BILLS DIGEST NO. 38, 2014–15              21 October 2014

Private Health Insurance Amendment Bill (No. 1) 2014

Amanda Biggs
Social Policy Section  

Date introduced: 24 September 2014

House:  House of Representatives

Portfolio: Health

Commencement:  On Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

Purpose of the Bill

The purpose of the Private Health Insurance Amendment Bill (No. 1) 2014 (the Bill) is to amend the Private Health Insurance Act 2007 (PHIA) to pause indexation of the income tiers that apply to the Medicare Levy Surcharge (MLS) and the private health insurance rebate (the rebate) for three years from 1 July 2015.[1]

Background

The MLS and private health insurance rebate were introduced under the Howard Government to halt and reverse the slide in private health insurance membership which had emerged in the mid-1990s. Along with Lifetime Health Cover (LHC) these measures were intended to encourage the take-up of private health insurance and thereby reduce growing pressure on the public hospital system.[2]

Since then, successive governments have broadly supported the principle of a ‘balanced’ health care system where private health insurance is seen to provide a balance to the publicly funded Medicare system. Although the former Labor Government somewhat contentiously introduced income tiers that means tested the rebate, it nevertheless retained the rebate and continues to support its retention.

Private health insurance rebate

The private health insurance rebate is a means-tested rebate on the cost of purchasing private health insurance cover.[3] Income tiers determine the level of rebate for which an individual or family is eligible. Currently, individuals on incomes below the base tier of $90,000 receive the highest level of rebate, while those in the three higher income tiers receive a proportionally lower rebate. Individuals with incomes above the highest income tier of $140,000 receive zero rebate on the cost of their premiums.[4]

The rebate cost to the Government was $5.9 billion in 2013–14.[5] Freezing the income tiers at the 2014–15 levels is expected to slow the growth rate of the rebate but budget estimates still forecast it will grow 5.9 per cent in real terms over the period 2014–15 to 2017–18, due to expectations that uptake of private health insurance will continue.[6]

Premiums for private health insurance rise annually but must be approved by the Minister for Health. A range of factors drive premium growth and these include higher medical costs; higher claims due to an ageing population and more chronic disease; new and more expensive technologies and fund performance. The average increase approved by the Minister for Health for premiums this year was 6.2 per cent.[7]

The pausing of indexation of the income tiers means that those with incomes above the base tier level or those who move into a higher income tier, will see the value of their rebate reduce relative to the premium they pay for their health insurance policy. The budgetary effect will be to reduce government outlays on the rebate.

Medicare Levy Surcharge

Medicare, Australia's universal national health system, is funded through a combination of general taxation, plus a two per cent levy on taxable income (the Medicare Levy—recently renamed the Medicare and Disability Care Levy) and the means-tested additional MLS, which only applies to higher income earners who decline to purchase private health insurance. Together, the Medicare Levy and the MLS raised around $10.5 billion in 2013–14, of which the MLS contributes only a small proportion of the total.[8] In 2011–12, the MLS raised around $205.6 million.[9]

The income tiers used to determine eligibility for the rebate are the same as those that are used to determine a taxpayer’s MLS liability. This is to ensure that the two measures operate together in order to support the take-up of private health insurance. Those with incomes below the base income tier are not subject to liability for the MLS if they choose not to purchase health insurance. However, those with incomes higher than this are subject to the MLS with the rate increasing in proportion to their income, from a base of one to the highest rate of 1.5 per cent of taxable income. It should be noted, this is in addition to their two per cent Medicare Levy liability.

The pausing of indexation will mean that those without private health insurance cover whose incomes rise are likely to move into the income tier at which they become liable to pay the MLS. Others may see the rate of their levy liability increase. Ultimately, government revenue from the MLS will rise.

It is not clear how much the MLS and the rebate will individually contribute to the total estimated savings of $599.3 million forecast from the pausing of indexation.

