Portbility of Socil Benefits: The Economics of Criticl Topic in Globlistion Orgniser: Robert Holzmnn nd Mrtin Werding Interntionl Portbility of Helth-Cost Cover: Mobility, Insurnce, nd Redistribution Mrtin Werding nd Sturt McLennn
Interntionl Portbility of Helth-Cost Cover: Mobility, Insurnce, nd Redistribution Mrtin Werding* nd Sturt McLennn** Abstrct: Socil insurnce nd other rrngements covering helth-costs effectively provide insurnce ginst chnges in helth sttus; they engge in burden-smoothing over the life cycle; nd they entil vrious elements of redistribution. Lck of portbility regrding this type of cover my impede interntionl mobility nd crete finncil losses or windfll gins on vrious sides, which cn led to risk segmenttion cross ntionl helth systems. Existing portbility rules do not fully ddress these problems. In this pper, we try to clrify the implictions of mobility for typicl systems covering helth costs nd the requirements which hve to be met to ensure full portbility. When individuls re mobile interntionlly, compensting pyments re needed bsed on chnges in expected net costs in both of the helth funds involved. Illustrtive simultions show tht this pproch my be opertive under rel-world conditions. JEL clssifiction: F22, F55, H51, H73, J6 Keywords: Socil insurnce, helth costs; migrtion, interntionl portbility; fiscl externlities, risk segmenttion June 2012 (Drft version, plese do not quote) * Corresponding uthor: Ruhr Universität Bochum, Ifo Institute for Economic Reserch & CESifo; Postl ddress: Ruhr Universität Bochum, Chir in Socil Policy nd Public Finnce, Room GC 04/312, 44780 Bochum, Germny; emil: mrtin.werding@ruhr-uni-bochum.de ** Universität Bsel, Institute for Bioethics nd Medicl Ethics; emil: s.mclennn@unibs.ch
1 Introduction* Public systems providing helth insurnce or helth cre re prticulr in tht they usully offer life-long cover, t lest potentilly, for everyone fulfilling the relevnt membership rules. Need for helth cre is life-long risk, possibly mterilizing t ny point during one s life cycle. Throughout, the costs of helth cre cn mount to notble frction of income nd, in extreme cses, my even exceed one s current, or life-time, income. At the sme time, expected helth costs hve strong life-cycle dimension, i.e., they typiclly increse t higher ges, while pyments mde by the individul to obtin helth-cost cover mostly do not follow this profile. Tken together, these spects imply tht interntionl mobility of individuls lmost necessrily rises portbility issue of some significnce. Existing legl rrngements regrding the interntionl portbility of helth-cost cover brodly define two ctegories of migrnts who re subect to different principles. Migrnt workers nd, in most cses, lso their fmily members, re usully offered pckge del in their destintion country. They re dmitted nerly utomticlly to the ntionl risk pool for funding helth costs s n nnex to their legl sttus bsed on n officil work permit grnted to t lest one member of the respective household. Bi- or multilterl greements leve room for this solution, while it is otherwise mostly governed by ntionl lw in the destintion countries. Interntionl lw then minly tkes cre of the rules for ll other cses of interntionl mobility, such s fmily members residing outside the workers country of employment, or retirees who move brod or, in fct, return home s pensioners, hving worked brod for substntil frction of their ctive life spn. Helth cre minly consists of medicl services which cn be delivered most esily where individuls re currently styin while funding cn be provided cross urisdictionl borders. Therefore, these cses usully give rise to some mount of cross-border coverge, with rules defining the conditions under which individuls get ccess to helth services in their current countries of residence nd with some interction between the two helth systems involved regrding reimbursements for the costs of tretment. 1 The rtionle behind this mixed regime is esy to understnd t lest from the perspective of destintion countries. Youn helthy immigrnts re usully considered net * 1 We re indebted to Brtosz Przywr (Europen Commission, DG EcFin) for kindly providing us with detiled results of his reserch on ntionl helth-cost profiles. We lso hve to thnk Robert Holzmnn nd prticipnts of the Workshop on Estblishing Portbility: Stte of the Art, Key Issues nd Next Steps, Mrseille Center for Mediterrnen Integrtion, Mrch 2010, for helpful discussions nd comments. All remining shortcomings nd omissions re ours, of course. Cf., in prticulr, the EU-level rules pplying to mobility within the Europen Union or bilterl greements governing mobility between number of other countries (for survey, see Werding nd McLennn 2011, Section 3). Where no forml rules exist, the consequences re not fundmentlly different from our stylized description, but prcticlly hndling portbility issues cn become lot more complicted. Note tht, in this pper, we re not concerned bout helth costs rising in foreign countries during short-term stys which re mostly limited to 90 dys per trvel nd tend to lst much shorter on verge.
