Bills Digest No. 123, 2012–13

31 May 2013

Private Health Insurance Legislation Amendment (Base Premium) Bill 2013

Amanda Biggs
Social Policy Section 

This Bills Digest replaces an earlier version dated 30 May 2013, to include references to DisabilityCare.

Date introduced: 15 May 2013

House: House of Representatives

Portfolio: Health and Ageing

Commencement: Sections 1 to 3, Schedule 1 items 4 to 5 and 7 to 12 and Part 3 on Royal Assent; Schedule 1, items 1 to 3 and item 6 from 1 April 2014. Schedule 1, Part 2 commences immediately after the commencement of items 1 to 3 of Schedule 1 (that is, 1 April 2014), but if item 2 of Schedule 1 of the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2013 does not commence before 1 April 2014, the provisions in Part 2 of Schedule 1 of the Bill do not commence at all.[1]

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 of the Bill

The purpose of the Private Health Insurance Legislation Amendment (Base Premium) Bill 2013 (the Bill) is to amend the Private Health Insurance Act 2007 (the Act) to establish a ‘base premium’ which will then be indexed annually based on the lesser of the Consumer Price Index (CPI) percentage change or the annual increase to the commercial premium charged by the private health insurer.

Background

Around 12.5 million Australians have private health insurance cover to assist with the cost of private hospital treatment and ancillary services such as dental treatment, which are not covered by Medicare.[2] 46.9 per cent of the population have private hospital cover, while 54.7 per cent have cover for general treatment (dental, optical, chiropractic).[3] Some 34 health insurers currently market around 20,000 health insurance products.[4]

In the 2012–13 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced two reforms around the private health insurance rebate. These were intended to generate savings in order to help fund the Dental Health Reform package announced on 29 August 2012.[5] In addition, the Budget included an announcement that savings from these reforms would also help fund DisabilityCare.[6] The two MYEFO savings measures were the removal of the private health insurance rebate from the Lifetime Health Cover loading component and indexing the rebate amount to the lesser of the CPI or the commercial premium increase. Legislation to implement the first measure was introduced in November 2012, and is yet to pass.[7]

The rebate is a government-funded reimbursement to the consumer for the cost of the premium for private hospital cover. It was introduced by the Howard Government as part of a suite of measures to encourage private health insurance membership in order to reduce pressure on the public system.[8] The rebate can be taken as an upfront discount on the premium when purchasing health insurance (known as the Premium Reduction Scheme), or claimed later as a tax offset. The vast majority opt to take the rebate as an upfront deduction.[9] Currently, the amount of the rebate is determined according to age and a means test.[10] This Bill does not alter this arrangement.

The cost to government of the rebate is estimated to be around $5.56 billion in 2012–13, up from $5.31 billion in 2011–12.[11] The cost of the rebate, which has experienced real growth per annum of just above six per cent, prompted the decision to impose a means test and increase the Medicare levy surcharge for higher income earners, from 1 July 2012.[12]

The value of the rebate as an effective tool in taking pressure off public hospitals is debateable.[13] It is notable that the most significant increase in membership occurred not when the rebate was introduced, but later when the Lifetime Health Cover campaign, ‘Run for cover’, was being promoted.[14]

Premium setting

The rebate is a proportion of the premium charged by health insurers (adjusted for age and income). The premium setting process itself is highly regulated in Australia. It involves the health insurers making annual submissions to the Health Minister for permission to increase the premiums they charge for their health insurance products.[15] In assessing these applications, the Minister seeks advice from the industry regulator, the Private Health Insurance Administration Council (PHIAC), and ‘considers whether the premium increases are the minimum necessary to maintain the affordability and value of private health insurance as a product whilst maintaining insurer solvency requirements, support benefit outlays and meet prudential standards’.[16] The process can involve negotiations with the health insurer if the Minister is not satisfied the amount sought is in the public interest. Early each year the Minister announces the outcome of this process which is the average premium increase that will apply from April that year. On 8 February 2013, Minister Plibersek announced she had approved an average premium increase of 5.06 per cent to apply from 1 April 2013.[17]

Over the last decade premium rises have tracked well above the CPI, at around an average of 6.1 per cent.[18]

Arguably, this negotiated process directly involving the Minister makes the premium setting process inherently political. This has prompted calls for a more independent and transparent process for premium setting.[19]

Changing how the rebate is calculated

The provisions in this Bill do not propose to alter the premium setting process. This will continue to occur as per current arrangements. Rather, the provisions would change the manner in which the rebate itself is calculated so that it would cease being automatically linked to commercial increases in premiums. Instead, the rebate calculation would be directly linked to a new indexation factor (the ‘base premium’ amount defined in new section 22-17 and new subdivision 22-C). This indexation factor would be the lesser of the CPI (the ‘CPI indexation factor’ defined at new section 22-65) and the actual commercial premium increase (the ‘premium indexation factor’ defined at new section 22-60).

