Scholarly article on topic 'Consumer choice among Mutual Healthcare Purchasers: A feasible option for China?'

Consumer choice among Mutual Healthcare Purchasers: A feasible option for China? Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Weiwei Xu, Wynand P.M.M. van de Ven

Abstract In its 2009 blue print of healthcare reform, the Chinese government aimed to create a competitive health insurance market in order to increase efficiency in the health insurance sector. A major advantage of a competitive health insurance market is that insurers are stimulated to act as well-motivated prudent purchasers of healthcare on behalf of their enrolees, and that consumers can choose among these purchasers. To emphasize the insurers' role of purchasers of care we denote them, as well as other entities that can fulfil this role (e.g. fundholding community health centres), as ‘Mutual Healthcare Purchasers’ (MHPs). As feasible proposals for creating competition in China's health insurance sector have yet to be made, we suggest two potential approaches to create competition among MHPs: (1) separating finance and operation of social health insurance and allowing consumer choice among operators of social health insurance schemes; (2) allowing consumer choice among fund-holding community health centres. Although the benefits of competition are widely accepted in China, the problematic consequences of a free competitive health insurance market – especially in relation to affordability and accessibility – are generally neglected. To solve the problems of lack of affordability and inaccessibility that would occur in the case of unregulated competition among MHPs, at least the following regulations are proposed to the Chinese policy makers: a ‘standard benefit package’ for basic health insurance, a ‘risk-equalization scheme’, and ‘open enrolment’. Potential obstacles for implementing a risk equalization scheme are examined based on theoretical arguments and international experiences. We conclude that allowing consumer choice among MHPs and implementing a risk equalization scheme in China is politically and technically complex. Therefore, the Chinese government should prepare carefully for a market-oriented reform in its healthcare sector and adopt a strategic approach in the implementation procedure.

Academic research paper on topic "Consumer choice among Mutual Healthcare Purchasers: A feasible option for China?"

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Consumer choice among Mutual Healthcare Purchasers: A feasible option for China?

Weiwei Xu*, Wynand P.M.M. van de Ven

Institute of Health Policy and Management, Erasmus University Rotterdam, The Netherlands

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Article history:

Available online 5 December 2012

Keywords: China

Consumer choice

Mutual Healthcare Purchasers (MHPs) Chinese health insurance sector Healthcare reform Risk equalization

ABSTRACT

In its 2009 blue print of healthcare reform, the Chinese government aimed to create a competitive health insurance market in order to increase efficiency in the health insurance sector. A major advantage of a competitive health insurance market is that insurers are stimulated to act as well-motivated prudent purchasers of healthcare on behalf of their enrolees, and that consumers can choose among these purchasers. To emphasize the insurers' role of purchasers of care we denote them, as well as other entities that can fulfil this role (e.g. fundholding community health centres), as 'Mutual Healthcare Purchasers' (MHPs). As feasible proposals for creating competition in China's health insurance sector have yet to be made, we suggest two potential approaches to create competition among MHPs: (1) separating finance and operation of social health insurance and allowing consumer choice among operators of social health insurance schemes; (2) allowing consumer choice among fund-holding community health centres. Although the benefits of competition are widely accepted in China, the problematic consequences of a free competitive health insurance market — especially in relation to affordability and accessibility — are generally neglected. To solve the problems of lack of affordability and inaccessibility that would occur in the case of unregulated competition among MHPs, at least the following regulations are proposed to the Chinese policy makers: a 'standard benefit package' for basic health insurance, a 'risk-equalization scheme', and 'open enrolment'. Potential obstacles for implementing a risk equalization scheme are examined based on theoretical arguments and international experiences. We conclude that allowing consumer choice among MHPs and implementing a risk equalization scheme in China is politically and technically complex. Therefore, the Chinese government should prepare carefully for a market-oriented reform in its healthcare sector and adopt a strategic approach in the implementation procedure.

Crown Copyright © 2012 Published by Elsevier Ltd. All rights reserved.

Introduction

In the blue print of the Chinese healthcare reform ("Opinions of the State Council of China on Deepening Health Care Reform") in 2009, the Chinese government explicitly states that one of the goals of the reform is to make healthcare affordable and accessible for every citizen (State Council of China, 2009). One of the major actions of the government has been the expansion of the basic social health insurance, aiming at a universal health insurance. Since 2009, the Chinese government has significantly increased healthcare investments (by 850 billion RMB over three years; approximately 109 billion euro, August 2012 exchange), a large share of which has been made in the health insurance sector (State

* Corresponding author. E-mail addresses: xu@bmg.eur.nl, xuweiwei12@gmail.com (W. Xu).

Council of China, 2009; Yip & Hsiao, 2008). As a result of this enormous additional investment, 96% of the population was covered by various types of social health insurance by July 2010 (Hu, 2010).