sset for helth systems of the countries receiving them. Things tend to be different if the migrnts helth sttus is poor, or if their ge is higher. Of course, there re mutul disdvntges, or dvntges, in the sending countries. Under the current legl frmework, workers decisions to migrte cn therefore give rise to externl costs or benefits of considerble size. This my eventully hve fr-reching consequences for the structure of risks covered in ntionl helth systems in both sending nd receiving countries. Things re potentilly less detrimentl with respect to non-working migrnts. Still, uncertinties nd prcticl difficulties involved in ppropritely ssessing reimbursements crete good resons for shifting responsibility for their helth costs cross countries in non-distortive fshion. In ny cse, meningful portbility rules for typicl public systems of helth-cost cover should tke ll these consequences into ccount. Providing insights s to how these effects could be mnged more ctively nd more in line with the underlying economic nd fiscl consequences of mobility is precisely the mbition of the present pper. Thus fr, the economics of interntionl portbility in helth-cost cover re lrgely unexplored, certinly with respect to publicly provided forms of cover. Exemptions re given by Holzmnn et l. (2005), Avto et l. (2009), or Holzmnn nd Koettl (2011) who re mostly deling with portbility in socil protection in broder fshion. There re limited number of reviews of the legl frmework for ccess to helth cre in foreign countries (see, e.g., Sieveking 2007, Pieters nd Schoukens 2009) nd of potentil repercussions of crossborder utiliztion of helth services nd interntionl migrtion on ntionl helth systems (see, e.g., Sieveking 2000, Eichenhofer 2002, or Schulte 2003). There re lso few studies on interntionl portbility of socil security nd helth cre focusing on rules pplied in prticulr countries or t regionl level (e.g., Woolford 2009, or Olivier 2009). In ddition, there is some mount of economic literture on portbility in the context of internl mobility, i.e., with respect to switches between insurnce providers within countries, which lso bers some lessons for our theme (see Dowd nd Feldmn 1992, Puly et l. 1999, or Gruber nd Mdrin 2002 for the US system of employer-sponsored privte insurnce; Meier 2005, or Bumnn et l. 2008 for substitutionl privte helth insurnce in Germny). To the best of our knowledge, however, prcticl rrngements regrding the portbility of helth-cost cover to foreign systems hve never been nlyzed regrding their ppropriteness or even optimlity. The structure of the pper is s follows. In Section 2, we highlight some fetures of helth costs which strongly contribute to the difficulties in mking helth insurnce portble, pying ttention to the typicl ge-relted profile of verge, or expected, helth costs nd to their differentition by risk-sttus. In Section 3, we try to disentngle the vrious elements of insurnce nd redistribution tht re involved in most public schemes covering these costs, nd we determine the components of costs nd benefits which could be shifted round 2
through interntionl mobility under these schemes. In Section 4, we first discuss in more detil the problems rising from lck of portbility, or from ill-designed portbility rules. We then suggest frmework for mking helth-cost cover fully portble cross helth systems nd illustrte the policy implictions of our pproch. Section 5 concludes, pointing to issues tht deserve further considertion. 2 Helth costs: importnt fetures In most countries, developed ones s well s dvnced developing ones, provision of helthcre benefits for the mority of the popultion is subect to mndtory rrngements. Institutions covering helth costs re strictly regulted nd often run by the stte in the form of public helth insurnce, or benefits re provided in-kind by tx-finnced public helth services. An importnt common feture of these rrngements is tht helth benefits re lrgely not pre-funded. In this pper, we will tke s given these wide-spred vrieties of public systems providing helth-cre benefits nd discuss our theme ginst this bckground. 2 Fetures which re importnt for understnding the difficulties involved in estblishing portbility in helth insurnce re the strong life-cycle profile of verge helth costs (see Section 2.1) nd the differentition of these costs by helth sttus (see Section 2.2). Here, we will use existing empiricl informtion which, in spite of some limittions, cn be used to illustrte the role of these fetures for the discussion of portbility rules nd to provide bsis for clcultions regrding prcticl issues lter on. 2.1 Typicl life-cycle profiles of helth costs As rule, verge helth costs re not flt over given individul s life cycle. Insted, they typiclly increse with ge from bout ge 45 onwrds, with n ccelerting rte of increse fter ge 65. The increse tends to be steeper for mles thn for femles, the ltter often hving higher helth costs thn mles between ge 15 nd 55, but reltively lower helth costs fterwrds. For countries where the relevnt dt re vilble, these observtions re lmost universl. Wht my differ substntilly cross countries is the level of these profiles, with different mounts of (ge-invrint) per-cpit helth costs or different shres in GDP spent on helth reflecting huge differences in the cost, qulity nd efficiency of helth services provided in ech country. 2 See Werding nd McLennn (2011, Sections 3.2 nd 4.2) for observtions nd reflections regrding prllel problems in privte helth insurnce which is often (fully or prtly) pre-funded. Interestingly, due to lck of portbility, there ppers to be generl trend towrds lock-in of individuls in on-going privte helth-insurnce contrcts, sometimes even with broder impct on ob mobility problem which hs long been discussed in the US. 3
