Private Health Insurance in OECD Countries: a Policy Brief

8. Has private health insurance shifted cost from public systems?

There are a number of reasons why private health insurance has not significantly reduced public financing burdens. For one thing, people with private insurance often continue to rely upon publicly financed hospital services in duplicate markets. Privately financed hospitals have often focused on a limited range of elective services, leaving the responsibility for more expensive services or populations to public programmes.
Second, in OECD countries that have restricted eligibility for public insurance to lower-income and vulnerable groups, leaving the rest to buy primary private health insurance (the United States, the Netherlands, Germany), public spending on health as a percentage of GDP is not lower than that of many countries that provide universal public coverage (figure 2). This can be partly explained by the concentration of healthcare cost among a small fraction of the population that is generally publicly insured — such as the elderly, chronically ill, and long-term disabled. Third, de-listing of services from public coverage, another strategy to shift cost onto the private sector, has generally remained confined to less expensive services, which may be paid for out-of-pocket or through supplementary private health insurance policies.
In some cases, private health insurance has actually added to public expenditure on health or public costs generally. Where private health insurance covers cost sharing on public coverage systems, as in France, the resulting increases in use of services raise the cost of publicly financed health systems. In addition, countries that grant significant public subsidies to private health insurance, as Australia and the United States do, have seen a reduction in government revenue or an increase in public cost.

Fig. 1: Health expenditure by source of health financing, 2000 (%)
Source: OECD Health Data 2003, 2nd edition
Note: Countries are ranked by decreasing size of PHI

Fig. 2
9. Does private health insurance make health systems more efficient?

While private health insurance is often viewed as a tool to enhance efficiency, the evidence shows it has made only a small contribution so far. Several reasons explain this performance. Insurers need to sustain high administrative costs in order to attract and retain clients, provide them with a diversity of insurance plans, and negotiate multiple contractual relationships with providers. Furthermore, in several OECD countries, insurers have had few incentives to manage care cost-effectively, due to a combination of desire not to restrict individual choice, providers’ resistance, and the cost of implementing such action.
Difficulties in extracting efficiency improvements from private health insurance markets can also come from the way in which insurers compete. In several OECD countries, insurers are confronted with limited competitive pressures as there is little consumer mobility across insurers. It is attractive for insurers to employ cost-shifting and selection of risk as a means of insurer competition and protection against adverse selection, rather then improving the cost-effectiveness of care provided to clients. Finally, the lack of ‘vibrant’ price and quality competition among providers inhibits market forces in insurance markets, for example if providers exercise dominant market power, leading them to demand high prices for health services and shielding them from insurers’ pressure to improve quality or cost-effectiveness of care.

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