Currently there are two major insurers responsible for fund collection and operation of the three social health insurance schemes in China: the Ministry of Health (MOH) and the Ministry of Human Resource and Social Security (MOHRSS). The MOH and its local branches (local health authorities at the county-level) are responsible for the New Rural Cooperative Medical Scheme (NRCMS). The MOHRSS and its local branches (local health insurance bureaus (HIBs) at the city level) are responsible for the Urban Employees' Basic Health Insurance (UEBHI) and the Urban Residents' basic Health Insurance (URBHI). The NRCMS and the URBHI are voluntary health insurance schemes for rural population and urban unemployed respectively. The premiums of these two schemes are paid directly by the enrolees to the insurers. The

0277-9536/$ — see front matter Crown Copyright © 2012 Published by Elsevier Ltd. All rights reserved. http://dx.doi.Org/10.1016/j.socscimed.2012.11.029

government encourages the enrolment in the two voluntary insurance schemes by substantial government subsidies (to a larger extent for the NRCMS than for the URBHI). The UEBHI is a mandatory health insurance scheme for urban employed people. The premium is collectively paid by employers and employees, the share of which depends on local regulations and the age of employees. There is currently no consumer choice of either the type of social health insurance schemes or the insurer. In principle, consumers can only be enrolled in a specific insurance scheme (according to their residence status and employment status) with a specific local insurer (according to their place of residence). With the NRCMS and the URBHI consumers can only choose to be enrolled or not, and not to choose among different insurance schemes.

Although the coverage rate of social health insurance has risen significantly in the past decade, it is questionable whether currently the major social insurers are efficient in providing health insurance. In fact, there have been some critics about the high level of financial reserves (deposit) of the social health insurers: it was reported that some insurers' financial reserves exceeded their one-year total premium revenue in the previous year (Lu & Wang, 2010). At the same time, co-payments for the social health insurance schemes are still high: the out-of pocket payments (OOPs) that individuals pay directly to healthcare providers at the point of service, still amount to approximately 50% of the total health expenditure (You & Kasuki, 2011). In other words, even though the health insurers collect more funds than necessary, they neither lower their premiums nor upgrade their products (i.e. by providing more comprehensive benefit packages than is currently the case or lowing co-payments). The social health insurers are also criticized as not acting as prudent purchasers of care because they basically contract with all public healthcare providers (in practice no selective contracting), and initiate very little quality monitoring or programs aiming at quality improvement/control of their contracted health providers (Yip & Hanson, 2009).

The Chinese government is planning to create competition within its health insurance sector in order to increase efficiency (State Council of China, 2009). Theoretically speaking, allowing consumer choice among health insurers is one option to give the insurers incentives to be efficient and to act as prudent purchasers of care. In practice, there are several countries with competitive health insurance markets, for example the Netherlands, Germany, Israel and Switzerland. In the Netherlands, it was found that the profit of health insurers was lowered due to competition (van de Ven, Schut, & Hermans, 2009). In the 2009 blue print of the Chinese healthcare reform, the Chinese government mentioned that private insurers would be encouraged to enter the social health insurance market, and market mechanisms would be introduced among social health insurers (State Council of China, 2009).

A major advantage of a competitive health insurance market is that insurers are stimulated to act as well-motivated prudent purchasers of healthcare on behalf of their enrolees, and that consumers can choose among these purchasers. Currently the individual consumer in China is in a weak position as a purchaser of healthcare because of the information asymmetry between the consumer and the provider of care (which may result in supply-induced demand) and because of a lack of information about the quality of healthcare. In addition, at the time that care is needed the consumer often is not in the position to compare the price and quality of the relevant providers of care. To emphasize the insurers' role of purchasers of care we denote them, as well as other entities that can fulfil this role (e.g. fundholding community health centres), as 'Mutual Healthcare Purchasers' (MHPs) (Bevan & van de Ven, 2010). Without proper regulation competition may induce serious side-effects especially for high-risk individuals, such as

unaffordability and inaccessibility of insurance, and to a certain extent inaccessibility to healthcare if MHPs have incentives to avoid contracting healthcare providers with good reputation of treating certain diseases. These problems are announced as the major problems to be solved by the Chinese healthcare reform (State Council of China, 2009). Based on the experiences in many settings with competitive health insurance markets, the regulations to prevent these problems should not be underestimated by the Chinese government.

This paper aims to: (1) raise the awareness of Chinese policymakers regarding the possible side-effects of allowing consumer choice among MHPs; and (2) discuss the principles and practice (including the international experience) of a risk equalization scheme, which is a method to ameliorate these side-effects.

The key research question is: How could China solve the problems of unaffordability and inaccessibility that are likely to arise if consumer choice among MHPs is introduced?

In addressing this research question, the following subquestions are considered:

- What feasible ways of creating consumer choice among MHPs can be identified?

- What are the advantages and disadvantages of (these ways of) allowing consumer choice among MHPs in China?

- Which measures have been taken to address the side-effects of competition in the health insurance sector in other settings (i.e. countries) with a competitive health insurance market, such as, Belgium, Germany, Israel, the Netherlands, and Switzerland?

- What lessons can China learn from the international experience in order to create consumer choice among MHPs without the problems of unaffordability and inaccessibility?

Section 2 discusses the two potential options for creating consumer choice among MHPs in China, analyses their possible advantages and disadvantages and considers solutions to problems that are likely to arise. Section 3 reviews and analyses several other countries' experience of addressing the problems of unaffordability and inaccessibility of health insurance. Section 4 considers relevant lessons for the Chinese healthcare sector. Finally, Section 5 presents our conclusions and discussion.

