BACKGROUND NOTE, Updated 1 March 2012

Private health insurance premium increases—an overview and update

Amanda Biggs
Social Policy Section

Introduction

Early each year the Health Minister announces the average increase to health insurance premiums following the Government’s assessment of applications for increases from health insurers. This announcement invariably attracts considerable media attention. Insurers may subsequently advise their members that they face premium rises higher than the figure announced by the Minister (which is an industry-wide average). Those consumers who feel aggrieved then may be prompted to make a complaint to the Private Health Insurance Ombudsman.[1] 

This background note, which also updates an earlier paper, gives an overview of rises in private health insurance premiums over the last decade.[2] It also outlines possible reasons for premium increases and for variations across individual funds, and outlines regulatory changes around premium increases that may have affected reporting of these rises.

Approval process for premium increases

Health insurers wanting to increase their premiums are required under the Private Health Insurance Act 2007 to submit their increase for Ministerial approval.  Applications for premium increases are normally made towards the end of the year prior to the quarter an announcement is made. The announcement normally occurs in February, to take effect from April 1 that year.

Over time there have been changes to the procedures governing the approval of premium rises. In 1996, the Howard Government introduced the practice whereby premium increases required approval by the Health Minister, in consultation with the Prime Minister and the Treasurer.[3] Following an interdepartmental review of health insurance arrangements in 2003, the process for seeking premium rises at or below the consumer price index (CPI) was ‘streamlined’. Those health insurers applying for lower-than-CPI increases were not required to provide as much information to support their claim, nor undergo the same level of scrutiny, as those applying for higher-than-CPI increases.[4] The Health Minister was empowered to disallow any premium increase if it:

•        could breach a condition of registration or other section of the National Health Act 1953

•        imposes an unreasonable or inequitable condition affecting the rights of any contributor

•        adversely affects a fund's stability

•        would be contrary to the public interest.[5]

Any changes to premiums were required to be tabled in Parliament.

In 2007, legislative changes affecting the process for seeking premium increases were made with the passage of the Private Health Insurance Act 2007 (PHIA). The notification period whereby a health insurer could seek approval from the Minister to increase its premiums was lengthened from 14 to 60 days—allowing health insurers a longer time to make applications. The Minister must now approve all applications for premium increases, unless this ‘would be contrary to the public interest’.[6] Except in the case of public interest, other criteria for disallowing increases are no longer specified in the Act. If the Minister refuses an increase the reasons must be tabled in Parliament within 15 sitting days.[7] This was a significant shift away from the onus being on insurers to ensure that their proposed increases are compatible with specified criteria, to the onus being on the Minister to show cause for not approving an increase. Furthermore, the only remaining specified reason to disallow an increase—the public interest test—is not defined in the legislation, and so far remains untested.[8]

In addition, the passage of PHIA altered the way premium increases were to be notified; a requirement that information on premium rises granted to individual insurers be tabled in Parliament was dropped, for example. The new Act also modified the objectives of the industry regulator, the Private Health Insurance Administration Council (PHIAC), which provides advice to the Minister (and the public) about the health insurance sector.[9] PHIAC’s role as defined in the new Act is broadly to ‘achieve a balance between its various objectives’, which are stated as:

•        fostering an efficient and competitive health insurance industry, and

•        protecting the interests of consumers, and ensuring the prudential safety of individual private health insurers.[10] 

A former objective, of ‘minimising the level of health insurance premiums’ was removed from the new Act, although PHIAC's role in providing advice on premium rises continues.[11] At the time this objective was removed, some criticised the decision, arguing that the objective was ‘vitally important’.[12] 

Trends in recent premium increases

Since 2002, average premium increases have generally been well above the CPI (see Figure 1). Premium rises are driven by a combination of factors, the major ones being:

•        an ageing population that increases utilisation and benefit outlays

•        adverse selection, which sees younger, healthier people foregoing health insurance—despite the financial penalty of higher premiums the longer they forego insurance—but not those most likely to need treatment

•        rising costs associated with advances in medical technology and new innovative treatments, and

•        unavoidable cost pressures, such as provider costs rising faster than the CPI, prostheses costs and Medicare Benefit Schedule increases not in line with other cost increases.

