BILLS DIGEST NO. 66, 2012–13

5 February 2013

Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012

Amanda Biggs
Social Policy Section

Date introduced:  28 November 2012

House:  House of Representatives

Portfolio:  Health and Ageing

Commencement:  1 July 2013

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The Bill firstly, proposes amendments to the Private Health Insurance Act 2007 (PHIA) and the Income Tax Assessment Act 1936 (ITAA 1936), that would remove the Private Health Insurance Premium rebate (the rebate) on the component of the health insurance premium which is comprised of the Lifetime Health Cover (LHC) loading.[1] The Bill also proposes amendments to the PHIA, the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA), to repeal provisions around the Incentive Payments Scheme (IPS), that reimburse the rebate in cash to purchasers of complying private health insurance policies.[2]

Background

Around 12.4 million Australians have some form of private health insurance (PHI), which assists them to meet the cost of private hospital treatment and a range of other privately provided health services. Some 46.9 per cent of the population has private hospital cover, while 54.5 per cent have general cover (for ancillary services such as dentistry) or a combination of private hospital and general cover.[3]

The proportion of those covered by PHI has not always been at these levels. Following the introduction of the national health insurance scheme Medicare in 1984, PHI membership began to decline in the face of competition from the ‘free system’.[4] This trend was only arrested and then reversed following the introduction of a suite of policy measures enacted under the Howard Government in the late 1990s.

The three measures mainly associated with halting the decline in PHI and restoring membership levels were: the Medicare Levy Surcharge (MLS) introduced in 1997, the Private Health Insurance Rebate (PHIR) introduced in 1999 and Lifetime Health Cover (LHC) introduced in mid-2000. The most significant improvement to membership levels occurred in the lead up to the introduction of LHC.[5]

Lifetime Health Cover (LHC)

LHC is a financial penalty on those who delay taking out PHI. People who delay the purchase of PHI until after their 31st birthday incur a two per cent loading on their premium for each year they delay purchasing cover.[6] So if a person decides to first purchase private hospital cover at the age of 40they face a 20 per cent higher premium for that policy compared to someone who is purchasing the same policy at age 30. The maximum loading which can accrue over a lifetime is 70 per cent. However, if a person has 10 years of continuous private hospital cover, any LHC loading is removed, provided they retain their hospital cover. Persons born before 1 July 1934 are exempt from LHC loadings.[7]

The LHC measure was originally announced in the 1999–2000 Budget. At the time the Health Minister described LHC as ‘a major and important reform’ that ‘increases the stability of the industry and helps contain the rising cost of health insurance premiums’.[8] The Minister explained:

By seeking to stabilise numbers in private health insurance and improve the risk profile of people with private hospital cover, Lifetime Health Cover will improve the stability of the private health insurance industry and ease the pressure on the public hospital system.[9]

Australia's regime of ‘community rating’ prevents private health insurers from charging higher premiums based on health status, age or claiming history. This effectively restricts the options for health insurers in managing the cost of higher risk members. LHC assists the sector by encouraging younger, healthier people to take out PHI, effectively cross-subsidising older, less healthy and higher claiming members.

Currently, around 1.07 million people, or 14 per cent of policy holders, have a LHC loading applied to their premiums. Notably, the proportion of those who incur a loading has increased every quarter since the introduction of LHC.[10]

Purchasers of PHI can obtain a government rebate on the cost of the premium they pay, subject to a recently introduced means test.[11] The rebate is calculated as a proportion of the premium paid; those on incomes below $84 000 receive the maximum rebate of 30 per cent on the cost of their premium.[12] A person with a LHC loading currently receives a rebate on the total cost of their premium, that is the premium plus any LHC loading. The Minister argues it is ‘irrational to have a Lifetime Health Cover loading that encourages people to take out private health insurance…and then have the government pay a portion of this loading’. She also argues it is ‘unfair to those…who take out private health insurance earlier in life’.[13]

Incentive Payment Scheme

Currently there are three ways in which the rebate can be claimed by a purchaser of PHI: via the Premiums Reduction Scheme (PRS), which is an upfront discount on the premium offered by the health insurer; as a tax offset claimed through the Australian Taxation Office; or via the Incentive Payment Scheme (IPS) which is in the form of a direct payment from a Medicare office.[14]

The vast majority of people eligible for the rebate claim it via the PRS or via the tax offset. Of the estimated $5.3 billion in rebates paid to policy holders in 2011–12, just $2.3 million was paid via the IPS.[15]

