Cahiers de la Chaire Santé

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1 Cahers de la Chare Santé The nfluence of supplementary health nsurance on swtchng behavour: evdence from Swss data Auteurs : Brgtte Dormont, Perre-Yves Geoffard, Karne Lamraud N 4 - Janver

2 The nfluence of supplementary health nsurance on swtchng behavour: evdence from Swss data Brgtte Dormont 125, Perre-Yves Geoffard 13, Karne Lamraud 14 September 2008 Correspondng author: Karne Lamraud, Extranef-Dorgny, Unversty of Lausanne, 1015 Lausanne, Swtzerland. Tel: Emal: We gratefully acknowledge the fnancal support of the Swss Natonal Foundaton for Scentfc Research (grant ) as well as the fnancal support of the Rsk Foundaton (Health, Rsk and Insurance Char, Allanz). 1 Insttute of Health Economcs and Management (IEMS), Unversty of Lausanne 2 Unversté Pars-Dauphne 3 Pars Scences Economcs (PSE) 4 Faculty of Busness and Economcs (HEC), Unversty of Lausanne 5 Groupement de Recherche en Econome Quanttatve d'ax-marselle (GREQAM) 2

3 The nfluence of supplementary health nsurance on swtchng behavour: evdence from Swss data Abstract Ths paper focuses on the swtchng behavour of enrolees n the Swss basc health nsurance system. Even though the new Federal Law on Socal Health Insurance (LAMal) was mplemented n 1996 to promote competton among health nsurers n basc nsurance, there s lmted evdence of premum convergence wthn cantons. Ths ndcates that competton has not been effectve so far, and reveals some nerta among consumers who seem reluctant to swtch to less expensve funds. We nvestgate one possble barrer to swtchng behavour, namely the nfluence of supplementary nsurance. We use survey data on health plan choce (a sample of 1,943 ndvduals whose swtchng behavours were observed between 1997 and 2000) as well as admnstratve data relatve to all nsurance companes whch operated n the 26 Swss cantons between 1996 and The decson to swtch and the decson to subscrbe to a supplementary contract are jontly estmated. Our fndngs show that holdng a supplementary nsurance contract substantally decreases the propensty to swtch. However there s no negatve mpact of supplementary nsurance on swtchng when the ndvdual assesses hs/her health as "very good". Our results gve emprcal support to one possble mechansm through whch supplementary nsurance mght nfluence swtchng decsons: gven that subscrbng to basc and supplementary contracts wth two dfferent nsurers may nduce some admnstratve costs for the subscrber, holdng supplementary nsurance acts as a barrer to swtch f customers who consder themselves bad rsks also beleve that nsurers reject applcatons for supplementary nsurance on these grounds. In comparson wth prevous research, our man contrbuton s to offer a possble explanaton for consumer nerta. Our analyss llustrates how consumer choce for one s basc health plan nteracts wth the decson to subscrbe to supplementary nsurance. Keywords: competton n health nsurance, swtchng behavour, premum convergence, supplementary nsurance 3

4 1. Introducton Accordng to ts advocates, competton n health nsurance markets should promote effcency n nsurance and care delvery. However, t may have some potental drawbacks, lnked to the ncentves t provdes for rsk selecton. Managed competton settngs have been mplemented to deal wth these dffcultes: homogenous contracts are defned to avod competton on coverage, health funds are not allowed to turn down an enrolee and rsk-adjustment schemes have been ntroduced to reduce ncentves for rsk selecton. Nevertheless, the effectveness of competton between sckness funds s a prerequste before any assessment about ts postve or potental harmful effects can be undertaken. Charactersng consumer behavour n health nsurance choce s a crucal ssue when determnng whether competton s effectve or not. Ths paper focuses on the swtchng behavour of sckness fund enrolees n the Swss health nsurance system. Swtzerland s an nterestng case for studyng competton n health nsurance markets. In 1996, the Federal Law on Socal Health Insurance (LAMal) was adopted, whch amed at ntroducng a perfect, managed competton scheme for basc health nsurance. The man regulatory features of basc health nsurance are as follows: 1) Basc health nsurance s mandatory 1 ; 2) A standardzed basc beneft package and the level of cost sharng (deductble, consurance of 10% up to an annual celng) are defned by the law and are nvarant across nsurers; 3) Premums are communty-rated. That s, premums can dffer between health plans but an nsurer must offer unform premums for people n the same age groups (0-18, 19-25, and >25), n the same geographc area (78 regons,.e. 3 per Canton), wth the same type of coverage (.e. contracts wth low/hgh deductble levels, contracts wth a lmted choce of provders); 4) Health nsurers must accept every applcant. There s an open enrolment opportunty every sx months (June and December) n whch ndvduals can swtch nsurance provders; 5) A rsk adjustment mechansm s n place. In short, there s no competton n contracts, and prvate frms only compete n premums. There s a lttle room for some nnovaton n contracts, but ths s left to the supplementary nsurance market, whch s separated by law from that of basc nsurance. Gven these features, premums for the basc package should have converged. However, results from Swss data do not support ths: twelve years after the reform, premum varablty s stll qute large and has decreased only slghtly. Ths dsappontng result has gven rse to several nterpretatons n the emprcal lterature (Beck et al., 2003; Colombo, 2001). It may reveal: () dfferences n servce qualty, () nerta of consumers resultng from swtchng costs or () rsk selecton practces by the nsurers. Our purpose s to focus on possble nteractons between basc and supplementary nsurance markets. Despte the fact that t s forbdden to sell basc and supplementary nsurance as a jont contract, some features of the market for supplementary nsurance may nduce external effects on the basc nsurance market. A survey carred out by the Federal Offce of Socal 1 Note that each famly member must hold an nsurance contract on an ndvdual bass. Furthermore, n Swtzerland, as opposed to all other countres, health nsurance cannot be provded by the employer as a frnge beneft and so the premum s fully pad by the enrollee, somethng whch should make hm/her more reactve to dfferences n premums. 4

