What happens when insurance policies set the price of food?

Date : 08 April 2010

Anyone who wonders why healthcare was the hottest topic in President’s Obama’s first year in office needs only to look at the figures. US healthcare spending broke through the $2.2 trillion barrier in 2007; that’s more than eight times the amount spent in 1980.

It’s not just an American problem. Healthcare costs are spiralling around the world for a variety of reasons including the ageing population profile, the cost of expensive new medical technologies and the rise in obesity. The leading economies can’t keep absorbing the increases, so a solution has to be found and it’s an area where the food industry has almost as much at stake as governments.

Recognising the part psychology has to play is key to solving the problem of obesity. As individuals, our rational mind tells us to exercise and eat a balanced diet to improve our chances of a long and healthy life and yet our impulsive instincts often override this and lead us into bad habits.

Solving a market failure

Another way to view the problem is via the discipline of economics. Preventing bad health is a lot cheaper than curing it so there ought to be a financial inducement for people to stay fit. In practice though, keeping fit can be a costly exercise.

The scheme offers people a financial incentive to   keep fit and healthy

For an economist, this is a form of market failure. There’s a big gap between cause (healthy activities) and effect (lower healthcare costs some time in the future)… although it is possible to bridge. PruHealth is a joint venture between the Prudential UK financial services business and Discovery Holdings, a South African health insurance company. For PruHealth, this is an actuarial equation. If you can prolong the life of your customers and reduce the cost of the claims they make, you improve the profitability of your business.

In their own words: "At PruHealth we believe that if you lead a healthy lifestyle, you should pay less for your health insurance. After all, you’re less likely to claim on it. That’s why we’ve created our Vitality programme, to reward our customers who exercise and try to eat well."


Subsidising healthy activities

Three things are needed to make the scheme work: scale, partnerships and some simple technology.

In South Africa almost 20% of the population are members of a private health scheme, and Discovery is the market leader. Since 1997, members of their life policy have been able to join the Vitality programme for an extra monthly fee (currently €10).

Anyone who belongs to one of the leading gym chains can quickly recoup the outlay. After a one-off registration fee, PruHealth covers the monthly subscription. Every time you attend the gym you earn Vitality points through a smartcard and these entitle you to a discount on your next insurance premium.

Subsidising healthy food

There are other ways to earn points including undergoing health checks. Most striking though, for people in the food industry, is the deal struck last year with Pick N Pay, the leading South African supermarket. Vitality scheme members enjoy a discount of between 15 and 25% on a range of 6000 healthy food products including fruit, vegetables, fish, poultry, wholegrain bread and cereals, skimmed milk, nuts and vegetable oils.

It’s the scale of the discount that’s so remarkable. Some might be tempted to criticise the scheme for distorting the market, except that this is a commercial deal that suits all parties. The details behind the arrangement are confidential, but the insurance company confirms that it pays the bulk of the subsidy.

PruHealth South Africa HealthyFood™ Breakdown

PruHealth South Africa HealthyFood™ Breakdown

Source: PruHealth

Investing for future returns

The healthy food scheme is proving extremely popular and has greatly boosted uptake of the Vitality programme. The dietary statistics will be fascinating to follow in the future, as will the impact on health treatment costs.

Already, PruHealth has released data on cost savings from its Vitality scheme prior to the healthy eating launch. To quote one example, the bill for cancer treatment of Vitality members is 16% lower compared with equivalent non-members. For some other treatments, the saving is even higher.

In due course, if PruHealth keeps releasing the data, we’ll be able to see the extra cost savings attributable to the healthy eating scheme. This figure should be of great interest to health planners and food companies everywhere.

Is the concept transferable?

PruHealth's UK scheme offers rewards for   purchasing healthy food

However, it could be that this scheme is suited to South Africa but not other countries. For instance, the South African state health service is relatively underdeveloped and private health insurance has grown to fill the gap.

Also, diet is a particular problem here. According to the World Health Survey, 85% of the highest income quintile in South Africa falls short in consumption of fruit and vegetables.

So the test for PruHealth, or one of its competitors, is to prove that a similar scheme can work somewhere else in the world.

The next frontier could be the UK where another PruHealth scheme is up and running. It doesn’t involve a subsidy for healthy food yet but members can reduce their insurance premiums by buying fruit and vegetables from Sainsbury’s and earn extra Nectar card points. The greater the involvement in PruHealth, the more the Nectar card holder is rewarded with points and these can be exchanged for goods and services.

What’s more the Vitality programme is now available in the US as a ‘plug-in’ added-value service to various health insurance schemes although no food retailer is yet involved.

A glimpse of the future

Let’s suppose then, that we’ve seen a glimpse of the future and that insurance schemes that subsidise healthy eating will eventually be commonplace worldwide. What would the implications be? Here are a few:

  • The playing field would be re-oriented with participating retailers and producers of approved foods enjoying exceptional growth.
  • Insurance companies would have a pivotal influence by deciding which food products are health inducing and which are not. They would base this, in the normal way of the insurance world, on the best available evidence rather than theory, claims or fashion.
  • The basis of proof would be the cause of great scrutiny and challenge. In South Africa some interests threatened legal action because of their exclusion from the Healthy Foods list.
  • Eventually, the amount of subsidy might vary by product. So-called “superfoods” could merit particularly high subsidies, should their benefits be proven.
  • Appearing on the approved list would be a big prize, providing a major incentive for companies to reformulate their products where possible.
  • The threat of new “fat taxes” might be averted. Governments would find them harder to justify if the market was already favouring healthy foods.

In this scenario the tide might even have turned on the escalation on healthcare costs, to the relief of tax and insurance payers everywhere.

Much is at stake for food companies, governments and the public. Trendwatchers should study this example intently.