How will the New Social Health Insurance Scheme Affect the Insurance Industry?

The Ethiopian Health Insurance Agency, a new establishment designed to change the nation’s health insurance platform, is almost ready to launch the first ever health insurance scheme in the country. Its goal is to escalate the health service coverage in order to speed up sustainable health care financing that augments equitable admittance to enhanced health services by means of cross-subsidization. 

The scheme is a walk away from out-of-pocket payments for healthcare. It is an important step towards averting financial hardships associated with paying for health services. Social health insurance is mandated for those employed where wage rates are high. In turn, this service is extended to those unemployed through a subsidy. Since a large proportion of people are employed in the informal sector in counties like Ethiopia, governments are unlikely to manage compulsory insurance in the informal sector. This forces governments to depend on insurance schemes offered on a voluntary basis to the non-formal sector where the bulk of the poor work. Here, premiums would be considerably below the actuarially fair price.

If universal healthcare coverage is to be financed through insurance, the risk pool needs compulsory contributions (otherwise the rich and healthy will opt out); the risk pool has to have large numbers of people since pools with a small number cannot spread risk sufficiently and are too small to handle large health costs; and where there is large number of poor, pooled funds will generally be subsidized from government revenue.

The decree has made health insurance compulsory to employers with more than 10 employees including government workers, pensioners and private employees. The premium for the health service is to be obtained from 3 Pct contributions of employees and employers based on the monthly salary of their workforce, while pensioners contribute one percent from their monthly income. The scheme provides essential health coverage and curative out patient care, inpatient care, delivery services, surgical services and diagnostic tests and generic drugs for the insured population when prescribed by medical practitioners.

Social health insurance (SHI) is not a new phenomenon in the world. In fact Germany has the world’s oldest national social health insurance system, with origins dating back to Otto von Bismarck’s Sickness Insurance Law of 1883. It is a conventional scheme deep-rooted all over the world. SHI has also been mandated for formal-sector workers in a number of developing countries. In order to achieve universal healthcare coverage, the institutional structure that emphasizes payment to providers for services delivered has been offered to those beyond the formal workforce (Vietnam 1993 and 2003, Nigeria 1997, Tanzania 2001, Ghana 2005, India 2008, China 2003) as an alternative to direct tax-based financing of providers and out-of pocket payments. In most other countries national health insurance systems were implemented in the period following World War II as a process of deliberate healthcare reform, intended to make health care affordable to all, in the spirit of Article 25 of the Universal Declaration of Human Rights of 1948 by nations which had adopted the declaration as signatories.

Although, health insurance industry plays a ubiquitous role in the nation’s socio economic development, it has a significant impact and would change the conventional way of providing voluntary commercial health insurance, unless the commercial insurers adjust their scheme to suit the changing needs. Currently, although official statistical data is unavailable, commercial insurers on average generate 25-30 Pct of their life and health premium income from health insurance.

Subsequent to the launching of the new scheme, the commercial insures will only concentrate on risks that fall over and above the benefits granted by social health insurance schemes. This might force them to reside only in areas not covered by social health schemes such as worldwide coverage and provide coverage for the usually “undesirable risks”. Here it has to be noted that insurers regard such segregated risks as “Adverse selection” as the perils naturally create imbalance on the “law of large numbers” which is a pillar to most insurance principles and a source for insurer’s profitability since such perils are nearly certain to happen. In many insurance markets, premiums paid by policyholders are pooled so that the financial impact of a single event doesn’t wipe out a household or organization. Health insurance is an exception where many policyholders use their insurance frequently. Thus, the math of insurance is about basics: pooling of risk from a large number of policyholders to fund a smaller number of unforeseen losses. However, this might not work where there exists adverse selection.

The commercial insurers reside only to niche markets from such adversely selected perils although the tendency requires prudent risk management capacity. Ironically the  uninsured areas that the scheme might exclude encompass treatments outside the country, treatment of injuries resulting from natural disasters, social unrest, epidemics, and high risk sports, treatments related to drug abuse or addiction and periodic medial check-ups unrelated to illness cosmetic surgeries, organ transplants, dialysis except acute renal failure, provision of eyeglass and contact lenses, in vitro fertilization, hip replacement, dentures, crowns, bridges, implants and root canal treatments except those required due to infections, provision of hearing aids and health services provided to any beneficiary free of charge are left for commercial insurers although these are “least preferred” perils for commercial insurers; provided the willingness of employers to buy  such coverage to their employees. However, the challenge posed here is that as health care costs continue to rise, it is possible that employers will decide to drop health coverage as an employee benefit for obvious reasons.

The benefit might have minimal impact on the personal accident insurance policies since it does not cover occupational injuries, traffic accidents and other injuries covered by other laws  since the proclamation considered such matters as inapplicable laws according to article 11 sub article  1 and 2 (a and b). The scheme has excluded additional medical benefits granted under collective agreements concluded in accordance with the Labour Proclamation No. 377/2003

Conversely, for the insured, the scheme would bring numerous advantages since it forces the commercial insurers to widen the scope of cover, loosen stringent policy terms and conditions, and diminish the list of exclusions from their insurance policies so as to stay competitive and win the heart and mind of customers. Moreover, beneficiaries of the social health insurance scheme are insured members and their families which have a wider scope than the commercial benefit coverage.

Challenges that the new scheme might face include:  claim fraud, high patient traffic and exodus to health centers since the majority of health care costs worldwide are the direct result of unhealthy lifestyles and/or failure to adhere to recommended treatment plans. Hospitals may see an influx of claims received for adjudication, benefits that are exhausted, benefits not covered, and resulting denials. At the same time, the non-financial barriers to access to healthcare, such as awareness and distance to healthcare facilities, must be minimized. Further, more rigorous evaluation studies on implementation and the impact of health insurance must be conducted to generate evidence for better-informed policy decisions.

In all likelihood, the commercial insurers may stagger to provide the conventional commercial health insurance, since the new platform might require their enrollment and scope of broader coverage. Although it reduces the mortality rate for other personal or life insurance policies, the practical impact of the new scheme on the commercial insurers and responses to the actions and reactions of affected stakeholders will be clearly noticed after full scale implementation. But obviously, the new health insurance scheme might serve as a major driver of innovation to the commercial and personal health insurance industry in Ethiopia which highly suffers from supply side imperfections and lack of demand. 

To determine the core needs of their customer base, commercial insurers will be forced to benchmark how other countries have managed such issues and adjust themselves. Accordingly, they need to formulate strategies to attract new consumers and to retain the existing ones through value-added and complementary health insurance services so as to better position themselves in the individual insurance market. Apparently, the new individual cohort will likely require a more sophisticated segmentation and analytical approach than in the past.

We wait to see whether employers drop health care benefits as costs become non-sustainable and state-run health exchanges loom as an alternative for employees? Will individuals without employer coverage choose to enter the individual insurance market? If so, what insurance features will they prefer? Will some select minimal coverage? How will doctors and hospitals respond as increased numbers of individual policy holders pressure the system? The journey has just begun and the new social health scheme is anticipated to revolutionize the way commercial insurers think.


2nd Year . February 2014 . No.12


Fikru Tsegaye

Fikru Tsegaye holds MBA in Marketing and MA in Human Resource and Organizational Dev’t. He is currently working at Ethiopian Insurance Corporation as Marketing and Strategic Management Team Leader. He can be reached at fikru.tsegaye@yahoo.com

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