5 Insurance (OFAS, 2001) showed that 75 % of nsurees had subscrbed to at least one supplementary nsurance contract. For 93% of these, ther contracts were wth the same nsurer as for ther basc nsurance contract, suggestng that the two markets are actually not that separated. In ths paper, we attempt to evaluate the nfluence of supplementary nsurance on the choce of the basc nsurance plan n Swtzerland. Havng supplementary nsurance may rase swtchng costs and be used as a tool for rsk selecton n basc nsurance. Our argument s thus connected to explanatons () and () above. Ths paper studes the decsons nvolved n both swtchng and subscrbng to a supplementary nsurance contract. It s structured as follows. Secton 2 provdes a lterature revew on health plan choce. Secton 3 offers some explanaton concernng how supplementary nsurance mght affect the decson to swtch. Data are descrbed n Secton 4. The related descrptve statstcs on market performance and on consumer choces are provded n secton 5. The econometrc specfcaton s presented n secton 6 and the results n secton 7. Concludng remarks and a dscusson of mplcatons are ncluded n the fnal secton of the paper. 2. Health nsurance choce: present state of knowledge In Europe, many countres have recently moved away from the tradtonal model of socal health nsurance provded by a sngle publc fund. Market-orented reforms of socal nsurance systems have ntroduced the possblty for ndvduals or frms to choose between several publc or prvate nsurers. Competton s assumed to put nsurance provders under consumer pressure, and to generate ncentves to ncrease qualty and/or decrease premums. However, as for any market, competton works only f the threat of consumers to vote wth ther feet s credble,.e. f enough consumers swtch to more effcent nsurers. Hence, many emprcal papers have studed consumer swtchng behavour, and attempted to dentfy the barrers to such behavour. Two man questons are asked n ths lterature, dependng on the country under scrutny and on the avalable data. In some countres, nsurance frms offer varous plans wth dfferent characterstcs. Ths s n partcular the case wth Managed Care n the US, where nsurance funds may offer access to dfferent health care provders, and the contractual relatonshp between nsurance frms and provders may vary from one fund to another. In such contexts, from the consumer pont of vew, contracts are dfferent, and the emprcal ssue s to understand the mpact of dfferent contract characterstcs on the choce of plan. In other countres, competton s restrcted to dentcal contracts. For perfectly substtutable goods, cross prce elastcty should be nfnte, but the fact that some consumers stll choose to buy or renew more expensve contracts reveals mperfect nformaton about the dstrbuton of prces or a status quo bas. In such contexts, the emprcal ssue s to estmate the prce elastcty: lower prce elastcty ndcates that swtchng costs are larger. However, the dstncton between these two polar cases s not always perfectly clear: n many countres, the health nsurance system s made of two layers - socal nsurance whch covers basc health care, and supplementary nsurance whch covers addtonal goods and servces (see, e.g., OECD, 2004). The supplementary nsurance market may ndeed affect ndvdual decsons about socal nsurance cover, especally swtchng decsons and health plan choce. 5

6 Several papers have attempted to compare consumer behavour n dfferent countres where health plan choce s possble. For example, Laske-Alderhof et al. (2004) ndcate that swtchng rates are hgher n Germany and Swtzerland than n Belgum, the Netherlands, or Israel. The authors attrbute these hgher swtchng rates to three man features. Frst, basc nsurance contracts have optons (n Swtzerland, the deductble level may be chosen). Second, the potental benefts (monetary gans) from swtchng are larger n Germany and Swtzerland than n the three other countres. Thrd, the nsurance market seems more compettve n Germany and Swtzerland. Ths s due to the fact that the level of market concentraton s relatvely low, and there are no barrers to entry. Schut et al. (2003) also show that the propensty to swtch was much larger n Germany than n the Netherlands (before the 2006 Dutch reform). Ths may be explaned by the more actve role of German employers, who contrbute sgnfcantly to employees premums and act as collectve buyers of health nsurance. In contrast, n the Netherlands before 2006, the choce of fund entrely depended on the ndvdual, but 90% of the premum was pad by a central fund. The small monetary gan for someone swtchng to a less expensve fund was not suffcent to compensate for the transacton costs. Interestngly, the 2006 reform rased the share of premum drectly pad by ndvduals to 50%, and seems to have led to a substantal ncrease n the rate of consumers swtchng (Douven et al., 2007). The analyss of swtchng behavour has also provded nterestng results as to the characterstcs of consumers who are more lkely to swtch. Ths behavour may be affected by elements of the demand sde as well as reactons on the supply sde n terms of drect or ndrect rsk selecton by nsurance funds. A result common to many papers s the hgher propensty of young, healthy and hghly educated ndvduals to swtch companes. As noted by Strombom et al. (2002), ths fndng means that companes wth hgher prces than ther compettors wll not only lose market share, but wll experence an ncrease n costs due to adverse retenton. Analysng data from the German Soco-Economc Panel, Nuscheler and Knaus (2005) fnd no evdence of selecton by funds, and stress the mportance of swtchng costs, whch are larger for ndvduals wth poor health. Characterstcs of nsurance plans have also been shown to affect health plan choce and swtchng behavour. Dfferences n premum matter for health plan choce and swtchng, but the lterature has faled to reach a consensus as to the magntude of premum elastcty. Emprcal estmates range from 8.4 to 0.1 (Schut et al., 2003; Laske-Aldershof and Schut, 2003; Buchmueller, 2000 ; Buchmueller and Feldsten, 1997 ; Royalty and Solomon, 1999). More recently, Tamm et al. (2007) showed that short-run prce elastctes n Germany are smaller than those prevously found n other studes. In the long run, however, ther estmates provde evdence of substantal prce effects. One mportant ssue offered to nsurance companes n managed competton settngs s the possblty to selectvely contract wth health care provders. Choosng a health plan gves the consumer access to a specfc provder network, wth a gven qualty of care. Beyond the role of prce elastctes, many papers have tred recently to evaluate the mpact of qualty of care on swtchng behavour. Usng US data, Beauleu (2002) fnds that qualty nformaton has a small, but sgnfcant effect on consumer plan choces. Ths result s not supported by Abraham et al (2006), who show that nformaton about hgher qualty alternatves s not connected wth the 6

