Insurance is about risk-averseness for both buyers and sellers. Buyers i.e. clients don’t want to incur huge debts when they are suddenly faced with a catastrophe.

So, they plan and overcome this uncertainty by insuring themselves — paying a small premium (compared to the enormous financial cost they may actually incur); and when the catastrophic incident does occur, they get a financial payout.

However, the seller i.e. insurer is also risk-averse.

The insurer wants to make sure that their business is profitable. So while they choose to take on the financial risk on behalf of their client, they also must ensure that on average, the total amount of money given to them from people buying premiums has to still be more than the total amount of money that ends up being paid out when people have a financial catastrophe.

How do insurers practice risk averseness? Through risk-selection. Choosing more people they perceive to be of “less risk” would ordinarily result in less payouts.

Before going off into a tirade about the profit-making insurance industry, please understand that there is nothing wrong with this entire process. This is exactly what the mechanism of an insurance business is, how it runs and how it is kept afloat.

Now let’s come to the issue of medical insurance. In medical insurance, risk-selection is carried out using the following cardinal rule: if someone already has a certain disease, or has a condition that is predisposing them to probably carrying a disease, insurers usually take one of three steps.

First, they may choose to exclude the individual altogether i.e. not allow them to buy insurance.

Second, they may choose to exclude the individual from making a claim connected to the high-risk condition or disease they may be facing, and third, they may opt to put a higher premium on the individual to mitigate the higher risk the individual is bringing to the “risk pool” — a concept called “loading”.

This is the existential problem which has proven to be difficult to resolve for almost every medical insurer all across the globe. By limiting or excluding entry to the risk pool by individuals with predisposing conditions, insurers have tried to keep their risk-controlled and payouts low.

But as the past few years have shown in Malaysia, this is not proving to be successful especially with many unknowing, undiagnosed individuals entering the pool, as I have mentioned in a previous instalment.

Despite the barriers, the pool does not seem to be as low-risk as they thought it would be — and what this has created is really a “small” pool which many Malaysians are not able to access.

The “small” pool is not proving to be financially viable, and this is the existential “vicious” circle that insurers may find themselves in.

Increasing barriers to not allow high-risk (predisposing conditions) to come in ends up with a small amount of pooled funds, which does not seem to be commercially viable.

So what’s the solution then? The answer may lie in allowing widening of the risk pool, and allowing individuals with predisposing conditions to enter the risk-pool by selling them medical insurance.

After such a lengthy explanation in the paragraphs above on how insurers need to reduce their risk to ensure their business is viable, and how individuals with predisposing conditions are most likely to increase the risk within the pool, the reader may think I am crazy to suggest this.

Interestingly however, real-world conditions suggest otherwise.

One of the health systems which is almost dependent fully on private medical insurance is in the US.

With the exception of a small group, the system is underpinned by private medical insurance, with individuals paying premiums and buying annual health insurance for them and their dependents.

Interestingly, the American health insurance system used to practice barriers for those with predisposing conditions, limiting their entry into the risk-pool.

The US suffered for decades with a significant percentage of its population remaining uncovered by insurance, with serious equity and poor documented health outcomes.

The Obama administration passed the Affordable Care Act, or Obamacare, as it is more popularly known.

One of the most significant transformations under the Act was that it removed the barriers of pre-existing conditions, ensuring everyone could buy insurance without facing hurdles such as loading or exclusion.

Insurers were prohibited from denying coverage to individuals because of pre-existing conditions. So, more individuals could enter the “risk-pool” making the amount of pooled funds larger.

However, to balance the fact that more high-risk individuals were entering the “risk-pool” which would cause larger payouts, the government also mandated that all individuals would be required to purchase insurance, or pay a monetary penalty.

In insurance, usually only high-risk individuals or individuals who have a low-risk threshold are the ones who proactively buy insurance — others such as young people usually don’t, as they deem it an unnecessary investment.

By ensuring everyone needed to buy insurance, the government ensured the amount of pool funds were widened, with many low-risk individuals buying in — and this would overcome the amount of money being paid out when higher-risk individuals needed to get paid out.

Defying insurers concerns and perhaps established logic at the time, Obamacare was rolled out in 2014. That’s right, more than 11 years ago. Here’s what has happened since in the US.

First, the numbers of those uninsured dropped by more than half. Second, income inequality decreased. Third, and most relevant to our current context: total healthcare spending came down, with a stabilisation of premium prices as well.

In short, despite having an increased number of people with predisposing conditions in the risk-pool (in fact all of them), the dam did not break. The pooled funds continued to be stable as its size grew due to the number of individuals who now subscribed to it.

So, the existential problem with including people with predisposing conditions into the risk-pool is merely this. We need to mandate that everyone needs to subscribe into the risk-pool.

In that way, the pool becomes large enough to support the payouts required of it from individuals with health problems, be they the ones with pre-existing conditions or not.

Now in a market driven by private medical insurance such as in Malaysia, the only way to do that is for the government to intervene, as the US government did.

That really leaves us with the next existential question: is our government ready to decisively intervene to reshape the medical insurance market?

See also: Is the medical insurance system broken? and Reducing risk in medical insurance

The views expressed are those of the writer and do not necessarily reflect those of FMT.