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

Source: Parliamentary Library estimates.[13]

Premium increases can vary across the sector, with some insurers applying for and being granted higher premium increases than others.[14] This can be due to a range of factors. In addition to variations in annual costs due to changed claiming patterns, there can also be changes to an individual fund's reserve levels, and in the investment income of individual funds from year to year. If these are not always fully anticipated, a fund may seek a higher premium rise the following year. Fluctuations in annual premium increases for individual health insurance products offered by health insurers also occur.

Consumer information

Before the passage of the Private Health Insurance Act 2007, details of the approved average premium increase to be applied to insurance products offered by individual funds were publicly released and tabled in Parliament. The requirement to table this information (and therefore make it public) has not applied since the introduction of the new Act.  Although health insurers are required to provide information to the public on the price of their individual health insurance products, they are no longer required to provide details of the average premium rise that will apply to their products.

In 2008, the former Health Minister, Nicola Roxon, indicated that she would consider improving the level of consumer information around premium increases by publishing the details of the average premium rise for each individual fund, rather than the usual practice of publishing only the industry-wide average. The intention would be ‘to enable consumers to assess their own fund’s performance against alternatives’ and therefore to ‘drive more competition’.[15] This process was announced in the context of the 2009–10 budget, and information on premium rises for individual funds has been published since the 2010 premium round.[16]

However, as far as encouraging consumers to switch health funds if they are unhappy about a premium rise, these improvements to the level of consumer information do not appear to have had the desired effect of driving more competition, at least not yet. Few consumers switch funds, although the percentage that has done so recently has risen slightly.[17] The reasons consumers don't switch funds are complex, but a number of disincentives make it difficult. These include loyalty bonuses, confusing arrangements around portability and barriers to comparing products easily.[18]

Concluding comments

Over the past decade, increases to private health insurance premiums have averaged around 5.8 per cent—that these remain well above increases to the CPI may continue to raise concerns in some quarters. However, premium increases above the CPI can be expected into the future as a range of factors will continue to drive costs for health services and subsequently the costs to insurers. These drivers include an ageing population, advances in medical technologies and treatments, a greater prevalence of chronic diseases and the impact of economic downturns (which affects insurer investment returns).

The ability of health insurers to control their costs is limited by a number of factors. Insurers cannot refuse membership based on health status; although they can delay providing coverage for a defined period of time for some pre-existing illnesses and/or impose benefit limitation periods for certain conditions.[19] Also, health insurers are prevented from charging members different premiums based on their risk of ill health. Those funds with a high proportion of members with chronic illnesses are likely to have relatively high claim costs, although there are some mechanisms in place to equalise risk across funds. Further, because health insurers do not cover all health services, their capacity to significantly improve their members' health status, reduce health care utilisation and, therefore, the number of claims made, is relatively limited. For example, funds are prevented from covering general practitioner services.[20] Although health prevention services are now offered by a majority of health insurers, growth in take-up of these remains relatively flat.[21]

The onus has now shifted from insurers having to justify their increases to the Minister being required to approve all requests (except when this is against the public interest) or justify reasons for non-approval. However the premium setting process continues to be highly political. In the current premium setting round, reportedly the Minister wrote to a number of insurers asking them to lower their proposed increases, as the increases they had sought were not in her view in the public interest.[22] However, as long as the one justification for refusing an increase, the public interest test, remains undefined and untested, the premium setting process will continue to lack full transparency. This makes it harder to ascertain how well it is serving consumers, taxpayers (who fund the private health insurance rebate) or the industry.

While reforms so far have had a modest effect on improving consumer information and supporting competition, further reforms may be warranted. These could include expanding the level and detail of comparative information available to consumers around products, improving clarity and transparency around portability rules and encouraging greater take-up of preventive services.

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[1].               For example, following premium rises in 2003, the Private Health Insurance Ombudsman (PHIO) received a record number of complaints relating to premium increases. Private Health Insurance Ombudsman, Annual Report 2003, PHIO, Canberra, 2003, p. 22. In recent years, the number of complaints relating to premium increases has declined.

[2].               The earlier paper is: A Biggs, Private health insurance premium increases—an overview, Background Note, 13 August 2009, Parliamentary Library, Canberra, 2009, viewed 29 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22library%2Fprspub%2FDIEU6%22

[3].               Industry Commission, Private health insurance, Industry Commission report no. 57, Canberra, 1997, p.66.

[4].               Department of Health and Ageing (DoHA), Annual report 2002–03, Canberra, DoHA, p. 218; see also, A Elliot, Regulation of private health insurance premiums, Research Note no. 41, 2002–03, Parliamentary Library, 2003, viewed 29 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22library%2Fprspub%2FBBI96%22

[5].               A Elliot, Ibid., p. 1.

