Project – Health Insurance Claims Experience and Premium Adequacy in Group Health Insurance: A Study of Selected Health Maintenance Organisations in Lagos State

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Health insurance has become an important mechanism for financing healthcare because it provides a means of pooling financial risks associated with illness and healthcare utilisation. Rather than requiring individuals or organisations to bear the full cost of medical treatment when illness occurs, health insurance involves the payment of predetermined contributions or premiums into a pool from which eligible healthcare expenses are financed. The World Health Organization (WHO, 2021) identifies health financing and financial risk protection as central components of universal health coverage because people should be able to obtain needed health services without suffering financial hardship. In Nigeria, the development of health insurance has increasingly involved both public and private-sector institutions, with Health Maintenance Organisations (HMOs) playing an important role in purchasing and coordinating healthcare services for insured persons. The National Health Insurance Authority (NHIA) Act 2022 formally recognises HMOs as accredited organisations responsible for functions within the health insurance system and defines premium as a contribution payable for health coverage (Federal Republic of Nigeria, 2022).

Group health insurance represents an important form of health insurance in which coverage is provided to a defined group, often employees of an organisation and eligible dependants, under a common arrangement. The group structure allows healthcare risks to be pooled across a population rather than being borne individually, while premiums are generally determined with consideration for the characteristics of the insured population, expected healthcare utilisation and the benefits provided. In Nigeria, private health plans offered through HMOs cover employees of small, medium and large organisations, families and other groups, with contributions creating a fund from which healthcare services are paid for when required (National Health Insurance Authority [NHIA], 2024). The economic viability of such arrangements depends substantially on whether the premiums collected are adequate to meet expected claims and other associated costs. Where premiums are too low relative to the cost and frequency of claims, the HMO may experience financial pressure; conversely, excessively high premiums may make coverage less affordable and less attractive to employers and members.

Health insurance claims experience is therefore a critical consideration in determining whether premiums are adequate. Claims experience refers broadly to the pattern of claims arising from an insured population, including the frequency of claims, severity or cost of claims, types of illnesses generating claims, utilisation of healthcare services and changes in claims costs over time. In health insurance, historical claims information provides an important basis for estimating future healthcare expenditure and determining appropriate premium levels. Campbell et al. (2014), in their assessment of risk management among Nigerian HMOs, found that lack of complete or current data on cost experience and claims was recognised as an important financial risk, while lack of consideration of utilisation information was also identified as a risk. Their findings indicate that claims and utilisation data are not merely administrative records but constitute important information for pricing, underwriting and financial risk management within health insurance operations.

The adequacy of premiums is particularly important because HMOs operate within a risk environment where healthcare utilisation can be unpredictable and healthcare costs can change over time. Premium adequacy occurs when the premium income generated from an insured group is sufficient, within an appropriate pricing framework, to cover expected claims and relevant expenses while allowing the HMO to remain financially sustainable. Campbell et al. (2014) found that more than half of the HMOs examined had weak enrollee bases and poor monthly premium income, with these conditions negatively affecting their ability to meet financial obligations. The study further identified inadequate underwriting, inadequate claims management and incomplete claims information among the risks confronting HMOs. These findings suggest that premium adequacy cannot be separated from the quality of claims information, underwriting practices and utilisation management. Where premium calculations do not adequately reflect actual claims experience, the financial sustainability of an HMO may be threatened.

The Nigerian health insurance environment has also experienced institutional and regulatory changes aimed at strengthening health insurance coverage and regulation. The National Health Insurance Authority Act 2022 replaced the former National Health Insurance Scheme framework and established the NHIA with responsibilities that include regulating health insurance schemes, accrediting HMOs and healthcare facilities, approving contributions, and overseeing mechanisms relating to healthcare purchasing and payments. The Act also recognises capitation and fee-for-service payments as important components of healthcare financing arrangements (Federal Republic of Nigeria, 2022). Such arrangements make the relationship between premiums, healthcare utilisation and claims particularly important because HMOs must manage funds received from contributors while meeting payment obligations arising from covered healthcare services. The regulatory framework therefore places considerable importance on sound financial management, appropriate pricing and effective administration of claims.

