Bills Digest No. 22   1997-98 Health Insurance Commission (Reform and Separation of Functions) Bill 1997

Numerical Index | Alphabetical Index

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.


Passage History

Health Insurance Commission (Reform and Separation of Functions) Bill 1997

Date Introduced: 27 June 1997
House: House of Representatives
Portfolio: Health and Family Services
Commencement: The amendments contained in Part 2 of Schedule 1 (which relate to the removal of Health Insurance Commission's function of conducting the Medibank Private fund) commence on the fund-transfer day. Subject to some minor amendments relating to investment of money under the Commonwealth Authorities and Companies Act 1996 (when it is passed), the remainder of the Bill commences on the day on which it receives the Royal Assent.


The purpose of this Bill is to:

  • provide for the separation of Medibank Private from the Health Insurance Commission (HIC) and for the creation of a new Medibank Private corporation.
  • allow for the HIC to take on the additional functions, specifically health payment services and provision of health information.


The Health Insurance Commission (Reform and Separation of Functions) Bill 1997 has two main objectives. The Bill proposes to separate Medibank Private from the Health Insurance Commission and also proposes to make several changes to the functions of the Health Insurance Commission.

Medibank Private was established by the Fraser Government in 1976, as part of its first set of changes to the Medibank program which had begun under the previous Whitlam Government. The existence of a government-owned entity providing a private health insurance product has long been controversial within the private health insurance industry. The role played by Medibank Private became even more controversial following the introduction of Medicare due to the co-location of Medicare and Medibank Private offices and the refusal of successive Labor governments to permit other private health insurance funds to act as agents for Medicare.

Market Coverage and Performance of Medibank Private

Medibank Private is a dominant force in the private health insurance market, providing coverage for some 1.9 million Australians and holds a market share of around 26 per cent(1). Like most other private health insurance funds, Medibank Private operates as a not-for-profit fund (the exceptions include National Mutual Health Insurance and FAI Health Benefits Ltd). In a comparative analysis of its performance against the rest of the private health insurance industry, Medibank Private claims a consistently lower level of management expenses per membership ($125 compared to $143 in 1994 95)(2). Similarly, in its recent report on private health insurance, the Industry Commission found that Medibank Private achieved lower management costs per membership than the rest of the industry but was 'unsure to what extent this reflects a statistical artefact, genuinely higher technical efficiency or cost shifting to Medicare'(3).

Issues: Unfair advantages and competitive neutrality

The main points of concern of its competitors has been that Medibank Private benefits from unfair marketing and cost advantages due to its co-location with Medicare offices and being run by the same body which runs Medicare, the Health Insurance Commission. In the report of its recent inquiry into private health insurance, the Industry Commission identified two key concerns with the current arrangements involving Medibank Private: marketing and cost advantages and competitive neutrality. Investigating the first area of concern, the Commission commented that:

Medibank Private shares its shopfronts with Medicare - and appears to derive significant market advantages unavailable to other insurers from their co-location. These advantages stem from easier billing arrangements for customers and the ability to readily market their product to people applying for Medicare refunds. The first of these advantages may well be rendered superfluous if hospitals, doctors and the private health insurance industry together adopt a better system of billing(4).

For its part, Medibank Private has always rejected the claims that it gains unfair advantages from its relationship with the Health Insurance Commission. It argues that it has had a beneficial impact on the competitive nature of private health insurance, introducing innovative products and adding value for its members and the industry generally(5). The Industry Commission supported this view in its report on private health insurance, arguing that Medibank Private 'appears to have played a catalytic role in intensifying competitive pressures in the industry'(6). The General Manager of Medibank Private, Ken MacDougall, was reported recently as stating that Medibank Private's links with the HIC were 'neither holding back Medibank Private nor putting it a step ahead of other insurers'(7).

Competitive neutrality is an issue at the nub of complaints by the health insurance industry that Medibank Private enjoys advantages denied to them. The Industry Commission defines 'competitive neutrality' as 'meaning that government business activities should not enjoy net competitive advantages over their private sector competitors simply by virtue of public sector ownership'(8). In its report on private health insurance, the Industry Commission found that 'there are governance and competitive neutrality principles associated with the relationship between the Health Insurance Commission (HIC) and Medibank Private'(9). Medibank Private rejects this view, arguing that it 'operates on a competitive neutral basis with its competitors, with minimum change being required to meet every one of the competitive neutrality principles'(10).

A Taskforce from the Department of the Treasury has been examining the issue of competitive neutrality and specifically its application to the relationship between the Health Insurance Commission and Medibank Private. The Industry Commission recommended in its report that 'depending on the findings of the current Treasury review, detailed consideration be given to separating Medibank Private from the HIC'(11). In the event, the Treasury Taskforce has reported only to Cabinet and its findings on competitive neutrality and Medibank Private are therefore not publicly available. In its response to the Industry Commission's report on private health insurance, the Government supported the Commission's recommendation that Medibank Private be separated from the HIC, stating that Medibank Private would be established as a 'government-owned company consistent with competitive neutrality principles'(12).