7 swtchng probablty. Conversely, patents place a hgh value on ther relatonshp wth ther personal physcan, whch makes swtchng more costly. Ths may provde an explanaton as to why swtchng costs may be larger for patents wth poorer health. Another key ssue s the potental nteracton between basc and supplementary nsurance choce. Ths ssue seems to be of partcular relevance n the Dutch system. Schut et al. (2003) and Laske-Aldershof and Schut (2003) explan the nerta of Dutch consumers by the magntude of swtchng costs n comparson to the relatvely small expected gans. However, ths result can be nterpreted qute dfferently and has to be examned more thoroughly. As stated by Laske-Aldershof and Schut (2003), despte the fact that t s forbdden to sell basc and supplementary nsurance as a conjunct product, there s a dscrepancy between the rules and the practce: n fact compulsory and supplementary nsurance are ted together n the Dutch system. Therefore, one has to take the ssue of supplementary nsurance combned wth compulsory nsurance nto account: ths creates heterogenety between nsurance plans n terms of premums and coverage. In Swtzerland, basc nsurance contracts are standardsed, and therefore are perfectly substtutable. Managed care s very lmted: less than 10% of enrolees have chosen an HMO style opton. The others have unlmted access to all care provders. Therefore, qualty of care or loyalty towards a preferred famly doctor cannot nduce barrers to swtchng. However, health nsurance frms may also offer supplementary nsurance contracts, and the market for such contracts s substantally less regulated: n partcular, contracts may cover varous sets of goods and servces, premums may depend on health status, frms can select rsks, and ndvduals may choose not to subscrbe to any supplementary nsurance contract. Examples of supplementary nsurance contracts nclude: the coverage of the extra costs of a sngle-bed room n case of hosptalsaton; the rembursement of alternatve medcne; dental care nsurance; the possblty to be hosptalsed anywhere n Swtzerland; etc. Overall, of total health expendtures, basc health nsurance accounts for 34%, out-of-pocket payments account for 31% and supplementary health nsurance for the sgnfcant share of 9% (OFS, 2007). One report carred out by OFAS n 2001 stresses that only a mnorty of households had swtched from ther basc health sckness fund after the ntroducton of LAMal. However, there s a swtch potental because 50% of households complaned about the fnancal burden of basc nsurance. Both Colombo (2001) and Beck et al. (2003) underscore the lack of convergence of premums across sckness funds. However, they delver rather dfferent assessments of the functonng of the Swss health nsurance system. Usng market share aggregate data, Beck et al. (2003) estmate a premum elastcty n the range between 2.1 and 1.0, whch s smaller than the German estmates, but larger than estmates from the Netherlands. Beck et al. (2003) consder that swtchng costs are neglgble. However, Beck et al (2003) argue that most swtchng occurs wthn nsurance funds belongng to the same group. They pont out the poor performance of exstng rsk adjustment mechansms n reducng rsk selecton ncentves. Colombo (2001) analyses data from the 2000 OFAS survey, and puts the stress on consumer nerta: annual swtchng percentages are very low and seemed to decrease steadly from 5.4% n 1998 to 2.1% n

8 The OFAS survey also ndcates that many customers were even unaware that they could purchase basc and supplementary nsurance contracts from two dfferent funds. The bottom lne s that only 7% of Swss resdents who subscrbed to a supplementary nsurance contract dd so wth an nsurer dfferent from ther basc nsurance one. As regards supply behavour, sckness funds can rsk adjust ndrectly f they te the condtons of a supplementary health nsurance contract to the possesson of a basc health nsurance contract wth the same fund. Moreover, many people complan that rembursement delays deterorated after they separated basc and supplementary health nsurance nto two dfferent sckness funds. Accordng to Colombo (2001), Such separaton s n addton very mpractcal because doctors and hosptals do not separate blls for servces ncluded under the two dfferent covers. Fnally, premums for supplementary health nsurance may be more expensve f people are not nsured by the same fund for basc health nsurance. These practces suggest sckness funds are successful n lnkng basc and supplementary health nsurance. Ths ntuton s confrmed by Paolucc et al. (2007), who examne the role of supplementary health nsurance as a potental tool for rsk-selecton n fve countres. Based on the nsttutonal comparson of regulatory settngs concernng health nsurance markets, they conclude that supplementary health nsurance may be a selecton tool n Swtzerland. These features are lkely to exert a great nfluence on the choce of sckness fund for basc nsurance, swtchng behavour and more generally the health nsurance market. Our purpose was to evaluate the nfluence of supplementary health nsurance on swtchng behavour n Swtzerland. 3. How supplementary nsurance may affect the decson to swtch As stated above contracts for basc nsurance are standardzed n Swtzerland. Moreover, nformaton about dfferences n premums for basc nsurance s perfect, wth publcatons n all newspapers, and webstes comparng premums: ths rules out any explanaton n terms of swtchng costs due to dffcultes n gatherng nformaton about prce dfferences. To analyse the nteracton between basc and supplementary nsurance, we have to consder two characterstcs of the Swss health nsurance market. Frstly, subscrbng basc and supplementary contracts wth two dfferent nsurers may nduce some admnstratve costs for the subscrber, such as sendng separate blls, etc (Colombo, 2001). Secondly, supplementary nsurance s regulated by the Insurance Contract Law, whch allows selecton and does not mpose any constrant on the suppled coverage. Therefore, swtchng can be dffcult for supplementary contracts as for example the new nsurer may offer a dfferent contract or requre some medcal examnaton before acceptng a new customer. These characterstcs can be summarzed as follows: - () Addtonal cost when basc and supplementary contracts are subscrbed to dfferent companes. - () Rsk selecton authorzed for supplementary nsurance 8

