By Theodore Panayotou
THE UPDATED Memorandum with the troika of international lenders requires “the implementation, without further delay, of the National Health System as to be in operation by the end of 2015 (extended recently to 2016) ensuring its financial sustainability while providing universal coverage and taking into account the possibility of its gradual implementation in stages”.
The existing system, which is a mosaic of insurers and providers, suffers from several weaknesses that adversely affect coverage, cost and quality of service, weaknesses that are exacerbated by the current recession and tight budgets.
The original planned National Health System (NHS) known as GESY, dates back to 2001 when the economic circumstances were entirely different.
These plans have since been updated and while they offer several advantages compared to the current system, they also carry a number of serious risks. Advantages include universal coverage, pooling of resources and free choice of providers as well as planning and coordination of services to eliminate the simultaneous excess demand and excess supply.
The risks of the planned NHS are: a) the possible excessive increase in demand and abuse of the system; b)the failure to control costs and the continuing need to increase the contributions of employees and employers, with negative effects on the labour market; c) the inadequate addressing of likely deficits by specialised institutions under the new payment system; d) the likely non-acceptance of the proposed regulations and restrictions of the private sector to keep prices low; and e) the likely large deficits in public hospitals due to a failure to adapt and compete with the private sector.
The likely results of all these risks are a significantly higher cost than projected in actuarial studies and the need to fill the gaps by the state. In addition, international experience with monopolistic public insurance systems, such as the proposed NHS, often means long waiting lists and lower service quality, as well as a difficulty in adjusting to the changing economic and social environment, such as the ageing of the population.
Finally, in case of inefficiency or collapse of the public monopoly, citizens would have no alternative and would risk being left without adequate coverage. The current problems of the British NHS on which GESY is in part modelled, coupled with the experience of Cyprus with semi-government monopolies, do not lend much ground for comfort.
To minimise these risks, it is proposed here that the planned NHS in the form of a closed public monopoly (GESY) is transformed into an open hybrid (public-private) system that leverages the private sector and the strength of the market and offers a choice between private and public insurance.
This has the additional advantage that it can be implemented in a phased manner, as envisaged in the Memorandum.
This proposed model is based in part on the recently modified Dutch national healthcare system.
Modifications are made to conform to the Cypriot realities, including the smallness of the country. One such modification is the coexistence and competition of a public insurance organisation side by side with private insurance companies with the dual objective to minimise the risk of cartelisation in the private insurance sector and, at the same time, to incentivise efficiency in the public sector (both insurers and providers).
While all systems face certain risks, the hybrid system leverages the private sector and the power of the market to contain operating costs and to provide better-quality healthcare services.
At the same time it ensures the maintenance of a healthy competitive environment and avoids the risk of creating a cartel in the insurance market through the co-existence of a public insurance organisation (as well as non-profit health insurance companies) competing directly with private insurance companies.
Another advantage of hybrid systems is the freedom of the individual not only to choose the insurer but also to change insurer under certain conditions.
This not only protects citizens from monopoly practices familiar to the Cypriots from their experience with the semi-public monopoly organisations, but it also ensures healthy competition and ultimately containment of per capita health costs.
The Public Insurance Organisation will provide the same package of minimum benefits (as private insurance companies) while the state will exercise its regulatory and supervisory role over the entire health system.
The legislative and regulatory framework will set out the obligations of health insurers, whether public, private non-profit or private for profit.
The basic benefits package (quantitatively and qualitatively) will be determined and enforced by the state health regulatory agency. The pricing will be made freely by insurers, who in competing for market share will have every incentive to minimise prices and maximise quality.
The public will choose between insurers on the basis of price, service levels, reliability and reputation of the company.
Under the proposal, each insurance company would be obligated by law to provide exactly the same pricing to all citizens and would make no differentiation in price or access based on the risk profile of the insured, or deny insurance, at the published premium for the basic package, to anyone who requests it.