Potential options for, and consequences of, creating consumer choice among Mutual Healthcare Purchasers in China

Two potential options for creating consumer choice among MHPs

As mentioned above, the role of MHPs could be played by various entities. Government agencies are chosen to act as MHPs in the UK (local health authorities) and in countries with National Health Insurance such as Taiwan and Korea (health insurance bureaus). For profit or non-for profit private health insurance companies act as MHPs in countries such as the Israel, Germany, the Netherlands and Switzerland. Healthcare providers act as MHPs or are involved in purchasing care with various schemes, for example the fundholding Primary Care Trusts (PCTs) in England, and different Health Maintenance Organizations (HMOs) in the US.

Although all the above mentioned entities can become MHPs in theory, it would be difficult to introduce consumer choice of MHPs in China in any abrupt way. Because healthcare is a semi-collective good, constituted on democratically established social rights, reform advocates not only have to overcome the various technical problems associated with any reforms, but also have to deal with substantial powers of veto against their reforms (Immergut, 1992). If the stakes of a policy program are high, as in the case of healthcare, actors may prefer to stick to their established

institutions and policy programs in order to avoid uncertain and risky outcomes (path dependency) (Genschel, 1997; March & Olsen, 1989). Because of the sunk costs of existing institutions and established policy programs, incremental changes in the system are much more frequent than fundamental ones (Wilsford, 1994).

In this section, we discuss the following two (potentially complementary) options for creating consumer choice among MHPs that 1) allow the Chinese government to learn from international experiences; and 2) are incremental rather than fundamental reforms, and therefore seem to be promising options in terms of policy implementation (Xu & van de Ven, 2009).

Option 1: separating finance and operation of social health insurance and allowing private insurers to operate social health insurance

As mentioned in the "Opinions of the State Council of China on Deepening Health Care Reform", one potential option of creating consumer choice is to separate finance and operation of social health insurance and allowing private health insurance companies to be operators of social health insurance schemes (State Council of China, 2009).

Although a number of private insurance companies currently operate in China's health insurance market, they are only allowed to provide supplemental health insurance products. The social health insurance sector has not yet been opened to private insurers. If finance and operation of social health insurance is separated, consumer choice could be introduced in the social health insurance sector by allowing qualified private insurance companies to operate social health insurance, and to allow individuals to choose among the insurers that would be stimulated to act as MHPs, no matter their public or private nature.

If the Chinese government succeeds in creating a level playing ground to all the insurers/MHPs, they will face potential pressure from their competitors. Even the public MHPs (HIBs and local health authorities) will face this pressure because their position in the health insurance sector will be at risk if they keep losing enrolees, though they might not be fully exposed to the risks of exiting the market. In the long run, only those MHPs that operate efficiently will survive the market. In this way, MHPs are likely to be strongly motivated to be efficient and acting as prudent purchasers of care.

This option has its pros and cons. This option does not introduce a path-breaking reform by completely changing the role of the current HIBs and local health authorities. Instead, the role of the current insurers remains largely unchanged in the reform, at least at the beginning. Therefore, such a reform might face relatively less obstacles in implementation. This option also gives equal opportunity and incentives for both public and private insurers/MHPs if implemented properly.

One issue concerning this option is that private health insurance companies in China are currently only third-party payers of care in supplementary insurance. They might need time to obtain experience and talents to be able to act as prudent purchasers of care. Another issue lies in how the government will regulate the market. This option only works if private and public MHPs compete on a level playing ground. It would be a challenge for the Chinese government to avoid being influenced by public MHPs in regulating the market.

Option 2: consumer choice among fund-holding CHCs

Since early 2007, Community Health Centres (CHCs) have been emerged in the urban areas. CHCs are government-owned (with a few private-owned exceptions) and funded healthcare facilities in the urban areas. The primary intention is to encourage patients to seek primary healthcare at lower costs at CHCs, rather than in higher-level hospitals. They function similarly to the general

practitioners (GPs) in many countries. The revenues of CHCs rely mainly on payments from HIBs and partly on OOPs from individual patients. As a result of China's recent massive investment in the healthcare sector, around 30 000 CHCs have been established in urban areas by November 2010 (Ministry of Health, 2010). Urban residents are encouraged, but not obliged, to register with CHCs that are close to their place of residence. They are generally allowed to choose freely among other CHCs in the city of their residence.

A capitation payment scheme, which constitutes an ex-ante payment from HIBs to CHCs based on the number of registered consumers, has been piloted in several cities, including Zhenjiang and Suzhou in Jiangsu Province, in order to stimulate the CHCs to be efficient in providing primary healthcare services (Anonymous, 2007). Under the capitation payment scheme, CHCs are reimbursed with a fixed amount of approximately 40 yuan per year per registered patient for providing primary healthcare services to these patients. This capitation payment is adjusted for patients with 11 specified types of chronic disease. This payment scheme aims to provide incentives to the CHCs to attract more registered patients, especially those suffering from one of the specified types of chronic disease, and to be cost-conscious in providing care. However, this scheme also gives incentives to CHCs to unnecessarily refer their patients to higher-level hospitals.

The second option for creating consumer choice among MHPs is that the HIBs transfer capitation funds to CHCs not only for the primary care provided by the CHCs themselves, but also for some secondary care delivered by higher-level hospitals (compare the GP-fundholders in England in the 1990s). This option is a step forward based on the current capitation payment scheme. An important aspect of this option, which we refer to as 'fund-holding CHCs', is that individuals should be allowed to freely choose among CHCs.