Annul helth costs (, constnt prices) Figure 1: Life-cycle profile of helth costs of mles nd femles in EU-15 nd EU-12 countries (clibrted to dt for Germny nd Polnd, 2010) 8.000 7.000 Germny 6.000 5.000 mles femles 4.000 3.000 2.000 1.000 0 mles femles Polnd 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Age Sources: Przywr (2010, Figure 7); own clcultions. To illustrte these ge-relted trends, Figure 1 shows smple profiles bsed on verge public helth expenditure for mles nd femles in countries of the EU-15 (clibrted to reflect Germn dt) nd the EU-12 (clibrted to dt for Polnd). The first is ment to represent the group of reltively rich countries tht were EU members lredy before 2004 nd re typiclly receiving immigrtion, not only from other EU countries. The second represents the less dvnced countries which oined the EU strting from 2004 nd hve been sending immigrnts to the EU-15 nd elsewhere for quite while now. This selection of countries nd the concentrtion on EU members is mtter of vilbility of relible, detiled dt on helth costs. The dt is tken from Przywr (2010, pp. 15 7); the underlying ntionl expenditure profiles re lso shown in n officil EU-level document (Europen Commission nd EU Economic Policy Committee 2009, pp. 118 19). 3 Originlly, the profiles displyed in Figure 1 were mesured in terms of percentges of GDP per cpit. Here, they re converted into nominl vlues using per-cpit GDP in Ger- 3 Even when mesured s percentge of GDP per cpit, verge helth costs in most EU-12 countries tend to be lower thn in the EU-15 (see Europen Commission nd EU Economic Policy Committee 2009, p. 119). The difference becomes more pronounced when these profiles re converted into nominl vlues using per-cpit GDP, s it is done here. 4
mny nd Polnd in 2010. Note tht they re ment to reflect profiles of costs covered by public helth insurnce, not totl helth costs, which is exctly wht is needed to ddress the problems of portbility tht could rise in public schemes. Ptients co-pyments, out-of pocket pyments, etc. re irrelevnt in this context. Where it exists, supplementry privte insurnce my cll for seprte considertions nd clcultions to become portble. But different types of cover should not be mixed up, s the implictions for portbility my differ. 2.2 Differentition by risk sttus The ge profiles shown in Figure 1 relte to verge helth costs. They re the result of ccidentl fluctutions in nnul helth costs rising for lrge number of individuls round n ge-relted upwrd trend. This upwrd trend, in turn, results from two components, viz. n increse in expected helth costs for individuls who re bsiclly in good helth nd growing proportion of individuls whose helth sttus hs deteriorted. While conceptully cler, the differentition of helth costs by risk sttus is hrd to pin down empiriclly due to, inter li, lck of sufficiently detiled dt. Relevnt dt do not exist t n EU-level or for Germny nd Polnd. Nevertheless, we ttempt to construct risk-specific helth-cost profiles following procedures which hve been described in much detil in Bumnn et l. (2008, pp. 300 302) nd using micro-dt from the US Medicl Expenditure Pnel Survey (MEPS), respectively, their exploittion in Herring nd Puly (2006). We differentite between ust two types of risks, tht is, low risks in good helth on the one hnd nd comprehensive clss of high risks in poor helth on the other. Being high risk is considered trnsitory phenomenon, with severl yers of higher expected costs following when this hs hppened. To obtin clerer distinction of risk ctegories, we dust the definition of risk clsses suggested by Herring nd Puly (2006) who consider being high risk s trnsitory phenomenon. Insted, we focus on chnges to high-risk sttus tht lift individuls to higher time pth of expected costs on permnent bsis. The two brod risk clsses we re looking t cn then be chrcterized s follows. Low risks re individuls who re bsiclly helthy, but require some tretment time nd gin; on verge, they experience smll increse in expected helth costs s they become older. High risks re individuls who hve developed conditions requiring more costly tretment more regulrly, so tht their expected helth costs re permnently incresed; lso, this occurs for growing shre of individuls s people get older. Effectively, we split up verge cost profiles shown bove into risk-specific profiles, gin clibrted to dt for Germny nd Polnd. The results obtined for mles re shown in Figure 2. As result of our clcultions, expected helth costs over the remining life spn re 2 to 3 times higher for high risks thn for low risks t ll ges. Individuls who re 5
Annul helth costs (, constnt prices) Figure 2: Life-cycle profile of helth costs of mles in EU-15 nd EU-12 countries, differentited by risk sttus (clibrted to dt for Germny nd Polnd, 2010) 12.000 11.000 Germny 10.000 9.000 8.000 7.000 6.000 5.000 4.000 3.000 high risk verge risk 2.000 1.000 0 low risk Polnd 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Age Sources: Przywr (2010, Figure 7); own clcultions. high risks in terms of incresed nnul helth costs could be low risks in terms of prospective life-time helth costs due to considerbly shorter (contingent) life expectncies involved in our ssumptions. Also, expected life-time helth costs of low risks reflect the fct tht individuls in good helth my become high risks with some probbility t ny point in time in the future. Together, these two effects could t lest imply tht the differentition by risk sttus turns out to be immteril for expected life-time helth costs. However, our clcultions suggest tht this is not the cse. The result is importnt becuse, to the extent tht it is relistic, 4 it hs direct impct on meningful rrngements for mking helth cre nd helth-cost cover portble cross countries. 4 The results in Herring nd Puly (2006) support the conclusion tht expected life-time helth costs for high risks exceed those of low risks. Building on dt from the US Helth nd Retirement Study (HRS), Sun et l. (2010) rech the opposite conclusion for individuls ged 65 nd bove. Potentil resons re tht they my not be ble to seprte ll individuls covered in the HRS into two risk clsses, so tht they effectively concentrte on sub-group of high risks for which the cost differentil vis-à-vis low risks is reltively smll; or tht they include costs for long-term cre (which re less importnt for younger individuls nd re not included in the helth-cost profiles underlying our clcultions). Considering the limittions of existing dt, this issue clerly deserves further ttention in future reserch for numerous resons. 6
