Too poor for Health Insurance?

In 2008 the Government of Tajikistan decided that a Mandatory Health Insurance (MHI) should be established in the country in 2010. By the end of 2009, the Government and the development partners in the health sector reached a consensus that a number of pre-conditions were not yet in place. The Government decided then to postpone the introduction of MHI to 2015. It was also recognized that a feasibility study was necessary to look deeper into the feasibility of alternative designs. The feasibility study has not been carried out yet, but is a priority in the pipe line of the technical assistance to the Health Ministry.

In 2009, before the decision to postpone the introduction of the MHI was taken, the Health Policy Analysis Unit (HPAU) of the Ministry of Health disseminated a policy brief intended to call the attention to technical aspects of insurance arrangements which had to be thoroughly addressed at the design stage. The policy brief highlighted the difficulties around the definition of the entitlements, the introduction of payroll taxes and the guarantee of coverage.

Tajikistan is a landlocked country in Central Asia with a population around 7 million. It became independent with the end of the Soviet Union, where it was one of the poorest Republics and a net importer of capital. With the ending of the support from Moscow, the economic conditions in Tajikistan deteriorated; the 5 years civil war that set off then further damaged the economy of the country.

Box 1 shows some socio-economic indicators of the country. The GDP per capita, now, almost 20 years after independency, is reaching the same level registered before the break up of the Soviet Union. Health indicators shown in Box 1 and Box 2 give an idea of the extension of the problems in the health sector. With one of the lowest percentage of GDP spent in health (5%), of which 76% is private out-of-pocket, the country basically needs support in all areas in the health domain. The outbreak of polio in 2010 is a dramatic evidence of that.

Health Insurance – a framework

To make predictions in relation to how health insurance schemes will start, function and develop we need to equip ourselves with a framework that identify the components of those arrangements, their starting point and their likely behavior. For that, clear definitions are needed.

What characterises a health insurance arrangement is the linkage between pre-payment by the beneficiaries for future cover of costs associated with uncertain health events. If there is no pre-payment, if the health events are not uncertain, if the cost to be covered are not to occur in an unpredicted future, the arrangement cannot be properly called “health insurance”.

Furthermore, the costs covered by the insurer (claims), at large extent should be independent from the pre-paid amounts. Usually there is no ceiling for the amount of health related costs covered by the insurer, although certain insurers may set coverage limits. Yet, in some cases the pre-paid amounts may reflect optional benefits (for instance, admission in luxurious hospital apartments). These nevertheless are small “deviations” of the basic model.

In any insurance arrangement there must be at least three independent entities: the beneficiaries, the health services providers and the insurer. If this is not the case, we should not call the arrangement health insurance in a strict sense.

Using the term “pool” with a metaphorical meaning, we can say that these three entities constitute, so to speak, different “pools”. The beneficiaries represent a “pool” of health risks and the original source of funds.

Payments by the beneficiaries (usually by premium or specific payroll taxes) are pooled at the insurer. The insurer therefore is a “pool” of funds with which it finances a “pool” of entitlements or, in other words, a “pool” of rules of entitlements. By their turn, the health service providers represent a “pool” of services, actually delivered or potential.

These “pools” need to “meet” in order to bring an insurance arrangement into life. With artistic license, Diagram 1 depicts the interactions between the entities and their respective pools.

In other words, the “pool” of services should meet the “pool” of health risks according to the “pool” of entitlements sustained by the “pool” of funds. The balance between those “pools” is not automatic, spontaneous or guaranteed; it is achieved through progressive improvement of technical design, managerial skills and resources availability.

The stabilization of insurance arrangements offering comprehensive health coverage may require a time frame of decades to evolve. Three factors are fundamental: 1) the market (insurers’ and providers’ alike); 2) the technocrats and experts designing the solutions; 3) the politicians developing and approving regulatory frameworks.

However, independent from the stage of development of insurance arrangements, there is always tensions between the three entities. The complementary interests bring them together, while the opposing interests set them apart. Health insurance is therefore a complex game where the entities involved pursue diverse and often opposing interests. In simple terms, as depicted by the arrows in Diagram 1:

1) Beneficiaries would want to pay as less as possible to insurers (arrow with negative sign) while insurers want to get as much as possible from the beneficiaries (arrow with positive sign);
2) The insurers want to minimize the payments made to providers (arrow with negative sign) while providers want to maximize them (arrow with positive sign);
3) The providers want to provide as less as possible to the beneficiary for a given cost (pink arrow with negative sign) while the beneficiary want to get as much as they wish (arrow with positive sign);

The three entities need each other to survive – but, at the same time, they need to maximize what each get from the others while minimizing what they give out; if the opposing interests are pursued to the extreme, the insurance arrangement collapses.

For better understanding of the complexities of the health insurance arrangement, let‘s make comparison with home insurance against fire. In this case there are only two entities. The amount insured has a ceiling (the value of the property). The insurer can workout the odds of a fire event with reasonable level of confidence. There is no interests of a normal beneficiary to set his/her home alight, knowing that a number of valuables with special personal value will never be bought again, no matter the size of the indemnity; so, moral hazard is very low.

