22 May 2014

MediShield Life Should Not Be Pre-Funded Part I

It appears that the Government is very keen that MediShield Life premiums should be pre-funded.

The Government's Rationale
The premium that a person pays for hospitalisation insurance, such as MediShield, MediShield Life or the Integrated Shield plans, increases as he grows older because the statistical probability of his being hospitalised increases.

The Government says that when we are young and employed and earning a good income, we can afford to pay more so that when we are old, we don't have to pay as much as what we would have to pay if we didn't pre-fund.

In other words, the young should set aside some money in MediShield Life as a form of savings and use this money later on in life to help reduce their premiums.

Hence, we should pre-fund our MediShield Life premium, the Government says.

Let's see why MediShield Life should NOT be pre-funded.

Medisave Account Balance Is Key, Not Income
The Government's argument that we can afford to pay more when we young and have a good employment income is flawed.

MediShield Life premium is paid from an individual's Medisave Account, not his current income.

If a person doesn't pre-fund his MediShield Life premium when he is young, the amount that he saves by not pre-funding will remain in his Medisave Account and grow at the same rate to help pay his premiums when he is old. Pre-funding doesn't change anything.

There are some people who may not have enough in their Medisave Accounts now or in the future because they do not earn enough or need to use their Medisave Account moneys. Pre-funding MediShield Life doesn't solve anything because it simply shifts the money crunch elsewhere; with pre-funding, these people will have less money in their Medisave Accounts to meet other medical expenses.

Saving for Tomorrow's Premiums
While it makes sense for the young to set aside some money to help pay for the higher premiums in the future, it makes no sense for anyone to save money in a common pool such as MediShield Life.

Loss of Ownership
Once a person pays his pre-funding premium into MediShield Life, it is no longer his, even if it will be used to defray part of the premiums that he and others in his age group will have to pay in the future.

Status Quo Is Better
It is simpler and more logical to retain the status quo — leave the pre-funding premium in each individual's Medisave Account and use this money, plus interest that it will earn, to help pay his MediShield Life premium when he is older. Over any given period, the pre-funding premiums will grow by the same amount, whether they are in MediShield Life or in the individual's Medisave Account.

There is another variation of this, which I will describe in Part II.

Early Demise
As a person ages, he will reach the point where he will stop pre-funding his MediShield Life and start drawing down on his pre-funded balances. These pre-funded balances must not be exhausted until the last person in his age group dies.

Let's assume this transition age for a given age cohort is 60 years, for example.

The cumulative pre-funded balances will grow year by year until the cohort reaches the age of 60. At that point, the pre-funded balances are at their maximum. Thereafter, they will decline as the pre-funded balances are used to partially pay the yearly premiums.

The closer to age 60 when a person dies, the more pre-funded premium he leaves behind for others in his cohort.

This unintended bequest will not occur with the status quo (see above) in which the pre-funded premiums stay in each individual's Medisave Account instead of being paid into MediShield Life's common pool. Upon his death, any unused pre-funded premium will be bequeathed to his beneficiaries.

Late Comers
Most if not all Singapore-born citizens will start pre-funding their MediShield Life when it is introduced in 2015.

New residents (citizens or permanent residents) start pre-funding only when they join MediShield Life.

Consider the illustration of new residents aged 38 in 2030. Singapore-born citizens — most of us — would have pre-funded their MediShield Life for 15 years. Will the Government require these newcomers to pay the 15 years of pre-funded premiums that the 38-year-old Singapore-born citizens would have paid into MediShield Life?

To the extent that the make-up pre-funding is not fully levied on new residents, the Singapore-born citizens would end up subsidising the new residents.

Is it likely that the Government will balk at collecting the full amount of make-up pre-funding from the new residents? Yes, because in 10, 15 or 20 years' time, the make-up pre-funding amount to be collected will be sizeable enough to deter some foreigners from taking up permanent residency or citizenship.

Free Loaders
MediShield Life will be universal and compulsory.

But how will the Government collect premiums from anyone who doesn't have sufficient balances in his Medisave Account?

Unless the MediShield Life premiums are collected from everyone (other than the poor and the elderly Pioneer Generation members, whose premiums will be paid by the State), it is likely that their premiums will be paid by other MediShield Life members.

It is bad enough if we have to subsidise the free loaders' base premiums (i.e., without pre-funding). It is worse if we also have to pay their pre-funding premiums.

As for the poor, it is fair that the State pay their base premiums (i.e., without pre-funding) but why should the State pay their pre-funding premiums, which are advance partial payments for the future when some of today's poor will no longer be poor?

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