In my opinion health insurance is probably one of the most misunderstood forms of insurance and often an easy target for unfair criticism.

Some people see ObamaCare as a result of President Obama accusing the health industry in the USA of applying excessive premium increases and bad practices. Locally we have experienced similar criticisms.

Health insurers are sometimes criticised for applying excessive premium increases and making excessive profits.

But the reality is that premiums are based on claims cost, and this has been increasing year on year. As a community we are using our health plans, and utilising healthcare services and this is what drives up the cost of premiums.

• Total healthcare expenditure in Bermuda — $678.4 million.

• Health insurance financed 56 per cent of that spend.

(National Health Accounts 2013)

Although the insurance industry sets the cost of insurance, it is not responsible for the increase in the cost of healthcare payments from which the premiums are derived. That is driven by the cost of the services delivered by hospitals, physicians, clinics, labs and pharmacies.

Another factor to consider is that in healthcare, unlike other industries, the choice or decision to purchase or use the service does not lay with the consumer. That is determined by the physician or healthcare provider. In fact the provider of health services determines the treatment, the price and as such has a strong influence on demand and supply.

Also factor in the fact that in Bermuda we are seeing an increase in physician-owned lab and diagnostic facilities. In other countries this can be often seen as a conflict of interest for physicians to own their own labs and make self-referrals.

We also have an ageing population and a higher population of individuals with chronic diseases. As we are seeing with the current problem of so-called ‘bed blockers’ at the new hospital wing. The issue of an ageing population has not been fully addressed.

Overweight and obesity has been identified by the Ministry of Health as the number one health concern for Bermuda. Most leading causes of death in Bermuda are related to chronic, non-communicable conditions caused by lifestyle factors such as inactivity and poor diet.

Fourteen per cent of the population is diabetic, 64 per cent of the population is overweight or obese. In 2010, 14 per cent of the population was aged 65 and over, an increase from eight per cent in 1980.

All of these combined factors have contributed to increased utilisation of healthcare services.

It is important for the public when they complain about health insurance to remember that their insurer is the middleman.

An insurer provides the products and administration base to ensure that:

• Employers meet their legal obligation to provide healthcare for their employee, by offering products that meet the legislative requirements. Also the insurer manages the premium collection, manages insurance coverage and pays claims.

• An insurer provides services to the individual by ensuring that when they consume often expensive services the insurance plan protects them from large out of pocket expenses, by reimbursing the providers of healthcare in a prompt efficient manner.

• An insurance company provides cash flow and ensures that a provider is compensated for the services that are provided.

• Government provides a regulatory framework and the insurer makes sure that government’s legislative requirements are enforced and that the taxes such as MRF are collected and passed on.

Insurers incur and charge for the cost of the effective administration of eligibility, the collection of premiums and the disbursement of payments to the practitioners who provide care. Insurers also aid and facilitate the transfer of patients to overseas facilities.

Let’s not forget that, in the absence of insurance, consumers of healthcare would be responsible for paying for and managing their own care.

Most health insurers are operating to fine margins — the bulk of the premium pays for the cost of medical services and the budgeted margin for profit on average is three to five per cent of the premium.

Insurers are also expected by employers to help control costs which is done by reviewing the medical necessity and appropriateness of medical treatment. It involves the adjudication of bills to make sure that charges are covered, that they are fair, and that they are accurate.

We also ensure that when overseas care is needed, it is available at the best possible price. We also manage the transfer from the local to the overseas system in a seamless and efficient manner.

Healthcare providers rely on insurers for cash flow and any deterioration in payment time would have a major impact on the availability of care at home and overseas where our ID card is currently accepted for direct billing.

Another key function of insurers is that of risk carrier. The cost of healthcare is notoriously difficult to predict and can fluctuate dramatically in any one year, for instance claims for one catastrophic event frequently exceed $500,000.

We are required by regulators and rating agencies to invest millions of dollars to support this risk. For every $3 million of gross premium the insurer must have $1m of capital.

As the cost of medical services increases, the demand for Capital to support the administrative and risk bearing part of the system also increases. If the system does overheat, it is the insurer that carries the burden, at least in the short term — not the Government or the taxpayer.

Other than the fact that it is mandatory, and required by law, health insurance protects us from large, out-of-pocket costs.

So, how we can better manage how we use healthcare and buy health insurance?

The Bermuda system has worked effectively for over 30 years and there has been a working consensus among all of the parties involved that has greatly assisted the delivery of healthcare to the public.

It is counterproductive to now criticise any one party in the healthcare system and to hold them solely accountable for the increases in the cost of healthcare.

Bermudians are used to getting the best of everything and have been lucky to live in an affluent economy. However we now have to face certain realities that the rest of the world has been wrestling with for a number of years.

We need to pragmatic about healthcare, and understand that there is a cost associated to it. The previous Government committed Bermuda to long-term costs when it upgraded the King Edward VII Memorial Hospital and the reality is that certain conditions can be treated locally but not at the most cost-effective price.

The small population size does not provide the same volume base that costs can be spread across. So if we want convenience of healthcare we need to understand that there is a higher cost associated with it.

As consumers we need to understand what the cost is for base services, we need to hold providers of healthcare accountable for the standards of services they are delivering and the cost of services. If they want to charge at similar standards as US providers then the level of healthcare should be at similar standards.

There needs to be more transparency in the system, conflicts in the system should be removed or more effectively monitored and we need oversight to prevent unnecessary utilisation or duplication of services.

There has to be better management of chronic diseases that are costing the system and individuals should take more control of their healthcare.

• Minimum cost of managing type 2 diabetes $4,000 per year.

• Minimum cost of managing hypertension with generic medication — $1,500 to $2,500 per year.

In terms of health insurers, there are contribution that we can make. We can play a role in providing oversight, ensuring that reimbursement to providers are for services that are medically necessary and appropriately.

We can protect consumers from errant billing, we can help ensure that consumers’ healthcare is managed through disease management and case management, help ensure that consumers are accessing healthcare that is appropriate and promote wellness in the workplace.

The issue of healthcare in Bermuda is not going to go away. It is up to all of us — providers, insurers and consumers to get to grips with this issue now.

Naz Farrow is the chief operating officer, health, for Colonial Medical Insurance.