Fire insurance

1. Limited claim (value of the property)
2. Only two “entities”
3. Very low chance for moral hazard
4. Low risk of adverse selection
5. High probability of selecting people averse to risk, what is good for the scheme

Health insurance

1. Unlimited claims
2. Three “entities”
3. High opportunities for moral hazard on the beneficiaries and providers sides
4. High risk of adverse selection
5. High probability of selecting people averse to risk, what is bad for the scheme

The concepts of Moral Hazard and Adverse Selection are fundamental for the understanding of the economics of insurance in general and health insurance in particular.

Moral Hazard is the behavior that is not constrained by its cost consequences. Examples: 1) people covered by insurance tend to use more health service than they would think they need, if they had to pay the cost of the services themselves;

2) Providers tend to provide more services than necessary when they get paid per unit of service provided.

Adverse Selection is a threat to insurance arrangements where people with high chance of using health services (bad risks) are more attracted to enroll than those with low health risk. This tendency may set the arrangement in a spiral of escalating costs that further expels the good risks from the pool, while keeping the bad ones, further aggravating the feasibility of the arrangement, may leading it to fall apart.

In summary, the problematic characteristics of Health Insurance arrangements are:

• Unstable Game, difficult to attain equilibrium – highly influenced by technology advances and politics
• High need of regulation due to the threats of opposing interests
• Either or both, insurers and providers are likely to constitute strong interest groups able to capture regulatory bodies
• Beneficiaries too fragmented as interest group

Beneficiaries get and use the insurance arrangements individually, therefore have little motivation to associate and articulate their common interests. Because of that they are normally the most vulnerable components of the arrangements, relying on politicians to protect their interests.

In assessing the feasibility of a health insurance arrangement the crucial point is the identification of the likely initial position of the three “entities”. In other words, where the beneficiaries, the providers and the insurer(s) will start the game, and what are their strength for pulling the arrangement into the direction that is more favourable for them.

Applying the framework to Tajikistan

The presented framework helps us to reflect on the fundamental aspects of the establishment of MHI in Tajikistan. It helps us to systematically consider the position of each of the “entities” at the onset of the insurance arrangement.

Likely initial position of the Beneficiaries as source of funds and pool of risks

Two aspects need to be considered in assessing the beneficiaries. As source of funds, the likelihood that enough revenue will be raised from them needs to be investigated. As pool of risks with likely large unanswered health demands and constrained access to health services due to informal payments, it is necessary to assess how the conversion of population into MHI beneficiaries is likely to lead to strong demand side pressure.

As source of funds, there should not be any expectation that untapped sources of revenue are still available considering that:

1. The formal employment base for additional payroll tax collection is very narrow; larger part of families’ income is generated from informal or difficult to tax activities, with most of the workforce deployed in the agricultural sector.

2. There is no support for a new payroll tax considering that formal payroll is already taxed at the level of 40% (income and social security taxes);

3. The remittances from abroad are unstable and do not flow through formal channels that can be targeted by specific tax;

A new payroll tax would certainly further drive economic activities into the informality. The main sources of income are informal, including the remittances. If on aggregated level the remittance is one of the highest sources of income for the country (estimated in almost 40% of GDP), at family and individual level it shows high fluctuations and vulnerability to crisis.

In relation to the pool of risks, it should be considered that:

4. 74% of the population of Tajikistan is rural, spread in thousands scattered villages with limited access to health care facilities; This population is likely to be either excluded from the benefits the scheme may offer, or will demand health services beyond the capacity of the system to respond.

5. With large families, including several generations, the link of those who effectively contribute to the MHI and those who will benefit from that contribution is likely to drive the scheme into a high dependence rate that will make unfeasible the provision of a comprehensive healthcare package. The scheme will have to either exclude non-contributors, or reduce the entitlements.

One can expect serious difficulties to link contribution to entitlements, if the insurance system is intended to have nationwide coverage. The urban areas will have better chance to use their entitlements than the rural population. Either way, funding non-contributors or excluding them from the pool, political, social or economic troubles will arise.

Likely initial position of the Providers as pool of services

The main issue in relation to providers is less the range of services they may be able to offer but the capacities they have to enter in a relationship with the insurers and beneficiaries where the reimbursement occurs for unit of service provided or according to some contractual arrangement that set the rules for the flow of funds between the parties.