Procedures nd ssumptions used for splitting up verge helth costs re pplied uniformly to the helth-cost profiles for Germny nd Polnd, s we re lcking more specific informtion. This mens tht differences between countries re minly driven by the cost differentils which lredy show up in Figure 1. Portbility rrngements will hve to del with such differences for young people who migrte to developed, high-cost country nd probbly lso for retirees returning home to less developed, low-cost country, while differences between individuls in good helth or poor helth contribute to the complictions tht rise. In ddition, vrition over time will mtter, wheres ll figures displyed in this section show cost profiles derived from cross section, i.e., profiles tht relte to different individuls t different ges in prticulr yer. We will return to this issue in Sections 3 nd 4, when ttempting to ssess expected life-time helth costs nd cross-country differences in truly longitudinl fshion. Lst but not lest, one should keep in mind tht the wy these costs re funded cn be rther different cross countries. Fetures in this re re clerly importnt when we now try to understnd the nture of public rrngements providing helth-cost cover before pproching the issue of portbility. 3 Helth-cost cover: components nd clcultions 3.1 Disentngling public helth insurnce Helth insurers nd other institutions covering helth costs re effectively providing quite number of distinct services which need to be disentngled when discussing the problems involved in mking cover for helth costs portble cross countries. Probbly the most bsic service of these institutions is tht they ct s specilized pyment gencies collecting invoices relted to helth services for their customers nd reimbursing helth-cre providers for their efforts. Besides tht, one cn distinguish vrious further ctivities tht re, or cn be, crried out by existing helth insurnce schemes. We will divide them into core set of elements of insurnce nd number of dditionl elements of redistribution. The list of elements mentioned here is ment to be exhustive in tht it incorportes, t lest in rough fshion, ll types of services involved in ctul rrngements. At the sme time, depending on ntionl trditions nd ntionl ttitudes regrding risk-tking nd redistribution, ctul schemes my fil to comprise ll of the elements listed here. ) Core elements of insurnce In ddition to hndling pyments relted to helth services, covering helth costs often involves one or more of the following elements of insurnce: (i) cover for current helth costs; (ii) insurnce ginst prospective deteriortion of one s helth sttus; nd (iii) intertemporl burden smoothing. 7
Cover for current helth costs effectively mounts to n insurnce ginst ccidentl devitions in current, i.e. nnul, helth costs from the respective men. Although it my be obscured by mny other elements we re going to introduce nd discuss here, it is prt of ny rrngement of helth-cost funding we re wre of. To void vrious forms of morl hzrd, insurnce of this kind my be limited by co-pyments, or insured individuls my hve to mke out-of-pocket pyments for some types of services. Nonetheless, they re never exposed to the risk of pying for ll their helth costs in given yer without ny limittion, or we would sy tht they hve no cover for their helth costs t ll. The second element, insurnce ginst systemtic chnges in the individul time profile of expected helth costs, is even more importnt for insured individuls, but it is lso less wide-spred. In fct, it is conventionl only in public helth insurnce or public helth-cre systems, while it is not included in most privte helth-insurnce contrcts. 5 The reson is tht this element requires bsence of risk rtin or long-term contrcts with cluses tht inhibit regulr risk re-ssessment. If this element is missing from given system of helthcost coverge, individuls end up pying risk-dusted premiums following risk-specific profiles of expected helth costs (see Figure 2). If the helth-sttus risk is tken cre of, nd if there re no further elements of insurnce or redistribution, nnul premiums tend to correspond to the verge profile of expected helth costs (Figure 1). The upshot of this is tht risk-specific nnul premiums cn become prohibitively high t higher ges. Older individuls my therefore drop out of privte helth insurnce with nnul risk rtin using public helth insurnce or public helth-cre systems s fll-bck. 6 By contrst, being covered by public system usully entils the option of life-long membership. Indeed, it typiclly offers full cover even for those who re born s high risks service tht mrket-driven insurnce would never provide. The third element, intertemporl burden smoothin typiclly builds on the second one, essentilly shifting the finncil burdens relted to given time profile of nnul helth costs cross the life cycle. As rule, it implies tht premiums exceed current helth costs for young individuls, while they fll short of expected helth costs for the old. Note tht this type of ge-relted redistribution does not necessrily led to interpersonl redistribution, s the present-vlue effects of these intertemporl shifts my cncel out over time. However, this is typiclly not the cse in public systems where burden smoothing is mostly byproduct of ge-invrint contribution rtes or tx rtes, sometimes complemented with specil rules defining the tx bse for contributions or txes for workers nd pensioners. 7 This 5 6 7 Germn nd Austrin privte helth insurnce contrcts pper to be the only mor exemptions due to common trditions in regulting this sector (see Bumnn et l. 2008 for further detils). If this is restricted by lw, individuls should be reluctnt to buy privte cover in the first plce. Another pproch is given by differentited membership rules for workers nd pensioners, s in the US. There (nd thus fr), public provision for the mority of individuls sets in exctly when people retire. 8
element could be formlly reflected in some mount of pre-funding for helth cost of older individuls n option which my become incresingly importnt in the course of demogrphic geing. Thus fr, however, most public schemes re unfunded, so tht burden smoothing leds to implicit libilities of public helth funds vis-à-vis younger cohorts. The three elements considered here hve in common tht they re suited to increse the welfre of ll individuls covered in rrngements for funding helth costs. If helth funds only provide these types of insurnce, life-time premiums or contributions imposed on ech insured individul re linked to verge cost profiles presented in Section 2.1 by cturil clcultions, even if they do not follow these profiles yer by yer. In relity, however, these elements of insurnce re often mixed with one or more of the elements of redistribution discussed below, which cn entirely disconnect contributions from benefits t the individul level. A further observtion is tht in systems incorporting the second nd the third of the forementioned elements, portbility becomes n issue whenever individuls re willing to switch from one helth fund to nother. The reson is tht these individuls re prty to long-term reltionships in which pyments mde by the individul, nd services provided by their helth funds, need no longer be blnced on n nnul bsis. b) Additionl elements of redistribution In public systems of helth-cost cover, considerble mount of redistribution cn be involved in how helth costs re ctully funded. Agin, the vrious forms of redistribution cn be condensed into three bsic