A ‘base premium’ (defined in new section 22-50) would apply to all policies in the same product subgroup, based on those available on or before 1 April 2013. This base premium would be multiplied by the ‘base premium indexation factor’ (which is defined in new section 22-55 as either the CPI or commercial premium increase, whichever is lower). This indexed base premium amount would be used to calculate the rebate that is payable to a consumer.[20]

For product subgroups that become available after 1 April 2013 a ‘weighted average ratio’ (defined in new section 22-50) will be used to determine the base premium for these products. This weighted average ratio will be determined by new Private Health Insurance (Incentives) Rules, on advice from PHIAC.

Calculating the CPI indexation factor would involve comparing the CPI number from the most recent December quarter with the CPI from the preceding December quarter (as explained in new section 22-65).

Increases in CPI traditionally run at a lower rate than annual commercial increases, as noted earlier. If these historical trends continue, over time commercial premiums should rise faster than the base premium amount—meaning that the value of the rebate to consumers will lessen over time. As an example, if a policy cost $1,600 in April 2013, this becomes the base premium amount for the calculation of the rebate for 2014. The indexed base premium amount for 2014 then becomes the basis for the following year’s calculation, and so on. The example in the Explanatory Memorandum shows that if commercial premiums increase by a factor of 5.5 per cent each year, then by April 2016 the commercial premium cost will be $1,879.[21] However, the base premium will be only $1,723, if CPI increases by 2.5 per cent each year. The rebate payable to a consumer will be calculated against this lower figure.

Potential impacts

Whether the measures in this Bill will lead to a decline in health insurance membership remains to be seen; previous forecasts of a mass exodus when the means test was introduced did not materialise, in fact, membership rose. However, the technical requirements the provisions will impose on health insurers (who calculate the rebate in most instances) could be burdensome. Furthermore, options for health insurers to keep their costs and their premiums low remain limited.

As well as paying out on claims from members—in 2011–12, more than $14 billion in claims were paid, an increase of 9.3 per cent on the previous year—Australian health insurers face a range of costs, many of which are beyond their direct control.[22] Under community rating principles, health insurers cannot discriminate between healthy and unhealthy members, or on age (other than those permitted under Lifetime Health Cover). Our ageing population and the rise in chronic conditions such as diabetes mean that insurers are facing higher claims; but many younger, healthier people still forego or delay purchasing health cover despite policy measures designed to encourage uptake. This results in a smaller pool of healthier, younger members to offset the cost of older, sicker members who make more frequent claims. In addition, insurers face rising costs associated with the adoption of new and often expensive technologies and other cost pressures beyond their control, such as prostheses costs and annual increases to the fees of services covered by the Medicare Benefit Schedule. Premiums are the main source of revenue for health insurers, so regular rises assist insurers to meet unavoidable rising costs while remaining solvent.

Committee consideration

Senate Community Affairs Legislation Committee

The Bill has been referred to the Senate Community Affairs Legislation Committee for inquiry and report by 17 June 2013. Details of the inquiry are at the inquiry’s home page.[23] At the time of writing this digest, no submissions had been received or hearings held.

Policy position of non-government parties/independents

In his second reading speech, Opposition Shadow Health Minister Peter Dutton described the legislation as ‘a detrimental Bill by a bad government’, that was being ‘rushed’ through the Parliament.[24] However, he reserved his comments on whether the Opposition would support the Bill until it was discussed at a party room meeting. Media reports suggest that the Opposition party room subsequently resolved to not oppose the Bill, although they agreed to continue to oppose a related Bill.[25]

The Greens support the Government’s proposed Dental Reform package, but it is not clear if they support this Bill, which would help fund this package.

