13 February 2015

Government Silent About Disamenities Of Pre-Funding MediShield Life

At Singapore Perspectives 2015, Deputy Prime Minister Teo Chee Hean repeated his Government's oft-mentioned selling pitch on pre-funding MediShield Life premiums[1]:

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 the pre-funded moneys are drawn down 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. Instead of a slope that looks like this, the premiums rise more gradually because you pay more when you are young and you pay less when you are older.

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."

In an earlier article Government Says Pre-Funding Medishield Life Is A New Feature. Really?, I explained that, contrary to what Mr Teo claims, pre-funding is not new; MediShield premiums already have a pre-funding component. However, pre-funding has many disamenities, which the Government doesn't talk about, and should be discontinued. I'll refer to the pre-funding arrangement as the Pre-funding Alternative.


No Logic
We are frequently advised to avoid prepaying for anything, especially when the benefit of prepaying is years, if not decades, away (as in the case of MediShield Life), unless there is a significant upfront economic advantage. But we will not derive any economic benefit, upfront or otherwise, from pre-funding our MediShield Life premiums.

Besides, there is a very simple and elegant alternative to pre-funding — let us keep the pre-funding amounts in our own Medisave accounts until such time when the money is needed. I'll refer to this as the Medisave Alternative.

Pre-funded Premium Doesn't Grow Faster
The Government says that we are able to pay more premium than the premium determined actuarially for our age when we are young than when we are older.

This argument is both flawed and irrelevant.

As with all our expenses, MediShield Life premiums will be paid from the cumulative income earned over our lifetime, not just the current year's income. If the Government doesn't believe that lifetime expenses must be funded by lifetime earnings, it should be giving all citizens a pension when they retire.

If we don't pre-fund, the extra money will be in our Medisave accounts (the Medisave Alternative) and we can use that in the future to pay the full actuarially determined premiums.

Furthermore, money earns the same interest whether it is pre-funded premiums in MediShield Life (the Pre-funding Alternative) or balances in our Medisave accounts (the Medisave Alternative). Nowhere has the Government said that the MediShield Life interest rate will be higher than Medisave account interest rate, nor is there any reason for the Government to pay a higher interest rate.

The rebate on our MediShield Life premiums when we are old is not a gift from the Government or Central Provident Fund Board; it comes from what we have pre-funded plus interest.

No Ownership
Pre-funding Alternative. Together with others in our age group, we have a indirect collective interest in the pre-funded premiums we will have paid into MediShield Life, which will be used for our benefit when we are older. But not only do we not have any legal title to the pre-funded moneys, we also don't know how much moneys there are.

Medisave Alternative. The moneys in our Medisave account belong to us and are in our respective names.

Loss on Renunciation of Residency
Prepayment Alternative. Inasmuch as we do not have legal title to the MediShield Life pre-funding moneys, we lose our implied "share" of the moneys when we renounce our citizenship or permanent residency.

Medisave Alternative. The moneys in our Medisave account belong to us, and can be withdrawn when we renounce our residency.

Loss on Early Death
Prepayment Alternative. Inasmuch as we do not have legal title to the MediShield Life pre-funding moneys, we lose our implied "share" of the moneys when we die. Our loss is greatest after we have made a lifetime of pre-funding and are just about to enjoy using the rebates to reduce our premiums in our old age (the current crossover age is 71 years old and the MediShield Life Review Committee's recommended crossover age is 66 years old[3]). Thus, pre-funding is more than inter-generational transfer yourself for yourself (in Mr Teo's words); it is inter-generational transfer for yourself and other survivors in your age group,

Medisave Alternative. The money in our Medisave account belongs to us, and will be distributed to our nominees when we die.

Late Entrants
Pre-funding Alternative. If we do an inter-generational transfer for ourselves, Central Provident Fund Board would have to keep track of the amount of pre-funding by each member of MediShield Life. It is not clear whether this will happen, but it did not happen with MediShield.

Consider the following table (Fifth Schedule Part V) from Central Provident Fund (MediShield Scheme) Regulations:

PREMIUM REBATE UNDER DIVISION 2 SCHEME
(THE MEDISHIELD SCHEME)
Age from which person was insured under MediShield without break in insurance cover
(Age next birthday)
Premium rebate at age next birthday, when age next birthday is

71-73 years
74-75 years
76-78 years
79-80 years
81-83 years
84-90 years
30 years and below
$156
$184
$209
$246
$434
$449
31-40 years
$117
$138
$157
$184
$326
$336
41-50 years
$78
$92
$104
$123
$217
$224
51-60 years
$39
$46
$52
$61
$108
$112
above 60 years

For example, a 72-year-old receives the same rebate of $156 regardless whether he joined MediShield as a newborn or a 30-year-old — a difference of 29 whole years of pre-funding between the earliest and the latest in the age group![4]

It's bad enough when both the newborn and the 30-year-old are citizens. But the balance of probability is that the 30-year-old is a foreigner who joined or joins MediShield or MediShield Life (in the future) on being granted citizenship or permanent residency.

Medisave Alternative. There is no need for Central Provident Fund Board to track when a person joins MediShield Life (or joined MediShield). Neither will there be any inequitable treatment of members resulting from grouping them into broad age bands (to track when they joined MediShield Life or MediShield) when determining the rebates to be given.


WHY THE GOVERNMENT WANTS PRE-FUNDING
There are a number of possible reasons why the Government wants us to pre-fund our MediShield Life premiums.

Reducing Government's Burden
As mentioned above, the age at which we stop pre-funding and start to draw down on the pre-funded premium pool in MediShield Life will be 66 years old (age next birthday)..

The closer to age 66 years when we die, the more we leave behind for others in our age group.

Similarly, the closer to age 66 years when we renounce our citizenship or permanent residency, the more we leave behind for others in our age group.

This is a form of compulsory indirect taxation on us.

Health care insurance should be about paying for our health care expenditure as determined by the health of the members of our age group at any given point in time. There is no reason for us to help pay for the health care expenditure of others in our age group years or even decades after we have died. If any member does not have the means to pay his premiums when he is old, or at any other age, it is the duty of the Government, not others in his age group, to provide him with financial assistance.

Avoiding Large Medisave Balances
The Medisave Alternative requires members to keep moneys in their Medisave accounts that would otherwise have been paid to MediShield Life as pre-funding. Members will have larger Medisave balances under the Medisave Alternative than under the Pre-funding Alternative.

However, many people prefer to withdraw as much as they can from their CPF accounts and maintain as low balances as they can in their CPF accounts; in fact, the lower the better. Under the Pre-funding Alternative, the pre-funded moneys are tucked away in MediShield Life, out of sight and out of reach of its members so much so that many people are not even aware that they have a "share" in the MediShield reserves by virtue of their having pre-funded their premiums over the past many years.

Avoiding Inability to Pay
As the Government yields to public pressure to allow members to use their Medisave moneys for increasingly more uses, some people may end up with very low Medisave balances especially in their old age. The Pre-funding Alternative takes some Medisave moneys away from them over their working lives, tucking them away in MediShield Life and out of their reach.

However, medical expenses are largely non-discretionary and people have low Medisave balances because they earn little and/or spend a lot on medical expenses.

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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.

4. The example shows the effect of using broad age bands for tracking when people join MediShield as it exists now. Whilst MediShield will be replaced by MediShield Life, the MediShield example is still instructive even though the rebates and the age bands may be different.

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