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Is the Multi-HMO System a Promising Candidate for National Health Insurance Reform in Taiwan?

by Lung-Sheng Lee

Lung-Sheng Lee  is an Associate Professor of Finance at Taiwan's Yu-Da Institute of Commerce

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The National health insurance program in Taiwan was begun on March 1, 1995. The Bureau of National Health Insurance (NHI) is responsibile for this program. Currently health expenditures in Taiwan amount to about 5.5% of GDP. Based on the following facts: the removal of a financial barrier to obtaining health care; 96 percent enrollment rate; freedom to choose providers; and high enrollees’ satisfaction, this program has accomplished an impressive achievement (Yang 1998). However, this program faces some problems and potential difficulties, such as the following:

Failure to contain rapid cost increases

Since the implementation of the NHI program, the rate increase in revenues has been significantly less than that of the increase in expenditures. Furthermore, premium adjustments are quite rigid due to the required authorization of Legislative Yuan. The vested members of Legislative Yuan will not agree to an increase in the premium due to their interest of getting reelected. As a result, the NHI fund has started to vanish, and the NHI Bureau is facing a emerging financial crisis. Wei et al. (1997) and Cheng (1998) pointed out that the fee-for-service (FFS) scheme in the current NHI program provides incentives for health care providers to provide excessive care, but not pay adequate attention to the quality of health care. The insured also have little incentive to utilize health care resources cautiously. The average annual number of physician visits exceeds 14 times per person, which is higher than that of OECD countries (Yang 1998).

Payment scheme leads to the misallocation of health care resources

Jang and Huang (1997) pointed out that the implementation of the NHI program has resulted in the misallocation of health care resources. First, clinics and small size hospitals are diminished. There is no gatekeeper in the program due to the fact that public is strongly against this idea. The insured has complete freedom to choose their health care provider and as a result tend to visit the well-equipped median-to-large size hospitals. Second, the unfair payment scheme may cause a serious shortage of doctors in some divisions. For example, the current payment for surgery is generally extremely low, and the NHI Bureau is reluctant to adjust it due to budgeting considerations. As a result, medical students tend not to choose surgery as their major since the inauguration of the NHI program. It is expected that there will be a shortage of surgeons if this biased payment scheme persists.

Problems with the current system include:

In summation, it is time for a major overhaul of this program in order to improve its efficiency and reduce the rapid increase in medical expenses associated with the current system.


The Current Reform Proposal



On the 22nd of May 1997, the Executive Yuan decided to reform the NHI system toward a "one-payer-and-multiple-insurers" setting, and the 2535th meeting of Exceutive Yuan passed the NHI reform draft. The NHI Bureau will be replaced by a special public juridical organization – the NHI Foundation. The NHI Foundation is designed to be the only payer and is supervised by the Department of Health. The NHI Foundation contracts several HMOs to provide health care services, and HMOs are paid by risk-adjusted capitation. The primary goals of the NHI Foundation are to gain administrative dexterity and avoid improper intervention of Legislative Yuan. Financial soundness is the first priority and the NHI Foundation will be empowered to set the premiums in a quite unrestrained manner. The contradictory roles of the NHI Bureau are resolved; the Department of Health will be the regulator, and the NHI Foundation will be the single payer. Enrollees can choose among several HMOs, including one public HMO.

HMOs are generally regarded as a pro-competitive element in the structure of the U.S. health care delivery system, and a way to effectively reduce the rate of health expenditure increases. [Lee 1996, Wholey 1995] Because of their fixed budget, HMOs have strong economic incentives to control the utilization of resources, and they tend to "conservatively" adopt new and expensive medical technologies. [Lee 1996, Moore 1991] In summary, HMOs that are paid by capitiation or restrained by a global budgeting scheme have financial incentive to curtail costs and improve efficiency.

In the past two years, the proposed multi-HMO system has evoked extensive debates in Taiwan. These debates mainly focus on the quality of health care and the realization of cost savings. [Lin 1998] Most intellectuals in Taiwan think the proposed multi-HMO system will work well. Wei et al. (1997, 1998) sent questionnaires to 180 opinion leaders and found that most of them believe that the multi-HMO system is a feasible model. This study concluded that the multi-HMO system has positive effects on enrollee’s satisfaction, choice of the insurers, enhancing competition, increasing efficiency, and avoiding the improper intervention of government, as well as Legislative Yuan. However, not every scholar or expert agrees that the multi-HMO system has overwhelming merit. [Chi 1997, Kao 1997, Lin 1988] Moreover, most doctors asserted that the quality of health care in HMOs is questionable and were strongly against this proposal. [Reid 1997, Wu 1997]

U.S. medical inflation has slowed down since 1993. Many attribute this trend to the prevalence of the HMOs. [Berman 1998, Sullivan 1998] Currently, there are about 140 million Americans enrolled in the HMO or similar programs. [Andreopoulos 1998] Recent opinion polls indicated that the HMO enrollees have high degree of contentment with their HMOs. [Berman 1998] However, some HMOs did fail to do a good job in containing cost increases in the past two years. [Brock 1998, David 1998, Fumo 1998]

Government Intervention and the Proposed Multi-HMO System

As mentioned before, the proposed multi-HMO system may solve the major problems in Taiwan’s current NHI program, but it also has some plausible negative side effects. First, the insurance market has the problems of asymmetric information, moral hazard, and adverse selection. Second, health care is a public good to some degree. As a result, appropriate government intervention is necessary. In the following section of this paper, the conceivable demerits of the proposed multi-HMO system are explored, and why appropriate government intervention is needed is discussed.

