Tuesday, June 21, 2016

Debunking the arguments for Integrated Shield Plans.

Due to a combination of government policy-making and the marketing propaganda being spread by insurance companies, the selling of Integrated Shield Plan (ISPs) have become almost as easy as taking a lollipop away from a child.

For most people, ISPs are a no brainer. The most convincing argument to purchase a ISP is that the deduction of premiums come from the Medisave account so no cash outlay is required. This is a very difficult argument to debunk because Singaporeans have come to believe that Medisave money is not your money and you are better off using it up because it will have no impact to your personal finances. 

I did some research by looking at sales brochures of some insurance firms and would like to convince the reader that the basic arguments to buy ISPs is probably unethical and it may even raise legal questions as to whether some sort of misrepresentation may even be taking place when a sale is being made ( Although the only way to confirm this is for a victim to take civil action ). 

Here are some points for your consideration:

a) You are already covered by Medishield, do you really need to go beyond that ?

The most important point about ISPs is that you are buying a better ward when you get hospitalised. You need to really ask yourself whether you really need to stay in a Class A ward when you fall sick. This points to the fundamental idea that insurance is about risk transfer. You already have a means of risk transfer via Medishield, do you need to transfer the incremental risk of expensive Class A medical support ?

All Singapore citizens are being covered by Medishield which provides reasonably generous subsidies for hospital stay for class C and B2 wards. When you buy an ISP, you are typically being made to buy insurance for a stay in better wards.

At least for the brochure I examined, the examples of medical costs incurred employ Class A as an illustration which has the tendency to make the medical expenses quite frightening. Your task when looking at this example is to ask your financial adviser to make the same illustration for a class C or B2 ward before you conclude that medical costs are cripplingly expensive in Singapore. 

b) Your Medisave account does not contain funny money which is out of your reach and belongs to the PAP.

You know something is wrong with an industry when some agents try to perpetuate the myth that CPF money is government money and not your money.

If they do so they are wrong. Your Medisave is money which belongs to you.

The problem is that you need to understand how CPF-MA flows into CPF-SA which flows into your hands after age 55. 

When your CPF Medisave Account (CPF-MA) exceeds the contribution ceiling of $48,500  $49,800, the excess flows into your CPF-SA. This is vitally important because after age 55, you are allowed to withdraw your CPF-OA and CPF-SA if it exceeds the minimum sum of around $161k. More if you pledge the value of your HDB flat to CPF.

What this means is that if you manage your Medisave frugally and spend on only what you need,you can have a larger pot of cash in your hands when you reach 55 years of age.

c) ISP premiums may cost 150% to 200% of your Medisave premiums but it will not seem that way when the sale is made.

Another bugbear of mine is that at least in the illustration shown on some sales brochures, you might observe that the Medisave premiums are only illustrated to be only 10-20% higher than your ISP premiums. 

This is due to the practice of the government giving Medishield subsidies based on your economic status. For example, at 41 years of age, my Medishield premium is officially $435. But the government subsidizes part of it, even if I am of a highest income bracket, I only pay $242 a year from my Medisave account.

At least one company I observed puts the pre-subsidy $435 side-by-side with their premium costs to trick the customer into thinking that the difference is not particularly large, when it should be $242 which should be compared against. 

To figure this out, the customer must be sharp enough to ask whether the current Medishield premiums incorporate government subsidies. 

We know that most ordinary folks would not do that.

d) When you get an ISP, you will literally pay the piper after age 50.

The most damning feature of some ISPs I observed is that, unlike Medishield, you start to incur a cash outlay after you reach 50 or 60 years of age. Based on that sales brochure, this cash outlay can escalate very quickly. Based on the lifespan of a Singaporean male, at age 83, you could be looking at an outlay of $1,000 to $4,000 a year. This effectively exacerbates the longevity risk you face and your monthly payouts from CPF Life may be required to pay off these premiums.

By the time you reach that age, your agent may be long retired or may even have died, you will be shouldering an additional financial burden to maintain your ISP. 

In summary, we should start thinking twice about government initiatives which increases the number of accounts which we have. Specifically cordoning money into Medisave will incentivise the private sector to exploit your inherent bias for mental accounting. Parents who invest in a large Child Development Account also tend to spend freely on specialist pediatricians because the medical fees are debited from a separate pool of money designated for childcare. This makes citizens dangerously lazy about their finances.

We are entering a new age with separate spending accounts for keeping fit and getting extra training. 

We should always be mindful that these accounts function as some sort of a subsidy for specific industries which are smart enough to exploit our psychological biases.



  




17 comments:

Unknown said...

Well said... there is also this skills future account, exercise account.. so many such bullshits..

Richard Ng said...

Hi Christopher,

Great post, a few comment :
For item (b), the new Medisave Account ceiling is $49,800.
For item (c), I can understand why the insurer(s) using the full Medishield Life premium as comparison because the subsidies and rebates are short-term and varied from person to person.

Christopher Ng Wai Chung said...

Thanks for the clarifications, Richard !

While subsidies and rebates are short-term and vary, it does create the wrong impression that these ISPs are a fantastic deal compared to the plan by the government. Most consumers are not savvy enough to challenge thee claims. As you will not know how good your insurance until long after you commit to it, it belongs to a class of goods known as credence goods.