The Minister claims that removing the IPS option will thus have little impact on policy holders, and is a ‘simple and low cost option to reduce the administrative burden on insurers, the Department of Human Services and the Australian Taxation Office’.[16] Details of this administrative burden have not been detailed. However, there is some evidence that the administration of the IPS does place additional administrative responsibilities on these agencies. An Australian National Audit Office (ANAO) report in 2005–06 highlighted the fact that both health insurers and Medicare Australia had to maintain separate systems and documentation for the purposes of processing IPS rebates. This was in addition to the PRS systems they had established. The ANAO reported that health funds and Medicare Australia operated two separate IT systems, as well as separate processing documentation, training, records and financial controls:

The ANAO was advised by health industry stakeholders that there are costs for the health funds associated with creating and maintaining IT software to support two separate systems. Industry stakeholders also considered that there would be savings if the IPS system was no longer available and could be turned off without the need for further change.[17]

Basis of policy commitment

The measure relating to LHC was announced in the Mid-Year Economic and Fiscal Outlook (MYEFO), one of two measures intended to reduce the cost of the private health insurance rebate to the Government.[18] The other measure announced in MYEFO—indexing of annual premium rebate increases to the consumer price index (CPI) if CPI is lower than the rate of commercial premium increases—is not addressed in this Bill.

The specific measure around IPS is consistent with the implementation of the Government policy of moving all government service centres to ‘cashless’. From 1 July 2012, all Medicare offices are officially cashless; from that date payments are made via electronic funds transfer (EFT) direct to recipient’s bank accounts.[19]

Committee consideration

The Bill has been referred to the Senate Community Affairs Legislation Committee for inquiry and report by 12 March 2013. Details of the inquiry are at the inquiry webpage.[20]

So far, 10 submissions have been received. The peak body representing health insurers, Private Healthcare Australia, opposes the legislation. It argues that the proposals in the Bill will add complexity to insurance arrangements, create an administrative burden on insurers, increase financial pressure on those with a LHC loading—particularly those on low incomes—and act as a disincentive on taking out PHI adding an extra burden on the public hospital system.

The Australian Physiotherapy Association (APA) also expressed concern. The APA questioned whether the provisions around LHC might prompt consumers who incur a loading to offset the loss of the rebate by downgrading their cover and dropping ancillary benefits. This in turn could have detrimental effects on physiotherapy practices, because most services are provided privately, not through Medicare.

On the other hand, the Consumers Health Forum (CHF) supports the Bill. The CHF argues that the provisions around LHC would encourage consumers to take out PHI earlier in life. However, CHF considers it essential that any changes be clearly communicated to consumers. CHF concedes that there is a risk some consumers may want to drop or downgrade their cover; therefore consumers should be advised of the consequences of such an act.

The provisions around the changes to the IPS did not attract significant comment.

Policy position of non-government parties/independents

The policy positions of non-government parties and Independents were not known at the time of writing.

Position of major interest groups

Comments from stakeholder groups in submission to the Senate Committee have been summarised above.

As noted earlier, the ANAO reported in 2006 that removing the IPS as an option for claiming the rebate was supported by the private health insurance sector because it would reduce administrative costs.

Financial implications

According to the Explanatory Memorandum, the removal of the rebate on LHC would yield savings of $386.3 million over four years.[21] There are no anticipated financial implications for government from the provisions around the IPS, even though the Explanatory Memorandum notes that the purpose of the amendments is to reduce the administrative burden on insurers, the Department of Human Services (which administers the IPS) and the Australian Taxation Office.[22]

Main Issues

The main concern of stakeholders, based on submissions to the Senate Committee, revolve around the provisions affecting LHC and that these will act to discourage the take-up of PHI.

The proportion of people incurring a loading on their health insurance premiums, due to the operation of LHC is notable, particularly because it has been rising. The intention of LHC is to encourage people to take up private health insurance when they are younger and healthier. Yet the number eschewing private cover is growing, despite the combined financial levers of LHC, the Medicare Levy Surcharge on higher income earners who remain uninsured, and the discount of the means-tested rebate. This suggests that the current settings for these levers might need adjustment.

However, removing the rebate from the component of the premium which is subject to a loading is unlikely to be sufficient to prompt a larger proportion of people to purchase PHI while they are younger.

The drivers of what prompts people to take out private health cover are not always financial, however, although financial incentives remain the focus of much government policy activity. An Australian Bureau of Statistics (ABS) survey from 1998 indicated that the chief reason people purchased PHI was ‘security, protection and peace of mind’.[23] Nearly half of all respondents identified security as their main reason for purchasing PHI; just five per cent cited financial reasons or government incentives/penalties. While the absence of recent survey data makes it hard to verify if security issues remain paramount, the fact that the focus of much consumer advertising for PHI products continues to emphasise security and peace of mind, suggests this remains a key driver for many.

While financial considerations also affect consumer behaviour and cannot be ignored, PHI membership levels have remained robust in the face of a number of policy changes affecting PHI affordability. Means testing of the rebate and increasing the Medicare levy surcharge for higher income earners did not result in membership levels falling, as some had warned it would.[24] Nevertheless, it remains to be seen whether the ongoing adjustments to PHI policy settings—with further changes mooted—will impact on consumer confidence in PHI arrangements.

