is necessary to adjust ageing provisions according to changes in health state. The provision has to be adjusted to the higher difference between the present values of initially agreed-on premiums and higher expected future expenditures. Thus the risk pool covers the resulting costs of the unpredictable change in health state, as it is the main characteristic of a health insurance. If the insured changes the insurance company a riskadjusted ageing provisions is transferred to the receiving insurance according to the higher expected costs. The new premium is calculated based on the new morbidity information and the accompanying (higher) ageing provision. Accordingly, the premiums between different insurers should only differ to reflect different levels of efficiency and different quality of medical services provided by the insurer but should not depend on the state of health of the insured. Risk selection is no longer an issue if ageing provisions can be transferred that cover the difference between expected costs and present value of paid premiums and when the individual is classified in the correct risk class. Bad risks as well as good risks are valuable costumers to the insurance. This is only the case if the insurances have no possibility or incentive to miscalculate the ageing provisions. a) Avoiding risk selection efficiently It can be shown that insurers are self-interested in a correct calculation of the individual risk-adjusted ageing provision. The respective share of the provision has to be calculated for every insured at regular intervals and the sum of all displayed ageing provisions of an insurance always has to equal the ageing provision displayed in the balance. If this condition is monitored by a regulation authority or through certified accountants, any incentives to miscalculate ageing provisions are abolished. If the releasing insurance calculates the ageing provision for an insured too low, the receiving insurance has to be much more efficient in order to compensate for the missing amount of ageing provisions. The other way around, despite his dissatisfaction with his insurance the insured has little incentive to change the insurer because he would have to pay a higher premium due to the small ageing provision offered by his former insurer. Thus the new insurer has to be able to calculate considerably lower premiums or he has to offer a higher quality of services. Competition is restricted by the former insurer. But, simultaneously, the ageing provisions calculated for the other insured in the risk pool would be too high because the sum of all provisions still has to equal the balanced provision. This will force these insured to leave the insurance because they can get insurance coverage at lower premiums without requiring competitors to be more efficient. In this case the remaining insured have to accept rising premiums because remaining ageing provisions are now too low to cover future costs. Increasing premiums would provoke more insured to leave the This corresponds to the mechanism suggested by Cochrane (995) to insure against premium risk. 8

9 insurance because the initially stated difference in premiums between competitors disappears. Miscalculation of ageing provisions can lead to failure in the competitive process. Why is it necessary to force insurers to calculate the individual risk-adjusted ageing provisions frequently for all insured and not only at the moment a single insured is willing to change the supplier? If the condition mentioned in the previous paragraph is violated and insurers are free to calculate the single risk-adjusted ageing provision only at the time an insured wants to change they might transfer a provision that is smaller than necessary to cover future costs for this insured. It is advantageous for the insurer if these insured leave the risk pool because the remaining ageing provision will be higher than necessary to cover future costs of the remaining risk pool. Premiums for the remaining insured can be reduced. The problem of risk selection arises. Insured who get a provision that is too small would only change the supplier if they were sufficiently dissatisfied to take the burden of a higher premium at another insurer. This can be achieved by giving additional incentives to change the insurer: the insurer might, for example, be able to identify those insured who are sensitive to differences in quality of health services and provide them with only average quality in fields of particular importance. Consider the case of young couples who want to have children. They are interested in high quality obstetrical services and paediatrics and they expect their insurer to provide them with these services on a high quality level. But the insurer also knows that this couple will change the insurance in the case of even a very small transferred ageing provision, i.e. they will accept an increase in insurance premium charged by the new insurer if they are dissatisfied with the services at their former insurance. This leaves room for risk selection. Whereas, if the insurer is forced to calculate ageing provisions for all insured frequently this behaviour can be excluded. There still might be differences in quality for the respective services. However, these differences will be depicted in different premiums, and they leave no room for risk selection. It is then impossible to skim the higher willingness to pay for certain services through miscalculated ageing provisions. The insurer can also miscalculate the amount of the balanced ageing provision in order to circumvent the illustrated efficiency condition. A sufficiently high ageing provision for the entire risk pool is necessary to cover increasing health expenditures in an ageing risk pool. But if the insurer tries to calculate an ageing provision lower than necessary to reduce the premiums two possible consequences follow: First, if he tries to get an advantage in competing for new insured, i.e. for newborns, the insurer will calculate lower provisions in order to attract insured by charging a lower premium. This advantage might not last very long because it will become clear that ageing provisions are insufficient to cover costs of the elderly. Premiums have to be raised and thus the advantage in competition is evened out. Second, the insurer might balance a smaller ageing provision than necessary in order to make a short-term surplus or to keep customers from switching to another insurance. If he charges the same premium as his competitors as it is necessary to provide for future costs in another way, say by calculating a surplus reserve the latter will compete for new insured by offering a higher ageing provision at the same price and quality of services. Thus, calculating a provision that is smaller than necessary to cover future costs is not a promising alternative in competition. See Donges et. al. (2002), p

