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Private health insurance rebate to deliver yet more savings for Government


The Mid Year Economic and Fiscal Outlook (MYEFO) included yet more changes to private health insurance rebate (PHIR) arrangements, on top of those recently implemented. These are expected to deliver savings of $1.09 billion over three years which will be used to offset the cost of the Dental Health Reform package announced in August this year.

Instead of being automatically inked to premium increases, the level of the PHIR will be based on an indexation arrangement. From April 2013, the rebate amount will be indexed to either movement in the consumer price index (CPI) or the percentage increase in premiums for private hospital cover, whichever is the lower figure. In addition, the private health insurance rebate will be removed from the Lifetime Health Cover (LHC) loading on premiums which applies when people delay taking out private health insurance until after their 31st birthday.

Currently, the amount of rebate for private hospital cover is calculated based on the amount of the premium charged to the consumer by the health insurer. Since changes to the PHIR came into effect in July 2012, the rebate is also means-tested. Those on lower incomes receive a higher rebate compared to those on higher incomes. Higher rebates also apply to those in older age brackets who are also on lower incomes.

However, the precise amount of the rebate varies with the cost of the premium charged. Premiums for private hospital cover vary depending on the insurer and the type of product. The value of the rebate is thus currently linked to the cost of the premium, with higher premiums attracting a higher rebate amount.

As explained in this Parliamentary Library paper, each year private health insurers apply to the Government for approval to increase the premiums they charge for private health cover. In April each year the Government announces the premium increases it has approved for the year ahead, and the average premium increase across the industry.

Under the new arrangements to apply after April 2014, if the health insurance premium increase approved by the Government is higher than the CPI, the rebate amount will be calculated based on the lower CPI figure.

Historically, increases to private health insurance premiums have tracked well above CPI levels. This year, for example, the Government approved an average premium increase of 5.06 per cent. While the lowest in four years it is still well above the budget forecast of the CPI increase which is 3.25 per cent for 2012–13 (Budget Paper no. 1, Statement 2: Table 1). The chart below compares premium increases and CPI levels since 2002.

Figure 1: Comparison between annual average percentage increases in private health insurance premiums and the CPI (June quarter)
Source: Parliamentary Library

Currently, a premium increase of 6 per cent on a policy that previously cost $1800 would yield a rebate of $572.40, if the consumer is eligible for the 30 per cent rebate. But the amount of the rebate would be $15 less if this year’s forecast CPI figure is instead applied to the calculation.
If the CPI continues to track at lower levels than rises in health insurance premiums, over time the amount of the rebate liability the Government will incur will decline, leading to rebate savings. But this will also mean an erosion in the value of the rebate for consumers.
It is not immediately clear how this measure will be implemented, although it will require legislative changes. The Treasurer did not specify for example, whether an individual health insurer’s premium increases would be compared with the CPI, or if the average premium increase approved across the industry would be the comparator. Nor is it clear which CPI figure would be used, that of the past year or the forecast CPI.
The Government may be hoping that this move will also prompt private health insurers to further limit their future premium increases. Faced with the prospect of their members receiving lower rebates, health insurers may seek to maintain value for their members by applying for lower premium increases each year. But as this previous Flagpost noted, health insurers have limited scope to control the cost of their premiums. Many of the drivers of higher health costs—such as an ageing population, more expensive medical technologies and increased prevalence of chronic diseases— are outside their direct control. A range of regulatory controls on portability and community rating also limit their capacity to control claim costs.
A further issue is that if CPI increases remain low, the financial incentive for the Government to seek lower premium increases will diminish over time. By removing the automatic link between the rebate amount and the actual premium charged, the role of the premium approval process becomes less critical to limiting the Government’s future rebate liability costs. Some in the industry have indicated they welcome this as less government interference in the premium setting process.
The second measure will reduce the rebate paid to people who incur a loading on their health insurance premiums. Under Lifetime Health Cover (LHC) arrangements, if a person delays purchasing private cover until after their 30th birthday, they incur a two per cent loading on their premium for each year they delay purchasing cover. This is meant to discourage the delayed purchase of private cover. Currently, if a person delays purchasing cover until they are 40 they incur a 20 per cent loading on top of their premium. But the amount of their rebate also rises by 20 per cent, potentially offsetting this financial disincentive. Some 1.05 million people (or 13.8 per cent of those covered) currently have a LHC loading on their premiums according to the latest data from the Private Health Insurance Administration Council.