Brazil's Health-Care Conundrum.

Through a series of government moves and societal changes, Brazil's health-care system is being redesigned.

Massive legislative and societal changes are revolutionizing health-care delivery. Costs are skyrocketing. Policymakers are clamoring to expand access. A growing middle class is demanding better coverage. Doctors are fighting efforts to reduce fees. Fraud is on the increase.

While the plot may sound close to home, this scenario describes the health-care sector in Brazil, a country of more than 170 million people that has undergone dramatic changes to its health-care system during the past several years.

Such sweeping transformations provide opportunity as well as uncertainty for the nation, its people and the entities that provide health-care coverage and services. The issues include the following:

* managing costs while expanding access;

* the impact of societal changes on health care;

* ensuring the long-term stability of private health-care companies; and

* encouraging participation in and support of changes to the health-care system.

Brazil is searching for solutions to these complex challenges. The initial results of this massive effort may provide insights and answers for insurers, health-plan sponsors and others who provide programs and services throughout the world.

Government Shifts

Until recently, Brazil's monetary instability and high inflation provided favorable conditions that allowed many businesses to earn significant profits. The health-care industry was no exception. By the early 1990s, dozens of U.S. and international insurers, health maintenance organizations and other health-care providers had entered the marketplace. Making money was simple. Since contributions to health plans were made at the beginning of the month while expenses were incurred up to 60 days later, significant investment returns were possible. The amount of money drawn to the system meant there was little pressure to manage health-care expenditures since massive profits were sufficient to compensate for overutilization, overpayment, fraud and waste.

In the early 1990s, the Brazilian economy faced major institutional, economic, political and technological changes that dramatically affected Brazilian health economics. One of the most pivotal of these changes was the introduction of "Plano Real," a comprehensive government initiative designed to stabilize currency. This move also drastically reduced the amount of money earned through health-financing vehicles. For example, many of the HMOs that dominated the private sector discovered an alternative means of ensuring profits by limiting insurance coverage to basic health care and leaving high-risk cases--chronic diseases, extended hospital stay, care of the elderly and organ transplants--to the Brazilian government.

A Changing Society

Meanwhile, growing urban populations, improved education and more women entering the work force were fueling a burgeoning and increasingly sophisticated middle class. This group began to demand higher-quality health care. Furthermore, better nutrition, education and primary public health care, such as vaccination programs, led to a dramatic decrease in childhood infectious diseases and a subsequent rise in survival and life expectancy. As a result, the number of adults needing costly chronic-disease treatment began to rise.

Because the Brazilian government is constitutionally responsible for providing health care to its citizenry, shifts in the political and economic market presented a difficult situation: how to maintain an underfunded system that "guaranteed" health care to an increasingly demanding population, many of whom also carried private health-care coverage. To complicate matters further, the government simultaneously faced an economic downturn that led to pressure from international lenders to reduce public spending, including health-care expenditures.

Recognizing the gravity of their situation, the Brazilian Ministry of Health sent a message that the best way to meet the future health-care needs of the population was to strengthen the private health-care sector. The government believed that by strengthening this area, wealthier Brazilians and those covered by employer-sponsored health plans, a growing number of whom are international- or U.S.-based, would choose to use their private health coverage. If less public money was used to care for those who could afford private care, these scarce resources could be focused more directly on subsidizing care for people unable to purchase health care in the private sector.

The first step came with the launch of Law 9656 in January 1999. The law stated that all providers of health plans would be required to ensure coverage for any disease that was also covered by the state system--that is, all known diseases covered by the International Code of Disease. As a result, private plans would no longer be able to transfer high-cost illness cases to the state program. There would be no maximum limits on length of hospital stays, and people over 60 years of age would have continuous coverage with premiums limited by law. Pre-existing conditions would be covered under the new law, and waiting periods would be limited to a maximum of two years.

The increased coverage mandated by the new law forced health-plan operators to increase premiums. Deciding on appropriate increases was complicated by lacking statistics on specific diseases that had been previously excluded from coverage. In short, there was no underwriting data or expertise. The difficulty of complying with the new law prompted some health-care plans to leave the market. Increased health-care costs also caused more companies offering employee benefits to review their costs and consider more cost-effective alternatives.