The Health Insurance Commission is required by section 34B of the Health Insurance Commission Act 1973 to identify the assets owned by each of its functions (eg Medibank Private, Medicare) and to calculate a rental payable for the use each function makes of the other function's assets. The principles for setting the rental charge are determined by the Minister for Health and Family Services. Section 34C of the same Act requires 'expenditure of the Commission which relates to the performance of more than one of its functions to be apportioned between the functions in accordance with principles determined by the Minister'(13).

Issues: Staffing

In its only media release on the issue to date, the Community and Public Sector Union (CPSU), the trade union covering employees of Medibank Private, detailed its concerns about the separation and possible future privatisation of Medibank Private. However, it did not raise any specific concerns about the future of staff of Medibank Private.

Changes to the functions of the Health Insurance Commission

In addition to the separation of Medibank Private, further changes are proposed in this Bill to the functions of the HIC. The Bill proposes an expanded role for the HIC, both in the delivery of health payments services and information to support initiatives in the health sector. A possible future expanded role for the HIC could be as a national payments agency for all government funded transactions in the health sector, as recommended by the National Commission of Audit(14).

While the core government functions of the HIC will continue to be Medicare and the Pharmaceutical Benefit Scheme, the Bill notes that its Childcare rebate functions (payment of the Childcare Cash Rebate) will be removed by later amending legislation. The responsibility for payment of the rebate is expected to be transferred to the new Commonwealth Services Delivery Agency.

Main Provisions

This Bill is comprised of three Parts and two Schedules.Part 1 is the preliminary Part dealing with commencement.Part 2 contains the substantive provisions for the transfer of Medibank Private from the HIC to a separate organisation.Part 3 gives effect to the amendments contained in the two Schedules.

Schedule 1 contains amendments to the Health Insurance Commission Act 1973 which will enable the HIC to take on additional functions.Schedule 2 contains consequential amendments to the Health Insurance Commission Regulations.

Part 2 - Transitional provisions relating to the transfer of Medibank Private fromthe HIC to a separate organisation (the nominated company)

Divisions 1 and 2 of this Part (clauses 3 to 14) deal with the establishment and nomination of a company which is to be the company that will take on the functions of Medibank Private from the HIC. Item 13 of Schedule 1 of this Bill specifically empowers the HIC to form companies.The company (referred to as the 'nominated company') must be one incorporated under the Corporations Law and all of its share capital must be owned by the HIC (clause 5).

The HIC is prohibited from transferring any of the shares in nominated company and the company cannot issue shares to any other person. (clause 11).The nominated company must seek registration as a registered health benefits organisation under the National Health Act 1953 to allow it to carry on business as a health insurer and it cannot conduct the business of Medibank Private until it obtains registration (clauses 12 and 6).

The HIC's functions are extended to include providing services and facilities to the nominated company on a cost recovery basis provided the arrangement is entered into while all of the shares of the nominated company are owned by the HIC (i.e. before the vesting of those shares in the Commonwealth).

Division 3 (clause 15) extends the HIC's functions to include facilitating the transfer of Medibank Private to the nominated company.

Division 4 (clauses 16 to 33) deals with the transfer of Medibank Private from the HIC to the nominated company.The Minister is empowered to determine a scheme for the transfer of the business of Medibank Private to the nominated company (clause 16).The scheme must provide for the transfer to take place on the fund-transfer day which is the day determined by the Minister and notified in the Gazette under clause 6.A copy of the scheme must be published in the Gazette within 14 days of its formulation.

Clauses 17 to 19 provide for the Minister to make declarations vesting assets and contractual rights and obligations in the nominated company and transferring liabilities to the nominated company.

Digest Comment: It is interesting that the assets, contractual rights and obligations and liabilities which can be transferred to the nominated company are not specifically limited to those which relate to the operation of Medibank Private.

Contracts entered into by the HIC for the supply of goods or services can be split by the Minister so that certain rights and obligations are transferred to the nominated company whilst the remainder are left with the HIC (clause 20).

Clauses 21 to 33 relate to the transfer and re-transfer of staff from the HIC to the nominated company.Staff cannot be transferred any later than 12 months after the shares in the nominated company are vested in the Commonwealth (see below) (clause 21).

Transferred employees must be employed by the nominated company on the same terms and conditions as they were prior to the transfer (clause 22).However, this does not prevent subsequent variation of terms and conditions of employment(clause 26).Accrued benefits and continuity of service are maintained.

Division 5 (clauses 34 to 35) provides for the vesting in the Commonwealth of the shares in the nominated company at a time declared by the Minister.Although these clauses follow those dealing with the creation of the nominated company and the transfer of operations to it, there is nothing to prevent the transfer of shares taking place before or at the same time as the transfer of operations.

Clause 35 obliges the Commonwealth to retain all shares in the nominated company and prohibits the nominated company from doing anything to result in anyone apart from the Commonwealth holding shares in it.

