26 May 2014

MediShield Life Should Not Be Pre-Funded Part II

This is the second part. Part I may be found [here]

Computational Complexities
With MediShield, CPF Board determines the premiums for each age cohort based on actual hospitalisation experience, and it adjusts the premiums from time to time. Similarly, the insurers offering the Integrated Shield plans base their premiums on actual hospitalisation experience, and adjust the premiums from time to time.

With pre-funding, CPF Board will have to determine not only the premiums for each cohort but also the forecast hospitalisation incidence and costs, and life expectancy. Based on these estimates, CPF Board then has to determine the cross-over age (the age at which each cohort stops pre-funding and starts drawing down on the pre-funded premium).

I believe these computations (apart from life expectancy) are extremely complex and it is not clear if anyone or any organisation has the necessary expertise to do them. To the extent that the computations are wrong, the last remaining members of any age cohort will either enjoy huge unused pre-funded premium balances or, just when they need it most, face depleted pre-funded premium balances.

Hospitalisation Insurance Is Not Life Insurance
Life insurance policies have been cited as an example of pre-funding in that the premiums are fixed throughout the life of the policies (pre-funding MediShield Life will result in the premiums increasing less rapidly than without pre-funding).

However, life insurance policies show us precisely why MediShield Life should not be pre-funded.

Healthy life insurance policyholders of the same age may pay different standard premiums because they had signed up at different ages. With MediShield Life, however, every healthy person of the same age pays the same premium; new residents who join MediShield Life and who haven't pre-funded or haven't paid an adequate loading in lieu of pre-funding, will eat into the pre-funding by Singapore-born citizens.

Life insurance policyholders who don't pay their premiums are either forced to take loans on their policies to pay the premiums or have their policies terminated. MediShield Life is compulsory for all, but those who don't pay will likely be subsidised by those who do.

Pooling pre-funding premiums is risky, as seen in 2008 when NTUC Income unilaterally revised the bonus structure of its life insurance policies, and policyholders could do nothing about it[1][2].

Finally, life insurance is very different from hospitalisation insurance: life insurance involves multi-year risk pooling of life expectancy while hospitalisation insurance involves risk pooling of hospitalisation incidence and costs for the current year.

Inter-Generation Cross-Subsidy
Some people believe that pre-funding is a mechanism to use part of the premiums paid by today's young to subsidise the premiums paid by today's old, so as to make the premiums more affordable for the latter.

It exposes today's young to considerable risk because when they become tomorrow's old, they have to depend on tomorrow's young to subsidise their MediShield Life premiums.

In addition, inter-generation cross-subsidy is regressive.

Firstly, every young person in the same age group, irrespective of his income, will share the cross-subsidy burden equally.

Secondly, low-income young individuals have to subsidise senior citizens, some of whom can easily afford to pay their premiums without cross-subsidies.

The Government says that there will not be any inter-generation cross-subsidy.

MEDISAVE SPECIAL ACCOUNT
As mentioned earlier, instead of pre-funding MediShield Life, a person can save the pre-funding amount in his Medisave Account to help pay his premium later.

There is the valid concern that a person may use so much of the moneys in his Medisave Account for other uninsured medical events that he may not have enough to pay his MediShield Life premiums later. However, as mentioned in Part I, a person doesn't tap into his Medisave Account frivolously nor is he permitted to. If he doesn't have enough in his Medisave Account for both MediShield Life premiums and other medical events, it is not something that he wants to happen. Forcing him to pre-fund simply shifts his problem elsewhere because the fact is that he just doesn't have enough money.

Nevertheless, if the Government wants to ensure that this person has some money to pay his MediShield Life premiums, it can consider using the Special Account model instead of pre-funding.

Currently, CPF members save for their retirement in their respective Special Accounts. The moneys in the Special Accounts are transferred to their respective Retirement Accounts when they reach the age of 55.

Instead of pre-funding his MediShield Life premium, a person can be compelled to save the pre-funding amount in a Medisave Special Account. The money will be in his name and for his sole use in the future, and will be left behind for his beneficiaries when he dies, unlike the case with pre-funding MediShield Life.

CONCLUSION
So why is the Government so keen on pre-funding MediShield Life?

With pre-funding, MediShield Life members who die early subsidise the MediShield Life premiums of their age-cohort members who outlive them, thereby reducing the likelihood that, or the extent to which, the State would have to subsidise the premiums of the poor among the latter.

But that should not be one of the objectives of hospitalisation insurance, which is to risk pool for the current year.

The dead should not be made to subsidise the hospitalisation costs of the living.

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Notes

1. NTUC Income Offers Some Of The Market's Best Yields For Life Insurance NTUC INCOME 10 Apr 2008.

2. Risk Of High Terminal Bonus TAN KIN LIAN'S BLOG 28 May 2008.


This article was last updated on 27 May 2014 11:00 am

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