For that, the two main concerns are: the existence of independent providers able to enter in contractual relationship, and their managerial capacity. Tajikistan health sector is basically characterized by the absolute predominance of public health service providers, and very few private providers. The health providers market is therefore very small and, for setting up insurance contracts, the sector can be described as follows:

1. Lacking of enough autonomous providers able to enter contractual arrangements
2. Lacking experience and skills on how to manage health service contracts
3. Lacking experience on health business management where costs and revenues are variable (all public providers rely on public budget, which is rigid and has about 90% of the funds tied to salaries)
4. Lacking legal and institutional environment promoting autonomous business initiatives in the health sector

Likely initial position of the Insurers as pool of funds and rules of entitlements

Health insurance will be a completely novel initiative in the country. For that, the potential insurer should be worried about:

1. Lack of assurance of enrolment in a voluntary scheme or enough revenue collection in a mandatory scheme;

Besides this major concern, the candidate institution will have to consider that, as much as seen in the heath services providers’ side, in the insurer side the context will be characterised by similar weaknesses as:
2. Lacking contractual experience and insurance business skills
3. Lacking actuarial information and technical knowledge to assess risks and set premiums/contributions in connection with entitlements
4. Lacking investment base for technical capital reserve

The insurer will also have to face important challenges in relation to the prevention of moral hazard in the beneficiary’s and provider’s side. Among the hard questions to answer it can be mentioned: What package to offer? What limits in entitlements to adopt? How to limit the bad risks in the pool? How to guarantee that service providers will apply the entitlements limits? How to select suitable providers? How to audit providers’ claims?

Summary of main points

In summary, the assessment of the likely initial positions of the three entities of a health insurance arrangement in Tajikistan would completely discourage any public initiative in the direction of setting up a MHI. The critical points are:

• The payroll base is not large enough
• There is no assurance that the beneficiaries will enrol in a voluntary scheme and/or mandatory contributions will be collected at minimally appropriate levels
• There are not enough skills for linking and managing entitlements, services and health risks through health insurance contracts
• There are not enough public and/or private autonomous health providers to operate under contractual arrangements

Conclusion – relative and absolute constraints

Setting up from scratch a mandatory scheme aiming at providing national health insurance coverage in an environment with no previous experience of such arrangements is a very audacious endeavor indeed. The difficulties do not stream mainly from the fact the Tajikistan is a poor country. The health package (entitlements) can be as narrow as the revenue base that can afford it.

In this sense, poverty is only a relative constraint. By decree, the Government can set the package of health services at the affordable level, and exclude from it any service likely to be in excess of the available budget. Alternatively, segments of the population can be excluded and the scheme can provide cover to the elected few who can contribute regularly in a stable manner. These options would nevertheless have political costs.

However, there are absolute constraints. These are the absence of:

• Service providers’ market
• Professionals able to design and manage the systems (in the insurer and provider sides)
• Political capacity for enacting and enforcing suitable regulations

As opposed to the relative constraints these absolute constraints cannot not be attained by Governmental decrees; they may require decades to develop.

The purchase-provide split and establishment of a single payer now in the health policy agenda of the country is a more suitable development - it may create the basis (autonomous properly managed providers able to enter in contractual relationship with an insurer) upon which the health insurance scheme can be built in the future.

The Government of Tajikistan has heard for many years that the MHI scheme in Kyrgyzstan is an example of successful story in Central Asia and should be the natural development of the health sector of Tajikistan. The “constructed” success of the Kyrgyz model has however frequently omitted the fact that only 4% of the health funds come from payroll taxes (barely enough to cover the administrative and managerial costs of the scheme). Besides that 40% of the funds come from Government and donors, and the remaining largest proportion of the costs are still paid out-of-pocket by the patients themselves.

With these figures in mind, the Kyrgyz model can hardly be presented as a success story. Nevertheless, what has been an experience that deserves the due attention and consideration is the fact that the model has successfully achieved the purchaser-provider split and the establishment of the single payer (the MHI Fund). The insurance aspect of the whole enterprise is not as quite relevant as compared to these achievements.

Still, it is necessary to emphasize that the current conditions in Kyrgyzstan were not attained just because the Government wanted to introduce over the span of a couple of years a MHI system in the country. The Kyrgyz model has already a story of almost two decades of implementation. The Government of Tajikistan has all the reasons to pay attention to the lessons of history. The development of MHI depends on factors that are not all under the control of the Government. The Government can promote favorable conditions but the development will depend on the actions of the other players, particularly the willingness on the providers’ side; that may require many years of consistent and continuous promotion and encouragement.

*Dr. João Costa obtained his PhD in health economics in 2000 with a study on private health insurance in Brazil. For the last 10 years, he has been working on health financing and health policy issues as international consultant and adviser in several countries for several international organizations. His main areas of interest are in those two fields (health financing and policy) in the context of development aid relationship between donors and recipient countries. Contact: Joao.Costa@unibas.ch

Recommended reading

• Tajikistan,HiT, Vol 12 N 2 2010, WHO European Observatory
• Kyrgyzstan, HiT, Vol 7 N2 2005, WHO European Observatory
• Implementing Health Financing Reforms, lessons from countries in transition, WHO European Observatory, 21 Observatory Study Series, 2010
• Mandatory Health Insurance: Basic principles and crucial prerequisites, Ministry of Health of the Republic of Tajikistan, Health Policy Analysis Unit - Health Policy Notes – Issue 1 – 10-2009