The multipillar system for health care financing: Thirteen good reasons for open capitalisation funds covering both pension and health care provisions

4. The possible advantages of open capitalisation funds for welfare Several advantages can be derived from the introduction of open capitalisation welfare funds:

  1. Homogenization of tax treatment would produce transparency and effectiveness for fiscal incentives, which today are different for pension and health care funds. It would be possible to concentrate on the tax detraction scheme that, as the OECD suggests, is capable of attracting wider groups of workers, while favouring a better control of tax expenditure;
  2. Today, both health and pension funds compete for the same financial resources: the contributions of employees and of sponsor companies, the contributions from members independently of their work situation, and severance pay. Open welfare funds would channel these resources into a single accumulation programme;
  3. The open welfare fund would open up possibilities for lowering administration charges and managing costs, and above all it would make integrated management of financial flows possible, both capable of making the most of the benefits of the capitalisation over mid-long term periods, and of carrying out a broad diversification of risks;
  4. With regard to the supply of services, the performance of the various functions could be guaranteed in conditions of greater flexibility, efficiency and effectiveness:
    • 4.1 Parts of the resources accumulated within the fund could be disinvested in the course of a member’s working life, within limits and for specific purposes, to enable the meeting of personal and family health care expenses. In particular, a given amount could be dedicated, year by year, to finance copayments for the access to health care services provided by the public health care system. Resources to finance copayments would be deducted from the accumulation on member’s individual account, meaning that copayment schemes would not lose their positive properties of demand and supply regulation (see following point 4.8)1;
    • 4.2 For acute treatments which involve high costs (either because they are not provided by the public sector or because accompanied by high copayments), as well as for socio-health cares (first of all, the lack of selfsufficiency), it would be possible to buy, as a particular asset of the fund, a collective insurance coverage for all members, paying premiums by disinvesting, year by year, a part of the capital accumulated in the individual accounts2;
    • 4.3 Using a portion of the capital accumulated at the moment of retirement, the fund may buy a collective insurance coverage against the risk of lack of self-sufficiency for the whole period of the members’ retirement;
    • 4.4 Since one of the aspects considered less satisfactory for pension funds (at least in current Italian legislation) is the rigidity of the subdivision of accumulated resources between an annuity and an una tantum capital, it would be possible to allow a wider access to una tantum to members who, by adhering to the collective insurance cover against lack of selfsufficiency, already pursue part of the insurance finality associated with the constitution of an annuity;
    • 4.5 Collective insurance contracts would have the advantages of lowering individual negotiation costs for members, and of facilitating risk exposure management on the part of insurance companies;
    • 4.6 Collective insurance contracts, moreover, would reduce the distortion caused by adverse selection on the part of members (those most exposed to adverse events tend more often to seek health treatments), and the distortion by excess of screening by insurance companies (coverage is preferably offered to those less at risk). In some cases, this distortion may even mean that the company refuses to insure;
    • 4.7 These virtuous effects, described in the two preceding paragraphs, would be enhanced if the fund, though maintaining voluntary membership, had a legal obligation to subscribe to a collective insurance coverage for the risk of lack of self-sufficiency of all its members (a sort of condition for obtaining tax benefits). In this case, the risk of being involved in an adverse event would be spread over a much larger group of persons of different ages (all those who in the meantime are contributing to the complementary pension);
    • 4.8 Finally, with the open fund the member would have a greater sense of responsibility toward the disinvesting of resources from the fund to finance the access to health care provisions. In fact, those resources would continue to accumulate within the individual capitalisation account, creating future pension benefits. The full appropriability of the resources, accrued on the personal account, reduces the likelihood of opportunistic behaviours of moral hazard;
  5. The open nature of the fund, besides allowing individual adhesions would not impede, the allowing of collective adhesions by whole groups of a company’s (employees, workers of a sector, of a territory …). Together with the complete portability of individual positions (even in the case of collective adhesion), the open nature of the funds can work as a constant stimulus for transparency and cost efficiency;
  6. Another advantage can be added to those listed. Within an appropriate normative and regulatory framework, the open welfare funds would have the right characteristics for carrying out the function of choosing the best health care, and channelling the demand of their members towards them, whether public or private. A mechanism which, supported by detailed and certified information on funds’ performance and of the suppliers that the funds choose, could promote not only cost efficiency, but also the quality of services. Moreover putting public and private suppliers in positive competition could contribute to resetting that border between the political and the health care organisation spheres in Italy, a border that is all too often a very grey area.

5. Conclusions
A new tool, such as the one suggested in this position paper, certainly requires a detailed plan and also an innovative effort on the part of financial managers and insurance companies. Nevertheless, the convergence of pension and health funds can open important possibilities for the reform of the financing structure of the two major items of welfare expenditure. It could bring about the decisive impulse for the development of a complementary private pillar based on the real accumulation of contributions in the markets, and integrated with collective insurance coverage for those health expenditures which, by their very nature, cannot be financed only by the accumulation of resources in individual accounts, but need to rely solely on a pure insurance scheme.
Open welfare funds would have the merit of rebalancing the pay-as-you-go scheme on which welfare systems today widely rely. Moreover, through the more suitable combination of tax incentives and of collective insurance coverage for major health expenses, the development of open welfare funds would not contrast with but, on the contrary, would reinforce those principles of solidarity and cohesion which are at the basis of welfare systems. And this is especially true in the face of the process of population ageing and of the rising incidence of health care expenditure over GDP. The proposal for open welfare funds deserves to be closely examined technically, socially and politically.

1 This point is of great importance in the light of the moving from the absolute toward the selective universalism.
2 Minor health care expenses can be directly financed using resources withdrawn from the accumulation. For bigger expenses (such as for lack of self-sufficiency), it is essential to maintain a pure insurance coverage, so as not to over weaken the accumulation program. This is the rationale for the link between the open fund, based on the accumulation of individual contributions on individual accounts, and the acquisition of collective insurances as part of the assets of the fund. It is necessary to apply pure insurance coverage only to a limited group of treatments, because this kind of coverage is not equipped to deal with the dynamics of future expenses. As the difficulties American insurance companies are experiencing demonstrate, the pure insurance coverage ends up with the recurrence, in the private area, of the same defects as the pay-as-you-go in the public health care systems. Insurance pooling is naught but a pay-asyou- go scheme applied over the group of insured members.

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