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Bills Digest No. 13  1999-2000
National Health Amendment (Lifetime Health Cover) Bill 1999

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

National Health Amendment (Lifetime Health Cover) Bill 1999

Date Introduced: 2 June 1999

House: House of Representatives

Portfolio: Health and Aged Care

Commencement: 1 July 2000. The delay in commencement is designed to allow people the opportunity to join a health fund and avoid a potential increase in health insurance premiums.

Purpose

The purpose of the Bill is to introduce 'Lifetime Health Cover' into private health insurance. It will require health funds to set different premiums depending upon the age at which a member first takes out hospital cover with a registered health fund. The Bill aims to discourage 'hit and run' behaviour thereby contributing to the stability of the private health insurance industry and restraining pressures for increases in premiums.

Background

The National Health Amendment (Lifetime Health Cover) Bill 1999 seeks to amend the National Health Act 1953 to introduce a major change to private health insurance arrangements through the introduction of Lifetime Health Cover.

Lifetime Health Cover

The former Industry Commission (now the Productivity Commission) undertook a comprehensive inquiry into private health insurance in 1996-97. Its final report was released in April 1997. The first of its 22 recommendations was as follows:

The Government announced in the 1999-2000 Budget that it would introduce Lifetime Health Cover (unfunded lifetime community rating) from 1 July 2000. This Bill proposes to give legislative effect to the Budget measure.

Essentially, Lifetime Health Cover will require health insurance funds to charge different premiums depending on the age at which people take up private health insurance. Existing members are protected and will pay the base rate (set at 30 years of age) for the rest of their lives, provided that they remain insured. The adoption of a commencement date of 1 July 2000 enables a 12 month period during which people who are not currently members of private health insurance funds can join and pay the 30-year old rate. People covered by private health insurance will be permitted a cumulative period of 24 months during which they may be uninsured for any reason. However, they will not be liable for a penalty contribution rate for a further 364 days, giving them a total of 1094 days or almost three years during which they will not be penalised for dropping their hospital insurance.

People born before 1 July 1934 will be able to join a health fund at any time and pay the 30 year old rate. People in this age group are exempt from the provisions of the Bill which govern the cumulative number of permitted days without hospital cover (item 5 of Schedule 1 of the Bill). This means that people aged 65 years and older on 1 July 1999 will be permitted to move in and out of private health insurance without restriction and will still pay the base (30 year old) rate of premium. This seems, on the surface at least, to not discourage (and may even encourage) the practice of 'hit and run' memberships in this age group. 'Hit and run' memberships refer to the situation whereby people take out private health cover, keep it for the qualifying period, have their procedure(s) and then drop out. The Minister for Health and Aged Care states in his second reading speech on the Bill that one of the aims of Lifetime Health Cover is to discourage hit and run behaviour.(2)

While it is important that older people are not disadvantaged by the introduction of Lifetime Health Cover, this objective could presumably have been achieved by permitting people born before 1 July 1934 to join a health fund at any time and pay the base rate premium, but restrict this to a single occurrence only, thereby subjecting older contributors to the same requirements of permitted days without hospital cover as the rest of the community. It can be argued that the worst possible result for private health insurance will occur if the introduction of Lifetime Health Cover succeeds only in attracting more of the poorer risks to private health insurance.

There is yet to be any announcement by health insurance funds on the new base rate premiums for health insurance policies. The Bill does not establish any date by which health funds will have to offer a base rate, other than the commencement date for the new scheme, 1 July 2000. However, if there is to be a genuine period of 12 months for people to consider their options, early knowledge of the base rate premium for each health insurance policy is arguably a necessary element of informed financial consent for consumers. It is possible that the existing contribution rate for each policy may become the new base rate.

Community rating

Lifetime Health Cover will replace the existing system of community rating. Community rating has been regarded as an essential element of private health insurance, providing protection from excessive premiums for the elderly and chronically ill. Community rating of premiums means that all contributors to private health insurance pay the same premium for the same product. It can be contrasted with risk rating, which applies to most other types of insurance. Under the latter system the risk profile of the individual seeking insurance is assessed and a premium is calculated accordingly. Risk rating applies to much private health insurance in the United States.

A recent study by the Australian Institute of Health and Welfare (AIHW) found that community rating was not only protecting people in poorer health from the high cost of risk-rated premiums, it was also redistributing benefits from low-risk groups to high risk groups. In addition, the study found that community rating had produced a redistribution of resources from the wealthier members of health funds to the poorer members, with members in the lowest income group receiving about three times the benefits of members in the highest income group. This occurred both among young and older members.(3) There is no reason to believe at this stage that the introduction of Lifetime Health Cover will affect the benefits conferred by community rating.