9 Gven ths framework, supplementary nsurance may affect the decson to swtch n four ways. (a) The frst mechansm s very smple and could be nterpreted as a pure swtchng cost effect. Gven that subscrbng basc and supplementary contracts wth two dfferent nsurers nduces admnstratve costs, subscrbers plannng to swtch to a new fund may have to consder movng both the basc and supplementary contracts: ths s more burdensome than a sngle swtch. 2 (b) The second mechansm refers to selecton practce on the supplementary nsurance market, and to consumer belefs about the exstence of such a polcy. Take for example a customer who thnks that he/she s a bad rsk and beleves that nsurers reject applcatons for supplementary nsurance contracts from ndvduals consdered as such. Havng a supplementary nsurance contract would then act as a barrer for hm/her to swtch basc nsurance. Indeed, after the swtch for basc nsurance more costs mght be ncurred, f the new nsurer rejected the applcaton for the supplementary contract or proposed an unacceptable offer (very hgh premums for example). These belefs may lead to an equlbrum n whch ndvduals wth poor health do not even try to swtch, and so nsurers do not even have to select rsks: ths mechansm s based on consumer belefs about selecton practce. To valdate such an nterpretaton, we have to check whether the nfluence of supplementary nsurance on swtchng propensty depends on the level of self-assessed health. Fndng that the effect of holdng a supplementary nsurance contract on the probablty of swtchng depends on the level of self-assessed health (.e. no effect when health s perceved as good, negatve effect when t s perceved as poor) would provde emprcal support to ths nterpretaton. The thrd and fourth mechansms refer to the use of supplementary nsurance as a tool to select rsks n basc health nsurance markets. Insurers would retan enrolees who hold supplementary contracts and drop the others. 3 Two possbltes mght explan such selecton behavour based on supplementary nsurance. (c) The frst s smply based on the fact that regulaton for supplementary nsurance s less constranng. Lack of contract standardsaton may lead to less severe pressure from competton, and postve profts could be made from sellng supplementary nsurance contracts. In ths context, proft-maxmsng nsurers would have an ncentve to retan supplementary contract purchasers. The emprcally testable consequence of ths hypothess s smple: f supplementary contracts are proftable for all levels of health, the effect of supplementary contracts on swtchng rates should be ndependent of the ndvdual s self-assessed health. (d) A second explanaton reles on the assumpton that holdng a supplementary nsurance contract mght be correlated wth beng a good rsk vs-à-vs basc nsurance,.e. havng a lower basc health care consumpton for a gven llness. Ths conjecture mght be relevant for supplementary nsurance coverng alternatve medcne: ndvduals who subscrbe to such contracts may be more reluctant to consume standard health care, especally drugs, covered by the basc nsurance. It mght also be true for other knds of supplementary contracts, whch 2 Notce that the paperwork assocated wth subscrpton to a supplementary nsurance contract s the same whatever the health condton (same quantty of papers to fll n, same clncal examnatons to undergo). 3 In Swtzerland, the rsk adjustment scheme s based on age and gender only. There reman strong ncentves to rsk selecton. 9

10 could ndcate a greater attenton to health and preventon. An nsurance company can observe the use of health servces of ts enrolees, but the econometrcan cannot: we only observe self-assessed health. If we suppose that supplementary nsurance ndcates that the ndvdual s a good rsk, then fndng that ndvduals wth supplementary nsurance and/or good health are less lkely to swtch, would n turn reveal that sckness funds try and succeed n retanng good rsks. Gven the prohbton of rsk selecton n the Swss market for basc nsurance, nterpretatons (c) and (d) rase the queston of the ndrect tools avalable to the nsurers to retan some of ther enrolees. A recent ndvdual example llustrates how t works. An nsurance company whch operates both on the basc and supplementary markets sent the followng letter to an enrolee holdng a basc contract: In order to thank you for beng nsured wth us, we are pleased to offer three specal dscount offers. 1. Sun glasses for CHF 5 (nstead of CHF 49.90). 2. A certfed sk helmet for CHF 20 (nstead of CHF 89.90). 3. Free hosptalzaton (two-bed room) coverage f you nsure wth our supplementary nsurance for a mnmal perod of 3 years (translaton of a mal receved from nsurance company X, Swtzerland, 12 September 2007). The enrolee who receved ths mal had no health care consumpton durng the precedng year, and anecdotal evdence regularly reported n newspapers suggests that ths s not an solated phenomenon. Such commercal practces are a good example of some strateges that nsurance companes can develop to retan good rsks. 4. Data We use two sources of data, the OFAS survey (2001) and nformaton recorded at the cantonal level. The OFAS survey The OFAS survey was obtaned from the Swss Informaton and Data Archve Servce (SIDOS). It dsplays nformaton on 2,152 ndvduals who were surveyed by telephone durng the early summer of As premums were set dfferently for people aged 18-26, we selected ndvduals older than 26, leadng to a sample of 1, 943 ndvduals. Extensve nformaton was collected at the mcro level (ndvdual or household, dependng on the queston) concernng health plan choce. People were requested to name ther nsurance funds for basc and supplementary health nsurance packages separately and to defne ther crtera for the choce of nsurers. The optons they had opted for (deductbles, HMO) and the composton of the supplementary beneft package were also reported. Respondents were asked whether they had moved from one sckness fund to another durng the prevous four years ( ) and whether they had changed any of ther health nsurance contracts. Informaton about one s ntenton to swtch n the future as well as general satsfacton towards nsurance coverage was also collected. Knowledge, belefs and atttudes towards LAMal were nvestgated. The survey records the household s ncome as a categorcal varable wth 11 categores. We aggregated ths nformaton nto three categores defned on the bass of the observed ncome dstrbuton (see Table 1 below): ncome lower than 5,000 CHF (.e. 3,300 ), ncome between 5,000 and 8,000 CHF and ncome hgher than 8,000 CHF (.e. 5,280 ). The threshold for the lowest category mght appear to be rather hgh but t s representatve of Swss ncome dstrbuton. Informaton about household ncome was mssng for 367 ndvduals. We checked that the recordng of ncome was not sgnfcantly connected wth the probablty of swtchng (sgnfcance level p = 151). To avod losng too many observatons, we mplemented an ordered 10

