Bills Digest No. 35, 2013–14              28 January 2014

Private Health Insurance Legislation Amendment Bill 2013

Amanda Biggs
Social Policy Section  

Date introduced: 12 December 2013

House:  House of Representatives

Portfolio: Health

Commencement: On Royal Assent

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 Bill 2013 (the Bill) is to amend the Private Health Insurance Act 2007 (PHIA) and repeal the Private Health Insurance Legislation Amendment (Base Premium) Act 2013 (PHILABPA), in order to specify that a single rebate adjustment factor will be applied to all government rebates for private health insurance policies.[1] The Bill provides that the single rebate adjustment factor will be determined in accordance with the Private Health Insurance (Incentives) Rules, made under section 333-20 of the PHIA.[2] The Bill also proposes minor amendments to the PHIA to clarify that, in the Private Health Insurance (Registration) Rules a restricted access group can include one or more classes of persons.[3]

Background

The Australian Government rebate on private health insurance is a means-tested rebate paid to consumers who purchase an approved private health insurance policy.[4] In the 2012–13 Mid-Year Economic and Fiscal Outlook (MYEFO), the former Labor Government announced that from 1 April 2014 the private health insurance rebate would be indexed to the lesser of the increase to the Consumer Price Index (CPI) or the increase in the commercial premium.[5] The intent was to reduce the growth in rebate expenditure, which had become one of the fastest growing components of Commonwealth health expenditure.[6] The Private Health Insurance Legislation Amendment (Base Premium) Act 2013 (PHILABPA), which implemented this measure, received Royal Assent on 29 June 2013. This measure is due to take effect from 1 April 2014.[7]

The legislation to introduce the indexation measure was referred to the Senate Community Affairs Legislation Committee (the Committee) in May 2013. The Committee received a number of submissions expressing concern or opposition to the Bill. For example, the Consumers Health Forum expressed concerns that it would increase the complexity of private health insurance, making it harder for consumers to understand. Health insurers also shared this view, pointing to survey data which showed that consumers already find the complexity of health insurance arrangements a deterrence, and that the measure would add further complexity. Health insurers were also worried about the additional administrative costs they would incur in implementing the measure, particularly because thousands of health insurance products would need an individual rebate calculated.[8]

Some insurers proposed alternative approaches that they argued, would simplify the proposed indexation arrangements. For example, Medibank Private suggested that indexation of the rebate be made at the industry level, rather than the product level:

We suggest the concept of the Base Premium be removed from the Bill and the methodology of indexing be lifted from the product level to an industry wide level. This would see the current Australian Government Rebate levels adjusted annually. Each year the Rebate levels would be reduced by the difference between the growth in premiums and the change in CPI.[9]

The Committee rejected this suggestion, in part because it would not foster competition and large insurers would have a disproportionate level of control over the rebate adjustment.[10]

According to the Minister’s second reading speech, the measures in this Bill will ‘redress implementation concerns’ associated with the PHILABPA, and ‘make it easier for consumers to understand and for insurers to implement’. It also is in line with the Government’s commitments to reduce red tape and unnecessary regulation.[11]

Committee consideration

Selection of Bills Committee

The Selection of Bills Committee resolved to not refer the Bill to a Committee for enquiry.[12]

Policy position of non-government parties/independents

The positions of the Labor Opposition, the Greens, the Palmer United Party and the Independents are not yet known.

Position of major interest groups

Following the passage of the PHILABPA, industry representatives have continued to express their concerns to the new Government. Their purported concerns, as articulated in the Minister’s second reading speech, are that the original measure was ‘unduly complicated, difficult and costly to implement’. Industry estimated that under the original measure they would have to apply a unique rebate calculation to 34,000 different health insurance products, which would result in an implementation cost to industry of at least $15 million.[13]

While the Minister’s speech infers that the proposed provisions are broadly acceptable to the industry as a whole, the Australian Healthcare and Hospitals Association (AHHA) has warned that the real beneficiaries are likely to be the large health funds and that the Bill will disadvantage consumers and smaller funds. According to Alison Voerhoven, CEO of AHHA:

