Competitive constraints in private health insurance raised—but a broader debate needed

Competition in the private health insurance market is the focus of a recent discussion paper released by the independent regulator, the Private Health Insurance Administrative Council (PHIAC). The paper is the first prepared by the new Premiums and Competition Unit (PACU) which was established in the last budget to help foster competition in the Australian private health insurance market. The paper aims to ‘promote discussion and stimulate comment on the nature of markets and competition’ in private health insurance, with a view to feedback informing a final report due for release in early 2013.

Private health insurance helps with the cost of privately provided health services, such as surgery in a private hospital, ambulance services and a range of ancillary services such as dentistry and optometry, and can provide for choice of doctor. Private health cover can help meet the ‘gap’—the difference between the Medicare benefit and the doctor’s fee—but only where gap cover arrangements exist and the doctor agrees to participate. Those with a pre-existing condition may have to wait 12 months before they can make a claim, or if their condition is excluded, may be ineligible from making a claim altogether. Even with private health insurance a patient may end up paying an ‘excess’ if they opt for a ‘front-end deductible’ policy (which are often cheaper), or if their provider charges above the scheduled fee.

On the other hand, under Medicare Australia's national, universal health insurance scheme, all Australians are eligible for free public hospital treatment as a public patient (although they may face a waiting period). They can also access free or subsidised primary and specialist out-of-hospital care; some 80.5 per cent of general practitioner services are bulk billed, so the patient pays nothing.

Since 1984, when Medicare came into being, the private health insurance sector in Australia has occupied an unusual place, and at times struggled to survive. This was most apparent following the introduction of Medicare, when private health insurance membership began to fall, in the face of competition from the ‘free’ system. By late 1998, just 30.2 per cent of Australians held private health insurance. But a suite of changes enacted under the Howard government—primarily Lifetime Health Cover, the Medicare Levy Surcharge and then the Private Health Insurance Rebate—helped arrest and then reverse this membership decline. Membership has since climbed to 47 per cent of the population (for hospital cover) and 54.5 per cent (for general cover), according to PHIAC. Some 12.4 million people now have either hospital or general (ancillary) cover.

Some might suggest that with 34 health insurers now offering some 25 700 individual health insurance products, competition in the private health insurance sector is healthy. But as the discussion paper explains, a number of factors constrain competitive forces.

Competitive constraints identified in the paper include the regulatory regime, which means:
  • Specific provisions around the type of policies offered and the price setting for these
  • Prudential and solvency requirements on insurers
  • Community rating which prevents discrimination based on health risk factors
  • Risk equalisation arrangements which pools risk across funds and
  • Take-up incentives and penalties such as Lifetime Health Cover and the Medicare Levy Surcharge.
Other factors that may affect competition include:
  • Market size and characteristics, including the limited number of new entrants 
  • Product design and diversity
  • Consumer behaviour/preferences
  • The role of intermediaries/brokers like iSelect which compare policies at low or no cost to consumers, and
  • The role of private hospitals
The paper goes on to pose a number of pertinent questions around these factors in order to prompt feedback on how best to reduce the negative impacts on competition.

One striking trend in private health insurance membership over the last few years, noted in the paper, is the rise in popularity of policies with exclusion clauses (for example, cheaper policies which exclude conditions such as hip replacement) or with excess and co-payment provisions. Just 7 per cent of policies had exclusion clauses in March 2007, but this had risen to 25 per cent in September 2012, according to just released PHIAC data. The percentage of policies requiring payment of an excess or co-payment has risen from 57 per cent to 78 per cent over the same period. The paper postulates this trend has been driven by price sensitive consumers, even though such policies are seen to benefit the insurer more than the consumer.

Another notable issue is that despite an extensive range of health insurance products being on offer, few consumers switch funds to take up new offers. This puzzle was also highlighted in a previous Flagpost, which noted that despite a guarantee of portability, a number of factors may be hindering consumers from switching health insurers. The complexity of products often limit consumer’s ability to make comparisons, loyalty schemes and bonuses often promote retention of existing membership, and limits on portability arrangements such as pre-existing conditions, also constrict consumer behaviour.

A key question raised in the paper is how private health insurance should address the future impact of an ageing population, deteriorating population health (ie the rise of chronic diseases) and increasing health costs. This challenge points to a broader issue—not addressed in this paper as it is not its focus—concerning the longer term sustainability of financing arrangements for health care.

The role of private health insurance in future health financing arrangements remains a key question, as this previous Flagpost asserts. For example, should private health insurance be restricted to providing top-up cover for services not funded under Medicare? Or, should its role be expanded so that it becomes a true competitor to Medicare? Or should other funding proposals, like Medicare Select be revisited? There are other financing proposals that also merit consideration and discussion among policy makers. While the current focus of public debate remains firmly fixed on membership trends and premium increases, it may be at the expense of a more fundamental discussion we need to have about the future sustainability of health financing.


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

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