elements tht re widespred nd used in different intensities nd combintions, though not universl: (i) income-relted redistribution; (ii) noncontributory cover for dependents; nd (iii) intergenertionl redistribution. Redistribution from rich to poor reflects the fct tht, in terms of normtive convictions tht mority of people would subscribe to, helth is often considered mor determinnt of equl opportunities, or is subect to kind of goods-specific eglitrinism. In ny cse, public helth insurnce or public helth-cre systems re typiclly designed to give everyone ccess to comprehensive set of helth services, regrdless of individul bilities to py for tht. Usully, this is brought bout by income-relted contributions or txes which re used to finnce these schemes, while ll of their members re entitled to receive uniform pckge of benefits. As result, individuls with higher income re pying substntilly more thn their expected helth costs, while individuls with no income t ll cn effectively be free of chrge. A distinct type of redistribution involved in number of public schemes is tht children nd non-working spouses of insured individuls my lso hve cover for their helth costs without incurring ny dditionl chrges, irrespective of the level income of their household. Discussing the normtive bckground for this type of redistribution is beyond the scope of 9
this pper. However, providing non-contributory cover for children my mke sense in systems tht re unfunded or re ctully funded by these children s future ernings cpcities. It simply mens tht children re credited the helth costs rising erly in their life cycle, while they re expected to py bck this implicit lon lter on, when they hve entered their period of economic ctivity. This leds to the lst element of existing rrngements of helth-cost cover, viz. redistribution between subsequent genertions. This type of redistribution rises with some necessity if finncil burdens through helth costs re shifted intertemporlly in unfunded systems since, in schemes of this kind, the present vlue of future benefit entitlements of ech ge cohort is typiclly lower thn the present vlue of their contributions by the mrgin between the mrket rte of interest nd the internl rte of return of these schemes (see Sinn 2000 for n in-depth explntion using unfunded pension schemes s n exmple). The ltter is bsiclly given by the rte of pyroll growth or the growth rte of GDP, corrected for more thn proportionl increses in helth costs. This difference is typiclly positive. It is needed to keep the systems implicit libilities on sustinble time pth when they re rolled over from one genertion to the next one. All these elements of redistribution re potentilly relevnt for the portbility of helthcost cover t lest, if the two schemes involved differ in these regrds. Redistribution generlly implies tht there is no link between contributions nd benefit entitlements t the individul level. Nevertheless, redistribution towrds poor people nd fmilies could be rrnged for in such wy tht the sum of ll contributions of given ge cohort is equl to the sum of ll helth costs for the sme group of individuls. In this sense, the life-cycle helth-cost profiles shown bove re still relevnt benchmrk for ssessing finncil flows nd finncil obligtions relted to systems covering helth costs. Things re different with respect to the intergenertionl redistribution involved in unfunded schemes. Here, contributions collected from given ge cohort exceed corresponding helth costs t rte which increses if the insured popultion is geing. In this cse, the intertemporl government budget constrint effectively constitutes the only binding limit for sustinble mount of redistribution. Therefore, it lso needs to be tken into ccount when ddressing interntionl portbility of helth-cre funding with intergenertionl redistribution. Of course, mority preferences with respect to desirble extent of redistribution in ny of the dimensions considered here my differ substntilly cross countries. Interntionl greements regrding the inclusion of redistributive fetures of ntionl helth systems in portbility rules my thus be difficult to rech. The rules designed for this purpose could be designed to reflect ll differences in the elements of redistribution between ntionl systems of helth cost cover, or they could bstrct s much s possible from these differences nd concentrte on the portbility of insurnce elements. 10
3.2 Expected net helth costs: the key to portbility Now, we would like to turn to the question of how interntionl mobility of individuls who settle, t lest temporrily, in nother country typiclly ffects the systems covering their helth costs. In public schemes tht hve no pre-fundin ll trnsctions between insured individuls nd helth funds tht occurred in erlier periods re pst history. Most public helth systems re offering long-term reltionships in which the blnce of pyments mde nd services received by verge members systemticlly shifts round over time, governed by the vrious elements of insurnce nd redistribution described in Section 3.2. Yet, whenever n individul considers becoming mobile, there is nothing left of premiums or contributions mde until then to fund for future helth costs of the individul. Therefore, the consequences of mobility for ntionl systems of helth-cost cover in sending s well s in receiving countries need to be determined in forwrd-looking perspective. From the perspective of sending countries, future contributions re revenues foregone, nd future benefit entitlements re (implicit) libilities tht re going to be wiped out if the individul moves wy. In receiving countries, new libilities re creted nd dditionl revenues re going to ccrue if the individul is dmitted to enter the helth system there. Meningful portbility should tke ll these consequences into ccount, while existing legl rrngements either neglect them (for migrnt workers) or mke them reson why other individuls (e.g., pensioners) re not dmitted to the receiving countries helth systems (unless they hve cquired t lest some mount of pension entitlements in this country). ) Expected helth costs: determinnts Let us consider simple, forml model which cptures ll relevnt chrcteristics of the individuls covered nd ll relevnt fetures of existing helth systems (see Holzmnn nd Koettl 2011, Sections 3 nd 5, who ddress portbility in socil insurnce in broder fshion, with some pplictions to helth cre). The strting point for our considertions re lifetime profiles of expected helth costs of given individul rising within given helth system, s those shown in Section 2. Techniclly spekin these profiles re vectors, or lists, of g nnul helth costs, AHC,, for individuls of gender g { f, m} (femles nd mles) in risk clss { l, h} (low or high) nd t ge { 0, 1 } ( being the ge t which the survivl probbility is set to zero in current life tbles). For simplicity, we restrict ttention to two risk clsses, viz. low risks who re bsiclly helthy nd (verge) high risks whose helth costs re permnently incresed. Here, we effectively concentrte on nnul helth costs rising from prticulr ge onwrds t which n individul is considering to migrte to nother country or to nother helth system, respectively. To do so, we need to tke into ccount the probbility tht the individul will survive until ge 1, (with 0 1 for ), nd subsequently 11
