Health insurers don’t provide advisers, let alone consumers, enough information to make rational health insurance decisions.

This is my opinion. Let me explain.

Last month I attended a professional development event which included presentations from several health insurance representatives.

All up, it was a great event. Personally, I find these development events to be hit-or-miss, but I found this one valuable.

But something gnawed at me, and I’ve been trying to put my finger on what I felt that way.

One of the sets of questions that were posed to the representatives was as follows:

What are the strongest rationales for having medical/health insurance in light of NZ’s public health system? At what point do insurance providers think that people with sufficient means should consider self-insuring rather than taking out these forms of insurance? Is it a necessity or a luxury?

(Yes. That’s my fingerprint on that set of questions.)

Frankly, I was disappointed with the responses relating to self-insurance. One of the presenters even said there’s no such thing as self-insurance! (Before saying that there is such thing as taking on the risk yourself, which I’m sorry – this argument is semantics and sophistry.)

A couple of the other presenters talked about how self-insurance might be legitimate, but referred to having wealth of $10 million or $5 million before considering it.

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In my view, no one seriously engaged with this question.

One thing that has become clear to me over the years, and was especially apparent at the presentation, was that health insurers (and insurers in general) like to talk about the big payouts they make.

A couple of the providers were keen to volunteer that they’ve made payouts of $240,000 or thereabouts in relation to individual claims. One of the providers said that they’ve paid around $290,000 to a single recipient (in relation to multiple claims).

Insurers also like to talk about how much they pay out to their clients. You’ll often read about how many millions they have paid out in relation to claims last year. They also like to talk about how much the insurance industry has paid out in total.

The Financial Services Council (FSC), for instance, recently published a press release and added the following “Industry Key Statistics (2017)”, even though it wasn’t strictly relevant to the release. Apparently, insurers in New Zealand pay out $1.2 billion in claims each year (“that’s an average of $3.3 million every day”). New Zealanders also have around 4 million life insurance contracts in place.

Insurers also like to talk about the more “common” types of claims. For instance, in a recent article published on Stuff, Southern Cross volunteered the following claim costs:

  • Breast cancer surgery: $6,400-$17,800
  • Endometriosis surgery: $6,900-$18,900
  • Knee replacement: $22,200-$30,000
  • Hip replacement: $20,700-$27,800
  • Varicose veins: $7,000-$9,800

NIB has a couple of graphics pointing out other costs, such as:

  • Angioplasty: $17,300-$27,400
  • Heart bypass: $35,000-$67,000
  • Single valve heart operation: $48,000-$60,000
  • Radiotherapy at the cost of $18,000-$37,000

And we can’t miss the big one: chemotherapy, at the cost of $15,000 to $145,000 per treatment cycle (where treatment isn’t funded by PHARMAC).

The thing is, it’s really hard to work out what the distribution of these claims is.

It’s one thing to know what the potential costs are. It’s another to know how likely they are.

Instead, health insurance is marketed to consumers – and their advisers – as if these events are “black swan” events.

At the individual level, that may be the case. But if there is one type of organisation that is capable of turning these black swan-seeming events into more predictable white swans, it’s insurance companies.

Most insurance companies are for-profit organisations. Even member-based insurers have finite resources. They need to be careful about how they underwrite risks. They need to ensure the amount of claims they have to pay don’t exceed the premiums they receive by clients (at least, over the long-run).

In order to price their policies appropriately, they engage actuaries who look at the figures. Actuaries look at statistics – like actuarial tables, which show how likely it is that someone will die between now and their next birthday. They care about the big claims and tail risks, but they also care very much about the distribution of payouts.

Insurance companies know all these facts. They need to, to operate their businesses successfully, without running the risk of blowing up.

Yet instead of providing this information to consumers and their advisers, they sell insurance as if all risks are “black swans”.

Generally, when I refer to black swans, I talk about highly impactful, highly improbable events. In this context, I’m using the term a little more broadly – to refer to events that they like to market as being highly impactful, and highly impossible to predict.

When in reality, some but not all of these events will be highly impactful. Many people can afford to pay for private surgery for varicose veins or even a knee or hip replacement, without significantly compromising their long-term financial outcomes.

And in reality, we can make some pretty good guesses about how likely certain events are. I may be wrong, but I’m conscious enough of my lifestyle decisions, what to keep an eye on (for example, BMI, blood pressure, and cholesterol levels), and the interventions I can take, to make the likelihood of needing an angioplasty, heart bypass, or single valve heart operation, fairly unlikely.

I can also make sure that my wife and I have enough of a financial buffer lined up so we can afford to pay for a knee or hip replacement should the time ever come.

If we need chemotherapy that isn’t funded by PHARMAC, then hopefully our trauma insurance (as opposed to health insurance) will pay a sufficient lump sum to help us. (I also note that many health insurance products have limits on how much they will pay in relation to non-PHARMAC funded treatments.) And by the time trauma insurance isn’t available (or is prohibitively expensive), we’ll have a buffer to cover one or more treatment cycles.

It’s possible to look at the maximums and see whether you have enough of a buffer to cover, say, $240,000 or $290,000 in medical expenses. If we take this as something of a “worst case” scenario, I would argue that someone with significantly less than $5 million could stomach this sort of expense without compromising their long-term financial outcomes.

Depending on the circumstances (including age and broader family circumstances), someone with $1 million or $2 million in assets could suck it up and pay for these types of costs, and still be able to support a reasonable quality of life.

(There’s also another factor, and I want to apologise ahead of time for being morbid. There can be a relationship between health issues and longevity. If you have a health issue that will cost $100,000 to deal with, it’s unfortunate but quite possible that your expected longevity isn’t going to be the same as it was before your diagnosis. This means that the $100,000 you may need to pay is a financial setback, but also needs to be considered in the context that you might not need to support your lifestyle for quite as many years.)

But let’s say that 95% of all health insurance claimants claim $100,000 or less. I think more people would be able to make a sober assessment, decide that they are prepared to run the risk, and self-insure.

Health insurers like to talk about the benefits of health insurance including “Faster access to treatment by avoiding public hospital waiting lists” and “More choice over when you receive treatment”. But the reality is, that these aren’t a function of having health insurance. It’s a function of paying for private health care – whether it’s your health insurer paying for it, or you paying for it.

As consumers, and advisers, we need this information to make educated decisions. And I think that if we had more information, more of us would self-insure.

PLEASE NOTE: The decision to self-insure should not be taken lightly. Especially if you have health insurance in place, and have health issues that have occurred since taking out the insurance. 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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