10 b) Risk-adjustment and information requirements For a perfect calculation of risk-adjusted ageing provisions insurances need to know the expected average costs for all possible risk classes. This exceeds the information requirements with respect to a system of morbidity-related risk adjustment schemes in community rated insurances. Private insurers in Germany state that these information requirements make the calculation of risk-adjusted ageing provisions impossible. Nevertheless, this information problem can be solved. First of all, private insurances already have long experience in calculating risk adjusted premiums and in the course of doing so they also calculate ageing provisions for different risk-classes. Otherwise they would not be able to cover future expenditures without increasing premiums. Furthermore, as far as risk selection associated with the portability of average ageing provisions is identified as a serious problem it seems to be obvious that insurance companies are able to calculate the difference of the present values of future expenditures and premiums. Otherwise they would not be able to decide if one insurer is a more valuable customer than another, given the amount of the average ageing provision. The information that is needed to identify target groups for risk selection is the same as the information that is needed to risk-adjust ageing provisions. However, only little information about future costs of different diseases is available in Germany because there has been little need to collect the data up until now. But competition will force insurances to calculate correctly because otherwise they would suffer disadvantages in the competitive process. This also implies the search for information and the elaboration of additional studies. Within this process it is not necessary to differentiate the risk-adjustment scheme as far as possible. There is a tradeoff between a more exact differentiation of risks aiming at minimizing the danger of risk selection on the one hand and rising costs with increasing differentiation on the other hand. The optimal differentiation is reached when marginal costs of these two cost categories are equal. It also implies that different classification systems can emerge. But if an insurance is accurate in the classification then the migration of insured to this insurance would be a desirable effect. As long as no market power results this would be the efficient way of identifying the most efficient modus of calculation. A further objection to this concept is that individually equivalent premiums for health insurance would lead to inequities because low-income citizens could no longer bear the increasing premiums due to a declining state of health. This process would burden those insured with expensive chronic diseases, i.e. those members of society who are already disadvantaged. As shown above, this argument is not true because it ignores a main task of a health insurance insuring not only present costs of medical treatment but also the risk of increasing health expenses in the course of time due to ageing or suffering a worse health state. Equivalent premiums are calculated at the moment of contract conclusion and the premium includes shares for coverage against increasing premiums due to ageing and increasing expected costs owing to changing health states. Thus, if insurance is contracted the first time at the day of birth and genetically determined diseases will not be brought into consideration 2, premiums will be the same for each individual of one cohort within one insurance company as long as nobody has changed the supplier. Everybody will be Health insurance premiums still might change in case of an increasing life expectancy or technological progress. We refer to premium changes due to ageing or changing morbidity. 2 Health insurers in Germany have voluntarily committed themselves to disregard information generated by genetical testing. 0

11 able to bear the cost of insurance because health expenditures up to the compulsory benefit package have to be exempted from taxation and covered by social assistance. Thus, there is no legitimate distributive objection against risk-equivalent health insurance premiums. VI. Conclusions In this paper we reconsidered the notion that there is no room for competitive markets in the health sector. A model was presented that allows for competition between health insurers by way of committing them to calculate risk-adjusted, portable ageing provisions. The concept of portable risk-adjusted ageing provisions can prevent the problems of risk selection that arise in community-rated frameworks. It offers an instrument for implementing competition in a funded system of health insurance. It represents a noteworthy option for reforms of social health insurances not only for the German case. It should not be overlooked that the transition to such a system poses difficult questions and that the process takes a long period of time. Some difficulties arise in the reform process because the implicit debt of pay-as-you-go financed systems like the community-rated health insurance has to be transferred into explicit debt. While premiums in a pay-as-you-go system are flattened through the contributions of the future generations in a funded system each insured builds precautionary savings. Thus, by switching from pay-as-you-go systems to funded systems the claims of today s contributors have to be satisfied by building up a sufficient capital stock. Financing of this capital stock will be challenging for efficiency and distributive reasons, it will be complicated for political economic reasons. But despite some difficulties one has to keep in mind that these sums have to be procured anyway in the case of reform as well as in the case of remaining in the pay-as-you-go system. Though, the reform case is promising a higher efficiency of the whole system. The citizens benefit from competition because services or treatments, insurances and structures providing services are constantly improved in the market process through the forces of demand and supply and the permanent risk of loosing current market positions. Literature AKERLOF, G. A. (970): The Market for Lemons: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics 84, S CASSEL, D. / JACOBS, K. / RESCHKE, P. / WASEM, J. (200): Zur Wirkung des Risikostrukturausgleich in der Gesetzlichen Krankenversicherung Eine Untersuchung im Auftrag des Bundesministeriums für Gesundheit (On the impacts of the risk structure adjustment in the German social health insurance market), Berlin u.a.. COCHRANE, J. H. (995): Time-Consistent Health Insurance. Journal of Political Economy 03, Nr. 3, S DONGES, J. B. / EEKHOFF, J. / FRANZ, W. / MÖSCHEL, W. / NEUMANN, M.J.M / SIEVERT, O. (KRONBERGER KREIS) (2002): Mehr Eigenverantwortung und Wettbewerb im

12 Gesundheitswesen. Schriftenreihe der Stiftung Marktwirtschaft Frankfurter Institut Bd. 39 (Towards more personal responsibility and competition in health care, Studies of the Kronberger Kreis No. 39), Berlin. HAYEK, F. A. V. (960): The Constitution of Liberty, London. PAULY, M. V. (984): Is Cream-Skimming a problem for the competitive medical market? Journal of Health Economics 3, S PAULY, M. V. (994): Avoiding the mistreatment of bad risks in a democracy: Universal Health Insurance from a Constitutional Perspective. Constitutional Political Economy 5, Nr. 3, S SACHVERSTÄNDIGENRAT ZUR BEGUTACHTUNG DER GESAMTWIRTSCHAFTLICHEN LAGE IN DEUTSCHLAND (2002): Zwanzig Punkte für Wachstum und Beschäftigung - Jahresgutachten 2002/2003 (Annual Report 2002/03 of the German Council of Economic Experts), Stuttgart. VAN DE VEN, W. P. M. M. / VAN VLIET; R. C. J. A. (992): How can we prevent cream skimming in a competitive health insurance market? The great challange for the 90 s. In: ZWEIFEL, P. / FRECH III, H. E. (Hrsg.): Health Economics Worldwide, Dordrecht, S