Chapter 3 - Health Insurance Classification

Page 1 of 19
Chapter 3: Health Insurance Classification

Certificate in Health Insurance

Confidentiality statement

This document should not be carried outside the physical and virtual boundaries of TCS and
its client work locations. Sharing of this document with any person other than a TCSer will
tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
Certificate in Health Insurance TCS Business Domain Academy

Page 3 of 19

Contents

Chapter - 3 Health Insurance Classification....................................................................... 4
Introduction ...................................................................................................................... 4
3.1 Classification of Healthcare Financing Systems ..................................................... 5
3.2 Criteria for classifying health insurance models .....................................................6
3.2.1 Sources of financing ......................................................................................6
3.2.2 Level of compulsion on participation in the scheme ....................................... 7
3.2.3 Group or personal health insurance ................................................................ 8
3.2.4 Method of calculating premium in health insurance ....................................... 8
3.3 Health insurance (HI) Mix ..................................................................................... 10
3.4 Other Important Characteristics of Health Insurance Schemes ............................ 11
3.4.1 Administration of the insurance scheme and nature of the carrier (public or
private) ........................................................................................................................ 11
3.4.2 Relationship among insurers (competition or not) ....................................... 12
3.4.3 Contractual relationship with providers ....................................................... 12
3.4.4 Financial advantage for health insurance policies ......................................... 13
3.4.5 Other regulations affecting cross-subsidization within health insurance
schemes ...................................................................................................................... 13
3.5 A cross-tabulation of private health insurance with respect to public health
insurance ......................................................................................................................... 14
3.5.1 Primary PHI ...................................................................................................... 14
3.5.2 Duplicate PHI ................................................................................................... 15
3.5.3 Complementary PHI ........................................................................................ 15
3.5.4 Supplementary PHI .......................................................................................... 15
Summary ........................................................................................................................ 16
References ...................................................................................................................... 18


Page 4 of 19

Chapter - 3 Health Insurance Classification

Introduction
Depending on type of participation, kind of provider and type of indemnity insured, health
insurance can be classified into several types like, social, private, community etc.., Moreover
connotation and classification varies from country to country. Hence it is essential to gain
an understanding on these differences, which will be dealt in detail in this chapter.

Learning Objectives
On completion of this chapter, you will understand the:
Health financing systems
Different types of health insurance models
Different types of health insurance schemes
Health Insurance mix


Page 5 of 19

3.1 Classification of Healthcare Financing Systems

There are various mechanisms for financing the healthcare systems. Such heterogeneity is
because of the differences in the cost and quality of the healthcare services and the
associated risk which varies when the health expenditure is spread across individuals over a
period of time.
Healthcare financing is classified based on the following criteria:

Pre-payment: This is related to the contributions/ premiums towards the
healthcare systems which are collected from the individuals even before the
utilization of healthcare services. These collected contributions are used in meeting
the cost of health services.
Pooling: Sharing of risk between the individuals of the healthcare system is called
as pooling, where the healthcare costs of each individual is shared across all the
individuals in the pool.

Pre-payment

NO

YES

Pooling

NO

Out-of-pocket payments
(OOP)
Medical Savings Accounts
(MSA)
YES Spontaneous charity Health Insurance (HI)
Table 1 Tabulation of Pre-payment and Pooling

Hence health insurance distributes the risk of meeting the healthcare expenditure across
the individuals by pooling costs over a period of time (pre-payment) and among a group of
people (pooling).
Because of features like pooling and pre-payment, health insurance is different from out-of-
pocket payment system. Though there is pre-payment for medical savings account,
financial risk is not pooled, so whatever amount is accumulated in that account would be
available in case of necessity.

Page 6 of 19

3.2 Criteria for classifying health insurance models

For any classification there has to be certain differentiating factors and also some common
features because of which things can be grouped. Here, health insurance is classified based
on the below mentioned criteria:
Sources of financing
Level of compulsion on participation in the scheme
Group or individual schemes
Method of calculating premium in health insurance (i.e. how premiums vary based
on health risk/ health status / health proxies like age etc..,)

Now based on each of these criteria health insurance models/ systems are classified:
3.2.1 Sources of financing
For any health insurance system there majorly are three different types of sources for
financing, namely:
i. Tax financing: It include general taxes, taxes collected by local governments and
earmarked taxation (revenue from this taxation is reserved for specific group or
usage)
ii. Social Security Contributions: Here premiums are collected exclusively for
financing various social security schemes from employers, employees or at times
shared among both. The premium amount will be decided accordingly.
iii. Private Premiums: Government is not involved in this kind of insurance system.
Hence, the policyholders and the insurance company come into a contractual
agreement where policyholders have to pay regular premium instalments and
insurance company will meet their healthcare costs.