CHCs are good candidate as MHPs because they have clinical knowledge and are at arms-length from the consumers. However, there are also pitfalls of this option: 1) the scale of registered patients of one CHC might be too small to satisfy the "law of large numbers" for being an MHP; 2) CHCs might lack necessary management skills, especially the skills regarding managing funds. These problems have been observed in the UK GP fundholders (Kay, 2002), and led to a reform in England from GP-fundholders to Primary Care Trusts (PCT) fundholders according to the recent UK government white paper Equity and Excellence: Liberating the NHS (UK Department of Health, 2010). In addition this option is not (yet) feasible in the rural areas in China because CHCs do not (yet) exist in rural areas.

Management skills could be obtained by CHCs over time. The problem of relatively small scale of CHCs raises the question whether it is feasible to pass the full risks of being MHPs to CHCs or it is better to pass only partial risks to CHCs. Exposure to the full risks might also become an obstacle in the implementation of such a policy. This problem could be addressed by various risk-sharing schemes and ex-post cost-based compensation between regulators or health insurers and CHCs. In this sense, option 1 and 2 are potentially supplementary to each other. If the management skills are obtained, and scales of CHCs grow over time, CHCs might be able to become independent MHPs in the long run.

Advantages and disadvantages of consumer choice among Mutual Healthcare Purchasers

There are a large bundle of literature that discussed the advantages and disadvantages of consumer choice among MHPs, as summarized below.

Advantages of consumer choice among MHPs

The main advantages of consumer choice among MHPs are as follows.

First, consumer choice can stimulate increased efficiency in the healthcare sector. When consumers are given the right 'to vote with their feet' and if they are provided with reliable information on benefit packages and price, they tend to choose the MHPs that provide the most favourable benefit package against the lowest price in the market (Enthoven, 1978). Thus, the market share of inefficient MHPs gradually shrinks. In option 2, even though fundholding CHCs are owned by the government, they are still under political pressure to operate efficiently. As a result of such market forces and political pressure, the healthcare system is likely to become increasingly efficient.

Second, MHPs are likely to respond to consumer needs. Competing MHPs are stimulated to meet their customers' needs and preferences in order to retain their existing customers and attract new ones (Enthoven, 1978). In the case of China, if consumer choice is created among MHPs, a likely direct outcome would be utilising the current huge unnecessary financial reserves held by HIBs to lower OOPs.

Third, consumer choice drives innovative activities among MHPs. MHPs are likely to be stimulated to initiate innovative activities in order to improve their efficiency or responsiveness to consumers' needs (Xu & van de Ven, 2009).

Disadvantages of consumer choice among MHPs

While the advantages of consumer choice described above are obvious, it is also true that, without proper regulation, consumer choice among MHPs can have serious side-effects.

First, there might be an unaffordability problem. In theory, competition could make the system more efficient, and the average premium will decrease, keeping quality constant. However, a lower average premium does not necessarily lead to lower premiums for everyone. In fact, without regulation, there might exist a wide variance among individual premiums, for example, extremely low premiums for young and healthy people, and extremely high premiums for old and sick people. In a competitive health insurance market, insurers attempt to breakeven on each contract as competition squeezes their profit per contract to the minimum. Without appropriate regulations, insurers adjust their premium per contract according to the expected costs of the consumers (risk rating), or adjust their products according to the risks that they accept (risk segmentation), or simply refuse high-risk individuals (risk selection). If the benefit package is standardized, risk-rated premiums could range from less than V400 to 40 000 or more per enrol per year (van de Ven, 2011). Thus, high risks either pay an excessive premium, or remain uninsured if they cannot afford the premium or are rejected by the insurers (van de Ven, 2000). Similarly to health insurers, fundholding CHCs either pass on excessive OOPs to the high risks or demand an excessive capitation payment from the insurers, who in turn charge the high risks excessive premiums. Without proper regulation, consumer choice cannot be combined with equity, because the high risks cannot afford the health insurance or healthcare they need.

Second, there might be an inaccessibility problem. Many countries with competing MHPs attempt to solve the problem of unaf-fordability by regulating premiums and benefit packages (for example, community rating and standard benefit packages). These measures, however, create the problem of inaccessibility. An example could be that MHPs refuse to enrol those individuals who will lead to predicted loss. The most commonly used regulation to solve the inaccessibility problem is open enrolment, i.e. insurers are obliged to accept all applications for the benefit package in question

(Enthoven, 1978). However, with open enrolment and community rating MHPs incur a predictable loss when they contract with a high-risk and make a predictable profit when they contract with a low-risk customer, which results in incentives for risk selection. Although straightforward risk selection is forbidden by means of the open enrolment requirement, there are many forms of subtle risk selection, such as selective marketing and intentionally avoiding a good reputation for managing chronic diseases, which are difficult to identify and prevent (Ackerlof, 1970). These risk selection strategies lead to market segmentation in the health insurance/MHP sector, i.e. high risks and low risks are insured with different MHPs. In the case of community rating per insurer/MHP the MHPs that are "specialized" in covering high risks have to charge higher than average premium. This is again may result in an unaffordability problem. If a flat premium across all MHPs is required, the MHPs with a concentration of high risks will eventually be driven out of the market. Anecdotal evidence of subtle forms of risk selection by CHCs has already been observed in China (Anonymous, 2010). As competition gives incentives to MHPs to avoid high-risk customers (risk selection), it becomes difficult for the latter to access health insurance or healthcare services (inaccessibility problem).