This means that regulatory oversight must exist to curb such practices.

anon said...

Hi Christopher,

Thanks for sharing your thoughts - always a pleasure to read your posts.

Would like to ask: if someone has already taken up an ISP, is it possible/feasible/viable to give it up and revert back to Medishield?

Thanks in advance, and wishing you the best in your studies and internship.

Sillyinvestor said...

U should seriously look at the breakdown of benefits of IP, which are also tiered, with that on govt medishield

Room and board is never a big item in hospital bill. U are not providing the full picture too.

I agree with u, I hope all would be buyers read and learn and make a sound decision. There are just too many bullshit from both camps

Christopher Ng Wai Chung said...

If room and board are never significant items, whoever is selling the plan should be able to provide a compelling picture to buy the ISP using purely B2 ward projections. There is no need to employ Class A ward projections which strip the estimates from government subsidies which the patient would be entitled to with Class B2.

You realise that all I get are eyeballs on this blog and I am not obligated to provide the full picture although I would really appreciate it if a reader is willing to shed more light on these insurance plans.

Christopher Ng Wai Chung said...

Sillyinvestor has attempted a rebuttal on his blog.

All readers may read it here : http://sillyinvestor.blogspot.sg/2016/06/integrated-plans-are-not-about-hospital.html

Christopher Ng Wai Chung said...

Anon,

I don't know the answer to your question. But I found this link :

https://www.moh.gov.sg/content/moh_web/medishield-life/integrated-shield-plans/about-integrated-shield-plans--ips-.html

It seems that that these private insurers only cover B1/A ward stays and passes through the premiums to the CPF board so I guess the answer is yes - If you pull out of the plan, you get your Medishield back.

Sillyinvestor said...

Christopher,

I took up your suggestion and studied MoH website of bills at B2 and C ward and the subsidized operations.

My apologies if I sound rude.

My findings can be found in my blog. It would seem if we stay at B2 and C, only 1 operation would really be a nightmare to medishield holders. Another 2-3 exceeded claimable amount but it's not crippling.

That is based on whatever info is available.

I still believe one should at least get surgery coverd as "per charged" by going for the lowest IP plan

Christopher Ng Wai Chung said...

Sillyinvestor,

You are not wrong, if you prefer Class A, then by all means buy an ISP.

The examples in the sales brochures can also illustrate using a real example how their ISPs can cut costs.

Unfortunately, they need to leave it to you to go through every expense item to convince yourself that you've made the right decision.

Regards

monster said...

Will everyone just ask for basic lifestyle when there are better? Does everyone take public transport? Then we don't need the COE. Does everyone drink coffee at hawker centre, then starbucks will be bankrupt. Do we all eat in hawker centres, than why are the good restaurants so crowded? Why do we even go for holidays and some even exotic ones? Why not just stay at home and save money? Why do people carry branded bags that cost more than $20k, and all the Swiss made watches, when Casio will tell the time just as accurately ?

We have a lifestyle to fulfil. We make money to live a better life, what that is differs from person to person. And when we are sick, maybe we also want to treat ourselves better, since we are already doing that when we are healthy. Maybe some prefer to avoid the very long wait at B2 / C ward, and prefer more attentive attention at private hospital? The rooms are also nicer, and more privacy in a single bed. Maybe can sleep better at night with no snoring ? Maybe to select a specialist for this particular illness, but the specialist only practice in the private hospital ?

Do you also blame the sales brochures when you choose a better lifestyle for your transport, housing, dinning, travelling, clothing etc?

Christopher Ng Wai Chung said...

monster,

Your argument might work if rhetoric actually works on me but it doesn't.

You don't actually have an argument. All you merely assert is that you have a right to seek better medical treatment. Treatment which can be bought using cash.

You are also skirting the fact that I am saying that the sales brochures do not accurately reflect the risks of not having an ISP. For your argument to hold water the sales brochure should the luxury and flexibility of your Class A/B1 options but it clearly does not.

Don't insult the intelligence financial bloggers.

Regards

Terence Yang said...

With the changes to what has now become medishield life, I have been contemplating chopping my IP. A key issue was as you addressed, the costs shoot up as you get older and cash top up comes into play as you get older, which is also when you need it most.
Yes you make the choice if you want stay ward A, not all of us do, I don't.
Finally someone wrote about the IP plans and we're thinking the same issues. You're getting me off my ass to chop it this year.
Terence

Christopher Ng Wai Chung said...

Terence,

You raised another good point - That Medishield reforms are making it better as we speak.

Regards

monster said...

If you prefer to stay in B2 / C ward, then you don't need any IP plan and you should stick with the Medishield Life plan. It's very simple. But for those who prefers a better quality of life, then we need to upgrade. It's just a personal choice.

monster said...

And I like to share this insightful post by another intelligent financial blogger.

http://sillyinvestor.blogspot.sg/2016/06/integrated-plans-are-not-about-hospital.html

Bapu said...

Christopher,

As always, thanks for your opinion and thoughts. I opted for a Class A ward plan, and the reasoning was in case of emergency, I wanted the optionality of being able to go to a private hospital. Ive heard horror stories of long queues at local/public hospitals for the B2 wards.

Is this an example of fear mongering in your opinion, or you dont think this situation happens often enough to warrant concern?