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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Health Legislation Amendment Bill (No.
3) 1999
Date Introduced: 11 March 1999
House: House of Representatives
Portfolio: Health and Aged Care
Commencement: Schedule 1 and Part 1 of
Schedule 2 commence on a day to be fixed by proclamation but no
later than six months after Royal Assent.
Part 2 of Schedule 2 commences on the transfer
date for the purposes of the Financial Sector Reform
(Amendments and Transitional Provisions) Act (No.1) 1999. If
the transfer date is prior to commencement of Part 1 of Schedule 2,
then Part 2 of Schedule 2 will commence immediately after Part
1.
Schedule 3, which deals with private health
insurance incentives, will be deemed to commence on 1 January
1999.
The Health Legislation Amendment Bill (No.3)
1999 (the Bill) amends the National Health Act 1953 and
seeks to address concerns about the prudential regulation of the
private health insurance industry. The Bill transfers the function
of approving the registration and merger of health funds from the
Department of Health and Aged Care to the Private Health Insurance
Administration Council (PHIAC). PHIAC is also empowered to set
solvency and capital adequacy standards for private health funds.
The industry will be prudentially regulated independently of the
government.
The Bill also amends the Private Health
Insurance Incentives Act 1997, the Health Insurance
Commission Act 1973 and the National Health Act 1953
to correct anomalies and adjust the operation of the recently
introduced 30 per cent rebate for private health insurance.
Measures contained in this Bill continue the
Government's recent changes to the private health insurance
arrangements and complement measures in the Health Legislation
Amendment Act (No. 2) 1999 and the Private Health
Insurance Incentives Act 1998. Measures in the Bill were
broadly foreshadowed in a Media Release by Dr Wooldridge
on 22 September 1998.(1)
The Private Health Insurance
Industry
The private health insurance industry plays a
significant role in Australia's health care system. As at 30 June
1998 there were 44 registered health benefits organisations, or
health funds. The overwhelming majority of health funds are
non-profit, with only three of the forty-four registered funds
operating on a 'for-profit' basis in 1997-98.
Contributions to private health insurance raised
some $4.7 billion in 1997-98, of which $4.2 billion was paid out in
benefits.(2) Private health insurance provides about 10 per cent of
Australia's total health expenditure which is more than is raised
by the Medicare levy but considerably less than the amount paid by
individuals in out-of-pocket costs. For example, in 1996-97, the
latest year for which a full breakdown is available, private health
insurance accounted for $4.7 billion in recurrent health
expenditure, while individuals contributed $7.07 billion by way of
out-of-pocket costs.(3) The Medicare levy raised approximately $3.6
billion in 1996-97.(4) Private health insurance is an important
source of finance for private hospitals, accounting for 70 per cent
of their total recurrent health expenditure in 1996-97.(5)
The private health insurance industry is heavily
regulated by the Commonwealth Government, with the National
Health Act 1953 (the Act) devoting over 80 pages to private
health insurance matters. In some areas, this regulation has been
necessary to achieve government objectives, such as community
rating of insurance premiums, but in other areas it is less clear
that the level of regulation is essential. It can be argued that
the extensive web of regulation has been responsible for inhibiting
innovation within the private health insurance industry. However,
it is equally arguable that the level of regulation has also
shielded some less than efficient practices.
One area of regulation which the Health
Legislation Amendment Bill (No. 3) 1999 proposes to make more
flexible is the requirement for minimum reserves. The Act specifies
that as a condition of registration, registered organisations must
maintain minimum reserves. These are: either $1 million or two
months contribution income, whichever is the greater (section
73BAB). The Act provides that the Minister may grant an
organisation an exemption from the minimum reserves requirements
(section 73BAC). However, the Minister is required to first seek
the advice of the Private Health Insurance Council (PHIAC). At 30
June 1998 there were 5 health funds which could not meet the
minimum reserves requirements, all of which had been granted an
exemption.