High administration and operation costs

The primary merits of multiple insurers are freedom to choose and its inherent competitive infrastructure. However, administration costs are usually very high. For example, administration costs in the German multi-insurer health care system is about four times greater than that of the British system. [Chen et al. 1997] Furthermore, HMOs generally spend significantly more in administration costs than the FFS insurers due to abundance of paper work and numerous review procedures. [Sullivan 1998] The cost reductions that result from the HMO’s financial incentives may not substantially outweigh the administrative costs. It is worthwhile to investigate this tradeoff between administrative costs and reduction of unnecessary care in the proposed multi-HMO system in Taiwan.

Controversial quality of health care

The quality of health care of HMOs is the focal point in the U.S. for the past several decades. Many worry that the HMO’s low price tag is achieved by sacrificing the quality of health care. Nonetheless, some studies indicated that the quality of care in HMOs is not inferior to that of FFS plans. [Lee 1996] However, medical disputes associated with the denial of care and claims of mistreatment by their members are not uncommon. [Andreopoulos 1998] As a result, most doctors in Taiwan worry about the quality of health care if the multi-HMO system is implemented. [Reid 1997, Wu 1997]

The quality of health care is largely influenced by market competition, the structure of the judiciary system, and government intervention. [Kongstvedt 1993, Lin 1998] For example, a state regulatory agency can fine and suspend or revoke the licenses of HMOs if their health care services are not rendered under reasonable quality of care consistent with the prevailing professionally recognized standards of medical practices. An example of this is the Sanus Texas Health Plan, Inc. agreeing to pay Mr. Hedrick, a Dallas city employee, about $14 million to settle after the jury awarded him $13.75 million because the jury could award treble damages according to the Texas unfair trade practices statute. The court held that "the HMO had acted in bad faith when denying coverage for a bone marrow transplant because the bone marrow transplant was not excluded from coverage by the organ transplant exclusion of the member’s benefit agreement." [Kongstvedt 1993]

To recapitulate, market force alone may not adequately assure the quality of health care. The intervention of the courts and other governmental intervention are also essential.

Attitude of government

Should the NHI program cover some extremely expensive high-tech treatment? A high-energy particle accelerator for cancer therapy is a good example of this issue. It is very costly and effective for some cancers. [Lee 1994] However, the more generous the coverage, the higher is the cost. [Gabel 1998, Ornstein 1998] Spending more on health care means spending less on other important things, such as education, defense, social services to the elderly and the poor, and other essential government programs. It is obvious that excessive health care insurance will hurt Taiwan.

As summarized by Newhouse (1993), new expensive technologies expand the capacity of medicine and increase costs. Weisbrod (1991) points out that not only does health insurance cause increasingly expensive technologies to be developed, but that the availability of new technologies enhances the demand for insurance. As a result of the "insurance-technology circle," health expenditures escalate. Broad coverage for diseases and expensive medical technologies will certainly lead to the rapid increase of health expenditures.

Based on the following rationale, the author thinks that the proposed multi-HMO system in Taiwan will be under a lot of pressure to provide broad coverage. First, over the past several years the government spent a huge amount of money in order to coax citizens to enroll in the NHI program. The government paid 36% of the budget of the NHI Bureau in 1997. According to the NHI reform draft of the Executive Yuan, the government's contribution will still be an important financial source of the NHI Foundation. The president of the board of trustee of the NHI Foundation is appointed by Executive Yuan and seven of the thirty five trustees are government officers. Also, the Legislative Yuan has an indirect influence on the decision-making of the NHI Foundation via the Department of Health.

The misallocation of health care resources

To some extent, HMOs’ low premium is due to the unfair low payment to contracted hospitals. As a result, hospitals merge or unite in order to be able to bargain more effectively with HMOs. This inevitably leads to higher medical inflation. [Winslow 1998] Based on U.S. experience, we can draw the following conclusion. The implementation of the multi-HMO system in Taiwan will likely gradually result in the agglomeration of health care providers and the diminution of small-size hospitals. It is, therefore, uncertain whether the proposed multi-HMO system can contain the medical care expenses in the long run. In addition, the rights of enrollees may also be weakened.

Concluding Remarks

The NHI program in Taiwan has performed satisfactorily. It has also produced serious, undesired side effects, including a rapid rise in the price of medical care, inefficiency, and the misallocation of health care resources. It is commonly believed that reforms are needed. On the 10th of July 1997, the Executive Yuan passed the NHI reform draft and decided to overhaul the system toward a framework of one public payer and multiple insurers. The Executive Yuan prefers the multi-HMO system. This has led to many debates about the role of HMOs in health care reform. HMOs do reduce the cost increases of health care, and there is no convincing evidence that indicates that HMOs provide a lowered quality of health care. The multi-HMOs system should be a viable reform plan. But government intervention focused on creating a suitable market environment and maintaining adequate independence of the NHI Foundation is also essential to assure the success of this reform measure.


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