Digest Comment: This will not prohibit a future sale of Medibank Private.It only means that any sale would need to be preceded by the repeal of clause 35.

Division 6 (clause 36) provides an exemption from State and Territory taxes in respect of all matters relating to the transfer of Medibank Private's operations to the nominated company and for the transfer of the shares in the nominated company to the Commonwealth.The exemption is primarily directed to stamp duties which would otherwise be payable on the instruments of transfer.

Division 7 (clauses 37 to 53) contain the miscellaneous provisions.The significant provisions are:

  • clause 43 provides for the transfer of records which relate to Medibank Private from the HIC to the nominated company.
  • clause 44 makes it clear that the nominated company is not to be taken to be a Commonwealth authority, a Commonwealth agency or instrumentality of the Crown.
  • clause 47 permits the Minister to delegate the Chairperson of the HIC all of the powers and functions of the Minister under Part 2 except those powers and functions dealing with the transfer and re-transfer of staff and certain functions in relation to the Commonwealth's shareholding in the nominated company.
  • clauses 49 to 51 provide for the continued availability of to the Ombudsman, freedom of information applications, applications to the Administrative Appeals Tribunal, and complaints under the Privacy Act 1988.It also provides for the continuation of applications and complaints not finalised before the fund-transfer date.

Part 3 - Amendments

As mentioned above, this part gives effect to the amendments contained in the two Schedules (clause 54).

Schedule 1 - Amendment of Acts

Part 1 - Amendments commencing on Royal Assent

The HIC presently has five types of functions:

  1. medicare functions
  2. medibank private functions
  3. consultancy functions - the HIC may enter agreements with other persons to provide consultancy and management functions relating to any of the expertise it has acquired in performing any of its other functions.
  4. information technology functions - the HIC may provide information technology services to the Commonwealth or a Commonwealth body.
  5. prescribed functions - the HIC may perform such other functions in relation to health insurance as are prescribed by regulation.A number of functions have been prescribed by the Health Insurance Commission Regulations, including investigation of inappropriate practices by practitioners, regulation of pathology services, regulation of pharmaceutical benefits and a number of others.

Part 1 of Schedule 1 of this Bill revamps those functions.The functions will be classified into four categories.These will be (item 11 of Schedule 1):

  1. medicare functions - these functions continue substantially unchanged.
  2. service delivery functions - the HIC may enter an arrangement with any Commonwealth authority for the provision of services to that authority and the HIC may receive payment for the provision of those services (proposed new section 7 on page 40 of the Bill).
  3. spare capacity functions - with the approval of the Minister, the HIC may provide services or facilities on a commercial basis to any person.The provision of the services or facilities must either utilise the HIC's spare capacity or relate to certain matters set out in proposed new section 8 (page 42 of the Bill) of the Health Insurance Commission Act 1973.
  4. additional functions - which are essentially what were prescribed functions, i.e. functions prescribed by regulations (proposed new section 8AA on page 43 of the Bill).

Proposed new section 8AB (on page 44 of the Bill) allows the States and Territories to confer powers and functions on the HIC.With the approval of the Minister, the HIC may perform those functions and exercise the powers.

The HIC consists of a Chairperson, the Managing Director and up to seven other members.At present there are seven 'other members'. Item 19 reduces the number of 'other members' to five.The current membership of the HIC will continue until two contracts expire to reduce the number of 'other members' to five.

Part 2 - Amendments commencing on the fund-transfer day

Part 2 of Schedule 1 consists of items 38 to 80.

Items 39 to 66 deal with the removal from the Health Insurance Commission Act 1973 of the provisions dealing with the HIC conducting Medibank Private.

Schedule 2 - Amendment of Regulations

This Schedule makes a small number of amendments to the Health Insurance Commission Regulations consequential upon the additional functions being conferred on the HIC.


  1. Health Insurance Commission, Annual Report 1995-96 , Canberra, AGPS, 1996: 17
  2. Ibid: 25
  3. Industry Commission, Private Health Insurance , (Report No 57), Canberra, AGPS, 1997: 359
  4. Industry Commission: 358 359.
  5. Ibid: 91 93
  6. Ibid: 358
  7. Tan Van Baren, C 'Medibank denies gain in HIC ties', West Australian , 24 April 1997.
  8. Industry Commission: 93
  9. Ibid: 359
  10. Ibid: 93
  11. Ibid: 360
  12. Minister for Health and Family Services, 'Government to maintain community rating as keystone of strengthened private health insurance system', Media Release, 10 April 1997
  13. Health Insurance Commission: 74
  14. National Commission of Audit, Report to the Commonwealth Government, Canberra, AGPS, 1996:53 55

Contact Officer and Copyright Details

Paul Mackey (Background)
Lee Jones (Main Provisions)
1 September 1997
Bills Digest Service
Information and Research Services

This Digest does not have any official legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 3 September 1997

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