11 probt estmaton to predct the mssng values of ncome. Ths was possble for 264 observatons, usng the followng explanatory varables: age, gender, employment status, educaton level, famly sze, locaton, health status and cantonal fxed effects. Unfortunately, the OFAS survey does not provde ndvdual nformaton about health expendtures, nor about the premums pad for supplementary health nsurance contracts. Moreover, t s a cross-secton. The cantonal database We constructed a second database based on the nsurance companes whch operated n the 26 Swss cantons from 1996 to For each company wthn each canton, yearly nformaton was recorded about the number of enrolees and the level of premum requested for each deductble level. Our source of nformaton was the Federal Offce for Publc Health (OFSP), who provded the number of enrolees drectly to us. Yearly premums are avalable on the OFSP webste. Ths second database, hereafter called the cantonal database, s made of 12,423 observatons. Each observaton relates to one nsurance company observed n a gven year n a gven canton. 5. Descrptve analyss 5.1. Dd competton nduce a decrease n premum varablty? Prce competton for homogenous contracts should nduce a reducton n premum dfferences. However, the emprcal results obtaned from the cantonal database dd not support ths predcton. In the cantonal database, nformaton relatve to premums was recorded at three levels: sckness fund, canton and year. For any gven year, the double dmenson of the data allows us to decompose changes n the premum varablty, nto changes n the between-canton varablty and changes n the wthn-canton varablty. Wth p j c, t, denotng the premum pad for the basc nsurance suppled by a sckness fund j n canton c n year t, one has: V ( p j, c, t., c, t j, c, t., c, t ) V( p ) V( p p ), where V ) s the overall varance of premums n year t. The between-canton premum varance, denoted ( p j, c, t by V p ) for each year s equal to the varance of the average premums per canton. It captures only (., c, t dfferences between cantons. p j p ) V s the wthn-canton premum varance. Gven that competton (, c, t., c, t takes place wthn each canton, any assessment on competton effectveness should be based on ths second term only. Graph 1 dsplays the annual values of the total, between-canton and wthn-canton standard devatons, computed for Log ). We used the log transformaton n order that changes n premum varablty would not be ( p j, c, t affected by premum ncrease over tme. Weghted ndcators were computed to take the number of enrolees per sckness funds nto account. The value of the overall standard devaton decreases very slghtly over tme, from 11

12 22 % n 1996 to 18 % n Ths small decrease s manly due to a decrease n the between-canton standard devaton. As stated above, competton takes place wthn the framework of each canton: wthn-canton standard devaton only can be affected by competton pressure. Graph 1 shows a very slght decrease n the wthncanton standard devaton. Premum convergence wthn cantons appears to be very lmted. The proporton of overall varablty due to average dfferences n premums between cantons s szeable wth more than 80% due to average dfferences between cantons 4. Adjustng premums for dfferences n the gender and age composton of the enrolees does not change substantally ths result. The hgh proporton of between cantons varablty may derve from prcng strategy on the supply sde. It questons the relevance of lmtng competton to the canton level. Graph 2 dsplays the annual values of the rato of the nnth decle to the medan of the premum dstrbuton. The rato s computed for each canton, and an average s then calculated, weghtng cantonal ratos by the number of enrolees n each canton. The same computaton s mplemented for the rato of the medan to frst decle of the premum. Graph 2 makes t possble to examne more closely the very small reducton that we observed on the wthn-canton varablty. It reveals that the dsperson s equal at the top and at the bottom of the dstrbuton at the begnnng of the perod, and then falls at the top of the dstrbuton (D9/D5), suggestng that for the hghest premums there s some competton pressure. However, the observed changes are very small. On the whole, there s no szeable decrease n premum varablty whch suggests that competton does not seem to be effectve. 5.2 The ndvdual level: basc features of the data Basc features of the nformaton provded by the OFAS survey are gven n Table 1. Durng the perod , 14.3% of ndvduals older than 26 swtched from one sckness fund to another. In 2000, 9.5% were consderng swtchng. A supplementary nsurance contract of any knd was subscrbed to by 74.8% of enrolees. In Swtzerland, an ndvdual may subscrbe to several contracts for supplementary nsurance coverng for example dental care, frst and second class treatments n hosptals, cross-border care, alternatve medcne, sckleave payments, etc. There s also a very smple supplementary contract enttled the Dvson commune Susse entère, whch extends basc coverage to any Swss hosptal, not only those n the home Canton. Ths contract s offered by most nsurers at low cost and wthout any medcal examnaton. When excludng ths knd of supplementary contract, the proporton of enrolees covered by a supplementary nsurance falls to 64.6%. More than one thrd of ndvduals belong to the lowest ncome category, whle the hghest category covers less than a quarter of ndvduals. Premums are communty rated wthn each nsurance company n a gven canton. However, a state subsdy fxed at the canton level asssts people on low ncomes to pay ther premum. The generosty of ths subsdy and the elgblty crtera vary between cantons: on the whole, 23 % of the respondents beneftted from such a subsdy. At the tme of the survey, subsdes were provded by the canton authorty ndependently of the fund chosen. Hence, swtchng was not more costly for those who beneftted from subsdes. 4 We computed the rato of between-canton to overall varance of the log of premums. 12

