The decentralisation of health social insurance in Latin America will provide significant opportunities for international reinsurers, but knowledge of the market will be important for success, writes John H. Rooney.
Health markets in Latin America face the prospect of significant change as governments decentralise the provision of health social insurance regimes. Single-pay or state-administered regimes are being replaced by systems that have significant private sector components and that raises the possibility of efficient health social insurance systems. Reforms have been implemented in Argentina, Chile, Colombia, and Peru. Reforms were enacted but are presently in suspense in Venezuela. The prospect of important reform exists in Mexico, and Brazil has enacted important legislation to reform the private health insurance market. The new markets will present important opportunities and challenges for the reinsurer of medical insurance risks.
Notwithstanding the import of the health social insurance reforms, the health sector changes have been the subject of relatively less attention than the reforms that have taken place in social security pension regimes. As the importance of these reforms becomes more evident, it can be expected that the sector will attract greater attention from the international reinsurance community. As is the case for all reinsurance transactions, the reinsurer with a true understanding of the new regimes will be better positioned to participate in this new market. It is hoped that this article will be a small contribution to greater understanding of these opportunities.
Under the traditional model in Latin America, either the salaried worker or his or her employer made an obligatory contribution expressed as a percentage of wages to the state, in return for which comprehensive health benefits were to be provided (often through facilities owned and operated by the state). The perception and often the reality was that the services were provided inefficiently or were of inferior quality. The inefficiency of the state social health systems was in part responsible for the development of private, parallel systems that often duplicated benefits provided by the state-sponsored social health insurance programmes.
Under the new model, the main source of financing continues to be deductions from the wages of salaried employees or their employers, but most of the contribution is used either directly or indirectly to finance the provision or administration of health benefits by private concerns. The effect of this change could be analogised to changing the course of a river. Often the amount of the deduction is the same or similar, but it is put to different purposes and the private administrators are subject to accountability regarding the quality of and financial responsibility for the services provided.
In Chile, the worker continues to own the amount deducted, and the administrator maintains those funds in an account that bears the worker's name. In other countries, the deductions are administered out of a central fund and used to pay a fixed premium. Those countries often redistribute the portion of deduction that exceeds the premium in order to subsidise workers or enrollees who cannot cover all or part of the premium through the deduction. The administrator normally must provide a programme of medical benefits either directly or by contracting with third parties for the provision of the benefits. Importantly, like an insurer the administrator must bear the risk of providing or financing the provision of the benefits out of the deductions that it receives on behalf of its affiliates.
Notwithstanding the fact that the administrator bears the financial risk of providing the health benefits, it normally is not licensed as an insurance company, and is often regulated by a dedicated regulator. This can in some cases operate to prevent the direct transfer of risk from an administrator to a foreign reinsurer. Consequently, there is often a close relationship between the administrator of a social insurance programme and a local insurance company.
Some important developments in Argentina, Chile, Colombia, Mexico, Peru and Venezuela are described below.
The health social insurance programme is administered by a type of employee organisation known as the obra social. In the past, workers had to affiliate with the employee organisation that serviced the sector of the economy in which the worker was employed and the employer paid a percentage of the worker's salary to the organisation. Now, workers are able to move among obras, and all obras are required to provide a standard benefit plan. In addition, private plans called prepagas are able to compete with the obras for affiliates if the prepaga agrees to submit to the same regulatory regime as the obras.The prepaga is a commercial company that is not regulated as an insurer. Nevertheless, the prepaga is obligated to provide the same obligatory medical plan as the obra and it is expected that the figure will soon come under closer government regulation. Due to factors unique to the Argentine market and regulatory system, health insurance does not comprise an important part of this market.
Reform of the Argentine health market has been a priority of the international development banks, so it can be anticipated that there will be additional changes in this sector.
As the first of the Latin American countries to reform health social insurance, Chile has an advanced system that is confronting issues more typical of an established, functioning decentralised social insurance system. In Chile, the worker maintains ownership of his or her account balance, which is maintained by a risk-bearing administrator known as an ISAPRE. The worker can use positive balances in his or her account to purchase supplemental coverage. The ISAPRE is not an insurance company, and is supervised by a dedicated regulator. Issues such as the imposition of emergency care as a mandated benefit and the reduction or elimination of a public subsidy that permits many workers to afford the cost of affiliation with an ISAPRE are in the forefront of public attention.
The Colombian reform is in many respects the most radical of all. With the exception of the Colombian system, all other countries that have enacted reforms focus on salaried employees and require some type of deduction in order to participate. In Colombia, everyone participates in the system, and deductions in excess of the fixed premium are used to subsidise the participation of Colombians who either cannot make a contribution or whose contribution would otherwise be insufficient to cover the premium. Other shortfalls are made up by public funds.
The Entidad Promotora de Salud (EPS) is the name given to the entity that receives the premium and assumes financial responsibility for the provision of the required benefits. The benefits are actually provided by credentialed, authorised entities that are contracted by the EPS. The EPS in Colombia also has a dedicated regulator. The Colombian system has been the subject of significant criticism, in that the fixed premium has been considered to be insufficient to finance the basis benefit plan, and the universality of the programme has been criticised as not feasible.
Although Mexico has yet to reform its health social insurance programme in a significant manner, proposals are being seriously considered for reforms of varying ranges. Recently, much discussion has been given to the concept of the reversion of quotas, whereby the Mexican Social Security Institute would return a portion of the payroll deduction to the employer, who would assume responsibility for the provision of the mandated benefits.In Mexico, private health insurance is not a very significant part of the insurance market. In recent years, however, an entity called an Administrator of Health Services has become popular. The administrator works with employers in the administration of employee benefit plans. Although not presently regulated by the insurance authorities, there are indications that the regulator is taking greater interest in this growing activity. One proposal would regulate these administrators as insurers and impose solvency requirements.
The health component of the Peruvian Social Security System was decentralised in 1996, and regulations implementing the reforms were issued in 1997. The institution that provides and finances the required health insurance programme is known as Empresa Prestadora de Salud or EPS. The Peruvian system differs from the Chilean system in the sense that the election of an EPS is made by majority vote of the workers of any single employer. Any worker who does not wish to join the selected EPS can opt to participate in the state-operated social security system. By law, the EPS is also required to provide a percentage of health services through facilities owned by the EPS. As in Chile, the EPS is regulated by a dedicated regulator.
Even though in November 1997 a law was enacted that set forth the general structure and timetable for reform of the health social insurance system and a specific law to accomplish that reform was enacted in late 1998, the present government has announced its dissatisfaction with the new system and suspended its implementation. While it can be anticipated that there will be changes to Venezuela's health social insurance system, it is not possible to determine at this point what the characteristics of the change will be.
Increased efficiency of health social insurance programmes should place pressure on traditional sources of private health insurance and related coverages. This new market will provide significant opportunities for international reinsurers, but knowledge of the market will be important for success. Since the amount of the deduction from the worker's salary limits the funds available to finance the health social insurance, it can be expected that pressure to provide benefits efficiently will be great. On the other hand, the decentralisation of health social insurance should create premium volumes and funding sources previously unseen in Latin America.
John H. Rooney, Rice Fowler, Coral Gables, Florida.
Mr Rooney is admitted to practice in the states of Florida, Louisiana and Texas. He advises insurers, reinsurers and intermediaries on their international activities, and has almost 20 years of experience operating in the field. He has registered reinsurers in foreign countries, advised on and handled the incorporation of insurance companies, and has advised on the day-to-day operations of insurance and reinsurance activities in foreign countries.Tel: 305 445 2930; fax: 305 445 2450; e-mail: email@example.com