Consumer issues driving current private health insurance debate

Proposals to reform private health insurance arrangements are being canvassed by the Health Minister, Sussan Ley through a consultation process, including an online consumer survey. The Minister has also appointed Professor Graeme Samuel to consult with industry. According to the Health Minister’s press release, the main concern with current arrangements is that consumers are not getting value for money.

Australia has a mixed system of public and private financing of health care. Medicare subsidises the cost of many health services, including GPs. Public hospitals provide free services to public patients, although waiting lists for elective surgery can be long. Alongside this public system, successive governments have supported the private health sector to, they have argued, ease pressure on the public system, and provide consumers with choice. Various mechanisms have been adopted to ensure the private sector remains a viable option: the private health insurance rebate (which subsidises the cost of premiums); lifetime health cover which adds a loading to premiums on health insurance purchased after age 30; and the Medicare levy surcharge which applies to higher income individuals who decline to purchase private cover.

A number of ideas have emerged from the consultation process, some potentially more contentious than others. These range from removing the private health insurance rebate for ‘natural therapies’ where there is little evidence of benefit; limiting exclusionary policies (which exclude certain services in return for lower premiums); offering a Lifetime Health Cover discount for members who purchase health cover when they are younger, and winding back community rating by imposing higher charges on smokers and the overweight.

Past private health insurance reforms have also considered affordability issues, but have also focussed on issues like efficiency or innovation. For example, Broader Health Cover reforms introduced in 2007 were designed to allow health insurers to offer a broader range of products, including for managing chronic conditions and hospital substitute treatments, in order to foster innovation. In 2009, the National Health and Hospitals Reform Commission proposed a government operated health and hospital plan called ‘Medicare Select’ which focused on improving the efficiency and responsiveness of health insurance (it was not adopted). Alternative financing models such as Medical Savings Accounts, which aim to reduce government expenditure on financing health care by getting individuals to finance their health care through regular contributions similar to superannuation, should be considered according to economists Jeff Richardson and Ian McAuley.

What is notable about the current debate is that it is focussed on consumer affordability issues, particularly improving value for money. This is driven partly by the relatively rapid uptake of health insurance products with exclusionary provisions, which are cheaper, but cover fewer services. These products are increasingly dominating the market. The Private Health Insurance Council (PHIAC, p. 5) reports that in 2013–14 around 30% of policies had exclusions for services such as joint replacement or cardiac treatment. Ten years ago, just 4.6% of policies had exclusionary clauses according to PHIAC (p. 33). Many people buying cheaper, exclusionary policies may then face gap payments when they need surgery which is not covered.

In addition, consumers are seeing the annual cost of their premiums rise around 6% per annum, while the amount of subsidy they receive in the form of the rebate is reducing due to indexation now being linked to CPI, rather than premium increases. Thus, improving value for money for consumers has come to be a key focus in the current debate.

While consumer value is a legitimate consideration, focussing on this poses some problems, not least that it makes it less likely that other issues will be properly debated. Important issues such as the role of private health insurance in taking pressure off the public system, the sustainability of expenditure on the rebate (forecast to grow by 7% according to the budget papers, p. 5-23). or broadening health insurance to cover other areas such as GP services, have tended to be sidelined in the current debate.

Any reform proposals around private health insurance will ultimately need to be considered in light of how these would interact with other parts of the health system. As well, the government has yet to receive the findings of other major reviews and reports into the health system which will also need to be weighed carefully. In addition to the important work around the reform of federation (which among other issues is considering the key question of financing hospitals) these include a major review of Medicare services and an Expert Reference Group advising on implementing a plan for mental health services. Developing even modest private health insurance reform proposals before these other processes are concluded would be problematic, given how these would be likely to impact on other parts of the health system.

Calls for a broader debate exploring the role and function of private health insurance are emerging, including from among others, the Consumers Health Forum who is concerned the current scope is too limited. The last major in-depth review of private health insurance was conducted by the former Industry Commission (now the Productivity Commission) in 1997. Given the significant role of private health insurance in our ‘mixed system’ and its complexity perhaps it is timely to consider a similar type of inquiry.


Flagpost is a blog on current issues of interest to members of the Australian Parliament

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