Third, there might be other unfavourable effects of risk selection. The potential problem of risk selection has various other effects that are unfavourable for the society. For example, efficient MHPs who do not engage in risk selection may lose market share to inefficient risk-selecting MHPs, resulting in a welfare loss to society. Risk selection also wastes resources because investment purely aimed at attracting low risks through risk segmentation or selection produces no net benefits to society (van de Ven, 2011).

Solving problems in a healthcare sector with competitive mutual healthcare purchasers

In order to solve the problems of unaffordability and inaccessibility, it is important to reduce (if not remove) the MHPs' incentives for risk selection. This can be done by implementing an adequate system of risk equalization, which is a system of cross-subsidies among individuals with high- and low-risk profiles. For risk equalization it is essential to (1) calculate the expected health expenditures of individual consumers over a fixed period (e.g. month, quarter or year) based on relevant information, and (2) granting subsidies to consumers or health plans to equalize the risk profiles of the potential insured (van de Ven & Ellis, 2000). In a health insurance sector with premium and benefit-package regulation, a risk equalization scheme can be implemented to reduce the incentive for risk selection. Without such regulation, a risk equalization scheme can be adopted as a form of subsidizing the high risks and solving the problem of unaffordability.

China is not alone in facing these potential problems; in fact, many countries with a competitive health insurance sector face similar problems. Among these countries, 5 countries are selected for discussion in this paper because governments in these countries have explicitly chosen to implement consumer choice among MHPs and to regulate the competition among MHPs: Belgium, Germany, Israel, the Netherlands, and Switzerland. In addressing the problems of unaffordability and inaccessibility, it is important to draw lessons from these countries. Netherlands is the only country, according to our knowledge, that has explicitly adopted the model of regulated competition in the healthcare sector and has been consistently working on this model for more than two decades. Therefore, the experience of the Dutch healthcare system was given more emphasis in this paper.

International experience in addressing the problems of unaffordability and inaccessibility

The problems of unaffordability and inaccessibility

The number of competing insurers in Belgium, Germany, Israel, the Netherlands and Switzerland ranges from four in Israel to around 400 in Germany. In most of these countries the insurers are fully financially responsible for their business. The exception is Belgium, where insurers have very low financial responsibility. New entrants to the health insurance market are allowed in all settings, except Belgium and Israel.

In order to solve the problems of unaffordability and inaccessibility, especially for the high risks, regulations such as risk equalization, community rating per insurer, benefit package regulation (i.e. a uniform or minimum benefit package) and open enrolment are enforced in all these five countries. Because the risk equalization systems in these countries are still imperfect, these regulations create incentives for subtle forms of risk selection, in particular in Israel and Switzerland.

In these countries risk selection is indeed widely observed. The tools for selection differ according to local policy constraints and regulations. In Belgium and the Netherlands, where basic and supplemental health insurance packages are usually provided by the same insurer, supplemental insurance is used as a tool for selection (Schokkaert & Van de Voorde, 2003; van de Ven, Beck, Van de Voorde, Wasem, & Zmora, 2007). In the Netherlands, where a discount on the premium is allowed for group insurance, identification of whether an individual is a member of a group insurance scheme is a tool for selection (van de Ven et al., 2007). In the Netherlands and Switzerland, where a differential deductible is allowed, a high deductible and a bonus to customers is used to attract favourable risks (Holly, Gardiol, Eggli, Yalcin, & Ribeiro, 2004; van de Ven et al., 2007). Other risk selection tools, such as selective marketing and avoiding a good reputation for managing chronic illnesses, are observed in Germany (Buchnerk & Wasem, 2003).

Implementation of risk equalization schemes

Risk equalization in theory

There are two main types of variance of individual health expenditure: random and systematic (van de Ven & Ellis, 2000). Insurers are assumed to deal with the random variation by having a large number of enrolees ('Law of the Large Numbers'). In a risk equalization scheme, the factors that are used to predict the systematic variance of individual health expenditure are known as 'risk adjusters'. Systematic variance can be attributed to two types of risk adjuster: subsidy-type (S-type) and non-subsidy-type (N-type) (van de Ven & Ellis, 2000). Age, gender and health status are generally considered to be S-type risk adjusters in most countries, whereas N-type risk adjusters may include insurers' efficiency and health providers' practice style and price. It is unnecessary for the sponsor (i.e. government, employers, or other entities that are willing and able to ensure efficiency and equity of the healthcare sector) to organize cross-subsidization for all systematic variance: only variance caused by S-type risk adjusters should be cross-subsidized. N-type variation is assumed to be reflected in the premiums. The effectiveness of a risk equalization scheme is often judged by its power to predict the systematic variance of contract-level health expenditure.

