New unit to lower health insurance premiums and improve competition

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New unit to lower health insurance premiums and improve competition

Posted 1/06/2012 by Amanda Biggs

The 2012–13 Budget included an announcement of funding for a new unit to advise the Government on private health insurance industry costs, insurance premiums and competition in the sector. Costing $2.3 million over four years—to be met by an increase in a levy imposed on private insurers—the unit will be established within the Private Health Insurance Administration Council (PHIAC), the independent regulator of the sector. One of the primary functions of the new unit will be to identify options to increase competition in the sector and put downward pressure on health insurance premiums (see Portfolio Budget Statement, p. 556).

Established in 1989, PHIAC's role is to monitor, regulate and maintain the prudential standing of the private health insurance industry as well as promote competition. PHIAC also supports and protects consumers, for example, by providing timely and reliable information about registered health funds to consumers.

The cost of operating PHIAC is largely met by a levy imposed on registered health insurers. The levy is calculated using a formula specified in the Private Health Insurance (Council Administration Levy) Rules. Money from the levy goes into consolidated revenue, and from there is appropriated back to PHIAC for its operating costs. In 2011–12 the levy raised $5.36 million. Beginning in 2012–13 the additional revenue from the increased levy will be $0.6 million annually; the levy was last increased by 2.5 per cent in 2011. An additional four staff will be added in 2012–13, taking total staffing numbers to 34.

A major challenge for PHIAC is achieving a balance between its three key objectives:
  • fostering an efficient and competitive private health insurance industry
  •  protecting the interests of consumers and
  •  ensuring the prudential safety of individual private health insurers.
Private health insurance in Australia is highly regulated which limits the extent to which competitive pressures can operate. For example, insurers cannot choose to insure only young healthy contributors who rarely make expensive claims. They must also insure older and chronically ill patients who are more likely to make claims. Unlike general insurance, health insurers cannot increase their premiums on the basis of a consumer's poor risk profile; instead all consumers generally pay the same premium amount (the exceptions are a premium loading that applies to those over 30 who delay purchasing cover and price differences across states). Health insurers must meet portability requirements (which ensure consumers can change funds) and apply maximum waiting time periods for pre-existing conditions. As well they must meet prescribed solvency, prudential and capital adequacy standards. Even the process for setting premiums, the price insurers charge for their products, is highly regulated with Ministerial approval required to increase premiums.

These arrangements are designed to protect consumers as well as reduce the risk that a fund might become insolvent and thus be unable to meet patient claims. PHIAC oversees these arrangements by conducting regular fund reviews, developing industry standards and administering and monitoring industry payments to the risk equalisation fund (which ensures the cost of high-cost claims is shared across the sector). PHIAC's efforts to protect consumers and ensure the prudential safety of health funds would appear to have been generally successful. No health insurer in recent times has failed, and all have maintained statutory capital and solvency reserves. The number of consumer complaints about health insurers made to the Private Health Insurance Ombudsman has remained relatively stable although last year did see a moderate increase.
But what about PHIAC's other objective, fostering an efficient and competitive private health insurance sector? The extent to which PHIAC has met this objective is much harder to ascertain.

One indicator of efficiency, management expenses as a percentage of income, has fallen slightly from an industry-wide average of 10.5 per cent in 2007–08 to 9.1 per cent in 2010–11 (see Operations of Private Health Insurers Annual Reports). However, achieving even greater cost reductions is not assured, given that improvements to a fund's bottom line through cost reductions might weaken any argument to Government to approve future premium rises.

Some efficiencies of scale have being realised through merger activities, with some smaller funds being taken over by larger ones. The number of registered funds has been falling steadily from 40 in 2004–05, to 38 in 2007–08, to 35 today. This trend is likely to continue. Attracting younger, healthier members who are less likely to make claims is also likely to continue as a key strategy, but it will become harder to do so, given the ageing of the population and the rise in chronic diseases.

Whether allocating more resources to PHIAC to foster competition and efficiency will result in more affordable health insurance remains to be seen, but given the structural barriers to greater competition, this task would seem difficult. Perhaps, as this earlier Flagpost suggests it is time to have a wider debate about the role of private health insurance in the health system, particularly as out-of-pocket medical costs, which are already high by international standards, continue to rise. Questions could include whether private health insurance should continue to be restricted to funding only ancillary services not covered by Medicare or the gap between the Medicare fee for in-hospital services and the amount charged to patients; or whether it should be expanded so that it can compete directly with Medicare across a wider range of services. Beginning to explore these issues in greater depth might be overdue.

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