What are the problems with private health insurance?

Private health insurance is an important component of the Australian health system, contributing over $4 billion annually to total health expenditure. However, private health insurance coverage has steadily declined in Australia since the introduction of Medicare. At 31 March 1983, following the election of the Hawke government, 65.8 per cent of the population were covered by private health insurance. At 31 March 1984, following the commencement of Medicare on 1 February, the proportion of the population covered by private health insurance had fallen to 54.9 per cent. By 31 December 1998 this figure had fallen to 30.1 per cent of the population. The decline in coverage was reversed in the March quarter 1999 when the proportion of the population covered by private health insurance increased to 30.3 per cent of the population.(4) This increase followed the introduction from 1 January 1999 of a non-means-tested rebate of 30 per cent of health insurance premiums. The estimated cost of the rebate is approximately $1.5 billion in 1999-2000, increasing to $1.7 billion in 2002-2003.(5)

Of perhaps more concern for health policymakers over the longer term is the trend of people aged 65 years and over to increase as a proportion of those insured. People in this age group have increased from 10.2 per cent of those insured in 1989-90 to 17.3 per cent in 1997-98.

The table below indicates changes in the proportion of the population covered by hospital insurance. It also provides details of changes in average premiums charged by private health funds for hospital insurance and the percentage changes in these premiums.

Sources: *Private Health Insurance Council (PHIAC)

Overview of recent changes to private health insurance

In part, the decline in the coverage of private health insurance, evident in the table above, has been due to the popularity of Medicare. In part it is due to a minority of the population requiring hospitalisation at any one time (ie many people assess themselves at low risk of requiring insurance) and, related to both these points, in part due to a perception that private health insurance represents poor value for money. A range of initiatives have been introduced in recent years to address some of the problems and shortcomings of private health insurance, including:

• The passage in 1995 of the Health Legislation (Private Health Insurance Reform) Amendment Act which, in part, facilitated contracting between private health insurance funds and hospitals (Hospital Purchaser Provider Agreements), private health insurance funds and doctors (Medical Purchaser Provider Agreements) and hospitals and doctors (Practitioner Agreements). The contracting arrangements were enhanced by measures in the Health Legislation Amendment Act (No. 2) 1997.
• The Private Health Insurance Incentives Scheme was announced in the 1996-97 Budget and commenced on 1 July 1997. Under the Scheme, the Commonwealth Government was to outlay some $600 million per year over 4 years to reduce the cost of private health insurance for low to middle income earners. This scheme did not succeed in increasing the level of participation in private health insurance and was replaced by the non-means-tested 30 per cent rebate from 1 January 1999.
• The Medicare levy surcharge for certain higher income earners without private health insurance was introduced with effect from 1 July 1997. This measure is also aimed at stopping the decline in the numbers of people covered by private health insurance and adds a surcharge of 1 per cent to the Medicare levy for individuals and families above specified income levels without private health insurance. People thus affected pay a Medicare levy of 2.5 per cent.
• The Treasurer, Mr Costello, issued the Industry Commission with terms of reference for an inquiry into private health insurance on 17 September 1996. The Commission issued a discussion paper and a draft report and its final report was released in April 1997. The Government issued its response to the Industry Commission's report on 10 April 1997, supporting most of the Commission's 22 recommendations.
• On 19 August 1997, the Minister for Health and Family Services, Dr Wooldridge, announced a range of reforms to private health insurance including informed financial consent for patients on the costs of medical and hospital treatment prior to a hospital episode. This announcement foreshadowed a number of measures included in the Health Legislation Amendment Act (No. 2) 1997 which passed the Parliament in April 1998.
• On 2 November 1997, Dr Wooldridge announced that eight trials involving 20 000 privately insured patients would be conducted during the next six months in NSW, Victoria, Queensland and South Australia to test methods of simplified billing and informed financial consent.
• The Health Legislation Amendment Bill (No 4) 1998 was introduced on 3 December 1998. Later renamed the Health Legislation Amendment Bill (No 2) 1999, the Bill contained a range of measures relating to private health insurance. Following the defeat or withdrawal of several measures, the Bill finally passed the Parliament, permitting the introduction of measures such as loyalty bonuses.
• The non-means-tested 30 per cent rebate for contributions to private health insurance commenced on 1 January 1999, following the successful passage of the legislation in December 1998.
• The Health Legislation Amendment Bill (No 3) 1999 was introduced into the Parliament on 11 March 1999. This Bill proposes a range of changes to the prudential regulation of the private health insurance industry. The Bill is still before the Parliament.