The current proposal is complex and is very likely to impose an additional administrative burden on health insurers, a cost which will inevitably disadvantage smaller funds and be transferred to consumers. Australia’s private health insurance market is very concentrated: the two largest funds have about 57% of all members and the smallest 24 funds have only 8%. Larger funds have a far greater ability to influence premium prices and premium growth than smaller ones. Adjusting the rebate level according to an industry average price increase, rather than at the product level, will lock in existing competition structures.[14]

This view appears to be broadly in line with the view expressed by the Committee when it rejected the indexation proposal from Medibank Private.

Financial implications

The Government considers that the proposed amendments will be cost neutral and not change the financial impact of the original MYEFO measure.[15] This forecast savings of $699.7 million over four years from implementing the indexation measure.

Health insurers have purportedly advised the Government that implementing this Bill would result in administrative savings to them in the magnitude of 80 per cent below the implementation cost of the original indexation measure.[16]

Statement of Compatibility with Human Rights

The Statement of Compatibility with Human Rights can be found at page 2 of the Explanatory Memorandum to the Bill. 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.

Key issues and provisions

Items 5 to 11 and item 12 of Schedule 1 propose the repeal of all provisions in the PHIA which refer to the Base Premium or indexation methodology and the complete repeal of the PHILABPA. These provisions specified that for each product subgroup a base premium would be calculated annually, and an indexation methodology applied which would be the lesser of the CPI increase or the commercial premium increase.

Section 22-15 of the PHIA sets out how the rebate is calculated for policies with one adult beneficiary. (The calculation for policies with more than one adult beneficiary is then based on the single calculation – see section 22-20 of the PHIA.) Item 2 of Schedule 1 proposes to amend section 22-15 by inserting new subsections 22-15(5A) to 5(E). Proposed paragraph 22-15(5A)(a) specifies that for the year beginning 1 April 2014, the percentage of premium rebate to apply to a policy holder will be calculated by multiplying the percentage of the rebate from that year by the proposed adjustment factor, to be specified in accordance with the Private Health Insurance (Incentives) Rules (proposed subsection 22-15(5E)). Proposed subsection 22-15(5E) also specifies that if the adjustment factor is more than 1, it is to be taken as 1 for the purposes of calculation. Proposed paragraph 22-15(5A)(b) specifies that for later years, the preceding year’s percentage would be multiplied against the adjustment factor.

Proposed subsection 22-15(5D) specifies that each adjustment year would operate for 12 months from 1 April.

Item 4 of Schedule 1 proposes to insert new definitions into the Dictionary for the ‘adjustment factor’ and the ‘adjustment year’.

The Bill does not specify how the adjustment factor will be determined, nor if the methodology must include a CPI component. In the Minister’s second reading speech the adjustment factor is simply described as ‘a ratio representing the proportion of the increase in the consumer price index compared to the average private health insurance premium increase’.[17] This suggests that the CPI will be considered in the development of the adjustment factor, but still does not specify how it will be applied.

The Bill also proposes an amendment to section 126-20 of PHIA, which deals with restricted membership health insurers. These insurers are allowed to offer restricted membership to specific groups, such as professional groups like teachers or police. Item 13 of the Bill proposes subsection 126-20(8), which clarifies that a group can consist of one or more classes or people, whether or not they are described in the Act as belonging to a particular profession.

Concluding comments

The Bill proposes adjustments to the way in which future indexation of the private health insurance rebate will be calculated, in order to make this process simpler and less administratively burdensome for industry. Indexation of the rebate linked to CPI increases is forecast to save the Government nearly $700 million over the forward estimates.

