Handcuffs
Policy holders risk getting handcuffed to their long-term-care insurance. Photo by Reuters
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The dry statistics tell us that every third person in Israel will need nursing care after the age of 80. And since life expectancy in Israel is already beyond 80 years old, the prospect of nursing care hangs over everyone – a risk that needs to be addressed by buying some type of long-term-care health insurance.

Private LTC insurance is considered the best kind, mainly because it's based on a binding contract. The insurance company can't deviate from it, not even if in the future, the statistics on LTC patients in Israel change for the worse. The same logic applies to the price of insurance: Nursing care already costs between NIS 5,000 and NIS 15,000 a month, so it's particularly important to purchase a policy that guarantees the price today.

But this is also the main weakness of private LTC insurance: It is extremely long term. A 30-year-old buying LTC insurance is entering a contract that is binding for 50 years or more. Even if he buys the best and most expensive private insurance available, which guarantees the highest-priced long-term care of NIS 15,000 a month, what's the chance it will still be relevant in 50 years?

When it comes to long-term insurance, it turns out that a binding policy can be more of a liability than an asset. The obvious absurdity is that it is almost certain that over the next 50 years the price of nursing care will climb to over NIS 15,000, meaning the insurance will only provide partial coverage.

Since the absurdity is obvious, the policyholder will probably grasp at some point that his insurance isn't enough and he needs to do something to increase his coverage. But what happens with long-term policies where the policyholder isn't capable of understanding that his insurance is outdated?

This isn't a stretch of the imagination but precisely what happens with private health insurance policies. As opposed to collective health insurance purchased in the framework of the workplace, and supplementary insurance offered by the health maintenance organizations, both of which are renewed and updated every few years, private policies are based on life-long binding contracts.

This would seemingly be to the policyholder's advantage, but in fact it's an absurdity hidden from view. At the rate medical technology is advancing, these policies become outdated almost the moment they're signed. New technologies are introduced, old technologies go out of use or enter the basket of universal health services (so that there's no point in paying for them privately), prices of innovative drugs decline over the years and the medical field is making strides at a dizzying pace. All this passes by a private health insurance policy, which remains frozen in time.

"In the space of 10 years, a private health insurance policy becomes 30% obsolete," estimates a senior Health Ministry official who also said he believes the problem is particularly severe with regards to the chapter of the policy dealing with acute illnesses. The supervisor of insurance at the Finance Ministry say he thinks this is an exaggeration and that most health insurance policies are up-to-date, but his department admits there is a problem. A private health insurance policy indeed isn't brought up-to-date, and the policyholder has no way of following developments and learning that the policy he holds has become outdated.

The problematic nature of private policies is evidenced by the loss ratio: the difference between premiums the insurance companies charge and the amount they pay out in claims. The loss ratio in private health insurance is just 40% compared with 80% or more for collective insurance. What this means is the insurance companies collect a great deal of money from policyholders and give them very little back in exchange. One of the reasons for this is the static nature of the insurance contract, which becomes obsolete and irrelevant within years.

The treasury's insurance supervisor attributes the low ratio to high commissions paid to insurance agents and prudence on the part of the companies, which worry about their profits due to the long span of the insurance policies. These are interesting arguments, but probably don’t concern the policyholder paying out of pocket for the most expensive health insurance on the market, presumably a premium product, when he is actually receiving an outdated and inferior product.

It should be pointed out that elsewhere in the world solutions to the problem have been devised. In the United States, where health insurance is entirely private, an obligatory loss ratio of 70% was established. This means that insurance policies must be structured to return at least 70% of the money policyholders pay in at any given point in time. A different mechanism was set up in Britain – a type of drug basket. The supervisor determines the basket of services that must be provided in insurance policies, and the premium gets updated accordingly. In any case, the mechanisms established around the world disrupt the stability of insurance policies: The terms of the policy are updated as well as the price.

Israel's insurance supervisor is afraid to adopt any of the mechanisms used elsewhere in the world because of the implications for prices. The insurance premium, which is now binding and permanent, would become variable. The supervisory department believes this would drive up the price of health insurance drastically over the years and we would lose more than we would gain: The insurance would be better and more up-to-date, but so expensive that hardly anyone would be able to afford it.

At the Health Ministry, they disagree, claiming that the rapid obsolescence of drugs and medical technologies also brings down their prices, so technologies could be switched at an additional cost that isn't too high. In any case, one can't help but wonder what Israeli policyholders would prefer for themselves: Paying a fixed price for insurance that isn't worth very much or paying more over the years for insurance that, when needed, can be used. It's by no means clear that the insurance supervisor's position is the correct one.