In its report on private health insurance, the
then Industry Commission questioned the appropriateness of the $1
million reserves requirement, noting that some small health funds
had obtained longstanding exemptions from the requirement for a $1
million reserve limit. It observed further that a 'one-size fits
all' approach to reserves is likely also to be inappropriate for
large health funds and for the 'for-profit' funds.(6) In regard to
the reserves of health funds, the Commission recommended
(recommendation 15) that:
-
- a clear protocol for breach of reserves be developed
-
- flexibility be introduced into reserve requirements for funds
facing different levels of risk and
-
- clearer guidelines of what constitutes acceptable liquidity and
diversification of reserves assets be produced.(7)
The Commission emphasised in its report that in
making any changes to the reserves requirements, 'the overriding
purpose of any regime should be protection of consumers, and not
protection of inefficient funds'.(8)
The Private Health Insurance
Product
Private health insurance is actually two
distinct forms of insurance: hospital insurance and ancillary
(extras) insurance. Both forms of insurance are community rated,
which means that the premium of an insurance table or policy
offered by a particular health fund must be the same for all
contributors and intending contributors to that table. Community
rating aims to ensure that the aged and chronically ill are
protected from high premiums. The alternative to community rating
is experience or risk rating, which applies to most other forms of
insurance, such as car, household and life policies.
Hospital insurance offers contributors benefits
additional to Medicare: choice of doctor for hospital care and
treatment and, to a more limited extent, quicker admission to
hospital. In return, contributors pay whatever fees their doctor
decides to charge for the procedure(s) less the schedule fee for
each procedure. (9)Medicare provides a rebate of 75 per cent of the
schedule fee for each procedure, while the health fund contributes
a further 25 per cent. Where health funds have reached agreements
with individual doctors and signed
Medical-Purchaser-Provider-Agreements, health fund contributors
with the appropriate level of cover are eligible for reimbursement
of fees charged above the schedule fee. The private health
insurance fund will also provide coverage of hospital accommodation
charges, theatre fees etc. The amount covered will vary with the
type of policy held by the contributor. Some 5.7 million people
were covered by hospital insurance at 30 June 1998.
Ancillary insurance offers contributors coverage
for services, products and treatment not covered by Medicare,
including dental and physiotherapy services and contributions
towards the costs of vaccinations and some pharmaceuticals. Some
ancillary insurance products offer benefits for alternative
therapies and rebates for membership of health and fitness clubs. A
small proportion of the population have ancillary cover only,
whereas approximately 75 per cent of people who have hospital
insurance also hold ancillary cover.
The Private Health Insurance
Administration Council
The Health Legislation Amendment Bill (No. 3) 1999 proposes a
significant revamp of the responsibilities of the Private Health
Insurance Administration Council (PHIAC). PHIAC was established
with effect from 28 June 1989 by amendments to the National
Health Act 1953 which inserted new Part VIAA. Upon
establishment, a range of functions which had previously been the
responsibility of the then Department of Community Services and
Health were transferred to PHIAC. The main powers and functions of
PHIAC are set out in section 82G of the Act and include:
- to monitor the financial performance of health funds to ensure
that the statutory reserve requirements are being met
- to administer the reinsurance account arrangements
- to collect and disseminate financial and statistical data,
including tabling of an annual report to Parliament on the
operations of health funds
- to establish uniform reporting standards for funds
- to impose levies to cover the operating costs of the Council
and any unpaid claims of a collapsed fund and
- to receive applications for the review of acute care
certificates and application fees, and administer the funding
arrangements for the operation of the Acute Care Advisory
Committees.
Section 82F of the Act provides for the Minister to make
guidelines for appointments to the Council. The original guidelines
were made on 28 August 1989 and were amended on 24 April 1992.
