12 August 2015

With MediShield Life, It Doesn't Pay To Die At Age 65

Pay more now so that you pay less in the future.

That is the promise of the pre-funding feature that will be incorporated in MediShield Life.

The Government's reasoning is twofold:

▪ A person is more likely to be employed when he is younger than when he is older (especially after he retires on his 65th birthday), and therefore has more financial resources to pay MediShield Life premiums when he is younger than when he is older.

▪ Hospitalisation insurance premiums increase as a person ages, reflecting the higher incidence of hospitalisation. Thus, premiums are low for younger persons and would remain "affordable" even after adding on pre-funding.

The Government's reasoning doesn't make sense.

When a person is younger and working, he sets aside (or should be setting aside) part of his income for his future needs.

If he pre-funds his MediShield Life premiums, such pre-funded premiums held by MediShield Life earn interest at 4 per cent. (The pre-funded premiums are MediShield Life's assets but because they result in matching liabilities, they do not form part of MediShield Life's reserves.)

If however, he is not required to pre-fund his MediShield Life premiums, the moneys remain in his Medisave Account and earn not only 4 per cent interest but (together with moneys in his Special Account and up to $20,000 in his Ordinary Account) also an extra 1 per cent interest up to $60,000.

He is worse off with pre-funding.

Why does the Government mandate pre-funding of MediShield Life premiums?

Two possible reasons.

First, the Government is probably concerned that a person may spend so much of the moneys from his Medisave Account on himself and/or his family members that when he is older, he may not have enough moneys to pay the MediShield Life premiums, which will have increased progressively as he grows older. This is despite there being conditions for, and limits on, Medisave withdrawals — a person can't simply use his Medisave moneys as he wishes, not that anyone desires to have a medical condition that requires him to use his Medisave moneys.

MediShield Life premiums and other qualifying medical expenses use the moneys in a person's Medisave Account, and neither expense can be avoided. Because this is a zero-sum situation, mandating pre-funding solves nothing if a person simply doesn't have enough money for both expenses.

Second, pre-funding disadvantages people who die close to the age at which they start to receive premium rebates (i.e., reductions in premiums from having previously pre-funded their premiums). MediShield Life premium rebates will start from age 66 years. However, a person who dies just before his 66th birthday won't get a single cent back from the premiums he has been pre-funding for years, even decades.

Who then benefits from the pre-funded premiums of those who have died? The survivors of the age cohort.

The purpose of hospitalisation insurance such as MediShield Life is to pool current financial risks for an age cohort. This is what collective social responsibility means.

The Government should not use MediShield Life as a means to force people who die young to subsidise, sometimes long after they have died, the MediShield Life premiums of those who live to a ripe old age.

Legislated compulsory pre-funding is unjust and wrong.

With MediShield Life's compulsory pre-funding, the worst thing to happen is to die one day before your 66th birthday.

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