RESEARCH PAPER SERIES, 2017–18              4 August 2017

Private Health Insurance: a quick guide

Amanda Biggs

Social Policy Section

Introduction

The financing arrangements for health care in Australia are complex, reflecting both historical developments unique to Australia and its federal system of government.

Australia's health system is a mix of public and private health care. Broadly, publicly-financed health care primarily refers to services funded through government programs such as Medicare and the Pharmaceutical Benefits Scheme, as well as public hospital services that are jointly funded by the Commonwealth and the states and territories. In addition, some health services are funded through private health insurance, individual out-of-pocket payments, and third party insurers such as motor vehicle insurers.

It is not mandatory to have private health insurance cover. Under Medicare, all Australians are eligible for subsidised medical treatment and free treatment as a public patient in a public hospital. However, private health insurance provides a choice of doctor, can help with the cost of treatment in a private hospital, and the cost of ancillary treatments not covered by Medicare such as dental, optical and physiotherapy.

This quick guide outlines the broad arrangements around private health insurance that exist today. It provides brief information on the industry and regulatory arrangements, private health insurance membership and types of cover, government surcharges and incentives, and key features of private health insurance in Australia.

Current private health insurance arrangements

Private health insurance sector

The origins of private health insurance lie in the friendly and mutual societies that developed in the 19th century, which, for a contributory fee, provided members with a range of medical services. These entities were typically linked to a specific industrial sector, such as railway workers, police or teachers.

Today’s private health insurance sector comprises some 37 registered private health insurers, a mix of not-for-profit insurers (mutual organisations) and for-profit insurers. This number also includes restricted membership funds which only provide cover to members of a specified industry or group. Private health insurers must comply with regulatory and prudential standards, including those listed below. Private health insurers can operate nationally, or be based in a particular jurisdiction or region.

According to industry regulator APRA, in 2015–16 private health insurers paid nearly $19 billion in benefits to members (see tab ‘Fin Perf’). Of this $14 billion in benefits was paid for hospital treatment which includes treatment in private hospitals, public hospitals, day hospitals and hospital substitute treatment (see tab ‘Bens by Cat’). Revenue (primarily from premiums, but also from investments) totalled around $22.5 billion. Management expenses totalled around $1.9 billion, or 8.5 per cent of total revenue (see tab ‘Fin Perf’).

Legislation and governance

Private health insurance is regulated primarily under the Private Health Insurance Act 2007 , the Private Health Insurance (Prudential Supervision) Act 2015, and related rules and regulations. Private health insurance is administered by the Department of Health with prudential oversight provided by the Australian Prudential Regulation Authority (APRA), a role previously performed by the Private Health Insurance Administration Council. Consumer complaints are handled by the Private Health Insurance Ombudsman, which sits within the Office of the Commonwealth Ombudsman and produces a State of the Health Funds report annually. Broader consumer and competition issues are dealt with by the Australian Consumer and Competition Commission (ACCC), which also provides annual reports on the sector to the Senate.

Types of private health insurance

There are two types of private health insurance: hospital, and general treatment (sometimes called ancillary or extras)—or these can be combined. Private health insurance does not cover services that are provided out of hospital and which are covered by Medicare, such as general practitioner services. Private health insurance coverage for the cost of ambulance services varies across jurisdictions. Private health insurance is available for singles, couples, and families.

Private hospital cover

Private hospital insurance only covers services for which a Medicare benefit is payable, as listed in the Medical Benefits Schedule (MBS). Services not listed in the MBS, such as plastic surgery for cosmetic reasons, are not covered by private health insurance. Hospital cover includes hospital substitute treatment, such as hospital-in-the-home care (subject to medical approval).

Medicare covers 75 per cent of the listed Medicare fee for hospital services; private hospital insurance covers the remaining 25 per cent (known as ‘the gap’). Private hospital insurance may cover part or all of any amount charged above the gap, and some or all of the costs of accommodation and operating theatre fees, drugs, prostheses, and diagnostic tests, depending on the policy and whether the insurer has agreements with hospitals.

Broadly, four levels of private hospital cover are offered, with varying levels of exclusions or restrictions:

•        public cover—covers the lowest benefit permitted in a public hospital, but the patient retains a choice of doctor

•        basic cover—low level benefit covering a minimal number of services with a range of exclusions and out-of-pocket costs

•        medium cover—includes some restrictions and exclusions, but covers a broader range than basic cover and offers lower benefits than top cover and

•        top cover—comprehensive; must cover all services listed in the MBS.

The National Health Reform Agreement allows patients with private hospital insurance who are admitted to a public hospital to choose whether to be admitted as a public or private patient. A recent report from the Independent Hospital Pricing Authority shows that the proportion of public hospital activity funded through private health insurance has grown in recent years and suggests this is driven by public hospitals encouraging patients to use their private cover. This has prompted the Australian Private Hospitals Association to express concern that this may drive up the cost of private health insurance premiums, while the Health Minister Greg Hunt said he would be concerned if this lengthened public hospital waiting lists.

General or ancillary cover

General treatment (or ancillary or extras cover) provides benefits for out-of-hospital services such as dental, optical, physiotherapy, natural therapies and non-Pharmaceutical Benefits Scheme medicines.

Membership levels

According to APRA statistics, as at March 2017 some 11.4 million Australians had private hospital cover (around 46.5 per cent of the population) and 13.5 million had ancillary or general cover (around 55.5 per cent of the population).