Another classification of health insurance schemes is into public and private with reference
to sources of financing:
Public health insurance: It refers to health insurance schemes that are financed by
government through:
Tax funded health insurance
Social Security schemes


Page 7 of 19

Private health insurance: It refers to health insurance schemes that are financed
through private premiums, which most of the times are voluntary. Though
government regulates this system, premium collection is not channelled through
the government.
3.2.2 Level of compulsion on participation in the scheme
Health insurance schemes can be classified based on the obligation of individuals to
participate in the scheme. Such level of compulsion can be of four types:
i. Mandatory participation in a single insurance scheme: There is a legal mandate
for individuals to take insurance cover in the specified insurance scheme.
Ex: Catastrophic medical expense scheme is a mandate in Netherlands for long-
term care
ii. Mandatory participation in health insurance but choice among alternative
schemes: Certain governments mandate insurance in specific category of coverage
like sickness coverage, basic health coverage etc..,
Ex: Basic Health insurance is a mandate for all Swiss residents as per Swiss Health
Insurance Law but there is a choice among insurers whose premiums and benefits
covered vary among themselves.
iii. Mandatory participation by employment terms: This kind of health insurance
schemes are not mandated by law but are to be obliged because of the employer
specified mandates or certain general agreements. Employers are not bound to
offer insurance to employees and employees can either be automatically covered
under insurance or have the choice to enrol in the scheme.
iv. Entirely Voluntary participation: In this case there does not exist any such
compulsion but are incentivised for participation through tax reliefs and financial
incentives. Most of the times, this type of schemes will be provided by private
insurers.

If it has to be classified in simple terms, insurance schemes can be termed as mandatory and
voluntary.
Mandatory health insurance: It includes schemes where participation is made
compulsory by government through various legislations. Mandate maybe
applicable to the entire population or certain groups. If it is for the entire population

Page 8 of 19

and is mostly financed by government then it can be termed as National Health
Insurance (NHI).
Ex: NHI in UK
Voluntary health insurance: Participation is voluntary in this type, whether it is for
an individual or for an employee group where employer offers health insurance
cover or employees voluntarily have a collective agreement.
3.2.3 Group or personal health insurance
People can go for an individual insurance or can form a group and go for a cover for the
entire group as in the case of employment. People coming under an organized sector can
only be a part of group insurance because of its nature. Generally premium for group
insurance is lower when compared to individual insurance because of several aspects like
spread of risk across the group, lower administrative and sales efforts etc.
A simplified classification can as described below:
Employment group health insurance: It usually covers all the employees of the
company. Group insurance has got a separate pricing and pooling structure, with a
separate benefit package as well.
Personal health insurance: It is applicable to all individuals and differs from the one
applicable for specific groups.
3.2.4 Method of calculating premium in health insurance
Health insurance premium is calculated based on several criteria. The most important of
them is risk. Below mentioned are few methodologies that are used in calculating premium:
Income related premiums: This is prevalent only in the case of social security
schemes, where premiums are usually subsidized for those who cant afford.
Community related premiums: It is a type of group insurance where the risk
characteristics vary between groups and hence the premium is calculated based on
the average risk of the group. In certain cases, premium may alter to a specified
degree, for instance premium loading for late entry. Most of the times community
rated premiums is the part of the product strategy, but in some cases it is because
of the governments regulatory mandate.
Ex: In Australia and Ireland for voluntary health insurance, in Switzerland for
mandatory health insurance.

Page 9 of 19

Risk-related premiums: In this case the actuary assesses each individual as a
separate risk-rated category and on the basis of the expected medical claims
premiums are calculated.

Now on collating all the above mentioned classifications, those health insurance models can
be grouped into following categories:

Public Health Insurance:
Tax-based Public Health Insurance
Social Security Schemes
Ex: Canadian Medicare in Canada, Securit Sociale in France, Medicare and
Medicaid in USA
Private health insurance:
Private mandatory health insurance
Ex: Basic health insurance in Switzerland mandated by Health Insurance
Law, 1996
Private employment group health insurance
Ex: Employer based health insurances are prevalent in almost all the
countries like USA, UK, Japan and India
Private community-rated health insurance
Ex: In Ireland and Australia, VHI (voluntary health insurance) insurers use
this type of rating
Private risk-rated health insurance
Ex: Individual health insurance in UK calculates premiums based on
individual risk rating.

Page 10 of 19

3.3 Health insurance (HI) Mix

At times classification of schemes is difficult and all the schemes might not fit into the
classification structure described because of the heterogeneous nature of insurance
schemes, where there is a combination/mix of public and private in financing and
administration.

