March 23rd, 2017
Industrial Engineering Professor and Millennium Institute MIPP researcher, Carlos Noton argues that one of the challenges in the Isapre market is to promote competition within the oligopoly and to increase the costumer protection. Also, he mentions that the vertical migration of Isapre’s effect for consumers is not trivial and could be beneficial for them in some cases.
The case of Isapre Masvida evidences some failures, flaws, and weaknesses in the private health insurance market (Isapres). According to you, what are the factors that contribute to these problems?
- In general, at an international level, several typical complications of the insurance market can be mentioned. The first one is the adverse selection, which is the self-selection of different risk groups. An example of this is that the sickest people choose bigger coverage insurance policies than the ones the healthiest people choose. The second complication is the so-called “moral hazard”: an example of this is the insurance overuse by the consumers that can also be led by the doctors, such as the fraudulent use of sick leave. A third obstacle can be the short-sighted behavior of consumers, which leads them to not change their coverage even though there are other options that are better in price and coverage on any situation than their current policy. The last complication can be the opportunistic behavior by the insurers. An instance of this is the discussion about the policy readjustment amount which tends to be higher than the Health CPI calculated by the Government.
In Chile and in particular one of the biggest flaws of this market has to do with competition and consumer protection. There is international evidence that demonstrates how hard to make an optimal choice is for a national consumer in this environment of over 60 thousand policies-literally-, existing infinite dimensions of different coverages, limits, and restrictions in the provider network. Clearly, the unregulated market does not allow us to choose efficiently and the State role in this situation is very important. For instance, a long-running proposal in Chile, and that the State has not been capable of implementing, is having certain health plans with identical characteristics among Isapres, making comparison and competition easier.
- Does our country have an adequate regulatory framework to avoid failures such as Isapre Masvida’s?
- The Isapre Masvida episode evidences weaknesses of the regulatory market on two areas. The first refers to the regulation of healthcare providers (clinics, hospitals, doctors, labs, among others) and the second refers to financial information of the sector.
Mr. Noton adds:
- The Superintendence of Health has important powers over Isapres but very few over clinics and other health providers (labs among them). The providers are not forced to release information or be audited. The accreditation and information released by the providers is voluntary, even for those related or integrated to the Isapre.
- What is your diagnosis of the Isapre market in the country? What are its main weaknesses and flaws?
- On financial matters, there is obvious room for improving the regulation. For example, the companies that audit Isapres are not forced to report any irregularity to the Superintendence. This must be improved, clearly. In this sense, it seems to me that the Isapre market is similar to the banking industry from which some policies and regulations can be followed. For instance, Bank and Financial Institution Superintendence (SBIF for its name in Spanish) has a legal department which is very strong and has resources according to its role. In the banking industry, the loans to related companies are strongly regulated, unlike in the health industry.
- In what way does the vertical integration harm or benefit the insured person? Why did Isapres take this model in?
- Vertical integration in Chile refers to the fact that an Isapre and some healthcare provider belong to the same holding and, therefore, should act as related companies seeking for the biggest profit for the holding. For example, Clínica Santa María and Isapre Banmédica and Vida Tres belong to the same economic group. This is a complicated subject and not a bad matter for the consumer in itself. We are studying this subject with Benjamín Vatter and Ignacio Cuesta, both PhD students in the United States. There are several hypotheses that must be seriously researched.
Mr. Noton adds:
- In general, the question of convenience is very connected to the degree of competence that can be observed in the Isapre market versus the competence in the clinic and provider market, and the possible efficiency gains that can be generated by vertical integration.
In this oligopoly context – understood as a very reduced Isapre and clinic offer- the degree of substitution among Isapres compared to the degree of substitution among clinics places us in different scenarios that can make vertical integration more or less attractive to consumers.
He gives an example:
- A typical argument in favor is the possible efficiency gain. But in a negotiation context between Isapres and clinics there are other non-trivial effects. For instance, vertical integration leaves the integrated Isapre in an advantageous position to negotiate with the no-integrated clinics, whose discounts can eventually be transferred to the consumers. Therefore, there are also other phenomena to be quantified such as the capture of clients and exclusion of other Isapre’s clients from integrated clinics, among other subjects. It is essential that an empirical evaluation of these arguments be made before drawing conclusions.
- What are the scenarios faced today by Isapre Masvida? Which were the mistakes of its management? What solution is in sight?
- A priori, we do not know. The information is not reliable at the moment and we cannot rule any hypotheses out. It may have failed on plans that were too cheap, very high costs, loans to related companies, poorly assessed investments, and so on. The Superintendence of Health priority now is that the healthcare contracts of its over 500 thousand beneficiaries are respected. There are several mechanisms for the current Isapres to take care of the portfolio of policyholders.
- The mechanism that provides less disruptions for the policyholders must be searched for. This means that it must be technologically feasible for the receiving Isapre and that it must reduce the market competence loss. Obviously, for the insured people to benefit from its advantages it is necessary that the provider network be also willing to continue. It is a complex and challenging subject.