Risk equalization in practice

Risk equalization schemes differ in complexity from country to country. Among those with risk equalization schemes, Belgium and the Netherlands have the most sophisticated set of risk adjusters. In Belgium, age, gender, employment status, disability,

income, mortality, area of residence (urban or rural) invalidity, eligibility for social exemption, and chronic illness are used as risk adjusters (Schokkaert & Van de Voorde, 2003). In the Netherlands, age, gender, region, socioeconomic status, source of income, pharmaceutical cost group and diagnostic cost group are used as risk adjusters (van Kleef & van Vliet, 2010). In most countries, age, gender and health-status indicators are used as risk adjusters (Holly et al., 2004; Nuscheler & Knaus, 2005).

Of the five countries reviewed, Israel has the simplest risk equalization scheme: there, age is the only risk adjuster used. Obviously, this scheme has low predictive power; and indeed, the health insurers in Israel are actively engage in risk selection activities. The insurer that is least active in risk selection, which is a publicly oriented insurer, incurs huge losses each year and relies heavily on expost government subsidies (Shmueli, Chernichovsky, & Zmora, 2003).

Even in those countries with the most sophisticated set of risk adjusters, risk equalization schemes are not effective enough to remove insurers' incentives for risk selection. In the countries reviewed, various methods of risk sharing are implemented to further reduce the insurers' incentive for risk selection. For example, in Israel there is 100% risk sharing for five specific chronic conditions (Shmueli et al., 2003); in the Netherlands, the government shares a certain (and decreasing) percentage of the insurers' loss (van de Ven & Schut, 2011); in Germany, insurers can voluntarily participate in risk-sharing schemes organized by the government (Nuscheler & Knaus, 2005).

Risk sharing not only reduces insurers' incentives for risk selection, it also reduces their incentives for efficiency. Therefore, all countries reviewed are making efforts to improve their risk equalization schemes and reduce the extent of risk sharing. However, there are several major obstacles to implementing an effective risk equalization scheme.

Practical obstacles to implementing a risk equalization scheme

In the countries reviewed, we have observed two main practical obstacles to the process of implementing a risk equalization system. The first obstacle is a lack of consensus among stakeholders, either on the desirability of competition in the health insurance sector or on the necessity of an effective risk equalization scheme. In some countries, this is seriously hampering the implementation of a risk equalization system. Resistance may come from various sources. In Belgium, there is no political consensus on the need for competition and a risk equalization scheme (Schokkaert & Van de Voorde, 2003). In Israel, there is a lack of public interest in a risk equalization scheme (Shmueli et al., 2003). In Switzerland, the implementation of a risk equalization scheme is resisted by certain insurers who engage in risk selection (Holly et al., 2004). The second practical obstacle is that the necessary data on the health status of individuals is not available, either because of legally enshrined confidentiality principles or because of the high costs of collecting such data. The latter obstacle can be observed in all the five countries.

Potential obstacles to creating consumer choice and implementing a risk equalization scheme in China

There are at least four potential obstacles to creating consumer choice among MHPs and implementing a risk equalization scheme in China.

There is a lack of political consensus on the need for competition among MHPs

Although the Chinese government, in the 2009 blue print of healthcare reform, declared its intention to introduce competition

in the health insurance sector (State Council of China, 2009), that cannot be achieved overnight.

In government reports and statements on organization of the three social health-insurance schemes, 'efficiency' is a frequently used term, rather than 'competition' or even 'consumer choice'. Indeed, policymakers in the healthcare sector tend to avoid the term 'competition' because they naturally link competition to the problem of unaffordability. This linkage is based on unfavourable experiences with unregulated competition in China's healthcare system since the 1990s.

Stakeholders in the healthcare system hold various and often contrasting opinions on a system with competitive MHPs. As previously stated (Eggleston, Li, Meng, Lindelow, & Wagstaff, 2008), there are at least six major stakeholders: (1) the MOH, which represents the insurer of NRCMS and all public healthcare facilities; (2) the MOHRSS, which represents the governmental agencies that operate the UEBHI and the URBHI; (3) the Ministry of Finance (MOF), which is responsible for granting subsidies to the MOH and the MOHRSS; (4) private healthcare facilities; (5) private health insurers; and (6) patients. The three most influential stakeholders — the MOH, the MOHRSS and the MOF — rarely cooperate with each other in making policies.

The MOH's attitude towards competition is heavily influenced by the opinions of the public healthcare facilities, especially large public hospitals, which often oppose competition due to their dominant position in the market and the perceived threat of being challenged by new entrants to the envisaged competitive market. This makes it difficult for the MOH to openly allow competition among CHCs (or alternatively, to give consumers a choice among CHCs). However, as governmental subsidies account for only 10% of the revenues of public healthcare facilities on average, care providers are in practice competing for market share and revenue (Eggleston et al., 2008). Furthermore, the MOF can also powerfully influence the MOH's decision-making processes because it channels huge subsidies for public healthcare facilities and the NRCMS to the MOH. As a result of these influences, the MOH's opinion on competition remains equivocal.

The MOHRSS is currently making a great effort to enhance the efficiency of the local HIBs. As the MOF finances both the MOH and the MOHRSS, the concept of 'internal competition' may be attractive to both of these ministries. Allowing private health insurers to step into the social health insurance sector and creating a 'level playing field' for them to compete with the HIBs entail entitling them to the same level of subsidies from the MOF. As this challenges the dominant position of, and therefore the benefit for, the MOHRSS, it may be difficult to achieve in the near future.

