Exit, Voice, or Loyalty? An Investigation Into Mandated Portability of Front‐Loaded Private Health Plans

• Published date: 01 September 2019
• Author: Martin Karlsson,Juan Pablo Atal,Nicolas R. Ziebarth,Hanming Fang
• DOI: http://doi.org/10.1111/jori.12233
• Date: 01 September 2019

©2017 The Journal of Risk and Insurance. Vol.XX, No. XX, 1–31 (2017).

DOI: 10.1111/jori.12233

Exit, Voice, or Loyalty? An Investigation Into

Mandated Portability of Front-Loaded Private

Health Plans

Juan Pablo Atal

Hanming Fang

Martin Karlsson

Nicolas R. Ziebarth

Abstract

Westudy theoretically and empirically how consumers in an individual pri-

vate long-term health insurance market with front-loaded contracts respond

to a newly mandated portability requirement of their old-age provisions. To

foster competition, effective 2009, the German legislature made the porta-

bility of standardized old-age provisions mandatory. Our theoretical model

predicts that the portability reform will increase internal plan switching.

However, under plausible assumptions, it will not increase external insurer

switching. Moreover,the portability reform will enable unhealthier enrollees

to reoptimize their plans. We find confirmatory evidence for the theoretical

predictions using claims panel data from a big private insurer.

Introduction

Veryfew countries in the world organize their health insurance system around private

health insurance markets. Even in the United States, the leading example of a largely

Juan Pablo Atal is at the Department of Economics, University of Pennsylvania, 3718 Locust

Walk, Philadelphia, PA 19104. Atal can be contacted via e-mail: ataljp@econ.upenn.edu.

Hanming Fang is at the Department of Economics, University of Pennsylvania, 3718 Lo-

cust Walk, Philadelphia, PA 19104, and the NBER. Fang can be contacted via e-mail:

hanming.fang@econ.upenn.edu. Martin Karlsson is at CINCH, University of Duisburg-Essen,

Weststadtt¨

urme Berliner Platz 6-8, D-45127 Essen, Germany. Karlsson can be contacted via e-

mail: martin.karlsson@uni-due.de. Nicolas R. Ziebarth is at the Department of Policy Anal-

ysis and Management (PAM), Cornell University, 106 Martha Van Rensselaer Hall, Ithaca,

NY 14850. Ziebarth can be contacted via e-mail: nrz2@cornell.edu. We thank Christophe

Courbage,Wanda Mimra, Martin Salm, and seminar participants at the University of Oslo,

the Gesundheits¨

okonomischer Aussschuß of the Vereinf ¨

ur Socialpolitik, as well as the World Risk

and Insurance Economics Congress (WRIEC) 2015 for excellent comments. In particular, we

thank Roland Eisen and Peter Zweifel for excellent discussions of this article. We take respon-

sibility for all errors in and shortcomings of the article. We do not have financial intereststhat

would constitute any conflict of interests with this research. Generous funding by the German

Federal Ministry of Education and Research (FKZ: 01EH1602A) is gratefully acknowledged.

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private system, public health insurance accounts for a large share of overall spending.

In addition, private health insurance has been increasingly regulated. For instance, the

Affordable Care Act (ACA) prohibits experience rating of premiumsand pre-existing

condition clauses. One major question is how to regulate private insurance markets

in order to foster competition between insurers, while containing premium growth

and allowing for consumer choice.

Besides the United States and Chile, Germany is one of the very few countries with

an entirely private health insurance market, not just a supplemental one.1The ex-

istence of this individual private market is due to historical reasons and allows the

self-employed, civil servants, and high-income earners to irreversibly opt out of the

public system and insure their entire health risks privately and individually. The

German individual private market is in some respects less regulated than the U.S.

market after the ACA. For example, there exists no guaranteed issue, and pre-existing

condition clauses are legal. Furthermore, at the beginning of the contract period, pre-

miums are individually underwritten and risk-rated. On the other hand, after the

initial risk-rating and in subsequent periods—to avoid jumps in premiums due to

health shocks—all premium increases are strictly community-rated at the health plan

level and guaranteed renewability exists.

One special feature of the German private market is the legal obligation of insur-

ers to accumulate old-age provisions for each enrollee. The rationale behind this

regulation is to incorporate a mandatory savings component in order to keep pre-

miums stable over the life cycle and to prevent excessively high premiums for the

elderly.2Therefore, the premiums for the young exceed their actuarially fair value,

whereas they fall behind for the elderly. The old-age provisions accumulate when

enrollees are young and dissipate when enrollees are old. Furthermore, there is no

official enrollment period and enrollees remain insured until they actively decide

to cancel their contracts and switch insurers. Guaranteed renewability exists and,

while the insured can cancel contracts, insurers cannot cancel contracts as long as

premiums are paid. This leads to one-sided commitment and poses challenges for

the insurer if good risks predominantly lapse their contracts (Hofmann and Browne,

2013). However, until 2009 this one-sided commitment was limited, because old-age

provisions were not transferable to competing insurers. Along with the renewed risk-

rating when lapsing contracts and switching insurers, the nonportability of provisions

and front-loading of premiums created a substantial lock-in effect because switch-

ing insurers typically entailed considerable financial losses. Currently, the average

old-age provision is around $24,000 per policyholder (Association of German Pri-

vate Healthcare Insurers, 2016). Consequently, effective 2009, the German legislature

passed a bill that mandated old-age provisions to be made portable (to a standard-

ized extent). The intention of the bill was to reduce switching costs and foster market

competition.

1In contrast, there basically exists no private group market in Germany.

2In Germany,there exists no Medicare for the elderly,which means that individuals are privately

insured for the rest of their lives.

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