The provisions that would remove the option to claim the rebate via the IPS appear consistent with the preferences of the health insurance sector as they would remove some administrative burden. The provisions are also consistent with the Government policy of implementing ‘cashless’ Medicare offices, and while only a small percentage of consumers are likely to be affected, nevertheless some may find it an inconvenience to be unable to claim a cash rebate directly.

Key provisions

Schedule 1—Lifetime health cover loading amendments

Private Health Insurance Act 2007

Item 2 adds new subsection 22-15(6) which specifies that the amount of the rebatable premium applicable to those in the means-tested income tiers, is reduced by the amount that is attributable to an increase in the premium due to the operation of Division 34, which specifies provisions around LHC loadings.

Income Tax Assessment Act 1936

Item 3 is a consequential amendment. It inserts new paragraph 264BB(2)(gc) into the ITAA 1936 which gives the Commissioner of Taxation authority to obtain information about whether a person’s premium has been increased due to the operation of the LHC provisions.

Item 4 is an applications provision and specifies that the amendment at item 2 of Schedule 1 applies to premiums paid on, or after, 1 July 2013.

Schedule 2—Incentive payments scheme amendments

Private Health Insurance Act 2007

Items 1–5 repeal or replace various paragraphs, headings and sections so that they omit incidental references to the Incentive Payment Scheme and Commonwealth payments in reimbursement of premiums.

Item 6 repeals Division 26, which is the substantive division which provides for the Incentive Payment Scheme.

Items 7–11 repeal or replace various paragraphs, headings and sections in relation to court matters and the administration of health insurers, so that these omit incidental references to the Incentive Payment Scheme.

Item 12–13 replace headings for Division 279 and Division 282, to clarify these and remove references to the Incentive Payment Scheme.

Items 14–18 repeal or replace paragraphs and subsections that refer to provisions that relate to the Incentive Payment Scheme, in relation to recovery matters.

Items 19–20 remove references to Division 26—the Incentive Payment Scheme—in a table which lists what decisions can be reviewed by the Administrative Appeals Tribunal.

Item 21 repeals the definition of ‘incentive payments scheme’ from the Dictionary in Schedule 1 of the PHIA.

Income Tax Assessment Act 1997 and Taxation Administration Act 1953

Items 22–27 make consequential amendments to the ITAA 1997 and TAA 1953 to remove or replace references to Division 26 of the PHIA or the Incentive Payment Scheme.

Savings provisions

Item 28 specifies that despite amendments made in Schedule 2 of the Bill, removing references to Division 26 of the PHIA and the Incentive Payment Scheme, claims lodged before the commencement of the Bill will continue to be considered, and payments made after commencement will continue to be subject to the administrative provisions, including provisions relating to recovery of payments and review of decisions, that applied before commencement.

Concluding comments

The provisions in this Bill are forecast to deliver considerable savings to government. Firstly, the Bill proposes to strengthen the policy intent of financial incentives that encourage early purchase of PHI when people are young and healthy, by removing the rebate from the component of the premium which is attributable to a LHC loading. Current policy settings arguably dilute the impact of LHC, because consumers with a loading on their premium can claim a rebate on the total cost of their premium, including that proportion that can be ascribed to the loading.

However, a number of stakeholders have expressed concern that the provisions will discourage consumers from purchasing PHI or prompt them to downgrade their cover.

The other provisions in this Bill would remove the IPS option of claiming the rebate in cash directly from a Medicare office. This would improve the administrative efficiency of processing claims for the rebate. Only a small number of consumers claim the rebate via the IPS, so any inconvenience is likely to be minimal.

The provisions will come into force in July 2013.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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ISSN 1328-8091

[1].              The Private Health Insurance Act 2007 is available at: http://www.comlaw.gov.au/Details/C2012C00792

              The Income Tax Assessment Act 1936 is available at: http://www.comlaw.gov.au/Details/C2013C00040

[2].              The Income Tax Assessment Act 1997 is available at: http://www.comlaw.gov.au/Details/C2012C00750

              and the Taxation Administration Act 1953 is available at: http://www.comlaw.gov.au/Details/C2013C00069

[3].               Private Health Insurance Administration Council (PHIAC), ‘Quarterly statistics’, September 2012, PHIAC, pp. 4–5, viewed 5 February 2013, http://phiac.gov.au/industry/industry-statistics/data-tables-membership-and-coverage/

[4].               Immediately prior to Medicare’s introduction, PHI membership was around 65 per cent. PHIAC, ‘Statistical trends in membership and benefits data tables’, June 2012, (All States table), viewed 5 February 2013, http://phiac.gov.au/industry/industry-statistics/statistical-trends/

[5].               Following the introduction of MLS and PHIR declines in membership stabilised. It was in the lead-up to the start date of LHC and the “Run for Cover” advertising campaign, that membership levels began to rise. Membership jumped from 32 per cent in March 2000, to 43 per cent in June 2000. PHIAC, ibid.