Against this complex background, the Chinese government has not yet determined a roadmap for introducing market mechanisms in the health insurance sector.

Policymakers largely neglect the problem of risk selection

Chinese policymakers often assume that because social health insurance agencies and CHCs are not-for-profit organizations, there is little incentive for them to engage in risk selection (Anonymous, 2009b). Although current policies emphasize the not-for-profit nature of the potential MHPs, this does not necessarily exclude their incentives for risk selection.

In China, social insurance agencies do not pursue profits but political achievements such as the number of insured covered or the financial reserves held by an HIB or local health authority. Therefore, even social insurers are motivated to engage in risk selection, because the more affluent or healthy their risk pool, the greater the financial reserves they can accumulate, and more "sustainability" the officers can claim.

Fund-holding CHCs can spend the revenue that they obtain — after deducting the costs — on improving equipment and awarding bonuses to their staff. Thus, even as not-for-profit organizations, the CHCs are strongly motivated to maximise their revenue and minimize their costs. The most straightforward way for fundholding CHCs to achieve a large difference between revenue and costs is to register low-risks and avoid high-risks. Without in-depth knowledge of risk equalization schemes, policymakers tend to be conflicted between, on the one hand, providing incentives to CHCs to increase efficiency and, on the other hand, sacrificing efficiency for equity. In most cities, the problem of risk selection is largely neglected by policymakers.

It is difficult to implement the 'English PCT budget' model in China

In China, CHCs are owned and managed by district-level health authorities. Most secondary hospitals are owned and managed by city-level health authorities, and most tertiary hospitals are owned and managed by provincial-level health authorities or the MOH. If CHCs are empowered to use the risk equalized capitation budgets of their registered patients to purchase healthcare, and if these capitation budgets are to (partially) account for the patients' expenditures in higher-level hospitals — as in the English PCT budget model — this will potentially pose a threat to the power of higher-level health authorities. Therefore, adoption of this model might face political obstacles in China.

In Zhenjiang, vertical integration of CHCs, secondary hospitals and tertiary hospitals has recently emerged (Anonymous, 2009a). Two medical groups, each composed of various CHCs, several secondary hospitals and a tertiary hospital, were established in November 2009. However, in addition to the administrative contract between health facilities and medical groups, the former are still officially owned and managed by various tiers of local government. Therefore, this kind of integration does not provide a solid base for implementing the English PCT budget model.

There is a lack of necessary data in China

Data deficiency is a major problem faced by most countries that have a risk equalization scheme or are considering implementing such a scheme. In China, data on the individual health expenditure of the insured population has been available since early 2000 (in some cities since mid 1990s), whereas data on the health status of individuals is limited to information on a dozen chronic diseases and around five severe diseases (the numbers of chronic and severe diseases differ from city to city).

Another major problem with the data on individual health expenditure is that Chinese citizens currently pay a large portion of their medical expenditure out-of pocket. OOPs are not always recorded in insurers' databases and can only be obtained from healthcare facilities. It is extremely difficult to obtain the OOP of a specific individual over a fixed period of time: individuals may switch from one provider to another for different episodes of treatment, and it is as yet technically impossible to link expenditures incurred by a single individual in different healthcare facilities, especially for OOP and for uninsured people.

Conclusions and discussion

Conclusions

The Chinese government is considering creating competition within its health insurance sector (State Council of China, 2009). It is important that the government considers seriously not only the advantages, but also the disadvantages of allowing consumer

choice among health insurers, including the key problems of unaffordability and inaccessibility, as well as potential methods to solve these problems.

Because a major advantage of a competitive health insurance market is that insurers can act as well-motivated prudent purchasers of healthcare on behalf of their enrolees, we analysed in this paper potential ways of allowing consumer choice among 'Mutual Healthcare Purchasers' (MHPs) in China, including the advantages and disadvantages. MHPs need not only be insurers, but can also be provider organizations that fulfil the insurance function, e.g. fundholding Community Health Centres (CHCs). We also examined the experiences of five countries in addressing the unaffordability and inaccessibility problems posed by competitive health insurance markets and highlighted some lessons that are relevant for China.

Our main conclusion is that although allowing consumer choice among MHPs presents clear benefits, negative side-effects such as the unaffordability and inaccessibility problems should not be underestimated. One way to attempt to address these problems is by implementing premium regulation, benefit-package regulation and open enrolment. However, such measures provide incentives for MHPs to indulge in risk selection, which is a severe problem because it may harm the accessibility of health insurance and in some cases healthcare, especially among high-risk individuals. In theory risk selection can be counteracted by an effective risk equalization scheme, but in practice most equalization systems appear to be still imperfect. In five reviewed countries with competitive health insurance markets, we have found that risk selection occurs in practice, albeit to different extents. In Israel and Switzerland, where the predictive power of the risk equalization scheme is poor, risk selection is a serious problem. In three other countries - Belgium, Germany, and the Netherlands - more sophisticated risk equalization schemes have been implemented, but all three countries still experience the risk selection problem to some extent. China is not likely to be an exception if a competitive health insurance system is allowed and encouraged. In addition, practical difficulties and obstacles are also likely to be encountered in the context of China. Ex-post risk sharing is widely used to compensate for the ineffectiveness of risk equalization schemes. In addition, in all these five countries that operate risk equalization schemes, political and technical obstacles have been encountered during or before their implementation. Similar obstacles exist in China. For successful implementation of a risk equalization scheme, relevant data at the level of the individual consumer must be made available. This seems to be a big challenge for China because the availability of such data is not clear, and even if the data is available, the stakeholders' willingness to share such data is unknown. If China is going to create consumer choice of MHP, the improvement of the data and the development of a sufficiently refined risk equalization scheme is a major challenge. The implementation of an effective risk equalization scheme in practice, which is a necessary precondition to create competition among MHPs, may be a politically and technically complicated issue in the context of the Chinese healthcare sector.