These guidelines were withdrawn on 16 June 1998 with effect from 1
July 1998. PHIAC's 1997-98 Annual Report notes that 'the
appointment of a new independent Council removes the need for the
guidelines'.(10)
The Health Legislation Amendment Act 1995 conferred
additional functions onto PHIAC. These additional functions
are:
- to collect and disseminate information about private health
insurance to allow consumers to make informed choices about the
product
- to distribute and make available copies of the Private
Patients' Hospital Charter at the PHIAC office and to publicise the
existence of the Charter in PHIAC publications, and
- modelling, evaluation and research of data derived from the
Hospital Casemix Protocol (HCP), the provision of such data being
with the approval of the Minister. This determination is a
disallowable instrument. The data is derived from the HCP as
supplied to the Department of Health and Aged Care under subsection
73AB(1) of the Act.
In 1998, several changes were introduced by the Health
Legislation Amendment Act (No.2) 1998 which affected the role
and functions of PHIAC, including:
- amendment of the Health Insurance Act 1973 gave PHIAC
the responsibility for approving Simplified Billing Agents. This
change took effect on 28 April 1998
- amendment of the National Health Act 1953 changed the
structure of Council from an advisory Council to an independent
Board with voting rights. Members of the new Board of the Council
are independent of both the Department and the industry. The
position of Director of PHIAC was changed to Chief Executive
Officer. These changes took effect from 1 July 1998, and
- these amendments also removed the requirement on health funds
to supply PHIAC with data from the Hospital Casemix Protocol (HCP),
and required the Department to supply aggregated data derived from
HCP data to the Council. This change took effect from 28 April
1998.
Schedule 1 deals with registration of registered
organisations (health funds) and proposes amendments to the
National Health Act 1953 (NHA). The schedule transfers
functions and powers from the Department of Health and Aged Care to
the Private Health Insurance Administration Council (the
Council).
Item 2 repeals section 68 of
the NHA, the proposed new section 68
allows health funds to apply to the Council for registration as a
registered health benefits organisation. Currently, the Minister
holds this function.
Proposed subsection 68(2)
provides that a health fund cannot apply for registration
unless:
-
- it is a company limited by shares, guarantee or both, and
-
- its constitution and rules provide the organisation is
established solely for the purpose of conducting a health
funds and incidental purposes and
-
- there is to be credited to that fund the whole of the income of
the organisation arising out of the carrying on by the organisation
of business as a registered health benefits organisation.
In considering an application for registration,
the Council must also consider whether the health fund will meet
the solvency and capital adequacy requirements established by the
Council (Item 11).
Item 16 ensures that the
Department is aware of the Council's activities and is intended to
promote accountability. The Council must inform the Department of a
decision to grant or refuse an application for registration within
seven days.
Item 17 proposes new sections
aimed at strengthening the protection for contributors to health
funds. New section 73AAB provides that
registration will cease if a company is no longer incorporated or
if it changes its rules or constitution so that a health fund
cannot be conducted by it. Proposed section 73AAC
imposes a statutory duty on registered organisations to give
priority to the interests of contributors to the fund in making
decisions on its management. Subsection (2) provides a defence for
a breach of section 73AAC if, having regard to the
circumstances, it is reasonable to believe that the decision gives
priority to the interests of contributors.
Proposed section 73AAD
restricts the purposes for which payments may be made from a health
fund. Payments that are permissible are those made for the
following purposes:
-
- liabilities incurred in covering contributors;
-
- payments to the Health Benefits Reinsurance Trust Fund;
-
- investments for the health insurance business;
-
- if the health fund has been established for profit-distributing
profits to shareholders;
-
- any other purpose that is directly related to the health
insurance business.
Proposed section 73AAE seeks to
protect contributors by empowering the Council, or if the health
fund is under administration, the administrator or liquidator, to
apply to the Federal court to vary or set aside a transaction (a
loan, a guarantee or charge) that they believe to be manifestly not
in the interests of contributors to the fund.
Item 26 inserts a new
section 74A making officers of a health fund liable for
fines of up to $10,000 for non-compliance with the NHA or
directions made by the Council.
Item 30 is another provision
that is intended to give enforcement powers to Council as the
regulator of the health insurance industry. The item inserts
proposed subsection 79(7) which provides that the
Council may cancel the registration of a health fund if that body
has reputedly contravened its obligations under the NHA or
if the Council believes a contravention is serious enough.
