Chapter 2
Key issues relating to the Bill
2.1
This chapter summarises the key issues raised during the course of this
inquiry that related to the Private Health Insurance Amendment (Lifetime
Health Cover Loading and Other Measures) Bill 2012.
Lifetime Health Cover loading amendments
Ensuring the Lifetime Health Cover
loading acts as an incentive
2.2
The key argument put forward in favour of the Bill is that it ensures
that the LHC loading acts as an incentive for people to take out private health
insurance early in life. It was reported to the committee that the scheme has
proved effective at encouraging young people to take out private health
insurance:
We have seen a trend for some time now of more people taking
out private health insurance, and the Lifetime Health Cover arrangements have
been very effective in increasing the number of younger consumers who have
private health insurance, which is, of course, what they were intended to do.[1]
2.3
The prospect of paying the Lifetime Health Cover loading is a strong
incentive for people to take out private health insurance policies. By applying
the health insurance rebate to the LHC loading that incentive is reduced. The
Consumers Health Forum of Australia expressed its support for the Bill on the
following grounds:
The LHC measures are intended as a deterrent, [the Consumers
Health Forum] considers it inefficient to apply a rebate to the loading. The
changes would also create a greater incentive to take up private health cover
early and generate a higher opportunity cost for delaying private health cover.[2]
2.4
This point was expanded upon at the committee's public hearing:
In a nutshell, it is counterintuitive for the government to
subsidise what is effectively a deterrent. It is inconsistent with the lifetime
health cover loading policy rationale. It sends mixed signals to consumers, and
it means that funds that could be better spent elsewhere in the health system
are being used to subsidise a penalty. We believe the bill, which proposes to
remove the rebate from the loading applied to a premium, would correct this
anomaly.[3]
2.5
A strong incentive scheme to take out private health insurance at a
young age is important for the sustainability of the private health insurance
industry in Australia. Australia utilises a community rating system. The
Department of Health and Ageing's (Department) website provides an explanation
of the community rating system:
Private health insurance premiums are not risk rated like
other forms of insurance, so that all consumers pay the same premiums as others
for the same policy, regardless of their age or health status. As set out in
the Private Health Insurance Act 2007, to ensure that everybody who
chooses has access to health insurance, the principle of community rating
prevents private health insurers from discriminating between people on the
basis of their health or for any other reason.[4]
2.6
The Lifetime Health Cover loading is a principal cog in the policy
machinery driving the sustainability of the community rating system, and
therefore ensuring ongoing access to private health insurance to millions of
Australians. The Consumers Health Forum of Australia clearly drew a link
between the community rating system, access for consumers, and the importance
of the lifetime health cover loading acting as an effective deterrent:
Consumers depend on the community rating system to keep
private cover fair and affordable. With a risk rated model there would be
nothing to stop insurers from denying consumers the cover they need if they
were considered to be a bad risk. In order to maintain the community rating
system, there needs to be a balance between older and younger policyholders.
Private health insurance would be unsustainable if policyholders were
predominantly high-end users of the health system. The lifetime health cover
loading plays an important role in supporting community rating by encouraging
people to sign up to private health insurance sooner.[5]
Increasing costs of private health
insurance for individuals
2.7
The primary concern regarding the proposed amendments was that it would
increase the costs of maintaining private health insurance policies. Estimates
of the precise cost to consumers of the changes varied widely between
stakeholders' individual modelling.
2.8
It was reported to the committee by GMHBA that:
The removal of the rebate on the Lifetime Health Cover
loading component of Private Health Insurance premiums will result in a further
1% to 18% (average of 10.6%) price increase from 1 July 2013 for those with
Lifetime Health Cover loadings. This will impact approximately 17.9% of GMHBA
memberships (approximately 40 000 individuals. In simple terms the removal of
the rebate means a 42% increase in the loading for these members.[6]
2.9
Presenting slightly different numbers, Hirmaa informed the committee that:
It has been estimated by a typical hirmaa fund that this
impact will amount to an average 8.4% premium increase in the first year of
implementation (commencing 1 July 2013). For those with significant loadings,
the premium increase will be much higher.[7]
2.10
The Department found that the average impact of the changes to a person
subject to a lifetime health cover loading was around $116. The Department
explained to the committee how they arrived at the aforementioned figure:
That $116 was formulated based on the average loading and the
average rebate...the average loading is about 24 per cent and the average rebate
was just over 30 per cent.[8]
2.11
In explaining the seeming discrepancy between the Department's predicted
cost increases compared to other stakeholders, Departmental officials
explained:
I think they are looking at people who are likely to have the
greatest possible increase, whereas our figure is based on the average across
all consumers. I note that just over three per cent of people who do have a
Lifetime Health Cover loading are actually at the maximum.[9]
2.12
HBF argued that the proposed changes were a breach of good faith by the
government with private health insurance policy holders who had made plans
based on the government's commitment to provide a rebate on policy costs.[10]
The committee heard a rebuttal of this argument by Consumers Health Forum
Australia who noted:
