The Brazilian health sector is changing and it is for the better. Humberto Torlini and Gisele Norris report.

On 3 June, after nearly two years of discussion by the National Congress, Brazilian President Cardoso sanctioned law 9656. This new law represents the first attempt to regulate private health plans in Brazil.

Major components of the new law are:

Liberalization of Brazilian health market

Today there are approximately 1,200 health maintenance organizations (HMOs) in Brazil and nearly 300 medical co-operatives. Until approval of the new law, foreign-owned HMOs and third party administrators (TPAs) were prohibited from owning a majority share in Brazilian operations. The new law removes barriers to foreign investment in the health sector and creates a level playing field for national and foreign-owned health organizations. Mergers and acquisitions of Brazilian HMOs are now taking place and this activity is expected to increase. The health sector's attractiveness for foreign investment is indicated by the recent activity of foreign insurance companies which have historically been unhampered by barriers to investment.

Foreign insurance companies have been busily strengthening their position in the health market since early 1997. Last year, Aetna invested nearly $400 million to buy 49% of Sulamerica's health business (Sulamerica is Brazil's largest insurance company); and Prudential increased its equity with Bradesco, (Brazil's largest bank and second largest insurance company). Other companies, such as AIG and Generali are also bolstering their local health operations. In anticipation of further liberalization of foreign capital in the HMO arena, Cigna invested nearly $200 million to buy the financially troubled Golden Cross Company, one of Brazil's oldest and largest HMOs.

The Brazilian private health market consists of about 42 million users and is currently valued at nearly $24 billion with a 5% annual growth rate.

Federal regulation of private

health plans

Although indemnity health insurance has been regulated since 1966, under the new law, HMO-type plans will also be required to demonstrate their financial reserves to the Brazilian Ministry of Health. In the past, HMOs were entirely unregulated with respect to the elements and breadth of coverage. As a result, many plans freely excluded expensive medical coverages. What is more, coverage was denied to individuals over 65 years of age and it was common to find waiting periods of up to 18 months for major surgery. Under the new law, all health plan carriers (HMO, co-operative and indemnity) are required both to demonstrate financial requirements and to submit revised coverage plans to the Ministry of Health (in the case of HMO and medical co-operative plans) or to the Brazilian insurance commissioner SUSEP (in the case of indemnity plans). Revised coverage plans must be submitted by 1 January 1999.

Financial requirements

The plan type (for example, whether it is an HMO, co-operative or indemnity plan), expected number of members, and locations of service will dictate financial requirements, including financial reserves, as well as the amount of stop loss and solvency insurance that each plan must purchase. In addition to these financial requirements, the insurance commissioner will also obligate detailed information concerning:

* Facilities and services owned and provided by the plan and those that the plan intends to provide through contractual agreements;

* Information regarding mobile (equipment) and immobile (buildings, etc) assets;

* Information concerning human resources and clinical responsibility;

* Registration number at the local state medical association;

* Financial feasibility study including an actuarial valuation.

Plan coverage

The new legislation has also established five coverage plans as described below.

1. The reference plan

A reference policy must be offered to all clients who must formally accept or deny such coverage. This plan offers the most complete coverage including all medical procedures listed in the International Classification of Diseases, Edition Ten (ICD 10). Inpatient treatment will include organ transplant, other quaternary surgical procedures, cancer, AIDS coverage, and a broad range of outpatient treatment. The plan may not limit the length of a hospital or intensive care stay. Plastic surgeries and treatment for proven pre-existing conditions may be excluded. The maximum waiting period for any treatments is six months, except in the case of maternity, wherein the carrier is free to establish a waiting period of 12 months. Carriers may establish co-insurance and deductibles at any level and determine any premium.

2. The hospital plan

The hospital policy will cover only in-patient treatment and may exclude certain quaternary medical procedures. Like the reference plan, the hospital plan may not limit the length of the hospital stay and is subject to a maximum waiting period of six months. However, the hospital plan is not required to provide maternity coverage. Premium, co-insurance, and deductible levels are determined by the carrier.

3. The ambulatory plan

This plan covers only out-patient medical procedures. Ambulatory chemotherapy, radiotherapy, and all diagnostic and laboratory tests (including MRIs and tomography) must be included. The carrier may not establish a maximum number of physician visits or tests but may freely establish premium, co-insurance and deductible levels.

4. The maternity plan

This plan covers all prenatal care, delivery, medical care for the newborn, and a maximum of 30 days inpatient care for the mother. The carrier may establish a waiting period of up to 10 months and set premium, co-insurance and co-payments.

5. Dental plan

Dental policies may be sold independent of other health coverage and carriers are free to design their dental plans. Carriers may apply the six month waiting period as well as co-insurance and co-payments and may freely determine the premium.

Other requirements

Retirees: If an employee has contributed to the company plan for 10 years or more, he is entitled to request continuing coverage at the date of his retirement. In this case, the employee must absorb 100% of the cost of the plan for himself and any family members that are covered by the same plan at the date of retirement. Cost increases are prohibited when existing members turn 65.

Dismissed Employees: Any employee that has contributed to a company health plan, has the right to continue his coverage upon his dismissal for a period equal to one third of the amount of time that he was an employee of the company (minimum guarantee of six months; maximum guarantee of 24 months). In such a case, the employee is responsible to assume the full cost of the medical plan and maintain the same number of dependents that were enrolled in the plan at the date of his dismissal.

Expected consequences of the new legislation

The size of the Brazilian market and its relative openness to managed care technology will undoubtedly encourage the entrance of several large American HMOs. Major consolidation has begun and will continue. Many speculate that the 1,200 HMOs will be reduced to about 300. Medical co-operatives are also undergoing dramatic consolidation and it is estimated that only 30 medical co-operatives will remain in the year 2000.

Because HMOs routinely excluded sophisticated medical procedures in the past, they have little experience in underwriting such risks. As a result, HMOs are eager to share their risk and there is an increasing demand for stop loss insurance in the market. Interest in solvency insurance is also growing as there is speculation that both stop loss and solvency coverages will be mandated by the new law. Aon Group Ltd, the largest reinsurance broker in Brazil, has well developed expertise in specialty health stop loss and solvency coverages.

Because insurance companies have historically offered comprehensive plans, policy adaptation will be a relatively inexpensive endeavor. HMOs that offered limited coverages, however, will incur greater expense in adjusting their coverages to meet the new requirements. This expense will undoubtedly be reflected in an increase in the cost of HMO premiums. Co-insurance, co-payments and deductibles are also new to Brazil and will undoubtedly change the care-seeking behaviors of consumers.

Brazil's large and dynamic private health market offers great opportunity for the investment of foreign capital. As in any international venture, however, the selection of the ideal partner and the adaptation of the foreign partner's organizational expertise to a country with distinct morbidity, mortality, language, culture, and technology, requires particular expertise. Having the support of a global independent consulting firm with existing operations in Brazil is the key to investment success. Aon Consulting, Brazil has such expertise.

Humberto Torloni is senior consultant at Aon Consulting, Brazil, and Gisele Norris is the vice president and Latin American representative of The Aon Healthcare Alliance.