Aging of Society and New Medical Technology: The Challenge for Health Insurers to Meet the Expectations of Consumers and Governments

1. Introduction

During the past decades, new medical technology has been mainly cost-increasing rather than cost-reducing, unlike technological change in industry. New medical technology has importantly contributed to the surge in healthcare expenditure (HCE), which also falls on health insurers both social and private (Newhouse, 1992). At the same time, medical advances continue to result in increasing life expectancy and improved quality of life, creating pressure on health insurers to include them in their list of benefits (Lichtenberg, 2001). However, contributions in particular to social health insurance have not kept pace with promised future benefits, causing a long-term financing gap in most Western countries (Kotlikoff and Raffelhüschen, 1999).
In this situation, health insurers are under pressure from two sides. One the one hand, governments expect them to slow the rise in HCE and in contributions. On the other hand, the insured seem to be keen to have access to the latest in medical innovation. This conflict of interest is exacerbated by the suspicion that medical innovations benefit people who do not survive for long. The reason for this suspicion stems from the finding that HCE increases with the proximity to death regardless of age (Zweifel et al., 1999). Use of latest medical technology resulting in a ‘cost explosion just before death’ would appear to be an investment in health of doubtful value.
This contribution seeks to shed light on these issues. Its point of departure is an ideal of (Western) man, viz. ‘to remain perfectly healthy and to drop dead when the time comes’ (Rowe and Kahn, 1997; but see also Phelan et al., 2004). This desired age profile of health status has become known as ‘rectangularization’. It implies that the gap between effective and ideal health status is most wide just prior to death. Seeking to close this gap, individuals use a great deal of medical care just before death, resulting in the ‘cost explosion just before death’ cited above. Now social insurers, being monopolistic schemes, can resort to a variety of measures to reign in the rise of HCE. One popular way has been to impose Managed Care-type restrictions of provider choice, meaning that patients have to see a gatekeeping physician first, or have to choose from a list of preferred providers who are at financial risk and therefore have an incentive to seek out a low-cost treatment alternatives. Another alternative is excluding or at least delaying coverage of new medical technology, rationing its use (especially by aged patients), and imposing copayments. These measures are also available to private health insurers in principle. However, they must be acceptable to their members, who are accustomed to having more rather than less choice in health care.
Since preferences with regard to health insurance cannot be measured easily, the evidence presented in this paper is of the Discrete Choice Experiment (DCE) type. Participants in a DCE are made to repeatedly choose between a status quo and a hypothetical alternative. In economics, the golden standard is actual choices, where consumers have to bear their financial consequences of their actions. However, many types of health insurance policy are not available in a given country. Therefore, DCEs may provide some second-best evidence. The author may be forgiven for citing four studies he has been involved in. While there would have certainly been other references, these four studies are especially topical because they seek to measure the preferences of consumers with regard to health insurance and access to medical innovation.
The first study concerns Managed Care-type restrictions of provider choice such as gatekeeping by physicians and a list of preferred providers imposed by health insurers. In the Netherlands and Germany, these restrictions are opposed also by members of social insurance (Becker-Leukert and Zweifel, 2013). The second work revolves around delaying access to new medical technology in an attempt to achieve cost savings. At least in the case of Swiss consumers, a delay of just two years would have to compensated by a substantial reduction in premiums (Zweifel et al., 2006). In the third study, focus shifts to a particular medical device, namely a hip protector designed to prevent fractures of the femur. Since estimated willingness-to-pay values are found to be negative across all age groups considered, its inclusion in the benefit list of Swiss social health insurance would not have made sense (Telser and Zweifel, 2001). Finally, the fourth study goes all the way to apply the benefit-cost criterion for deciding whether or not to add a new preparation for the treatment of diabetes to the benefit list of German social health insurance (Sennhauser and Zweifel, 2013). This criterion is of even higher relevance to private than to social health insurers because their members have a choice. If their willingness to pay for a medical innovation exceeds the extra premium caused by the added cost, they are happy to see the innovation included in the benefit list of the insurer; otherwise, they may cancel their policy. In this particular instance, willingness-to-pay values of the majority were found to match the (expected) extra cost associated with coverage of the treatment. Thus, most members can be expected to accept the increase in contributions necessary to finance the ne preparation. More generally, the benefit-cost criterion enables health insurers to serve as the intermediaries between their clients (who want access to medical innovation but dislike paying higher contributions) and governments (who want to see HCE stabilized).
The plan of this paper is as follows. Section 2 expounds the ideal health profile (‘remain perfectly healthy before dropping dead’) of Western man and its consequences in terms of the demand for HCE in general and medical innovation in particular. The so-called Red Herring hypothesis, stating that the proximity of death rather than age is the main driver of this demand, is also outlined. If true, the Red Herring hypothesis has important implications for health insurers. Since age continues to be the best indicator of proximity to death at any given point in time, it is the aged consumers who need to be won over for any new policies in health insurance designed to mitigate the ‘cost explosion just before death’. Therefore, Section 3 presents experimental (DCE) evidence suggesting that restrictions of the Managed Care-type would have to be compensated by substantial premium reductions to be acceptable to German and Dutch consumers. In Section 4, the focus shifts to medical innovation. A general delay of access to new therapies of no more than two years would have to be highly compensated, according to another DCE. However, this does not imply that all new therapies are welcome; in the case of the hip protector, another DCE reveals negative willingness-to-pay values throughout. By way of contrast, a new diabetes preparation is shown to trigger willingness to pay coming close to its extra cost among the non-diabetic majority of the insured, justifying its inclusion in the benefit list if subject to some copayment. Concluding remarks and some suggestions for health policy are offered in Section 5.

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