The position of the various Independents is not clear. Peter Slipper has previously indicated he opposes changes to private health insurance arrangements, while Bob Katter has expressed support for encouraging private health insurance membership, which might lead him to oppose this Bill.[26]

Position of major interest groups

The peak body representing health insurers, Private Healthcare Australia issued a statement noting that consumers are likely to bear the impact of the indexation changes, by paying more for health care. It expressed concern that ‘any move which might result in people leaving Private Health Insurance will also have a negative effect on Public Hospitals’.[27]

Chris Rex, President of the Australian Private Hospitals Association (APHA) has criticised both the proposal to remove the rebate from the Lifetime Health Cover Loading (addressed in a separate Bill) and the provisions in this Bill, describing them as ‘regressive’. He is concerned that the indexation of the rebate to CPI will ‘erode the value of the rebate’, and shift the burden of health care costs back onto taxpayers.[28]

According to an article in a health insurance industry newsletter, implementing this Bill will be a ‘headache for insurers’ who will ‘need time to prepare for this big change’ as they will have to prepare their systems ‘to handle the different rebate increases’.[29]

Financial implications

This measure is forecast to generate savings of $699.7 million over four years.[30]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[31]

Key provisions

Main amendments

Section 22-15 of the Act sets out how the rebate is calculated for policies which have only one adult beneficiary.[32] Under the current provision, the rebate is calculated by reference to the actual premium paid or payable. Item 1 removes references in existing paragraphs 22-15(1)(a),(b) and (c) of the Act to the amount of the premium payable, and replaces these with references to the ‘base premium amount for each day’, because in future the amount of the benefit (rebate) will be determined by indexation of the base premium, rather than the actual premium payable by the policy holder.

Section 22-20 performs a similar function to section 22-15, but relates to policies which have more than one adult beneficiary. Accordingly, item 3 makes an amendment that corresponds to the changes made by item 1, by repealing and replacing paragraph 22-20(b) so that the rebate for policies with more than one adult beneficiary will be calculated by reference to the ‘base premium amount’, rather than the actual premium payable by the policy holder.

Item 2 inserts a new section 22-17 which defines the base premium amount that will be used to determine the share of the benefit (rebate) for policy holders. New subsection 22-17(1) defines the base premium amount as the amount which is paid or payable for a product subgroup for a set period, expressed as a daily amount. New subsection 22-17(2) provides that the base premium for payments made by instalment is proportional to the payment made. New subsection 22-17(3) provides that for the purposes of working out the total premium the application of lifetime health cover (which applies an annual two per cent loading on a premium if cover is taken out after the age of 30) and allowable discounts for cover, be taken into account; and that the application of the premium reduction scheme in Division 23 of the Act be disregarded. New subsection 22-17(4) allows for a future day of payment for the base premium to be calculated, if required.

Item 4 inserts a new subdivision 22-C—Base Premium into the Act, comprised of new sections 22-50 to 22-65. New subsection 22-50(1) provides that for policies in a product subgroup that were available on or before 1 April 2013, the base premium will be the premium charged on 1 April 2013.[33] New subsection 22-50(2) provides that the base premium will be indexed on 1 April each year, according to the indexation provisions specified in new subsection 22-55.

New subsection 22-50(3) provides that the base premium for a product subgroup that becomes available after 1 April 2013, will be the premium charged at the time the product is introduced (expressed as an amount per day) multiplied by a ‘weighted average ratio’. New subsection 22-50(4) provides that for this subgroup, the base premium will also be indexed in April each year. New subsections 22-50(5) and (6) provide that the ‘weighted average ratio’ will be determined by the Private Health Insurance (Incentives) Rules. It also provides that these Rules may provide for the Private Health Insurance Administration Council (PHIAC) to give advice on determining the ‘weighted average ratio’ and require health insurers to provide relevant information to PHIAC. New subsection 22-50(7) specifies that for the purposes of determining the base premium for a subgroup, any change in premium due to the operation of the premium reduction scheme, lifetime health cover and allowable discounts be disregarded.

New subsection 22-55 specifies the indexation that will be applied to the base premium in April each year. New subsections 22-55(2) and (3) specify that the base premium is first multiplied by its base premium indexation factor (which is defined in new subsection 22-60), then rounded down to the nearest cent, even where the base premium indexation factor is less than one. New subsection 22-55(4) specifies that the base premium indexation factor is the lesser of the ‘premium indexation factor’ and the ‘CPI indexation factor’ (defined at new subsection 22-65), as of 1 April.

