Private health insurers paying out less in benefits compared to premiums collected: study

You're probably familiar with those private health insurance ads on TV. The ones where a young woman is enjoying a hike when she trips on a stick and hurts her knee.

The message is that life can go sideways unexpectedly and you need supplementary health insurance to cover that unforeseen tumble down a hiking trail.

If you're working, you may be insured via your employer's group benefits program for services not covered by Medicare. Many families and retirees buy supplementary coverage through companies such as Blue Cross or Manulife. In all, about 60 per cent of Canadians have private coverage either through work or individually.

But a new report has found the gap in money being paid out in benefits by private insurers compared with the premiums they collect has been growing over the last two decades.

The study, led by Michael Law of the University of British Columbia's Centre for Health Services and Policy, found that the gap totalled $6.8 billion in 2011, CBC News reports.

[ Related: ‘Health care insurance’ costs skyrocket in Canada: Is our system unsustainable? ]

The study, published Monday in the Canadian Medical Association Journal, found the percentage of premiums paid out as benefits by insurers on group plans in 1991 was 92 per cent. By 2011, it was 74 per cent.

And Canadians who bought an individual coverage plan got back just 38 per cent of premiums via benefits, down from 46 per cent, the report found.

The report, which can be found here, recommends the government tighten regulation on for-profit health insurance.

"Unlike other countries that rely heavily on private insurance, Canada has comparatively light regulation of private health insurers," the report says. "For example, there are no restrictions in Canada regarding the percentage of premium revenue that must be paid as benefits.

"Absent such oversight, non-medical spending in insured group plans offered by for-profit firms has nearly tripled as a percentage of premium income. Furthermore, it appears from the available evidence that these increases are not related to changes in plan design that would benefit plan members."

The report said government could improve the situation either by replacing private insurance with public programs, which generally have lower administrative costs and would probably be cheaper for things like drugs, or impose more regulation on the private insurance sector.

Law told the Vancouver Sun stricter rules limiting the percentage of premiums insurers could pocket would help protect consumers.

"As part of the changes that were introduced in the Affordable Care Act in the United States, known as ObamaCare, they introduced caps on insurance plans so that they have to pay between 80 and 85 per cent of the premiums they collect as benefits," he said. "So if the United States could do this, I don’t see why we couldn't."

CBC News noted the U.S. law that states when a greater share of premium revenues goes towards administration and profits, plan members get a rebate, which in 2012 totalled US $1.2 billion.

Law's study found the gap between premiums and benefit payouts widened steadily after 1999, when the federal government allowed insurers to morph from mutual insurance companies – owned essentially by their policyholders, like credit unions – into publicly traded companies.

But Law said it's impossible to say from the available data whether increased profit is the only reason behind the lower percentage of payouts, the Sun reported.

[ Related: Canadians leery of private health-care insurance: Pro-medicare group poll ]

The Canadian Life and Health Insurance Association, which represents the industry, was quick to challenge the report's conclusions.

Vice-president Stephen Frank told the Sun via email the report is misleading because it did not include the not-for-profit health insurance sector, which plays a dominant role in some provinces.

"The supplemental benefits market in Canada is very competitive," said Frank. "Employers and individuals can choose between plans offered either by for-profit or not-for-profit companies [such as the Blue Cross companies or Green Shield Canada]. Market pricing reflects this choice and competition."

Pacific Blue Cross, the largest private health insurer in British Columbia, said it does not pay dividends to shareholders.

"Money that we make in the way of a surplus goes right back into our business and there’s not a lot of money there," spokesman Brad Lyle told the Sun.