Many players in the country's healthcare marketplace did not welcome the dramatic changes with open arms. For instance, when insurance companies attempted to control costs by developing a system that identified uniform and standardized fees for doctors and hospitals, some providers reacted by submitting more bills to insurers. Likewise, when precertification was introduced for specific diagnostic examinations, additional reasons to have such examinations were created.

While these tactics made up for providers' losses in the short term, they added to instability, misinformation and increased costs in the health insurance market. Greater use of pharmaceuticals and spiraling prescription-drug costs also have affected health-care costs.

A Strong Commitment

Despite the challenges that they face, Brazil's leaders and its people are committed to developing a strong, equitable health-care system. Currently, about 42 million people, or 24% of the population, are covered by a non-government health plan. In addition, the growing number of multinational companies with offices and employees in Brazil--employees who expect well-designed, quality health-care benefits--are also fueling the demand for efficient and effective health-care programs.

The need for a strong, profitable health-care system has encouraged many insurance companies and providers to design systems that overcome the challenges posed by the new legislation, thereby driving forward the process of reform. For example, some HMOs that own services and employ physicians have reoriented provider incentives to control costs. Employed physicians are paid a fixed monthly salary so they have little incentive to either over- or under-provide services. In addition, insurance carriers are introducing the concept of reinsurance or stop-loss coverage. These products allow both HMOs and self-funded employers to transfer some portion of their "catastrophic" risk--risk related to high severity of a disease--to an outside reinsurer. Such a risk transfer improves the predictability of the cedant's financial results.

Medical malpractice insurance also is emerging as an important protection. Although relatively unheard of until recently, Brazil's exposure to Western-style "justice" is increasing the population's sensitivity to issues of medical negligence, and the number of lawsuits has grown. According to qualitative research conducted by Aon Brazil, medical malpractice is the No. 1 insurance concern of many physicians and hospitals. To address this concern, new lines of coverage, including medical liability, property, directors and officers and equipment, have been introduced. Other types of insurance coverage, such as errors and omissions, are being implemented to protect private hospitals, medical groups and even provider networks.

Seeking Financial Solvency

Another important step the country is taking to ensure the stability of health insurers is the development of solvency requirements. While there are a few large players, about two-thirds of health plans would be defined as "small" with 20,000 or fewer members. The Brazilian government has brought together a team of internal and external experts to design financial standards to ensure that plans do not risk bankruptcy.

Brazil also has made significant inroads in the area of health-care technology Internet usage is growing, particularly in the health-care industry. Within three years, the government plans to have all major cities connected via the Internet to health-care information. The government is also close to introducing a national health-care card. These cards would be used at local health-care facilities, and data would be collected and analyzed to determine future needs and funding. In addition, several of the leading hospitals in the area have taken up the banner of computerized patient records, a strategy being explored in the United States, as well. Sponsors of private health plans recognize that these innovations will have the ability to improve efficiencies and reduce administrative costs. The results may well place Brazil in a technology leadership position in Latin America.

To succeed in providing cost-effective health care, the government and private companies must continue to develop strategies to help employers effectively design and communicate health-plan benefits and identify appropriate, quality carriers. Employers, in turn, must decide how much they are willing to contribute to the cost of such plans. These decisions are complex. Guidance and training are needed in the art of plan designs, communications with members and negotiation with providers.

In just a few years, Brazil has made significant strides toward a more robust private health-care sector, The bold moves of the government have created opportunities for insurers, health plans and other health-care providers. There are still questions to answer, and more challenges lie ahead, The nation's commitment to change, however, will continue to produce results that will position Brazil as an example for other nations. Most importantly, these reforms will ensure the long-term viability of a strong health-care system and ultimately improve health care for the people of Brazil.

Gisele Norris is senior vice president of Aon Healthcare Alliance, a health-care Industry specially group offering technical product and service expertise to the Aon Group. Ronn Gabay is a consultant with the alliance.

Brazil at a glance:

Capital: Brasilia

Population: 172,860,370

Life expectancy for men: 58.54 years

Life expectancy for women: 67.56 years

Source: CIA World Factbook, 20(X) edition