Overall, the effect of pausing indexation is likely to shift the cost of private health insurance away from the Government and onto the consumer. This is proposed at a time when reports show that consumer contributions to the cost of health care continue to grow while government expenditure in real terms is falling. According to the Australian Institute of Health and Welfare, in 2012–13 government funding of health expenditure fell by 0.9 per cent in real terms for the first time this decade, largely as a result of a 2.4 per cent decline in the Australian Government’s funding of health care. Meanwhile, out-of-pocket spending by individuals grew by 6.7 per cent over the decade (compared to government expenditure growth of 4.4 per cent) and the proportion individuals contributed to overall health expenditure also grew to a high of 17.8 per cent.[10]

Committee consideration

Selection of Bills Committee

The Committee resolved to not refer the Bill for inquiry.[11]

Policy position of non-government parties/independents

The position of Labor regarding this particular measure has yet to emerge. They have opposed a number of measures in the budget which would see a shift in health costs onto individuals. This includes their opposition to the proposed co-payment for GP, pathology and diagnostic imaging services, and the rise in the co-payment for PBS medicines.[12]

The position of the Greens is not immediately clear. In the past the Greens have opposed the operation of the MLS, arguing it is unfair to impose a financial penalty on people who decline to buy private health insurance.[13] However, they supported the former Labor Government’s measure to means test the MLS and apply a higher levy for higher income earners, but this was in return for higher funding for dental care and because they supported means testing the rebate.[14] The Greens have also expressed concerns over higher out of pocket health care costs.[15] But they have yet to state a position in regards to this measure.

The positions of the Palmer United Party (PUP) and the cross benchers are not yet known.

Position of major interest groups

Only a few health insurers have expressed views about the pause in indexation. Health fund BUPA has reportedly claimed that up to 400,000 health fund members could lose some, or all, of their rebate for health cover, adding to cost of living pressures for those affected.[16] Medibank Private Managing Director, Mr George Savvides commented on the issue in evidence to a Senate Estimates hearing:

Senator LUDWIG: Will the matters that I raised impact on membership numbers, claims experience or the types of cover members have been taking up? It really goes to some of the questions that Senator Bernardi was exploring with you around your claim experience but also the way that, if you change certain parameters, that influences the way consumer will address that cover.

Mr Savvides: I think they get drowned out. They are too small an impact. The more overt pressure on the sector has been the imposition of the means-testing of the rebate. That has created, in the current situation, the lowest level of industry growth that we have seen for many years. It is around two per cent. There is a high degree of downgrading, which is margin corrosive and also of higher risk for the individual. They are more likely to experience a disappointment when they go to claim because they have lower cover content, which we work hard to avoid because we worry about that risk for them as well. The fact is that around the role of the rebate to keep health insurance affordable, to keep the appetite for that demand for the products strong, they are the bigger issues that dominate the sector. They have been around for a while. The most recent measures in the budget, while they will have some impact—and I have alluded to a couple—get drowned out by those previous measures, which are more primary, the rebate in particular.[17]

Associate Professor Lesley Russell from the University of Sydney in an analysis of the 2014–15 Budget criticised the pausing of indexation on the rebate as ‘a punitive impost on those whose income increases enough for them to move up an income tier, so they receive less rebate’.[18]

Significant commentary from other stakeholder groups has yet to emerge.

Financial implications

The Explanatory Memorandum to the Bill states that it is estimated to realise net savings of $599.3 million over four years.[19] The measure is one of two announced in the 2014–15 Budget that seek to achieve total savings of $1.7 billion over five years.[20] The second measure is the pausing of the indexation of some Medicare Benefits Schedule (MBS) fees for two years from 1 July 2014. This latter measure does not require legislation to implement. Pausing indexation to the income tiers is also ‘in line with the Government’s approach to fiscal responsibility and sustainability’ according to the Portfolio Budget Statements of the Health Portfolio.[21]

Savings are slated to be invested in the proposed Medical Research Future Fund.[22]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[23] The Government considers that the Bill is compatible.

The Parliamentary Joint Committee on Human Rights concurs with the Government’s assessment.[24]

Key issues and provisions

Schedule 1—Amendments to the Private Health Insurance Act 2007

The Schedule contains only one amendment.

The Schedule proposes the insertion of a two new subsections 22-45(3A) and (3B) into the Private Health Insurance Act. Section 22-45 specifies the indexation arrangements that apply to the income thresholds that determine the private health insurance rebate amount and liability for the MLS. Indexation arrangements are currently calculated using an indexation factor, which is based on full time adult average weekly ordinary time earnings as reported by the Australian statistician.

Item 1 proposes subsection 22-45(3A) which directs that indexation not occur for the 2015–16, 2016–17 and 2017–18 financial years. Proposed subsection 22-45(3B) specifies that the indexation amount to apply during these years is the amount that applied in the most recent year for which the amount was indexed. This would have the effect of pausing indexation at the 2014–15 level.

After the expiration of the suspension of indexing, normal indexation arrangements would apply to the following financial years.