Empirical evidence from Nigeria demonstrates that the financial and operational performance of HMOs can be affected by weaknesses in risk management, provider payment arrangements and utilisation management. Campbell et al. (2014), based on a cross-sectional assessment of 33 HMOs participating in the Nigerian health insurance system, reported that only about half of the assessed risk-management strategies were being utilised and that inadequate claims management, poor operations management, inadequate human resources, incomplete claims data and lack of attention to utilisation information were among the identified concerns. Similarly, Mohammed et al. (2014) found only moderate satisfaction among HMO staff with optimal-resource-use activities and reported concerns involving provider payment mechanisms, administrative efficiency, benefit-package inclusions and active monitoring. These findings demonstrate that the financial sustainability of health insurance depends not only on premium collection but also on how effectively claims, providers, utilisation and administrative resources are managed.

The issue is particularly relevant in Lagos State, which is one of Nigeria’s major commercial and healthcare centres and has a substantial concentration of private-sector organisations, healthcare providers and HMOs. Existing empirical research has specifically examined HMO operations within Lagos Metropolis. Akinbode et al. (2019), in a study involving 340 enrollees of ten leading HMOs operating in different parts of Lagos Metropolis, found concerns regarding access, responsiveness and quality of healthcare services provided through HMO-accredited facilities. Although that study focused primarily on service performance rather than premium adequacy, its findings demonstrate the importance of examining how health insurance arrangements function within the Lagos environment. Furthermore, Onoka, Hanson and Mills (2016) found that Nigeria’s HMO industry operates through multiple risk pools and differentiated health plans, while identifying concerns relating to market structure, risk selection and the need for effective regulation. These characteristics make Lagos an important setting for examining whether claims experience is appropriately reflected in the premiums charged for group health insurance.

Despite the importance of claims experience to health insurance pricing and financial sustainability, there remains a need for more empirical investigation of the relationship between actual claims experience and premium adequacy among HMOs operating group health insurance schemes in Lagos State. Existing Nigerian studies have examined HMO risk management, healthcare service quality, resource utilisation and the development of the HMO industry, but comparatively less attention has been directed specifically at whether the claims experience of insured groups is adequately reflected in the premiums charged and whether variations in claims frequency, severity and utilisation are associated with premium adequacy. Campbell et al. (2014) identified inadequate claims information and inadequate underwriting as important risks, while Onoka et al. (2016) highlighted the complexity of risk pooling and product differentiation within Nigeria’s HMO market. Consequently, this study seeks to examine Health Insurance Claims Experience and Premium Adequacy in Group Health Insurance among selected Health Maintenance Organisations in Lagos State, with particular attention to claims frequency, claims severity, healthcare utilisation and the adequacy of premiums collected. The study is expected to provide empirical evidence that can assist HMOs, employers, regulators and other stakeholders in improving health insurance pricing, claims management and the financial sustainability of group health insurance schemes.

1.2 Statement of the Problem

Health Maintenance Organisations play an important role in the administration and financing of health insurance in Nigeria, yet their ability to remain financially sustainable depends on effective management of premiums, claims and healthcare utilisation. The central financial challenge is that premiums must be sufficient to cover expected claims and associated costs without making insurance unnecessarily expensive for employers and insured persons. Evidence from Nigerian HMOs suggests that financial risks can arise where enrollee bases are weak, premium income is inadequate and risk-management mechanisms are insufficient. Campbell et al. (2014) reported that a substantial proportion of HMOs in their study experienced difficulties meeting financial obligations, while poor monthly premium income was associated with financial risk. This raises concern about whether premiums charged under group health insurance arrangements are sufficiently aligned with the actual claims experience of insured populations.