HI Models
HI Mixes

Tax-
based HI

Social
security

Private
mandatory

Employer-
based

Community
rated

Risk
related

Public-Private
mix

Public health
insurance

Private health insurance

Mandatory
voluntary mix

Mandatory health insurance

Voluntary health insurance

Policy relevance
of the
mix

Burden for public
finances,
financial
sustainability,
impact
on labor market
flexibility,
extent of pooling

Extent of pooling, coverage
Solidarity and progressivity, degree of cross-subsidization in
the scheme

Table 2 Health Insurance Mix

Page 11 of 19

3.4 Other Important Characteristics of Health Insurance Schemes

There are certain other variables that describe the characteristics if a health insurance
system in addition to those mentioned above, that can be used for analyzing the policy and
measuring the performance of the policy mix. These include:
Administration of the insurance scheme and nature of the carrier (public or private)
Relationship among insurers (competition or not)
Contractual relationship with providers
Financial advantage for health insurance
Other regulations affecting cross-subsidization within health insurance schemes
3.4.1 Administration of the insurance scheme and nature of the carrier (public or private)
Both public as well as private entities can sponsor, administer and manage health insurance
schemes. Such entities include:
i. Public entities like government organizations, public sector units, social security
offices etc..,
ii. Private entities like private for-profit and not-for-profit insurers, mutual fund
companies, sick funds etc..,

Classification is based on two criteria - source of funds and administration, which results in
public-private classification. For instance, private institutions can provide and administer
public health insurance schemes. Conversely, government can also provide private
insurance policies. Hence, four different combinations will come into picture, an example of
which is shown below:

Source of funds
Administration of the insurance scheme

Public Private
Public HI
(Taxation, Social
security contributions)
NHS in UK Sickness funds in Netherlands
Private HI
(Private premiums)
VHI in Ireland Employer insurance and HMOs
Table 3 Cross- tabulation of source of funds w.r.t administration of the insurance scheme

Page 12 of 19

3.4.2 Relationship among insurers (competition or not)

One more important characteristic that can be emphasised on is the relationship among
carriers, whether it is competitive or not. Insurers deal with specific type of funds (like
sickness fund, long-term and mental care fund etc..,) which may or may not compete/ fall in
the same segment. Private insurers typically compete among themselves for customers.
Nature of the competition is also affected when regulatory framework varies for different
types of insurers.
3.4.3 Contractual relationship with providers
Differences in health insurance schemes might arise because of the differences in the
contractual relationship between providers and insurers. There exist three different
categories of these contractual obligations:

i. Indemnity insurance: There is no contractual agreement between providers and
insurers in case of pure indemnity insurance models. Any indemnity tries to restore
the individual back to his/her financial position as per the terms of the contract. In
case of indemnity insurance, in accordance with the contract terms (co-payments
and deductibles) insurer gives insured the choice of doctors, healthcare facilities like
hospitals and other hospitalization services. Accordingly insurer pays his share in
the expenses (bills) incurred. Generally it is done on a fee-for service basis.

ii. Selective contracting: With the help of the bargaining power, insurer partners
(empanels) with few healthcare providers, doctors, and specialists to provide
services at a reduced cost. Because of this facility, insured need not pay the
expenses (bills) upfront, as the insurer settles them with the providers. It is
advantageous to both insurer and insured because, insured need not worry about
re-imbursement process and insurer by using the purchasing power reduces the
total cost incurred in providing services. Selective contracting is highly prevalent in
managed care services.

iii. Integration with providers: The relationship between providers and insurer is more
than being partners. Most of the cases providers are employed by the insurer or on
a contractual agreement. HMO (Health Maintenance Organization) is one such
example.

Page 13 of 19

3.4.4 Financial advantage for health insurance policies
One more advantage with the health insurance system is the tax reliefs associated with
them in most of the countries, for instance:
i. General tax-breaks: If any individual or an employer on employees behalf buys a
health insurance, government grants tax relief as a percentage on the premium
amount paid towards the same.
Ex: In India, premium paid towards health insurance is tax deductible u/s 80D of
Income Tax Act, 1961.
ii. Selective tax breaks: If the income levels of individuals are too low, health
insurance premiums might either be subsidized/ completely waived off by the
government.
Ex: In Switzerland mandatory health insurance is subsidized to the poor.
3.4.5 Other regulations affecting cross-subsidization within health insurance schemes
It is not possible for government to finance the entire healthcare scheme covering entire
population. Hence it categorizes people based on their income levels and the risk groups
and promotes premium subsidies accordingly by imposing regulations and certain legal
stipulations. Yet another way of imposing legal enforcements is the use of community
related premiums.
Some other enforcements are:-
Open enrolments and prohibition on risk selection while choosing applicants.
Ex: In countries like Australia and Ireland, insurers do not have the liberty to choose
among the applicants of voluntary health insurance who are aged below 65.
Defining the minimum standard benefit package which insurers have to comply
with at the basic level
Mandatory option of renewal, if insured comply with all the terms of contract then
insurer is obliged to offer a renewal of contract.