One effect of indexation over time, regardless of how it is calculated, is that while Government outlays on the rebate should reduce, consumers will receive a lower level of rebate as each year their rebate amount is adjusted downwards by an adjustment factor linked to CPI. As the AHHA points out those with membership of smaller funds may be particularly negatively affected as smaller funds have less capacity to control costs and so are more likely to pass these onto consumers in the form of higher premiums. Consumers in Australia already face high out-of-pocket costs relative to other OECD countries, so the measure may add to consumer concern over health costs.[18]

Another issue is the uncertainty over precisely how the adjustment factor will be determined. Unlike the original indexation arrangement, where the methodology for indexation was specified in legislation, the proposed provisions in this Bill do not specify the methodology but allocate this process to a legislative instrument. Some may argue this will make the process of rebate setting less transparent.

Given the level of complexity that already surrounds private health insurance, consumers may require additional information at the time the average premium rise is announced by Government that helps explain the impact indexation will have on the level of their rebate. It will also be important to monitor the number and scope of complaints to the Private Health Insurance Ombudsman, in order to gauge whether the new process of indexation is understood in the community.

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

[1].              Private Health Insurance Act 2007; Private Health Insurance Legislation Amendment (Base Premium) Act 2013, accessed 17 January 2014.

[2].              Private Health Insurance (Incentives) Rules 2012 (No. 2), accessed 17 January 2014.

[3].              Private Health Insurance (Registration) Rules 2009 (No. 2), accessed 17 January 2014.

[4].              The rebate is only available for policies that include hospital cover. Singles on incomes below $88,000 (families below $176,000) receive a 30 per cent rebate; singles on incomes between $88,001–$102,000 (families between $176,001–$204,000) receive a 20 per cent rebate; singles on incomes between $102,001–$136,000 (families between $204,001–$272,000) receive a ten per cent rebate. Those on incomes above these thresholds receive no rebate. Higher rebate amounts apply to older groups. See Australian Government, Private Health Insurance Ombudsman, ‘Australian Government Private Health Insurance Rebate’, webpage, accessed 9 January 2014.

[5].              Australian Government, Mid-year economic and fiscal outlook 2012–13, Commonwealth of Australia, Canberra, 2012, p. 237, accessed 8 January 2014. Savings of $699.7 million over four years are forecast.

[6].              Ibid., p. 9.

[7].              For details of this legislation, readers are advised to consult the Bills digest. A Biggs, Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, Bills digest, 123, 2012–13, Parliamentary Library, Canberra, 2013, accessed 8 January 2014.

[8].              Senate Community Affairs Legislation Committee, Private Health Insurance Legislation Amendment (Base Premium) Bill 2013 [Provisions], The Senate, Canberra, 2013, pp. 3–4, accessed 9 January 2014.

[9].              Medibank Private, Submission to the Senate Community Affairs Legislation Committee, Inquiry into the Private Health Insurance Legislation Amendment (Base Premium) Bill 2013, 6 June 2013, p. 6, accessed 9 January 2014.

[10].              Senate Community Affairs Legislation Committee, op. cit., p. 8.

[11].              P Dutton, ‘Second reading speech: Private Health Insurance Legislation Amendment Bill 2013’, House of Representatives, Debates, 12 December 2013, p. 2584, accessed 8 January 2014.

[12].              Senate Selection of Bills Committee, Report No. 11 of 2013, The Senate, Canberra, 2013, accessed 8 January 2014.

[13].              P Dutton, op. cit.

[14].              Australian Healthcare and Hospitals Association (AHHA), Large private health insurers the only winners in proposed rebate indexation changes, media release, 12 December 2013, accessed 9 January 2014.

[15].              Explanatory Memorandum, Private Health Insurance Legislation Amendment Bill 2013, p. 1, accessed 8 January 2014.

[16].              P Dutton, op. cit.

[17].              Ibid.

[18].              In terms of annual individual expenditure, the Consumers Health Forum (CHF) recently estimated that Australians pay an average of $1075 per year out-of-pocket on health services. This is $94 higher than the average paid in other developed countries. A Biggs, ‘Health spending: patients bearing higher costs,’ FlagPost weblog, 2 May 2013, accessed 10 January 2014.