Pros and cons of lifetime health cover

As with the introduction of most policy measures, there are arguments for and against the changes proposed by the Bill. Arguments in favour of Lifetime Health Cover include:

• Over time, Lifetime Health Cover should result in a broader cross section of the community being covered by private health insurance. This is because younger people will be encouraged to join funds at the cheaper rate, rather than waiting until they are older.
• As the age profile of people insured changes, premiums should begin to stabilise and may even fall, because the funds will have more 'good risks'.
• The introduction of Lifetime Health Cover, combined with the effect of other initiatives such as the 30 per cent rebate and loyalty bonuses, will make private health insurance more attractive to people who currently regard it as poor value.
• The existing system of community rating encourages a 'short-term' view of private health insurance whereby many people weigh up their risks and join private health insurance funds only when they expect to use their insurance cover. This approach was labelled as 'mercenary' in briefing material accompanying the Budget papers.(6) These types of people are known as 'hit and run' memberships within the industry.
• The plan has the support of the private health industry, including health funds, doctors and private hospitals. It is also supported by organisations representing older people, such as the Council on the Ageing and the Association of Independent Retirees.
• A public opinion poll taken just before the Budget indicated that 68 per cent of Australians agree with the principle of lifetime community rating.(7)
• The current system results in 'adverse selection' by attracting mainly those people who expect to claim while the younger and generally healthier people drop out or refuse to join. The Industry Commission, in its 1997 report into private health insurance, argued that this adverse selection led to a 'vicious circle' of increasing premiums which led to dropouts of lower risk members, leading to higher pay outs and, in turn, still higher premiums because of the deteriorating number of low risk members.(8)
• The proposed model of Lifetime Health Cover ensures protection for existing members, who will be eligible for the base rate premiums. Extra provision for people aged 65 years and older on 1 July 1999 is provided by enabling them to join at any time in the future and still pay the base rate premium. All members of the community receive protection through the 12 month 'amnesty' during which anyone can join a fund and pay the base rate premium.

Arguments against Lifetime Health Cover include:

• Many members of private health insurance will receive only a marginal benefit at best and people delaying coverage will be penalised.(9)
• While there are some potential benefits to health funds (and therefore to members) these benefits will only be realised if there is greater control by the funds over medical costs and charges. Notwithstanding attempts at reducing the 'gap' between medical charges and insured benefits, it is questionable whether control of medical costs can be achieved to any great extent.
• The rate at which premiums will increase (2 per cent per year) is not enough to encourage greater participation in private health insurance by younger and healthier people.(10)
• Younger people are already faced with significant costs. Those enrolled in tertiary studies will barely have repaid their HECS and university fees before they are required to contribute to private health insurance at age 30 in addition to paying their Medicare levy. These people are likely also to be in the early stages of mortgage repayments and may also be facing the additional costs of raising a family.
• Lifetime Health Cover may be administratively difficult for the health funds.
• Lifetime Health Cover is playing at the edges of health insurance, it is not a solution to the underlying issue which is that most of the community, especially younger people, regard private health insurance as too expensive and unnecessary.
• If the risk profile of private health insurance improves by attracting younger people, overtime older uninsured people may be discouraged from taking it up (because of the higher marginal costs which they would face) and will rely on the public hospital system.(11) Older people are on average, greater consumers of health care, therefore the public sector may actually face higher costs, and
• The degree of 'crisis' in private health insurance has been overstated. Data from the Australian Institute of Health and Welfare indicate that private health insurance funded 20 per cent of total health expenditure (ie Commonwealth, State, Territory and private sector) in 1982-83. In 1983-84 (Medicare began on 1 February 1984) this proportion had dropped to 15.8 per cent and in 1984-85 the first full year of Medicare, it was 8.8 per cent of total health expenditure. In 1996-97 private health insurance expenditure accounted for 10.9 per cent of total health expenditure(12). However, it can be argued that private health insurance has only been able to maintain its contribution to total health expenditure by increasing premiums. It is questionable how much longer that would be sustainable.