Concluding comments

The Bill proposes amendments to the Private Health Insurance Act 2007 that would suspend for three years the normal indexation arrangements for income thresholds that determine the private health insurance rebate and liability for the MLS. The measure is forecast to reduce government outlays on the rebate and increase revenue from the MLS, with savings being directed into the proposed Medical Research Future Fund. Policy holders of private health insurance are likely to see the amount of their rebate fall relative to the premium charged. Higher income earners who decline to purchase private health insurance cover are likely to incur a higher liability for the MLS. This would reinforce the recent trend which has seen consumers carry an increasing burden of health care costs. The measure does not appear to have raised significant concerns within the private health insurance sector.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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[1].              Private Health Insurance Act 2007, accessed 16 October 2014.

[2].              For an examination of whether these measures have been successful in reducing pressure on the public system see A Biggs, ‘Debate: does the private health insurance rebate relieve pressure on public hospitals?’, FlagPost, weblog, 1 June 2011, accessed 30 September 2014.

[3].              The rebate applies to hospital, general treatment and ambulance policies.

[4].              Income tiers for families are roughly double those for singles.

[5].              Australian Government, Budget strategy and outlook: budget paper no. 1: 2014–15, 2014, p. 6–22, accessed 25 September 2014.

[6].              Ibid.

[7].              Industry weighted average. Department of Health, ‘2014 private health insurance premium round outcome and outline of process’, Department of Health website, accessed 30 September 2014.

[8].              Australian Government, Final budget outcome 2013–14, 2014, Table 3, p. 6, accessed 30 September 2014.

[9].              Australian Taxation Office (ATO), ‘Taxation statistics, 2011–12’, Table 1: individuals tax, ATO website, accessed 30 September 2014.

[10].              Australian Institute of Health and Welfare (AIHW), Health expenditure Australia 2012–13, Health and Welfare Expenditure Series, 52,
cat. no. HWE 61, AIHW, Canberra, 2014, p. ix, Table 3.2, accessed 1 October 2014.

[11].              Senate Selection of Bills Committee, Report No. 12 of 2014, The Senate, 25 September 2014, p. 2, accessed 25 September 2014.

[12].              C King (Shadow Minister for Health), Dutton admits that some 'can't afford' $7 GP tax, media release, 1 August 2014; C King, ‘Second reading speech: National Health Amendment (Pharmaceutical Benefits) Bill 2014’, House of Representatives, Debates, 15 July 2014, p. 8001, accessed 1 October 2014.

[13].              R Siewert, Rachel Siewert short statement on Green position on private health insurance, media release, 3 February 2010, accessed 1 October 2014.

[14].              R Di Natale, ‘Second reading speech: Fairer Private Health Insurance Incentives Bill 2012, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge ) Bill 2012, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge —Fringe Benefits) Bill 2012’, Senate, Debates, 14 March 2012, p. 1688, accessed 1 October 2014.

[15].              R Di Natale, Out-of-pocket costs push health care out-of-reach, media release, 22 August 2014, accessed 9 October 2014.

[16].              S Dunlevy, ‘Sneaky health fund rise’, The Herald Sun, 15 May 2014, p. 8, accessed 1 October 2014.

[17].              G Savvides (Managing Director, Medibank Private), Evidence to Senate Finance and Public Administration Legislation Committee, Estimates-Finance portfolio-Medibank Private, 29 May 2014, p. 10, accessed 1 October 2014.

[18].              L Russell, Analysis of 2014-15 health budget: unfair and unhealthy, Menzies Centre for Health Policy, University of Sydney, 2014, p. 58, accessed 1 October 2014.

[19].              Explanatory Memorandum, Private Health Insurance Amendment Bill (No. 1) 2014, p. 1, accessed 21 October 2014. 

[20].              Australian Government, Part 2: expense measures’, Budget measures: budget paper no. 2: 2014–15, 2014, p. 139, accessed 25 September 2014.

[21].              Australian Government, Portfolio budget statements 2014–15: budget related paper no. 1.10: Health portfolio, p. 119, accessed 25 September 2014.

[22].              Explanatory Memorandum, op. cit., p. 1.

[23].              The Statement of Compatibility with Human Rights can be found at page 2 of the Explanatory Memorandum to the Bill.

[24].              Parliamentary Joint Committee on Human Rights, Thirteenth report of the 44th Parliament, The Senate, 1 October 2014, p. 16, accessed 21 October 2014.