Page 14 of 19

3.5 A cross-tabulation of private health insurance with respect to public health
insurance

Coverage under public health insurance

Individuals covered
under public cover
Individuals not
covered under public
cover

Coverage
under private
health
insurance
(PHI)
schemes

PHI covers necessary
medical services that are
covered under typical
public coverage system

Duplicate PHI

Primary PHI:
- Substitute
- Principal

PHI covers cost sharing
applicable to public
coverage systems

Complementary PHI

PHI covers top-up health
services not
included in public systems
or primary PHI
Supplementary PHI
Table 4 Cross-tabulation of private health insurance w.r.t public health insurance

3.5.1 Primary PHI
It provides the basic health insurance for those who are not covered under public cover.
Reasons for not having coverage include:
No public health insurance
Not eligible for public cover
Not falling under the subsidized category of public health insurance
Opting out of public

There are two types of primary PHI:-
Substitutive: As the name suggests it substitutes the cover which otherwise is
available through public health insurance or employer insurance

Page 15 of 19

Principal: It provides cover for those individuals who are not eligible for public cover
or for whom social scheme is not applicable. Employers mandatory insurance is an
example of this type.
3.5.2 Duplicate PHI
It provides similar services or cover which a public health insurance offers, but the difference
being the level of service and breadth of the provider network such as :-
Relatively faster access to facilities when compared to public systems
Access to private healthcare facilities whose costs are completely covered by
private insurance
Wider choice among doctors, consultants, provider network (hospitals)
3.5.3 Complementary PHI
It complements services that are covered under public insurance or any substitutive or
principal PHI. For instance, it covers co-payments that otherwise would have to be paid by
the policyholders, which now are reimbursed.
3.5.4 Supplementary PHI
Additional health services are covered under this insurance which otherwise are not covered
under the public system. Uncovered services vary from country to country. Examples of
such services are:
Luxury care,
Dental care,
Long term care,
Rehabilitation,
Alternative or complementary medicine


Page 16 of 19

Summary
Healthcare financing is classified based on the following criteria:
Pre-payment
Pooling
Criteria based on which health insurance models are classified are:
Sources of financing
Level of compulsion on participation in the scheme
Group or individual schemes
Method of calculating premium in health insurance (i.e. how premiums vary
based on health risk/ health status / health proxies like age etc..,)
Healthcare is financed using three different types of sources:
Tax financing
Social Security Contributions
Private Premiums
Public health insurance schemes are financed using tax financing and social security
contributions
Premium payments in private health insurance mostly are voluntary
Based on level of compulsion on participation in the scheme, health insurance is
classified into four types:
Mandatory participation in a single insurance scheme
Mandatory participation in health insurance but choice among alternative
schemes
Mandatory participation by employment terms
Entirely Voluntary participation
In simple terms it can be classified into two types:
Mandatory health insurance
Voluntary health insurance
Depending on the category of people in the insurance pool it can be classified into:
Employment group health insurance
Personal health insurance
Premium calculation can be done using three methods:
Income related premiums

Page 17 of 19

Community related premiums
Risk-related premiums
Private health insurance is categorized into four different types, they are:
Private mandatory health insurance
Private employment group health insurance
Private community-rated health insurance
Private risk-rated health insurance
Some Important Characteristics of Health Insurance Schemes are:
Administration of the insurance scheme and nature of the carrier (public or
private)
Relationship among insurers (competition or not)
Contractual relationship with providers
Financial advantage for health insurance
Other regulations affecting cross-subsidization within health insurance
schemes
Health insurance schemes can be sponsored, administered and managed by:
Public entities like government organizations, public sector units, social
security offices etc..,
Private entities like private for-profit and not-for-profit insurers, mutual
fund companies, sick funds etc..,

Page 18 of 19

References
Jennifer Wilson, White Paper on Segmentation in the Healthcare Insurance Industry
Framework for developing health insurance rogrammes, Ministry of Health & Family
Welfare, Government of India, New Delhi
Jonathan Gruber and Helen Levy, The Evolution of Medical Spending Risk, Journal of
Economic Perspectives-Volume 23, Number 4-Fall 2009, Pages 2548
Bhat Ramesh & Mavlankar Dileep (2000), Health Insurance in India: Opportunities,
Challenges and Concerns, Indian Institute of Management, Ahmedabad.
World Health Organization (2006), Health financing: A strategy for the African Region,
Addis Ababa: World Health Organization.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.

Page 19 of 19

Chapter 3 - Health Insurance Classification

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3 - Health Insurance Classification

Uploaded by

Copyright:

Available Formats

Page 1 of 19

Chapter 3: Health Insurance Classification

You might also like