There are various views among commentators and industry players on the introduction of Lifetime Health Cover. Some examples include:

The Australian Private Hospitals Association (APHA) believes that:

The Association of Independent Retirees Inc (AIR) has welcomed the introduction of Lifetime Health Cover, arguing that:

Some commentators have criticised the introduction of Lifetime Health Cover and their comments include:

and

Main Provisions

The principal amendment proposed by the Bill is the insertion of a new schedule to the National Health Act 1953.

Item 7 of the Bill inserts a new section 73BAAA which provides that it is a condition of registration that registered organisations (health funds) comply with Schedule 2 of the Act.

Item 11 inserts new Schedule 2 which provides the rules for the Lifetime Health Cover regime. The new schedule is composed of three parts. Part 1 states the general rules that are to apply.

Under clause 1 health funds must increase the amount of contributions payable for hospital cover by an adult beneficiary if the person did not have hospital cover either on:

• 1 July 2000, if they turned 31 before that date; or
• the day they turned 31, if after 1 July 2000.

The date that applies is known as the 'Schedule 2 application day' (clause 5).

Clause 1(2) provides a formula for determining the amount of the increased contributions payable for people who were without hospital cover on 1 July 2000 or on turning 31. The general rule is that an individual's contribution should increase by 2 per cent of the base rate (the rate a health fund would charge independent of the effects of lifetime health cover regime and exclusive of any loyalty bonuses or discounts) for every year that has passed between the schedule 2 application day and the time hospital cover is taken out.(17)

Clause 2 deals with the situation where a person ceases to have hospital cover at some date after their schedule 2 application day. The general rule is that the individual must pay an extra 2 per cent of the base rate for each year that they are without hospital cover.(18)

An increase will only be levied if on more than 364 days (other than permitted days with out hospital cover) an adult beneficiary did not have hospital cover.

The definition of 'permitted days without hospital cover' is found in clause 3. The clause provides that the first 730 days where an adult beneficiary does not have cover are deemed to be permitted days. A beneficiary will not be required to provide any explanation for dropping their hospital cover.

In addition, regulations may be made under proposed paragraph 3(1)(b) specifying circumstances where days are permitted days without hospital cover. While the Act gives no indication of the circumstances to be covered by such regulation, the explanatory memorandum states that regulations will allow health funds to suspend an adult beneficiary's hospital cover for reasons such as unemployment, overseas travel or extend overseas postings.(19) It is arguable that the suggestion that health funds have the discretion to determine whether membership should be suspended introduces an element of arbitrariness to the regime. More consistent treatment of beneficiaries would be facilitated if the regulations listed a set of circumstances that would constitute permitted days without hospital cover.

The potential for unfairness however is mitigated by the fact that the Bill does provide for a long period where a person's fund membership may lapse. The combined effect of clauses 2 and 3 is that a person may be without hospital cover for periods totalling 3 years without incurring any increased liability under the Lifetime cover regime.

Part 2 deals with exceptions to the general rules. Clause 7 provides that a person born on or before 1 July 1934 is not liable to have their premiums increased by the formula contained in Part 1. A likely consequence of clause 7 is that the Bill will initially have only a limited impact on the incidence of 'hit and run' behaviour by elderly persons.

Clause 8 is a capping provision. Health funds are not permitted to increase the amount of contributions payable to more than 70 per cent of the base rate regardless of the period of time a person has had hospital cover.

Clause 9 deals with the situation where people may have joint hospital cover but one beneficiary is liable to pay a higher contribution because they did not have cover on 1 July 2000 or when they turned 31 or had ceased to have hospital cover for more than the permitted number of days under clauses 2 and 3.

Clause 9 provides that the liability of each beneficiary is to be worked out separately. For each person the base rate is the base rate for joint hospital cover divided by the number of beneficiaries. The amounts calculated for each individual are added together to determine the required contribution.

Clause 10 allows the Minister to determine that a person is to be treated as having hospital cover on July 1 2000. This power is subject to a sunset clause. An application must be made to the Minister by 1 July 2002. Item 8 amends section 105 AB of the Act allowing an application to be made to review a decision of the Minister to refuse to make a determination.

Clause 11 states for the sake of certainty that the exceptions contained in Part 2 prevail over the general rules in part 1 in the event of inconsistency.

Part 3 deals with administrative matters.

Under Clause 12 health funds must comply with requirements in the regulations to notify adult beneficiaries or other persons about the operation of the schedule. The regulations may also require funds to share information so that the lifetime cover regime can be applied appropriately to beneficiaries transferring funds.