A second problem concerns the availability and effective utilisation of reliable claims and healthcare utilisation data for premium determination. Health insurance pricing requires information about the frequency and cost of healthcare claims, the characteristics of the insured population and patterns of healthcare utilisation. However, Campbell et al. (2014) found that lack of complete or current data on cost experience was recognised by almost all participating HMO respondents as a financial risk, while lack of complete or current claims data and insufficient consideration of utilisation information were also identified. Where historical claims experience is incomplete, outdated or poorly analysed, premium-setting decisions may fail to reflect the actual risk profile of an insured group. This may result in premiums that are inadequate relative to claims costs or unnecessarily high relative to the risks being transferred.

A third problem relates to increasing healthcare utilisation and the management of claims within the HMO system. Claims costs can be influenced by the frequency with which insured persons seek healthcare, the types of illnesses treated, provider practices, benefit-package design, referral patterns and the cost of medical services. Mohammed et al. (2014) identified concerns relating to provider payment mechanisms, administrative efficiency, benefit-package inclusions and active monitoring within Nigeria’s health insurance system. In addition, Akinbode et al. (2019) found concerns among enrollees in Lagos regarding access, responsiveness and quality of services delivered through HMO-accredited hospitals. These findings suggest that claims experience may be shaped by both demand-side and provider-side factors, making it necessary for HMOs to continuously evaluate whether premium income remains appropriate relative to actual healthcare utilisation and claims expenditure.

The specific problem addressed by this study is the limited empirical evidence on the extent to which health insurance claims experience influences premium adequacy in group health insurance among selected HMOs in Lagos State. While previous Nigerian studies have identified weaknesses in claims management, utilisation information, underwriting, risk management and premium income, there remains a need to examine these issues specifically from the perspective of the relationship between claims experience and premium adequacy. Campbell et al. (2014) identified inadequate underwriting and incomplete claims information as important risks, while Onoka et al. (2016) demonstrated that Nigerian HMOs operate multiple risk pools and differentiated health plans, creating a need for appropriate risk assessment and pricing. Therefore, the unresolved question is whether the frequency, severity and utilisation patterns reflected in the claims experience of group health insurance portfolios are adequately incorporated into premium determination by selected HMOs in Lagos State. This study is designed to address this gap.

1.3 Purpose of the Study

The general purpose of this study is to examine the relationship between Health Insurance Claims Experience and Premium Adequacy in Group Health Insurance among selected Health Maintenance Organisations in Lagos State.

Specifically, the study seeks to:

1. examine the effect of claims frequency on premium adequacy in group health insurance among selected HMOs in Lagos State;
2. determine the influence of claims severity on premium adequacy in group health insurance among selected HMOs in Lagos State;
3. assess the effect of healthcare utilisation patterns on premium adequacy among selected HMOs in Lagos State; and
4. examine the extent to which claims experience is incorporated into premium determination for group health insurance by selected HMOs in Lagos State.

1.4 Research Questions

The study will be guided by the following research questions:

1. What effect does claims frequency have on premium adequacy in group health insurance among selected HMOs in Lagos State?
2. What influence does claims severity have on premium adequacy in group health insurance among selected HMOs in Lagos State?
3. To what extent do healthcare utilisation patterns affect premium adequacy among selected HMOs in Lagos State?
4. To what extent is claims experience incorporated into premium determination for group health insurance by selected HMOs in Lagos State?

1.5 Research Hypothesis

The following null hypothesis will be tested at 0.05 level of significance:

H₀: Health insurance claims experience has no significant effect on premium adequacy in group health insurance among selected Health Maintenance Organisations in Lagos State.

1.6 Significance of the Study

The study will be significant to Health Maintenance Organisations because it will provide evidence concerning the relationship between claims experience and the adequacy of premiums collected from group health insurance portfolios. The findings may help HMOs strengthen claims analysis, utilisation monitoring, underwriting and premium-review practices.