13 Table 2 shows that whle subscrpton to supplementary nsurance s not sgnfcantly lnked to gender t s to age: people aged are more lkely to subscrbe to a supplementary nsurance contract (excludng Dvson commune Susse entère contracts). Table 3 shows that subscrbng to supplementary nsurance s negatvely assocated wth the propensty to swtch: the probablty of swtchng s one thrd lower (odds rato sgnfcant and equal to 72 %) when the ndvdual has supplementary nsurance. Conversely, the ntenton to swtch seems to be ndependent of supplementary nsurance (odds rato equal to 93 %, wth a sgnfcance level p=0.66). Other statstcs (not reported here, avalable on request) show that swtchng depends on age group and supplementary nsurance status. Younger people exhbt a hgh swtchng propensty, whatever ther supplementary nsurance status. Ths s not the case for older people as ther swtchng propensty decreases wth age and s reduced f they have supplementary coverage. Health status was measured by the ndvdual s self assessed health, whch was recorded on a fve pont scale collapsed nto three categores: Poor, Good and Very good health. Table 1 shows that about 17 % of ndvduals graded ther health as Poor and 35 % as Very good. Income level was strongly related to self-assessed health, wth those better off havng better health (Table 3bs). The magntude of ths nfluence s startlng: the probablty of havng poor health decreases by two-thrds for people earnng an ncome n the ntermedate category. For those belongng to the hgh ncome category, the probablty of havng poor health s dvded by a factor of fve, n comparson wth those on low-ncomes. There s an apparent connecton between subscrpton to supplementary nsurance and havng good health (Table 3bs). But ths mpact s no longer robust after multvarate analyss. Ths ndcates that t s entrely due to the nfluence of ncome on supplementary nsurance: when ncorporatng both supplementary nsurance and ncome n the logstc model, we found that the correlaton between supplementary nsurance and health status s no longer sgnfcant. 6. Econometrc specfcaton and estmaton Specfcatons To nvestgate the decson to swtch health plans we consder a bnary varable y defned by y 1 f the ndvdual swtched and y 0 when he/she dd not swtch. The beneft of swtchng can be modelzed as a latent varable * y defned by y x ' g s, where ' * x s a vector of ndvdual characterstcs, g s the monetary gan of swtchng and s s a dummy varable ndcatng whether the ndvdual had subscrbed to supplementary nsurance. A dffculty arses from the fact that we cannot buld a relevant measure for the monetary gan to swtch g. Gven that we do not observe the nsurance company whch the swtcher comes from, we can only construct a proxy that evaluates the expected gan of swtchng for swtchers and nonswtchers. As explaned below, ths proxy s lkely to nduce smultanety bases and t s preferable to smply omt ths varable n the estmated specfcaton. Hence, we consder: 13

14 where y x ' s u, (1) * u s a dsturbance supposed to follow a normal dstrbuton. The decson to swtch s gven by: y 1 f y * 0. (2) We also specfy a model explanng the decson to subscrbe to at least one supplementary nsurance contract 5. The beneft of subscrbng s specfed as a latent varable where s * z ' v * s defned by:, (3) z ' s a vector of ndvdual characterstcs. The decson to subscrbe s gven by: s 1 f s * 0. (4) Is subscrpton to supplementary nsurance exogenous to the decson to swtch? A separate estmaton of equatons (1) and (3) would lead to based estmates f ther dsturbances are correlated. The dsturbances u and v would be correlated f both were nfluenced by unobserved varables such as the ndvdual s rsk averson or health status. However, regulaton n the basc nsurance market, especally contract standardsaton, s lkely to elmnate any nfluence of rsk averson or health status on the decson to swtch. Ths equaton has nothng to do wth demand for nsurance, gven that basc nsurance s mandatory. These components of the ndvdual unobserved heterogenety mght therefore affect only v. Equatons (1) and (3) defne a two equaton model known as a bvarate recursve model (Maddala, 1983). If and v are not ndependent, one has to use a maxmum lkelhood estmator, where the lkelhood derves from the jont dstrbuton of ( separately. s, y ). Conversely, f u and v are not correlated, both equatons can be estmated The condtons for dentfcaton of ths model were met. Several nstruments explanng the decson to subscrbe to supplementary nsurance were excluded from the decson to swtch: gender, ncome n three categores and educaton n fve categores were not sgnfcant n the swtchng equaton. Moreover, a Sargan test performed on the correspondng lnear probablty model led to a non rejecton of the null hypothess that these nstruments are vald,.e. uncorrelated wth u (p = 0.910) 6. In what follows, we present the results of the estmaton of the bvarate probt model and of separate estmatons of models (1) and (3). The jont estmaton of the bvarate model led to a non sgnfcant correlaton coeffcent ρ between u and v, justfyng a separate estmaton. Ths concluson s supported by a Hausman test run on the correspondng lnear probablty model to examne whether s s an exogenous varable n the model explanng u 5 Excludng Dvson commune Susse entère contracts 6 The Sargan test was performed on the lnear probablty model correspondng to specfcaton enttled (III) (see Tables 4 and 5) 14