to ny higher ge (with 0 ). We ssume, with some sense of relism, tht survivl probbilities re differentited not only by ge, but lso by gender nd risk sttus (with l h ). For those who re currently low risks, we lso need to tke into ccount tht they my continue to be low risks t ge 1 (in the rnge 0 1), with probbility or tht they my experience deteriortion in their helth sttus with probbility 1. The wy we define high risks, we do not llow for chnge in helth sttus in the opposite direction. For convenience, we ssume tht the probbility of chnge in helth sttus my vry with ge but does not significntly vry by gender. Besides these life-cycle chnges in relevnt chrcteristics of the individul, we need to consider future increses in ge-specific helth costs through n nnul helth-cost infltion fctor, 1 c. This fctor my differ from generl price infltion nd is simply ssumed to be constnt here. Also, to mke nnul helth costs mesured s longitudinl profile for given individul comprble cross time, we need to ssess them in terms of present vlues using n nnul discount fctor, 1 r, which is gin ssumed to be constnt. 8 In theory, c 1 nd r 1 must hold, while in prctice they cn sfely be ssumed to exceed zero. b) Expected helth costs: differentition by risk sttus Building on these ingredients, we cn clculte expected future helth costs, EHC, individuls of gender g in risk clss nd t ge. For individuls who re high risks, expected helth costs re simply given by the sum of nnul helth costs for high risk rising from ge onwrds, weighted with the relevnt survivl probbilities, up-rted with helthcost infltion, nd discounted to form present vlues for the current time period (with t { 0, 1 } being time index tht is equl to zero for the current yer). g, for EHC h t 1 (1 (1 c) r) t t t 1 x h x AHC h t (1) Alterntively, we cn lso use recursive formul which simply dds the present vlue of nnul helth costs for high risk expected for the next yer of life, ppropritely weighted nd up-rted, to expected future helth costs of high risk ssessed from the perspective of this next yer. This lterntive version reds EHC h 1 1 c r h AHC h 1 EHC h 1. (1') A recursive formul of this type is ctully needed to express expected future helth costs for individuls who re currently low risks, s they my become high risks with some prob- 8 In theory, meningful restrictions pplying to both fctors only imply tht c > 1 nd r > 1, while we cn sfely ssume c nd r to be lrger thn zero, certinly in terms of long-term verges, in relity. 12
bility t ny point in time in the future. Expected life-time helth costs for low risks re thus given by EHC l 1 1 c r l AHC l 1 EHC l 1 (1 ) AHC h 1 EHC h 1, (2) generic formul for expected future helth costs for individuls in ny risk sttus being EHC 1 1 c r AHC 1 c) Non-contributory cover for dependents EHC 1 (1 ) AHC h 1 EHC h 1. (3) If n individul hs dependents with non-contributory cover, we cn re-interpret eqution (3) s formul for ssessing expected future helth costs for this individul i, with gender gi, gi i risk sttus i nd ge i, the relevnt intermedite result being EHC, i. To obtin totl expected future helth costs linked to the coverge of helth costs for this individul, we hve to dd helth costs for prtner p nd for ech of the N children (numbered n { 1, N} ) who re eligible for dditionl cover. The relevnt mount of expected future helth costs is then given by EHC EHC gi, i i pehc gp, p p N n 1 k n EHC gn, n n, (4) where p {0, 1} nd k n {0,1} re eligibility counters pplying to prtners nd children, gp p respectively. In eqution (4), expected future helth costs for eligible prtners, EHC, p, re clculted s in eqution (3), tking into ccount the prtner s gender, risk sttus nd ge. n When clculting expected future helth costs for ech eligible child, EHC,, the formul stted in eqution (3) must be pplied to the periods until n (not n ), being the lst yer of ge in which children cn be expected to be eligible for non-contributory cover through (one of) their prents. d) Long-term sustinbility of finncing helth cre When ssessing the mount of expected future helth costs rising for given individul in given system of helth-cost cover, we lso hve to ddress the fct tht this system my not be sustinble over the time horizon of our clcultions or, eventully, in terms of the intertemporl government budget constrint. 9 In other words, bsed on the equtions we hve derived here thus fr, we my ccount for future helth costs tht re not going to rise t ll gn n 9 See Blnchrd (1990) for conceptul clrifiction of wht sustinbility mens from public-finnce point of view. In EU Economic Policy Committee (2001; 2003) it is explined how this notion is nowdys used to monitor public finnces in long-term perspective in EU countries (nd, occsionlly, lso in other developed countries, see Huner et l. 2007) for prcticl purposes. 13
for those who continue to hve cover from the system, for instnce, becuse helth-cost infltion c is too high or becuse the ge composition of the insured popultion is expected to deteriorte. 