[6].               Private Health Insurance Act 2007, Section 66-10(3), Public interest is not defined.

[7].               Ibid., Section 66-10(6).

[8].               The Minister has sometimes asked a health insurer to resubmit their application for premium increases but has not refused any re-submitted applications. In 2001, Minister Wooldridge disallowed a premium increase on the grounds it would not be in the public interest to grant it. M Wooldridge, 'Questions without Notice: Private health insurance: premiums', House of Representatives, Debates, 28 March 2001, p. 25869, viewed 29 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F2001-03-28%2F0051%22.

[9].               This includes advising the Minister on premium rises.

[10].               Section 264-5 of the Private Health Insurance Act 2007.

[11].               Repealed section 82BA(2)(c) of the National Health Act 1953, contained this objective.

[12].               For example, the Australian Physiotherapy Association argued that minimising premiums was ‘vitally important’ and should be retained. See A Biggs, L Buckmaster, Private Health Insurance Bill 2006, Bills Digest, no. 81, 2006–07, 2007, Parliamentary Library, Canberra, p. 16, viewed 29 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FXH5M6%22

[13].               Graph prepared by Joanne Simon-Davies, Statistics and Mapping, Parliamentary Library. Sources: ABS, Consumer Price Index Australia, December 2008; Reserve Bank of Australia, Statement on Monetary Policy, Department of Health and Ageing, Report on private health insurance premium changes [various years, title varies]; A. Pratt, Public versus private? An overview of the debate on private health insurance and pressure on public hospitals, Research Note no. 54, 2004–05, Parliamentary Library, Canberra, 20 June 2005; Private Health Insurance Administration Council, Operations of the Private Health Insurers Annual Report [various years]. The most recent increase of 5.06 per cent has not been included because comparative CPI figures are not yet available for the period.

[14].               For example, in 2011 premium increases granted to individual funds varied from 1.5 per cent to 14.38 per cent. See Department of Health and Ageing, '2011 Premium Round Individual private health insurer average premium increases', viewed 30 January 2012, http://health.gov.au/internet/main/publishing.nsf/Content/privatehealth-average-premium-round

[15].               D Cronin, ‘Health Minister flags insurance overhaul’, Canberra Times, 9 October 2008, p. 8, viewed 25 January 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FINRR6%22

[16].               Department of Health and Ageing, 'Private health insurance', viewed 8 February 2012, http://health.gov.au/internet/main/publishing.nsf/Content/privatehealth-average-premium-round

[17].               In the June quarter 2011, around 0.8 per cent of the total number of people covered by health insurance, transferred to another fund. In the September quarter this percentage had risen to 2.12 per cent. See Private Health Insurance Administration Council, PHIAC A Report, June and September 2011 quarter, 'Changes during the quarter' p. 2, viewed 19 January 2012, http://www.phiac.gov.au/for-industry/industry-statistics/datatablesphiaca/

[18].               A Biggs, 'If switching health insurance funds can save money, why don't more Australians do so?, Flagpost, Parliamentary Library 30 June 2011, viewed 20 January 2012, http://parliamentflagpost.blogspot.com/2011/06/if-switching-health-insurance-funds-can.html

[19].               A benefit limitation period is where the member is only entitled to limited benefits for a particular condition or treatment for a set period of time. After that period of time has elapsed the member would normally be entitled to full benefits for the condition or treatment. Private Health Insurance Administration Council, Insure? Not sure?, PHIAC, 2008, p. 24, viewed 2 February 2012, http://www.phiac.gov.au/resources/file/insure.pdf

[20].               These points were all made by A Boxall, 'Private health insurance premium increases', Flagpost, Parliamentary Library, 19 November 2010, viewed 25 January 2012, http://parliamentflagpost.blogspot.com/2010/11/private-health-insurance-premuim.html

[21].               Thirty of the thirty-four funds now offer these services. Private Health Insurance Administration Council, Operations of private health insurers: annual report 2010–11, PHIAC, Canberra, 2011, p. 24, viewed 2 February 2012, http://www.phiac.gov.au/resources/file/Annual%20Report%20on%20Operations%202010-11%20web%20version.pdf

[22].               M Metherell, 'Health funds told to drop planned rises in premiums', Sydney Morning Herald, 7 February 2012, p. 4, viewed 8 February 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1402602%22