Mergers between health funds are, under
Item 43, to become subject to the approval of the
Council instead of the Minister. The Council must approve the
transfer unless action is being taken under Part VIA of the
NHA (a Part that deals with the conduct and supervision of
the affairs of health funds).
The Administrative Appeals Tribunal will have
the jurisdiction to review the decisions of the Council under
Items 44, 45, and 46.
Schedule 2 is aimed at
providing the council with appropriate powers to prudentially
regulate registered funds so as to ensure the assets of the health
funds are protected.
Part 1 amends the National
Health Act 1953. Item 2 repeals sections
73BAB and 73BAC which specify requirements for minimum financial
reserves. In place of these standards item 3
imposes proposed Division 3A - a framework for
solvency standards and proposed Division 3B - a
capital adequacy regime. Solvency standards are designed to ensure
that a health fund has sufficient assets to be able to meet
liabilities as they become due. Proposed section
73BCB requires the Council to establish written solvency
standards. Health funds must comply with solvency standards
(proposed section 73BCD) and are subject to
solvency directions by the Council if it has reasonable grounds to
believe that a health fund may be insolvent (proposed
section 73BCE). In making these standards, the Council
must consult with the Australian Government Actuary.
The capital adequacy requirements are concerned
with ensuring that health funds are sufficiently financially robust
(ie are able to take losses in bad years) in order to conduct their
business in the best interests of contributors and comply with the
National Health Act 1953. The Council's powers under
proposed Division 3B mirror those bestowed in
relation to solvency standards. Health funds must comply with the
capital adequacy standards (proposed section
73BCI) and are subject to direction by the Council
(proposed section 73BCJ).
While the Parliament will no longer be directly
responsible for determining solvency and capital adequacy standards
for health funds, standards set by the Council are disallowable
instruments and are thus subject to the scrutiny of the Parliament.
The Minority Report of the Senate Committee on Community Affairs
recommended increased transparency in relation to standard
setting.(11) The Minority accepted that the advice of the
Australian Government Actuary should not be binding on the Council
but recommended that the Council be required to state its reasons
for disagreement. It was argued that such a practice would enable
the Parliament to be better informed in making an assessment of
standards when considering a question of disallowance.
In keeping with the Council's new role as
regulator of health funds, the legislation contains a number of
provisions which bestow powers similar to those exercised by the
Australian Prudential Regulation Authority. Item 6
inserts proposed paragraph 82G(1)(db), which
allows the Council to appoint inspectors to investigate the affairs
of a health fund. Pursuant to amendments in item
7, the Council may appoint an administrator, approve the
voluntary winding up of a health fund and apply to the Court for
the winding up of a health fund.
Proposed section 82XF gives the
Council power to appoint an administrator to a fund if the
appointment is in the interests of contributors and the fund has
breached solvency or capital adequacy standards or other rule
imposed under the NHA.
The Bill expedites procedures for the
appointment of inspectors under section 82R. Currently, the section
requires the Minister to give a fund 14 days to show cause why it
should not be investigated. Item 25 repeals this
'show cause' requirement. The new section will provide that an
investigator may be appointed by the Minister or PHIAC.
The Bill imposes personal liability on officers
of funds. Proposed subsection 82XT(5) states that
an officer of a fund under administration will be guilty of an
offence if the officer enters into a transaction or dealing or is
otherwise involved in a transaction that is void because the fund
is under administration. Proposed section 82XU
provides that a court may order compensation where an officer has
been found guilty of an offence under proposed section
82XT(5). A due diligence defence however, is available if
it appears to the court that the person acted honestly; and having
regard to the circumstances of the case, the person ought fairly to
be excused from paying compensation. The onus of proving due
diligence rests with the officer.
Further proposed section 82YZE
states that if a health fund contravenes the Act and the fund
suffers a loss as a consequence and the court orders the fund to be
wound up, the officers of the fund are jointly and severally liable
to make up the loss. Proposed subsection 82YZE(2)
provides for a due diligence defence but the onus of proof rests
with the officer.