10 The esiest wy to del with this compliction is to pply uniform sustinbility fctor 1 s (with 0 s 1) to expenditure ccruing in ech yer in the future. Adusting our clcultions, we then obtin sustinble future helth costs, SHC e) Expected revenues for finncing helth cre SHC, g, given by ( 1 s) EHC. (5) Future helth costs essentilly turn into future expenditure sved if n individul is ctully leving ntionl system of helth-cost cover. Of course, expected finncil contributions to this system which the individul could hve mde in the future re no less importnt. Around the world, er-mrked contributions specificlly collected for helth funds, inections from generl-government budgets tht re minly tx-finnced, or some mixture between these two pproches ply dominnt role in this re. We my thus tke nnul tx revenues, T ( y ), tht re rised from ech individul nd re effectively chnnelled into the helth system s the bsis for ssessing expected finncil contributions. The wy we model them, these revenues re derived from generic tx function T which my differ by tx pyers ge nd is pplied to tx bse g i y, tht is ssumed to consist of wges nd pensions minly, but my comprise other income, consumption, or ny combintions of these components s well. In ny cse, the tx bse my vry by gender, helth sttus nd ge due to the rules pplied s well s the bility to py txes. Building on time series of nnul tx pyments conditioned on relevnt chrcteristics of given individul, we cn determine the present vlue of expected future tx revenues tht this individul would hve to py under current rules. In its most generic form, the relevnt formul reds ET 1 1 w r T 1 ( y 1 ) ET 1 (1 ) T 1 ( y h 1 ) ET h 1. (6) The ssessment of future tx revenues follows similr logic s the ssessment of expected future helth costs, with recursive structure to llow for chnges in risk sttus t ny point in time in the future. The fctor 1 w (with w 1) reflects wge infltion or ny increse in the verge, individul-level tx bse. For simplicity, we ssume tht the tx function is dusted to wge infltion. Tht is, within given period of time the tx function T my well exhibit progression with respect to the tx bse g i y,, while it behves s if it were liner 10 In both cses, future helth expenditure could not be finnced using constnt shre in GDP of the respective country, i.e., from constnt contribution rtes or constnt frction in tx revenues in n otherwise unchnged environment. 14
in n intertemporl perspective. The function is lso ssumed to be stble otherwise, s we neglect potentil future increses in contribution rtes, tx rtes etc., which could be mde regrding the future sustinbility of the system on the expenditure side. If cover for dependents ffecting future helth costs is non-contributory, eqution (6) is the finl version of expected future revenues linked to membership of n individul in given system. f) Expected net costs of migrnts The finl result of our clcultions reltes to the finncil consequences of the possibility tht n individul leves system of helth-cost cover nd my then enter nother system locted elsewhere. This result is given by expected future net costs (or surpluses, s it my be) relted to the membership of this individul, ENC SHC ET. (7) ENCs clculted for given individul (nd ll dependents with non-contributory cover) cn be lrger thn, equl to, or smller thn zero. They re determined by individul chrcteristics of those who consider migrting s well s by fetures of the helth systems which g would be ffected. For the potentil sending country A, ENC,, A mesures the net costs sved, or the surplus foregone, if prticulr individul ctully leves the ntionl helth system compred to sitution where it hs continued, nd eventully life-lon cover. For g receiving country B, ENC,, B mesures net costs incurred, or surpluses ccruin if the individul is dmitted to the helth system in this country. When letting go migrnt, helth funds in the sending country my thus effectively g wish to clim ENC, g, A if ENC, A 0 ; they my be willing to py up to ENC,, A if ENC, A 0. Conversely, when ccepting migrnt, helth funds in the receiving country g my be willing to py (in brckets: they my wish to clim) ENC,, B if ENC, B 0 ( ENC, B 0). Idelly, to mke helth-cost cover portble the two helth funds involved could thus compenste ech other for ny net costs voided or net costs incurred, bsed on the net-present-vlue positions in both helth systems. The sme logic cn lso be pplied to temporry moves, provided they lst long enough tht ccounting for the consequences ppers to be worthwhile. If this is the cse, trnsferring the provision of insurnce for helth costs (including the elements of redistribution tht my be ttched to it) my mke sense. If the temporry move of n individul, plus ny dependents, lsts for d yers, helth funds in the sending country my wish to clim (or py) ENC, A ENC d, A if this difference is negtive (respectively positive). Tht is, expected net costs ccruing in the more remote future, fter the individul will hve returned, need to be deducted from the result pplying to cse where mobility is open-ended or expected to lst indefinitely. Conversely, helth funds in the receiving country my be willing to py (or 15
clim) ENC, B ENC d, B if this difference is negtive (respectively positive). Rel-world scenrios of interntionl migrtion cn be substntilly more complicted, involving vrious sources of uncertinty, chnges in erlier plns, nd consecutive moves in different directions. In ny cse, the formul tht we hve derived here cn be esily pplied pro rt temporis, the shortest durtion of n expected sty in given country, or under the rules of given helth system, for which this mkes sense probbly being one yer. g) How to isolte insurnce from redistribution It is open to debte whether the distinction between elements of insurnce nd elements of redistribution should be tken into ccount in designing pproprite portbility rules (see Section 3.1). Seprting the effects of insurnce from those of redistributive elements of public helth systems my nevertheless be useful t this stge. The design of elements of redistribution vries lot cross ntionl systems covering helth costs, while public systems of helth-cost cover next to utomticlly provide insurnce in ll its bsic forms distinguished bove: cover for current helth costs, insurnce ginst ny deteriortion of one s helth sttus, nd some mount of intertemporl burden smoothing. Redistribution then leds to further modifictions of the totl mount s well s the life-cycle profile of contributions due, while ntionl helth systems typiclly give ech individul ccess to benefits which re fully cptured by expected (sustinble) future helth costs s ssessed bove. Probbly the esiest wy of determining contributions tht cover ll elements of insurnce, but no redistribution, in n unfunded system of helth-cost cover is to clculte the per-cpit mount of totl nnul helth costs for ech individul who is covered by the system (including dependents) nd for ech yer tht membership cn be expected to lst (weighted with the relevnt survivl probbilities). 11 Fictitious nnul lump-sum premiums which re obtined in this wy cover fir shre in nnul helth costs nd do not reflect the extr-costs rising from chnges in helth sttus. At the sme time, they do not reflect the effects of redistribution involved in ctul contributions. 12 If expected future helth costs of n individul remin unchnged, while revenues collected from the individul re dusted to undo the effects of redistribution, expected future net costs will chnge ccordingly. By nd lrge, the differences between expected net helth costs by ge, gender nd risk sttus will become smller thn when redistribution were in- 11 12 As in the clcultions described in Sub-section c, cover for dependent children should of course be restricted to the (mximum) period in which they cn be eligible. Also, one could clculte seprte mount of per-cpit costs for this group becuse these costs tend to be considerbly lower thn for n verge dult. One could probbly be more creful in neutrlizing the intergenertionl redistribution involved in unfunded systems of helth-cost cover. To do this, one would hve to mke sure tht, on present vlue terms, lifetime contributions of ech individul re equl to life-time helth costs rising for n individul t verge helth risk. 16