[6].               The loading applies to those who delay purchasing private hospital cover by the 1st of July following their
31st birthday.

[7].               Certain exceptions also apply to former ADF members, and others. As well, a person can suspend their cover for short periods up to a total of 1094 days over the person’s lifetime, or if they are going overseas, without incurring a loading. See Private Health Insurance Ombudsman, ‘Lifetime health cover’, viewed 7 December 2012, http://www.privatehealth.gov.au/healthinsurance/incentivessurcharges/lifetimehealthcover.htm

[8].               Dr M Wooldridge, ‘Second reading speech: National Health Amendment (Lifetime Health Cover) Bill 1999’, House of Representatives, Debates, 2 June 1999, p. 5753, viewed 7 December 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F1999-06-02%2F0029%22

[9].               Dr M Wooldridge, ‘Second reading speech: National Health Amendment (Lifetime Health Cover) Bill 1999’, House of Representatives, Debates, 9 June 1999, p. 6451, viewed 7 December 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F1999-06-09%2F0029%22

[10].               Private Health Insurance Administration Council, ‘Quarterly statistics’, op. cit.

[11].               For details of the rebate amounts and income levels, see Private Health Insurance Ombudsman, ‘Australian Government private health insurance rebate’, webpage, viewed 7 December 2012, http://www.privatehealth.gov.au/healthinsurance/incentivessurcharges/insurancerebate.htm

[12].               Those aged 65 to 69 receive a rebate of 35 per cent, while those aged over 70 receive a rebate of 40 per cent.

[13].               T Plibersek, ‘Second reading speech: Private Health insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012’, House of Representatives, Debates, 28 November 2012, p. 13 655, viewed 11 January 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F50ef4858-02bd-437b-a64f-599769ecfec6%2F0025%22

[14].               Australian Government, ‘Claiming the Australian Government rebate on private health insurance’, Department of Human Services website, 7 August 2012, viewed 11 January 2013, http://www.humanservices.gov.au/customer/enablers/medicare/australian-government-rebate-on-private-health-insurance/claiming-the-australian-government-rebate-on-private-health-insurance

[15].               Australian Government, Annual report 2011–12, Canberra, Department of Human Services, 2012,
p. 181, viewed 18 December 2012, http://www.humanservices.gov.au/corporate/publications-and-resources/annual-report/resources/1112/. The estimate of rebate expenses is from Australian Government, Budget strategy and outlook: budget paper no. 1: 2012–13, Canberra, Commonwealth of Australia, 2012, p. 6-24,
viewed 18 December 2012, http://www.budget.gov.au/2012-13/content/bp1/html/index.htm

[16].               T Plibersek, op. cit.

[17].               Auditor General, Administration of the 30 per cent private health insurance rebate follow-up audit, Audit report no. 42, 2005–06, Australian National Audit Office, Canberra, 2006, p. 52, viewed 18 December 2012, http://www.anao.gov.au/Publications/Audit-Reports/2005-2006/Administration-of-the-30-Per-Cent-Private-Health-Insurance-Rebate-Follow-up-Audit

[18].               Australian Government, Mid-year economic and fiscal outlook 2012–13, Commonwealth of Australia, Canberra, 2012, p. 50, viewed 18 December 2012, http://www.budget.gov.au/2012-13/content/myefo/html/index.htm.

[19].               Australian Government, ‘Medicare payments go electronic’, statement, Department of Human Services,
15 June 2012, viewed 8 January 2013, http://www.humanservices.gov.au/corporate/media/media-releases/2012/2012-06-15-medicare-payments-go-electronic

[20].               Senate Community Affairs Legislation Committee, Inquiry into the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012, inquiry webpage, viewed 5 February 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=clac_ctte/private_health_insurance/index.htm

[21].               Explanatory Memorandum, p. 2.

[22].               Ibid.

[23].              Australian Bureau of Statistics (ABS), ‘Health insurance survey Australia’, June 1998, Cat 4335.0, ABS, Canberra, viewed 14 January 2013, http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4335.0Main+Features1Jun%201998?OpenDocument

[24].               For example, Private Healthcare Australia warned that 1.6 million people would drop their PHI if the rebate was means tested. See Private Healthcare Australia, Means testing will hurt health care, media release, 16 August 2011, viewed 5 February 2013, http://www.privatehealthcareaustralia.org.au/news/media_releases/means-testing-will-hurt-health-care/