15 the decson to swtch. Ths test led to the concluson that the exogenety of level p = 0.509) 7. s cannot be rejected (sgnfcance The dffculty n measurng the monetary gan of swtchng As stated above, we constructed a proxy to capture the monetary gan of swtchng to a lower premum for basc nsurance. An mportant dffculty arses from the fact that we dd not observe the nsurance company whch the swtcher came from. The premum that he or she pad before the decson to swtch would have been the approprate explanatory varable for the swtchng decson. However, ths nformaton was not avalable. We therefore constructed a proxy based on the value of the premum pad to the enrolee s nsurance company at the tme of the study. To do ths, we consdered the premums p observed for each deductble level n the cantonal database, adjusted for nflaton n the basc health nsurance sector. The monetary gan of swtchng for an ndvdual who comes from sckness fund k and swtches to fund j s equal to p p and s based on the premums related to the year of the swtch. Gven that we dd not observe k, we constructed a varable for those who swtched whch evaluated the expected swtchng gan. Ths s defned as follows: n (dp) E p k p j k j (p k p j )( k n ) k j k k j (5) where n s the number of enrolees of sckness fund k durng the year precedng the swtch. Ths defnton reles k on the assumpton that the probablty of comng from sckness fund k s equal to the proporton observed for all ndvduals of the sample n the year precedng the swtch. For non-swtchers, the varable dp represents the potental swtchng gans, f the fund s chosen at random. It undervalues potental swtchng gans for non-swtchers, gven that a fund s not chosen randomly. For non swtchers For swtchers, dp s computed as the mean value of the monetary gans of swtchng over the four prevous years. dp s a measure of the ex post gan, whch s not the approprate varable to explan the decson to swtch. If t were ntroduced n the equaton explanng the decson to swtch, k j dp would be non exogenous. Straghtforward algebra shows that the correspondng smultanety bas would be postve: the elastcty of the swtchng decson wth respect to the monetary gan of swtchng would therefore be overestmated. Unfortunately, no relevant nstrument s avalable to solve ths smultanety problem. Hence, t seemed preferable to us to smply omt ths proxy from equaton (1). Nevertheless, to control for the robustness of our man result concernng the nfluence of supplementary nsurance on the swtchng propensty, we ncluded dp n one verson of the estmated models (specfcaton IV n Tables 4 and 5): the resultng estmates were not affected. 7. Results 7 The test was run on specfcaton (III) n Table 5 15

16 The bvarate model and equatons (1) and (3) were estmated wth and wthout canton fxed effects to deal wth the unobserved heterogenety between cantons. The results were qualtatvely the same (detaled results are avalable upon request). Therefore we only reported those results based on the canton fxed-effects models. The estmatons of the sngle and bvarate probt models are dsplayed n Tables 4 and 5. As stated above, the estmatons of the bvarate model show that the correlaton of the dsturbances between both equatons s not sgnfcant. Hence, we concentrated on the sngle equaton results. 8 Four specfcatons were consdered for an ndvdual s decson to swtch: wth supplementary nsurance ncluded as a plan covarate (I), wth the addton of the subjectve health status (II), wth supplementary nsurance nteractng wth subjectve health status (III) and fnally wth the proxy dp (IV). We found that the probablty of swtchng contnuously decreases wth age. Ths result s consstent wth the emprcal lterature on swtchng behavour revewed n secton 2. Younger people (27-35) have a hgher probablty of swtchng than the reference age group (35-50) whereas older people (>65) have a lower probablty. Choosng a deductble level hgher than the basc one s also assocated wth a sgnfcantly hgher propensty to swtch. To nvestgate whether the mpact of supplementary nsurance could vary wth age, we estmated the same model wth cross effects of age group wth the supplementary nsurance dummy. Ths specfcaton led to a loss n precson yeldng many non sgnfcant coeffcents. Our results show that havng subscrbed to supplementary nsurance has a sgnfcant negatve mpact on swtchng (Table 4, specfcatons I and II). Specfcaton III allows the mpact of supplementary nsurance to vary n relaton to the subscrber s self-assessed health. The estmates show that supplementary nsurance has no sgnfcant effect on swtchng when the enrolee s self-assessed health s "very good". Instead, for those havng supplementary nsurance wth only poor or good self-assessed health, the lkelhood of swtchng decreases when subjectve health status deterorates. These results support mechansm (b). They are consstent wth expectatons from enrolees that swtchng may be more dffcult for supplementary contracts due to rsk selecton on the supplementary nsurance markets. Notce that ths sgnfcant cross-effect does not pck up a drect effect of self-assessed health on the propensty to swtch. The results of model (II) (Table 4) show that self-assessed health, when ntroduced separately, does not have a sgnfcant effect on swtchng as suggested both by the ndvdual p-values and the Wald test evaluatng whether the coeffcents of Good and Very Good health are jontly equal to zero. These results rule out the other potental mechansms that were proposed n secton 3 to descrbe how supplementary nsurance mght affect the decson to swtch. Indeed, under assumptons a and c, the effect of supplementary contracts on swtchng rates should be ndependent of an ndvdual s self-assessed health. We 8 The bvarate probt results exhbt one dfference from those of the sngle equaton: the effect of the supplementary nsurance s no longer sgnfcant n the swtchng equaton. However t s mportant to notce that the coeffcents of the bvarate probt models are of the same magntude as those of the sngle equaton estmates. Ths s true for the supplementary nsurance varable and the nteracton terms between supplementary coverage and health status. Only the precson of the estmates deterorates greatly n the bvarate estmatons: the nstruments that we use to explan the subscrpton to a supplementary contract lead to a loss of nformaton. 16