Organisations that insure citizens with disproportionate costs will be reimbursed by a national reinsurance, which redistributes the cost of risk between insurers, as it is done in all countries with multi-payer systems.
This is the only way to ensure the universality and sustainability of the system and the mandatory public insurance at the same price regardless of risk profile.
The universality of insurance (100 per cent of the population) would be secured by law, either through compulsory registration of all citizens in a public or private insurance plan or automatic enrolment in the public Health Insurance Organisation with the ability to opt out if one is enrolled in a private insurance plan.
The latter is preferable since it is easier to enforce and permits cross subsidisation of low-income citizens by high-income citizens who opt out (as they receive back only the average contribution regardless of their actual contribution).
The basic package of health coverage will be determined by the state (based on financial and social policy considerations), and will be common and uniform for all citizens. It will cover doctor visits, diagnostic tests, medication, hospital care, and preventive medicine.
To prevent abuse of the system through either excessive or unnecessary use or lack of precaution and prevention (moral hazard), the health system will not fully compensate all medical services.
The compensation of preventative services (e.g. vaccinations, insulin) and chronic and catastrophic illness will be full (100 per cent) or nearly full, while other services will be compensated 70-90 per cent to avoid abuse.
The percentage of compensation or the respective co-payments for each service will be set by the state. Abuse of services (excessive or casual use) could be discouraged by reducing premiums for those who submit no claims for the entire year.
In a multi-payer NHS, the state fulfils its social role through targeted subsidies of health insurance for lower-income groups. Low-income earners who choose public insurance are exempt from contributions or related taxes wholly or partially depending on their income.
Those who choose private insurance would receive from the state a subsidy equal to the per capita contribution or taxation of members of the public insurance.
Income criteria would apply here: the very low-income earners would receive 100 per cent subsidy while those with somewhat higher incomes would get partial subsidy according to the state-established income criteria.
Those who want extra insurance for services not covered by the basic package could purchase insurance from private insurance companies at a price determined freely by the insurance companies.
The state would not subsidise premiums for supplementary insurance.
For proper implementation of a hybrid health system a regulatory framework must be created and a supervisor established to oversee its implementation.
The ministry of health could play this role. Even better, would be the establishment of an independent Regulatory Authority of Health (HRA) which would determine the basic coverage package, implement the law that guarantees the universality of insurance by the insurance companies and ensure fair competition.
The cost of a hybrid national health system for the economy is anticipated to be lower by 15-25 per cent than the current system and well below the projected budget for GESY as currently planned.
Of course, a study needs to be conducted to estimate the likely cost using updated figures for 2013 and projected figures for the period 2014-2020, if not longer.
The funding in the proposed hybrid system would be through general taxation or progressively structured contributions based on income criteria. Those who choose to withdraw from the public insurance will be reimbursed an amount equal to the average per capita contribution or taxation of members of the public insurance.
In this way, the higher income earners will continue to contribute to public insurance plan (on a progressive scale) even when they opt out in favour of private insurance. The subsidy for low-income and vulnerable groups will be funded from the general contributions to the Public Insurance Organisation and general taxation.
Regardless of the health system adopted, public hospitals need to be reformed to reduce operating costs, eliminate waiting lists and improve quality of service. GESY requires the full autonomy of public hospitals and their functioning as independent bodies governed by public law.
Their revenue would come from the services they provide to policyholders, after a transition period of three years during which any deficit would be covered by the state.
Despite the political difficulties that forced a freezing of the effort to grant autonomy to public hospitals, the proposal does not seem more difficult than its alternative, which is the reorganisation and the issuing of shares (equity) with a majority stake given to the existing staff as compensation for the loss of civil service status.
Dr Theodore Panayotou is director of the Cyprus International Institute of Management (CIIM). He is a member of the President’s Council of the National Economy. For 25 years he taught Economics and Environmental Management at Harvard University. Dr Panayotou also served as consultant to the World Bank and several UN agencies. He was recognised for his contribution to the work of the Intergovernmental Committee on Climate Change which won the Nobel Peace Prize in 2007