The Explanatory Memorandum provides a number of useful examples that the reader is encouraged to consult for further clarification.[34]

New subsection 22-60(1) specifies that the ‘premium indexation factor’ to apply to a product subgroup will be calculated by dividing the premium for that subgroup by the ‘reference premium’. New subsection 22-60(2) defines the reference premium as the premium charged for that policy subgroup in the preceding year, if the subgroup was made available on or before 1 April in the preceding year; otherwise it would be the premium charged when the subgroup was first made available. New subsection 22-60(3) specifies the rounding process. New subsection 22-60(4) directs that any changes in premium as a result of the operation of the premium reduction scheme, lifetime health cover or allowable discounts be disregarded.

New section 22-65 specifies the CPI indexation factor to apply on 1 April each year. New subsection 22-65(1) provides that this is calculated by dividing the most recent December quarter CPI index number by the December quarter CPI index number from the year preceding the most recent December quarter. New subsection 22-65(2) defines the CPI index number as the weighted average of the eight capital cities as published by the Australian Statistician. New subsection 22-65(3) specifies the rounding process.

Minor and contingent amendments

Amendments from items 5 to 12 are addressed adequately in the Explanatory Memorandum.

Item 13 is a contingent amendment that relies on the passage of the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012. It repeals subsection 22-15(6) of the Act, as proposed by that Bill. As explained above, section 22-15 of the Act sets out how the rebate is calculated for policies which have only one adult beneficiary. Under the current provision, the rebate is calculated by reference to the actual premium paid or payable. Proposed subsection 22-15(6) of the Act would continue the current reference to the actual premium payable. However, on the commencement of the amendments made by the current Bill, this will no longer be appropriate as the rebate calculation will be based on the base premium amount and not the actual amount of premium. Accordingly, proposed subsection 22-15(6) will be redundant.

Concluding comments

The provisions in this Bill are designed to generate savings to help pay for two other policy commitments, the Dental Health Reform package and DisabilityCare. Broadly, the provisions alter the way in which the private health insurance rebate is calculated so that it would be aligned with changes to the CPI, rather than commercial premium rises. Historically, commercial premium rises have tracked well above CPI, meaning that substantial savings to government can be achieved by making this adjustment.

The Government applies a number of policy levers to encourage private health insurance membership in order achieve the policy objective of taking pressure off the public system—the rebate, Lifetime Health Cover and the Medicare levy surcharge. While the value of the rebate as an effective tool on its own is debateable, nevertheless, if it becomes less attractive, it is not clear if the other two policy levers—Lifetime Health Cover and the Medicare levy surcharge—would remain sufficient to continue to meet this policy objective.

Health insurers will be required to undertake additional administrative tasks associated with calculating the annual indexation of the rebate, and some may find this an added burden, particularly given the short time frame for implementation. Insurers have limited capacity to keep their premiums as low as CPI in an environment where many of their business costs are rising and lie beyond their direct control. Therefore, the historical trend of premium rises tracking above CPI can be expected to continue. Consumers will eventually carry the cost of these premium increases, as the amount of the rebate payable will decline over time. Although previous predictions that changes to private health insurance arrangements would lead consumers to drop or downgrade their health insurance en masse, or utilise the public system more frequently have failed to materialise, such predictions may re-emerge during debate on this Bill.

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 Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012 is currently before the Parliament. If enacted it will be the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2013 and will commence on 1 July 2013.

[2].              Private Health Insurance Administration Council, (PHIAC), ‘Statistical trends in membership and benefits data tables March 2013’, PHIAC website, March 2013, accessed 27 May 2013.

[3].              Ibid. The vast majority have both general and private hospital cover.

[4].              Department of Health and Ageing (DoHA), ‘2013 private health insurance premium round outline of premium approval process’, DoHA website, accessed 27 May 2013.

[5].              Australian Government, Mid-year economic and fiscal outlook 2012–13, Commonwealth of Australia, Canberra, 2012, p. 237, accessed 27 May 2013.

[6].              Australian Government, DisabilityCare Australia: budget 2013–14, Commonwealth of Australia, Canberra, 2013, p. 4, accessed 31 May 2013.

[7].              For details see A Biggs, Private Health Insurance Amendment (Lifetime health Cover Loading and Other Measures) Bill 2012, Bills digest, 66, 2012–13, Parliamentary Library, Canberra, 2013, accessed 27 May 2013.