Proposed section 82YZB details
provisions that apply in the event that a fund or organisation is
wound up. Firstly, the priority arrangements in section 556 of the
Corporations Law apply. The costs of the liquidator and
administrator rank first, followed monies owed to the employees.
Unsecured creditors then rank equally. If any assets remain after
the application of the principles in section 556 they are to be
applied first in discharging the liabilities to contributors to the
fund, then to other fund liabilities.
The purpose of this Part 2 of
Schedule 2 is to remove references to friendly
societies from Part 1. This is because under the
Financial Sector Reform (Amendments and Transitional
Provisions) Act 1999 regulatory responsibility for friendly
societies has moved to the Commonwealth from the States and
Territories. Upon the transfer, friendly societies will become
Corporations Law companies.
Part 1 of Schedule 3 amends the
Private Health Insurance Incentives Act 1998 to correct
anomalies which arose as a result of the expedited passage of that
legislation. In particular the amendments seek to clarify
entitlements to the premium reduction scheme. Items 7 to
28 allow a person to register for a premium reductions
scheme once only rather than on an annual basis. Proposed
section 11-10 will allow persons who pay premiums but are
not covered by the policy (such as employers and parents of
dependent children) to claim a premium reduction.
The amendments have a retrospective operation
and are taken to commence on 1 January 1999, the same date as the
Private Health Insurance Incentives Act 1998.
Concerns were raised at hearings of the Senate
Community Affairs Legislation Committee on the Bill about whether
the Council has adequate resources to perform the role of
independent prudential regulator of the private insurance industry.
The Council has only 6 staff.(12) It was also questioned whether
the Council would be sufficiently focused on the interests of
contributors to funds. The Minority report of the Committee noted
the absence of an objectives clause for the Council.
The Australian Health Insurance Association
(AHIA) criticised the Bill before the Senate Committee on Community
Affairs (SCCA)(13) on the basis that the Council's proposed powers
were stronger than comparable provisions in the Corporations Law.
Examples include the powers to: appoint an administrator, give
general directions to an administrator and approve a wind up.
The Department of Health and Aged Care said that
as with other forms of insurance, specific legislation overrode the
Corporations Law. The Department argued that the special powers
given to the Council were a reflection of the requirement that it
Act in the interest of contributors.
-
- Hon Dr M Wooldridge, 'Reforms to improve efficiency and value
of private health insurance', Media Release, 22 September
1998.
- Private Health Insurance Administration Council, Annual
Report on the Operations of the Registered Health Benefits
Organisations, PHIAC, Canberra, 1998.
- Australian Institute of Health and Welfare, Health
Expenditure Bulletin, November 1998.
- Budget Paper No 1, 1996-97, pp 4-28.
- Australian Institute of Health and Welfare, op cit, p
30.
- Industry Commission, Private Health Insurance (Report No.
57), Industry Commission, Canberra, 1997: 362.
- ibid: p 365.
- ibid: p 364.
- Medicare benefits are based on fees determined by the
Commonwealth Government for each medical service. The fee is known
as the 'schedule fee' after the Medicare Benefits Schedule (MBS)
which lists each service and its relevant fee. The fee for any item
in the MBS 'is that which is regarded as being reasonable on
average for that service having regard to usual and reasonable
variations in the time involved in performing the service on
different occasions and to reasonable ranges of complexity and
technical difficulty encountered' (Medicare Benefits
Schedule: 15).
- Private Health Insurance Administration Council, Annual
Report 1997/98, PHIAC, Canberra, 1998.
- Senate Community Affairs Legislation Committee, Report: Health
Legislation Amendment Bill (No.3) 1999, April 1999, p 7-8.
- Senate Community Affairs Legislation Committee, Report: Health
Legislation Amendment Bill (No.3) 1999, April 1999, p 7.
- Ibid, p 5-6.
Paul Mackey and Mark Tapley
29 July 1999
Bills Digest Service
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ISSN 1328-8091
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