cluded in the clcultions, but they need not dispper. Specificlly, vrition of expected net helth costs by ge is still likely to be substntil. The reson is tht nnul helth costs tend to increse t higher ges, while contributions those ctully pid s well s those imputed here re likely to be considerbly lower t lter stges of the life cycle. Yet, positive expected net helth costs for older individuls re the result of n implicit element of pre-sving which is inherent in ny kind of intertemporl burden smoothing. Bsiclly, the implictions of our dusted clcultions re thus unchnged. When the effects of redistribution re neutrlized, expected future net helth costs re most likely positive in ech cse. Still, if individuls consider migrtin dusted net helth costs cn be tken to indicte potentil willingness to py on the side of the ntionl helth scheme in the sending country, while they reflect potentil clims of the helth scheme in the receiving country. Agin, the sme logic cn be pplied to temporry migrnts if the provision of helth insurnce shll be trnsferred for limited number of yers. 4 Portbility nd portbility rules Individuls who re willing to move between different sources of helth-cost cover re t risk of mking substntil finncil losses if they re losing entitlements tht hve been cquired with their former insurer without being ble to find comprble cover elsewhere. On the other hnd, if they re ble to switch rther esily from one source of helth-cost funding to nother, this my impose substntil burdens on other members of either the former or the future risk pool. All these potentil losses or corresponding benefits for the individul leving system or for other members of one of the risk pools involved re effectively two sides of the sme coin, viz., the finncil consequences of n individul exiting from or entering helth scheme. Here, we will first highlight in more detil the problems tht my rise from lck of portbility (Section 4.1). Then we will move on to discuss options for estblishing some form of portbility in helth cre nd helth-cost cover (Section 4.2). Specificlly, we will propose solution bsed on trnsfers between systems covering helth costs, lso providing simultions tht re ment to illustrte how such scheme could work under rel-world conditions nd wht further issues might turn up if it is put into prcticl use (see Section 4.3). 4.1 Problems rising from lck of portbility ) For potentil migrnts An extreme form of non-portbility rises if migrnts drop out of their erlier system of helth-cost cover, but do not get ccess to the system in their destintion country. In less extreme forms, migrnts my not be offered comprble cover t comprble costs in new 17
system becuse net-contributions they hve mde in their erlier system re neglected there. Any of these cses my give rise to concerns regrding the migrnts socil nd finncil sitution (see Avto et l. 2009, pp. 455 56). In ddition, the existence (or simply the fer) of these consequences my feed bck on individul decisions. Most importntly, lck of portbility of helth-cost cover my discourge individuls from migrtin 13 even where it cn be expected to increse socil welfre (from globl perspective). The sme my pply to decisions to migrte home lter on. It my lso ffect migrnts choices between different trget countries, or between different obs within given country. 14 In ny of these cses, individuls tend to respond to differences in ccess to helth-cost cover in wy tht is individully rtionl, but does not led to n efficient lloction of lbour or efficient loction choices of privte households. Lck of portbility my thus not only be detrimentl with respect to ctul migrnts, but lso hits potentil migrnts, preventing them from becoming mobile in the first plce. It my even hve negtive impct on lbour mrket performnce nd economic dynmics for society t lrge, both in potentil source nd trget countries. Different individuls will be ffected by this mobility-lock in different wys. Youn helthy workers with good qulifictions re typiclly welcome in ny trget country. They cn esily get ccess to the helth system there becuse, inter li, they re expected to be net-pyers in this system. 15 Things tend to be different with respect to individuls who re older nd less helthy, so tht their expected future net helth costs re likely to exceed zero by substntil mrgin. The sme my be true with respect to individuls with low qulifictions or lrge fmilies, depending on how these chrcteristics re reflected in ntionl helth systems. Up to point, countries receiving migrtion re ble to discriminte between some of these groups in their immigrtion lws; for instnce, by rewrding youth nd qulifictions in points-test systems for dmitting new migrnts, or by demnding helth checks before grnting residence or work permits. However, restricting ccess to country (only) to void high expected helth costs of migrnts is rther untrgeted pproch. Focusing on helth costs nd on how they re covered is likely to be better solution. b) For helth funds nd other members of their risk pools If helth funds could chrge ech new member with risk-dusted premiums tht re bsed on cturil clcultions, mobility of individuls nd lck of portbility would not be 13 14 15 In n empiricl study, Geis et l. (2008) show tht qulity of the helth-cre system in the destintion country ppers to ttrct migrtion, while they re unble to control for the cost of pying for helth cre in seprtion, i.e., s distinct from the negtive effects of more generl tx mesure. For instnce, Avto et l. (2009, p. 455) point to the possibility tht lck of ccess to helth cre or helth insurnce (or lck of portbility thereof) my drive migrnts into working in the informl sector. Problems relted to these cses of mobility show up elsewhere, nmely in terms of negtive effects for helth systems in their home countries (see Sub-section b). 18