The study will also be useful to employers and corporate organisations that purchase group health insurance for their employees. Better understanding of the relationship between claims experience and premium adequacy may help employers evaluate the sustainability and value of health insurance arrangements and engage HMOs more effectively during premium negotiations and benefit reviews.

The study will be beneficial to regulatory authorities, particularly the National Health Insurance Authority. The NHIA Act 2022 gives the Authority responsibilities relating to regulation, accreditation, contributions and healthcare payment arrangements (Federal Republic of Nigeria, 2022). Findings from the study may therefore provide additional empirical information for regulatory discussions concerning appropriate pricing, claims management, monitoring and financial sustainability of private and group health insurance schemes.

The study will also be valuable to insurance and actuarial professionals. Claims experience constitutes an important source of information for assessing risk and determining appropriate premium levels. By examining claims frequency, claims severity and healthcare utilisation, the study may provide practical insight into areas that require closer actuarial and underwriting attention.

Finally, the study will contribute to academic research in insurance, risk management, actuarial science and health financing. Existing Nigerian studies have examined HMO risk management, resource utilisation, service quality and the development of the HMO industry, but this study will specifically focus on the relationship between claims experience and premium adequacy within group health insurance in Lagos State. It may therefore provide a foundation for future studies on health insurance pricing and financial sustainability in Nigeria.

1.7 Scope of the Study

The study focuses on Health Insurance Claims Experience and Premium Adequacy in Group Health Insurance among selected Health Maintenance Organisations in Lagos State.

The study will examine claims experience through the following dimensions:

• Claims frequency;
• Claims severity;
• Healthcare utilisation; and
• Claims information/data used in premium determination.

The dependent variable is premium adequacy, which will be examined in relation to the extent to which premium income is considered sufficient in relation to expected claims costs and other relevant financial obligations associated with group health insurance.

Geographically, the study is limited to selected Health Maintenance Organisations operating in Lagos State, Nigeria. The study does not seek to cover all HMOs in Nigeria or all categories of health insurance business.

1.8 Operational Definition of Terms

Health Insurance: A financial arrangement through which individuals or groups make predetermined contributions or premiums in exchange for coverage of specified healthcare services and expenses.

Health Maintenance Organisation (HMO): An organisation accredited by the appropriate health insurance regulatory authority to perform specified functions in the administration and management of health insurance arrangements. The NHIA Act 2022 formally defines an HMO as an organisation accredited under the Act to perform stipulated functions (Federal Republic of Nigeria, 2022).

Group Health Insurance: A health insurance arrangement in which healthcare coverage is provided to a defined group of persons, such as employees of an organisation and eligible dependants, under a common insurance or health plan.

Insurance Claim: A request for payment or healthcare service made under the terms of a health insurance arrangement following the occurrence of a covered healthcare event.

Claims Experience: The historical pattern of claims arising from an insured population, including the number, frequency, cost, severity and nature of claims and associated healthcare utilisation.

Claims Frequency: The rate or number of claims arising from an insured population over a specified period.

Claims Severity: The average or individual financial cost associated with health insurance claims.

Healthcare Utilisation: The extent and pattern of use of healthcare services by insured persons, including consultations, hospitalisation, medication, diagnostic services and other covered healthcare services.

Premium: A contribution payable for health insurance coverage. The NHIA Act 2022 defines premium as a contribution payable for health coverage (Federal Republic of Nigeria, 2022).

Premium Adequacy: The extent to which premiums charged and collected are sufficient, within the applicable pricing framework, to meet expected claims costs and relevant expenses while supporting the financial sustainability of the health insurance arrangement.

Premium Determination: The process of establishing the amount of premium payable for a particular health insurance plan based on factors such as expected claims, utilisation, risk characteristics, benefits and associated expenses.

Risk Pool: A group of insured persons whose premiums and healthcare risks are combined for the purpose of financing covered healthcare costs.

Project – Health Insurance Claims Experience and Premium Adequacy in Group Health Insurance: A Study of Selected Health Maintenance Organisations in Lagos State