Private health insurance membership as a proportion of population initially fell after Medicare was introduced in 1984 (see chart below from APRA). However, following the introduction of measures to encourage membership, the proportion covered increased. Since September 2015, private hospital coverage as a proportion of the population has declined from 47.4 per cent to 46.5 per cent.

Hospital treatment coverage (insured persons as a proportion of population)

Source: APRA

Complexity of products

Private health insurance is becoming more complex. A range of different co-payments, exclusions and restrictions can apply, making it increasingly difficult for consumers to choose a suitable policy. The number of insurance products on offer is not clear either. In the ACCC’s 2014–15 report to the Senate, it estimated there were around 46,500 private health insurance products as at June 2015 (p. 35). More recently, the Private Health Insurance Ombudsman clarified that this estimate (based on the number of Standard Information Statements (SIS) which summarise the key product features) included products that are no longer available. Removing these brings the total number of SISs to 27,281 as at January 2017, but this also includes products offered by restricted membership funds.

The government advises consumers to shop around for the best value. Consumers can use a government website to compare policies, or they can use a number of commercial comparator websites. However, according to a recent Choice survey, consumers still report difficulties in comparing policies.

Consumer incentives and penalties

As already noted, a number of government incentives and penalties apply to encourage greater participation in private health insurance. These are explained briefly below.

Lifetime Health Cover

Introduced by the Howard Government in July 2000, Lifetime Health Cover (LHC) is a two per cent annual loading on the cost of premiums for people over 31 who delay taking out private health insurance. The maximum loading is 70 per cent. It means that a person who takes out hospital cover at age 40 for the first time will pay 20 per cent more on their premium than someone who buys the same hospital cover at age 30. After ten years of continuous cover any LHC will cease to apply. Those with LHC are allowed specified ‘permitted days’ without cover. For example, if they travel overseas they can choose to be without hospital cover for periods totalling 1,094 days (or three years).

According to the latest industry statistics, in March 2017 some 13 per cent of adult policyholders had incurred a LHC loading.

Private health insurance rebate

The private health insurance rebate is an income-tested government rebate on the cost of private health insurance premiums for hospital, general treatment and ambulance policies. Introduced in 1999, the rebate originally provided a 30 per cent discount on premiums for those under 65, with higher rebates for older Australians. Income testing was introduced in 2012, resulting in those on incomes above an indexed threshold receiving a lower rebate or no rebate at all. From 2014, the calculation of the rebate changed from a flat 30 per cent (higher for older policyholders) to the difference between the Consumer Price Index (CPI) and the industry weighted average increase in premiums. Over time, this has resulted in a lower rebate being available. Income tiers and their applicable rebate levels are published by the Government each year from 1 April. The income tiers used for income testing are normally indexed annually, but were frozen at 2014–15 levels until 2018 as part of a Budget Savings Measure. The Government announced in the 2016–17 Budget that it would maintain the freeze until 2021. Legislation to enact this extension was passed in September 2016.

Medicare Levy Surcharge

The Medicare Levy Surcharge (MLS) is an additional levy (on top of the 2.0 per cent Medicare levy) imposed on high-income earners who decline to purchase private health insurance. The surcharge is calculated at a rate of between 1.0 to 1.5 per cent of income.

The same budget savings measure which froze the income tiers for the private health insurance rebate has also frozen the income tiers for the purpose of determining liability for the MLS.

Features of private health insurance in Australia

Private health insurance in Australia has some notable legislated features.

Community rating

Private health insurance in Australia is community rated, not risk rated like other insurance products such as life insurance. Community rating requires that private health insurance policies be offered at the same price irrespective of an individual’s risk factors such as age (apart from the LHC age loading), health status, previous claiming history or how frequently they need health care. Private health insurers participate in a risk equalisation scheme which partially compensates insurers with a riskier membership profile.

Portability and waiting times

The portability rule allows consumers to switch to another policy with a different insurer without incurring additional waiting times, provided the new policy offers the same level of benefits as their old policy. Certain limits and restrictions apply. Private health insurers can impose a 12-month waiting period before hospital benefits can be claimed by a newly joined member or someone upgrading to more expensive cover if the person has signs or symptoms of a pre-existing condition. A 12-month waiting period for obstetrics, and a two month waiting period for psychiatric care, rehabilitation, palliative care and other services on new or upgrading members can also be applied.

If a person has already served out part of a waiting period on their previous policy, the remainder of the waiting period will apply on the new policy, provided there are no added benefits or better conditions under the new policy.

Broader Health Cover

Private health insurers can also offer coverage for hospital substitute treatment (such as hospital-in-the-home) and programs to help manage chronic diseases, under Broader Health Cover arrangements.

Private health insurance reforms

The Private Health Ministerial Advisory Committee was established in September 2016 to advise the Minister for Health on a range of reform options. Its Terms of Reference include developing simpler categories of insurance (such as gold, silver, bronze), empowering consumer choice, transparency and affordability improvements, improving value for rural and regional consumers, alternative funding models for general treatment and other issues as directed by the minister. The Committee was established following a consultation process in 2015–16 and a consumer survey which revealed a number of consumer concerns with private health insurance.

Separately, the Senate Community Affairs Legislation Committee is undertaking an inquiry into the value and affordability of private health insurance and out-of-pocket medical costs.

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