Health funds must also comply with regulations made under Clause 13 that certain kinds of evidence is proof of a beneficiary's age and whether a person had hospital cover at a particular time.

Concluding Comments

The National Health Amendment (Lifetime Health Cover) Bill 1999 proposes to introduce a major change to the private health insurance arrangements through the introduction of Lifetime Health Cover. Its success or failure will depend on the extent to which people who are currently insured, as well as those currently uninsured, perceive the benefits of private health insurance. The attractiveness of private health insurance has been enhanced by successive policy initiatives, most notably the introduction of the 30 per cent rebate from 1 January 1999. However, many people, particularly younger and healthier people, appear unsure why they need to contribute to and thereby help to subsidise the private health insurance arrangements, in addition to contributing to and helping to subsidise the public health insurance arrangements under Medicare.

An additional issue from the health financing perspective is the effect of the initiative on total health expenditure. Total health expenditure refers to all health expenditure, that is, expenditure by the Commonwealth, State and Territory Governments, health insurance funds, out-of-pocket expenditure by individuals and other health expenditure through workers compensation arrangements. If more people take up private health insurance as a result of the introduction of Lifetime Health Cover and other initiatives, this will add to the pool of total health expenditure.

However, because the nature of the relationship between the public and private sectors is poorly understood, it is impossible to estimate whether the increased funds available though private health insurance funds will lead to any decrease or re-allocation in funding by the government sector. The complex and unresolved nature of the relationship between private health insurance and Medicare prompted the Industry Commission to sum up its report into private health insurance as follows:

Lifetime Health Cover, together with other initiatives to support private health insurance, have been described by the Government as long-term measures, the effectiveness of which may not be fully apparent for 5-10 years. In this context, and, given that even the most optimistic commentators predict continuing pressure on Australia's total health expenditure, it may be timely to revisit the recommendation above from the Industry Commission, which has been echoed by current commentators,(21) for a review of Australia's health system. Although such a review risks domination by sectional interests so evident in the Australian health system, it may also engage the community at large.

It can be argued that the Australian health system's uneasy mixture of public and private financing and public and private service provision, together with the involvement of several layers of government, is a combination of historical accident, Constitutional necessity and some long-term vision. Although it is no easy task, it may be time for the community to stand back and examine what it requires of the Australian health system, what is possible, and the most effective and efficient means of achieving the desired ends.

Endnotes

1. Industry Commission, Private Health Insurance, (Report No. 57), Canberra, Industry Commission 1997, p li.
2. Hon. Dr Michael Wooldridge, Second Reading Speech, Hansard, 2 June 1999, p 4642.
3. Deborah Schofield, Private Health Insurance and Community rating: who has benefited?, Canberra, Australian Institute of Health and Welfare, 1997, p 19.
4. Private Health Insurance Administration Council, Quarterly Statistics, March 1999.
5. Senate Community affairs Legislation Committee Estimates Hearings, Health and Aged Care Portfolio, 1 June 1999, p 139.
6. Health and Family Services Portfolio, Backgrounder: the Government's Private Health Insurance Plan, 1999, p 3.
7. Medical Benefits Fund of Australia, MBF Healthwatch Survey 16: National report, April 1999
8. Industry Commission, op cit, xxxiii.
9. Don Hindle, 'Out with the old, in with the young: lifetime community rating', Australian Health Review, vol. 2, no. 1, 1999, p 160.
10. Jacquie Haynes, 'No insurance still a healthy alternative', Australian Financial Review, 15-16 May 1999.
11. Don Hindle, op cit, p 157.
12. Australian Institute of Health and Welfare, Health Expenditure Bulletin, various.
13. Australian Private Hospitals Association, 'Hospitals industry welcomes continuing reforms, Media Release, 12 May 1999.
14. Association of Independent Retirees Inc, Media Release, May 1999.
15. Don Hindle, op cit, p 156-160.
16. Kenneth Davidson, 'Health carrot gives way to the stick', Age, 18 March 1999
17. The formula may be expressed in the following form: (Age-30) x 2% x Base rate.
18. Years without hospital cover x 2% x Base rate.
19. Explanatory Memorandum, p 10.
20. Industry Commission, op cit, p 399.
21. See for example, Paul Gross, 'Why so many think ill of health funds', Australian Financial Review, 19 May 1999.

Contact Officer and Copyright Details

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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and their staff but not with members of the public.

ISSN 1328-8091
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