Discussion

Creating consumer choice among MHPs in the Chinese healthcare sector and implementing an effective risk equalization scheme may take years or even decades. Three key issues in the implementation would be: 1) who is the regulator of the health insurance market; 2) who organizes the risk equalization scheme; and 3) who collects the funds. As the governmental agencies, i.e. the local HIBs and the health authorities, have been intensively involved in the social health insurance market in China for more than a decade, they are good candidates to be the regulator of the (local) health

insurance market. If the Chinese government adopted option 1 for the reform, the entity that is responsible for financing health insurance (which was a part of the previous HIB before the separation of finance and operation) would be the best candidate to act as both regulator of the market as well as the organizer of risk equalization schemes. If option 2 was adopted, the HIBs and the local health authorities can cooperate with each other and become the regulator of the market. The HIBs can also act as the organizers of the risk equalization schemes. The answer to the question "who collects the funds" depends to a large extent on how the premiums are calculated. If premiums are calculated according to the income of the enrollees, it would be difficult for the private health insurers to collect funds because they normally do not have income information about their enrolees. In this scenario, local health authorities or the entities that are responsible for financing social health insurance could act as funds collectors and distribute the funds among operators of health insurance. Because there are currently two major social MHPs (namely local HIBs and local health authorities) in China in basically any specific administrative areas, it would be difficult to implement a risk equalization scheme in one area without intensive cooperation between these two MHPs (which would be difficult) or combining them into one single entity. In several cities, there have been signs of combining different social health insurance schemes into one universal one in an administrative area. This would be a helpful pre-step of implementing risk equalization schemes in the future.

Given the complex nature of the Chinese healthcare system, policymakers need to adopt a strategic approach in designing reforms that envisage a healthcare system with competitive MHPs. For example, in the potential option of gradually introducing competition of allowing qualified private health insurance companies to enter the social health insurance market and compete with the existing operators of social health insurance schemes (MOH, MOHRSS, and their local branches), it is unnecessary to give them full financial responsibility in the early stages. Initially, they could be given 10% financial responsibility, and the percentage could be increased gradually as they adapt to a competitive market and master the necessary skills to become prudent purchasers of care and efficient administrators. Such risk sharing provides a safety net to insurers/MHPs. In China, a combination of these methods may succeed in reducing fear-based opposition to competition among MHPs, and thus smoothen the process of stimulating competition. For UEBHI, with which premium is to a large extent income-related, one part of the current HIB could be turned into an independent entity that is responsible for collecting premium because it will be difficult for private MHPs to collect income-related premium. The HIB could then organize a risk equalization system that provides payments to both public and private MHPs. The current HIBs and local health authorities are also good candidates to organize risk equalization schemes because they have more than 20 years' experience of operating social health insurance and have rich data about the historic individual level health expenditure and to a certain degree individual's health status.

Consumer choice among MHPs may be effective in terms of reducing unnecessarily excessive financial reserves of the current social health insurance agencies. However, if healthcare providers are not motivated to compete with one other, competing MHPs will have little room to negotiate with them over the price and quality of care. Thus, the benefit of consumer choice among MHPs will be limited. In China, although healthcare providers are legally owned and managed by the government, in practice they are largely financially independent. Providers are given incentives to generate revenue. However, due to inappropriate price regulation and reimbursement policies, the current competition is not increasing efficiency. The Chinese government is aware that the wrong

incentives have been given to public hospitals and has declared its intention to implement reforms geared to efficiency and public interest in the public hospital sector (State Council of China, 2009). As yet, there is no clear roadmap for reform of the public hospital sector, which indicates a need for further research.

To the Chinese government, consumer choice among MHPs seems to be an attractive proposition (State Council of China, 2009). Yet without well informed and carefully considered regulation, unaffordability and inaccessibility may arise as major obstacles to the socially desirable goal of equity in the healthcare system. As the problems of unaffordability and inaccessibility are the two major problems that need to be tackled by the Chinese government, an effective risk equalization scheme is necessary if consumer choice among MHPs is allowed. It is also desirable because solidarity has been a deeply rooted value in China, considering the historical Cooperative Medicine in China during 1950s and early 1980s. Theoretically at least, with an effective risk equalization scheme, both solidarity and efficiency can be achieved in a competitive health insurance sector. However, establishing and consolidating such a scheme is a technically and politically complicated procedure. Potential modules of organizing risk equalization schemes are to a large extent a political choice. For example, the choice of risk factors and their weights depends on both data availability and political decisions. To overcome the potential obstacles of creating consumer choice among MHPs and implementing an effective risk equalization scheme, the Chinese government needs to be well prepared—both technically and politically.

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