17 fnd that the three cross effects are sgnfcantly dfferent (see the Wald tests mplemented on specfcaton III). Under assumpton d, a very good health status should reduce the propensty to swtch or ncrease, n absolute value, the negatve effect of holdng supplementary nsurance. Our fndngs reject such predctons: self-assessed health s not sgnfcant when ntroduced alone, and the negatve effect of holdng supplementary nsurance s lower when self-assessed health mproves. For, poor, good and very good self-assessed health, the estmated cross effect of supplementary nsurance s equal to -0.35, and respectvely (ths latter coeffcent beng non sgnfcant). Fnally, our results do not support the assumpton that supplementary nsurance s a tool for selecton on the basc nsurance market. Instead they suggest that barrers to swtchng are manly lnked to selecton n the supplementary nsurance market. The bottoms of Tables 4 and 5 dsplay the results relatve to the decson to subscrbe to a supplementary nsurance contract. They show that ths decson s not a monotonc functon of age, as the probablty of subscrbng ncreases wth age untl the category It then decreases for people older than 65. Descrptve statstcs have shown that poor health has a negatve nfluence on the subscrpton to a supplementary nsurance contract. Low ncome s however strongly correlated wth poor health status (Table 3bs). In fact all the nformaton about health s captured by ncome: the nfluence of self-assessed health on supplementary nsurance s no longer sgnfcant when ncome and educaton are ntroduced as covarates. Therefore the results exhbted n Tables 4 and 5 do not nclude health status as a covarate. We found a sgnfcant and postve nfluence of the ncome level on the propensty to take out supplementary nsurance. Ths result seems to be at odds wth a standard assumpton n nsurance theory that absolute rsk averson decreases wth ncome, whch would make nsurance contracts an nferor good (Eeckoudt, Goller and Schlesnger, 2005). However, health nsurance covers the costs assocated wth ex post consumpton of some health care goods (ths holds for basc nsurance as well as for supplementary nsurance). Therefore, f some such goods (e.g. a prvate room at the hosptal) are (ex post) superor goods, the wllngness to pay for an nsurance contract whch would cover the cost of these goods could well (ex ante) ncrease wth ncome. Qute nterestngly, we fnd that for basc nsurance contracts the level of deductbles chosen ncreases wth ncome. Ths emprcal fndng s n lne wth the decreasng absolute rsk averson assumpton 9 : rcher ndvduals are more wllng to self-nsure a substantal share of ths rsk. In the end, ncome has opposte effects on the demand for basc and supplementary nsurance. Rather than a rsk averson effect, ths result suggests that the ex post demand for goods covered by these two types of nsurance are strkngly dfferent n terms of ncome effects. 8. Concluson A better understandng of the effectveness of competton n the health nsurance market s of major nterest for polcy makers. Needless to say, competton puts provders under pressure only f consumers are able to swtch 9 Results avalable upon request and are not publshed here. Studyng the demand for basc nsurance s outsde the scope of ths study. 17

18 from the less effcent to more effcent funds. Potental barrers to swtchng may explan the persstence of neffcences. In Swtzerland, the ntroducton of a managed competton scheme for basc health nsurance has faled to reduce the premum varablty: wthn cantons, the premum varablty appears to have been stable between 1996 and Ths fndng rases the queston of the effectveness of competton n Swtzerland for the basc health nsurance market. In ths paper we nvestgated one of the potental barrers to swtchng, namely supplementary nsurance. Two key features characterze the Swss markets for basc and supplementary health nsurance: frst, the customer ncurs addtonal costs when he/she holds basc and supplementary nsurance contracts wth dfferent companes; second, rsk prcng and rsk selecton are authorzed for supplementary nsurance. Gven ths framework, holdng supplementary nsurance mght lmt the decson to swtch through varous possble mechansms: swtchng costs, rsk selecton practces n supplementary markets and rsk selectons practces n basc health nsurance markets. Our emprcal fndngs suggest that the man mechansms at work rely on customer belefs regardng selecton practces n supplementary markets: f the customer thnks he/she s a bad rsk and beleves that nsurers reject applcatons for supplementary contracts from ndvduals consdered as such, he/she mght refran from swtchng, even for basc nsurance. Hence, n comparson wth prevous research, one man contrbuton of our research s to offer some possble mechansms for consumer nerta. Our analyss llustrates that consumer choces for basc and supplementary health plans are not ndependent. Even though basc nsurance and supplementary nsurance are regulated by two dfferent laws and supervsed by two dfferent nsttutons, both markets turn out to be closely ted n Swtzerland, as nsurance companes are allowed to operate n both markets. Managed competton n the basc nsurance market may suffer from the lack of adequate regulaton n the market for supplementary nsurance. The two man polcy optons are ether to separate these two markets more effectvely, or to regulate the supplementary nsurance market dfferently, n partcular preventng rsk selecton. Our analyss deserves further nvestgaton. Addtonal research s requred to compute monetary gans of swtchng. The varable we used to calculate the beneft from swtchng may ntroduce endogenety bases, and our analyss may overestmate the mpact of premums n the swtchng decson. It would be nterestng to provde an assessment of the respectve nfluences on the probablty of swtchng, of supplementary nsurance and expected gans of swtchng. Ths mght help us understand whether the barrers to swtchng nduced by supplementary nsurance are large enough to explan the lack of premum convergence. Ongong research based on new data provdng more nformaton on swtcher trajectores wll make t possble for us to mprove our understandng of competton n the Swss basc and supplementary health nsurance markets. 18

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