[8].              The other two measures being Lifetime Health Cover and the Medicare levy surcharge. The rebate and the other two policies are designed take pressure off the public system by encouraging private health insurance membership. See M Wooldridge, ‘Second reading speech: Private Health Insurance Incentives Bill 1998’, House of Representatives, Debates, 12 November 1998, p. 263, accessed 28 May 2013.

[9].              Over 99.9 per cent of rebate claims are done this way. 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. 13,656, accessed 28 May 2013.

[10].              In 2012, individuals on incomes below $84,000 (or families on a combined income below $168,000) receive a 30 per cent rebate on their premium. This falls to 20 per cent for individuals on incomes below $97,000 (or families below $194,000). The rebate falls to 10 per cent for individuals on incomes below $130,000 (or families below $260,000). No rebate is payable for individuals with income over $130,001 (or families over $260,001). Higher rebate amounts apply to those aged 65–69, and those over 70. Amounts indexed annually. Private Health Insurance Ombudsman (PHIO), ‘Private health insurance rebate’, PrivateHealth website, accessed 30 May 2013.

[11].              Australian Government, Budget strategy and outlook: budget paper no. 1: 2013–14, Commonwealth of Australia, Canberra, 2013, p. 6–27, accessed 27 May 2013; Australian Government, Budget strategy and outlook: budget paper no. 1: 2012–13, p. 6–24, accessed 29 May 2013,

[12].              This year’s budget reported real growth of 6.3 per cent Australian Government, Budget strategy and outlook: budget paper no. 1: 2013–14, op. cit., p. 6–30.

[13].              A Biggs, ‘Debate: does the private health insurance rebate relieve pressure on public hospitals?’ FlagPost weblog, 1 June 2011, accessed 28 May 2013.

[14].              PHIAC, ‘Statistical trends in membership and benefits data tables’, op. cit. This graph shows that in the lead up to the introduction of Lifetime Health Cover, membership grew dramatically.

[15].              DoHA, ‘2013 private health insurance premium round outline of premium approval process’, op. cit.

[16].              Ibid.

[17].              T Plibersek, Press conference: private health insurance premium increases, transcript, Sydney, 8 February 2013, accessed 8 May 2013.

[18].              A Biggs, Private health insurance premium increases—an overview and update, Background note, Parliamentary Library, Canberra, 1 March 2012, p. 3, accessed 27 May 2013.

[19].              Deloitte Access Economics, The future of private health insurance premium-setting, Deloitte, November 2012, accessed 27 May 2013.

[20].              The amount of the rebate varies according to the application of a means test. See PHIO, op. cit.

[21].              Explanatory Memorandum, Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, p. 9, accessed 29 May 2013.

[22].              DoHA, ‘2013 private health insurance premium round outline of premium approval process’, op. cit.

[23].              Senate Standing Committee on Community Affairs, Inquiry into the Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, The Senate, Canberra, 15 May 2013, accessed 29 May 2013.

[24].              P Dutton, ‘Second reading speech: Private Health Insurance Legislation Amendment (Base Premium) Bill 2013’, House of Representatives, Debates, 27 May 2013, p. 97, accessed 28 May 2013.

[25].              P Coorey, ‘Coalition backs down on health insurance’, The Australian Financial Review, 28 May 2013, p. 1, accessed 28 May 2013.

[26].              J Heath, ‘Independents won’t back health Bill’, The Australian Financial Review, 5 April 2013, p. 15, accessed 28 May 2013.

[27].              Private Healthcare Australia, ‘PHA statement regarding MYEFO’s private health insurance measures’, Private Healthcare Australia website, 22 October 2012, accessed 28 May 2013.

[28].              C Rex, The attacks continue, Private Hospital, December 2012, p. 8, accessed 28 May 2013.

[29].              Editorial, ‘Government “abolishing health insurance rebate by stealth”’, Life+HealthInsuranceNews.com.au, website, 22 May 2013, accessed 28 May 2013.

[30].              Explanatory Memorandum, Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, op. cit., p. 2.

[31].              The Statement of Compatibility with Human Rights can be found at page 3 of the Explanatory Memorandum to the Bill, op. cit.

[32].              The Private Health Insurance Act 2007, viewed 30 May 2013.

[33].              ‘Product subgroup’ is defined at subsection 63-5(2A) of the Act. It generally refers to policies that cover specific subgroups, such as singles or families.

[34].              Explanatory Memorandum, Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, op. cit.,
pp. 9–10.