10 February 2015

Government Says Pre-Funding MediShield Life Is A New Feature. Really?

At Singapore Perspectives 2015, Deputy Prime Minister Teo Chee Hean repeated his Government's oft-mentioned selling pitch on pre-funding MediShield Life premiums:

I think quite a number of the health care systems in the world do inter-generational transfers in a rather irresponsible way because they tax the next generation to spend on the health care of the previous generation anonymously without any mutual obligation directly to each other.

In the design of MediShield Life, we try to avoid inter-generational transfers.

When MediShield is not compulsory, each age group pays the premium appropriate for its medical costs because otherwise they would opt out when they are young when they have to pay more (because of pre-funding) and opt in at an older age (when rebates using the pre-funded premiums are given, to reduce the premium appropriate for their medical costs at that older age).

But we have made MediShield Life compulsory. Then you do inter-generational transfers for yourself by paying a higher premium than is appropriate for your age group when you are young. This makes sense because when you are young, you have earning capacity, you have excess / surplus and you can pay more than the premium appropriate for the age group. As you age, the premiums will increase more gradually with pre-funding than without pre-funding.

As his Press Secretary explained in a letter to The Straits Times[2]:

"If premiums were set solely based on the health risks and consumption at each age, they will rise very steeply with age. Hence, we sought to distribute the premiums more evenly over the insured's lifetime and moderate what he has to pay in old age.

When the insured is younger and in his prime working years, he 'pre-pays' part of the higher old-age premiums that are payable when he is older and no longer working. With this 'pre-payment', the premium he pays when he becomes older will be less than the actual insurance cost for that age group."

Mr Teo says that pre-funding (or prepaying) premiums is a very important feature of MediShield Life, which is not available under the current MediShield.

Was Mr Teo correct when he said that MediShield members have not been pre-funding (or prepaying) premiums under the current MediShield?

MediShield Life Review Committee Report
According to the MediShield Life Review Committee Report[3], which presumably Mr Teo would have and should have read in its entirety, especially in conjunction with the Parliamentary debate on 8 and 9 July 2014:

"Rebates on premiums are given to MediShield holders from age 71 to 90 [the current maximum age covered] if they have joined the MediShield scheme before age 60 (as of the next birthday) and have been insured continuously under the scheme.

The amount of premium rebate given to policyholders depends on their age of entry."

and

"The present MediShield scheme includes a mechanism to help Singaporeans pay premiums ahead. This is done by distributing premiums more evenly throughout one's life, i.e., higher premiums during working age, so that premiums rise by less in old age. These additional amounts paid during working age are set aside in a pool in the MediShield Fund, which individuals and others in the same age cohort can tap on to enjoy premium rebates when they are older.…

Policyholders currently only start receiving premium rebates (which reduce the net premium) from 71 years old. We recommend starting the premium rebates earlier at age 66."

Central Provident Fund (Medishield Scheme) Regulations
Regulation 17 of Central Provident Fund (Medishield Scheme) Regulations states:

"17.—(1) A member or his dependant —

(a) who is or was insured under the Scheme in Division 2, or in a particular Plan in Division 3, immediately before he attains or attained the age of 60 years; and

(b) who continues or continued to be insured under the Scheme in that Division and Plan without any break in insurance cover until he attains or attained the age of 70 years,

is entitled, in respect of the premium payable for renewal of his insurance cover under the Scheme in that Division and Plan on or after he attains the age of 70 years, to a discount off the premium (referred to in this regulation as a premium rebate).

(2) The premium rebate, corresponding to the age at which the member or his dependant was insured under the Scheme in the same Division and, if applicable, Plan without any break in insurance cover, is set out in the Fifth Schedule.

(3) Where there is or had been a break in insurance cover, the premium rebate is to be based on the age at which the member or his dependant last rejoined the Scheme in the Division and, if applicable, Plan under which he is or was insured immediately before he attains or attained the age of 60 years.

(4) Where an insured person is insured under an integrated medical insurance plan with an insurer, the insurer shall pass on the premium rebate which the insured person is entitled to receive to the insured person.

(5) For the purposes of this regulation and regulation 18, there is a break in insurance cover when a person is or was not insured under any insurance plan under these Regulations immediately before the commencement of another insurance plan under these Regulations."

Conclusion
It is indisputable that MediShield members have been pre-funding their premiums.

So why did Mr Teo say that we haven't?

Firstly, perhaps he was mistaken. He is not alone. When pre-funding was first discussed in August 2013, Minister of State for Health Amy Khor and others made scant mention of the fact that MediShield premiums were pre-funded (and are still pre-funded today). But after they have read the MediShield Life Review Committee Report and sat through two days in Parliament debating that report, there is little excuse for any Member of Parliament not to know that MediShield premiums are currently pre-funded.

Secondly, he wanted to make it seem that the pre-funding feature of MediShield Life is something new that the Government is introducing that will supposedly benefit us immensely. However, the advantages of pre-funding are exaggerated and illusory, and may even disadvantage us; In a subsequent article, I will deal with the scarcely publicised negative aspects of pre-funding our MediShield and MediShield Life premiums.

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Notes

1. The words attributed to Mr Teo (above) have been edited for clarity. The following is the unofficial transcript of what he said:

"When we talk about inter-generational transfers, I think quite a number of the health care systems in the world do it in a rather irresponsible way because they do it by anonymous inter-generational transfers. That means you tax the next generation to spend on the health care of the previous generation anonymously without any mutual obligation directly to each other.


In the design of MediShield Life, we indeed are trying to avoid the inter-generational transfer and we are doing it this way.

When MediShield was not compulsory, each age group has to pay the premium appropriate for the medical costs of that age group because otherwise I will wait until I am old and then I will come in at a cheaper rate than the appropriate medical expenditure for that age group. So because the current MediShield is not compulsory, that had to be the design of MediShield. Otherwise people would just opt out at a young age if you ask them to pay more and opt in at an older age if that premium is not properly actuarially calculated.

But with MediShield Life, what has happened now is we have made it compulsory, and this is a very important feature about MediShield Life and that is why we have to make it compulsory. When you make it compulsory, then you can do inter-generational transfer yourself for yourself by having yourself pay a higher proportion than need be for that age group when you are young. And that makes sense because when you are young, you have earning capacity, you have excess / surplus, and you can actually pay more than you need to at that age group for your MediShield [Life] premiums so what you do is that instead of a slope that looks like this

you adjust the slope so that you pay more when you are young so that you need only pay less when you are older. So the inter-generational transfer now takes place within yourself and I think that is quite fair. That inter-generational feature is a very important feature of the new MediShield Life."

Mr Teo did not present the graphical illustration shown above; it is taken from MediShield Life Review Committee Report 2014.

2. YAP NENG JYE Addressing Pitfalls of Health-Care Cost Transfers The Straits Times 28 Jan 2015. Mr Yap is Press Secretary to Deputy Prime Minister, Coordinating Minister for National Security and Minister for Home Affairs.

3. MEDISHIELD LIFE REVIEW COMMITTEE MediShield Life Review Committee Report 2014.

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