There is already a time limit on how long consumers have to
pay the loading – that is, the 10-year time limit if they have held cover
continuously over a period of time – and we are not aware of any particular
undertakings by government about ongoing payment of the rebate on the lifetime
health cover loading that would make this particular change a breach of good
faith.[11]
Impact on low income earners
2.13
It was put to the committee that the proposed changes would have a
particular impact on low income earners. GMHBA Limited, a not-for-profit
regional health insurer based in Geelong, Victoria, noted that there are a
significant number of low income households with private health insurance:
According to Private Healthcare Australia, the Australian
Taxation Office and the Australian Bureau of Statistics, 3.4 million people
with private health insurance live in households with income less than $35 000
per annum. A staggering 5.6 million people with private health insurance live
in households with gross annual incomes below $50 000.[12]
2.14
GMHBA argued that the proposed changes are:
[D]iscriminatory to lower income earners – all members with a
Lifetime Health Cover loading are equally impacted by the change irrespective
of their income levels. It is in fact highly regressive having the greatest
percentage effect on the lowest income families.[13]
2.15
Hirmaa – the peak industry body representing five open access regional
private health insurers and thirteen restricted access insurers – explained why
those on lower incomes are more heavily impacted by the changes proposed in the
Bill:
The impact increases with the higher the level of rebate
policyholders currently receive, resulting in lower income earners (those not
in the means tested tiers) being the most disadvantaged by the proposed
changes.[14]
2.16
The committee heard evidence from the Australian Osteopathic Association
arguing that those on low incomes are extremely price sensitive:
[E]specially for those on lower incomes, I think a $7 to $10
increase a week in their private health insurance for those on a lower income
probably will be the difference for whether they stay or go.[15]
Increasing strain on public health
infrastructure
2.17
It was also put to the committee that if the costs of private health
insurance increases as a result of this policy, it will become less affordable
and more consumers are more likely to drop or reduce cover thereby increasing
demand of public health infrastructure.[16]
2.18
GMHBA Limited posited that the anticipated savings that will result from
the amendments are unlikely to be realised due to increased demand on the
public health system and therefore expenditure:
Whilst the Government claims that the removal of the rebate
on the Lifetime Health Cover loading will result in savings to the Government
of $386.3 million over four years, we believe that over time the cost to the
public health systems from past and proposed changes will be much more as we
see a shift to public over private due to a lack of support through a fair
rebate.[17]
2.19
This view was also supported by the Australian Osteopathic Association
which argued that a decline in the number of people with private health
insurance would increase public health expenditure. This would offset savings
made through the proposed amendment.[18]
2.20
This argument is dependent on a large number of people dropping their
private health insurance coverage. While conceding that the changes would have
some impact on the number of people who choose to take out private health
insurance, Consumers Health Forum Australia contended:
We do not really know what the impact will be but we would
expect it would a marginal impact, and, as I have said, we have seen successive
policy and premium changes in recent times...We would not expect this policy to
result in large dropouts, because it is a policy that is applied to the loading
and not the premium itself, so we would not expect that it would lead to a huge
impact.[19]
2.21
In the Parliamentary Library's Bill Digest, Amanda Briggs observed that:
While financial considerations also affect consumer behaviour
and cannot be ignored, [private health insurance] (PHI) membership levels have
remained robust in the face of a number of policy changes affecting PHI
affordability. Means testing of the rebate and increasing the Medicare levy
surcharge for higher income earners did not result in membership levels
falling, as some had warned it would.[20]
2.22
Although the Department recognised that there are a large number of
individuals impacted by the amendment, (1 077 372 as at September 2012) it was
argued that most individuals would only see minor increases in private health
outlays as a result of the amendment which are unlikely to impact overall
private health insurance membership levels.[21]
As it is not anticipated that there will be a decline in the number of people
with private health insurance, it should not add to the burden on the public
system:
We do not believe that this will lead to a reduction in
private health insurance [coverage]. Therefore, if that is correct, there would
be no flow-on to the public sector.[22]
2.23
The Department also emphasized for the committee that the proposed
changes only impact on hospital policies, not general treatment or extras
cover.[23]
Informing consumers of the impacts
of the Bill
2.24
The committee heard from both those who supported the Bill and those who
opposed it that it was important to ensure that affected individuals were made
aware of the changes proposed in the Bill. The Consumers Health Forum of
Australia argued that:
It [is] essential that any changes to the cost of premiums
are clearly communicated to consumers. We recommend the development of consumer
information on the changes to the LHC arrangements, including a rationale for
the proposed changes and case studies that illustrate the impact of any
changes...In some cases, the changes may also result in consumers making a
decision to discontinue their cover, and consumer information should clearly
outline the consequences of such decisions.[24]
2.25
The Department informed the committee that private health insurers would
inform affected clients of the impact of the changes:
As is currently the case, private health insurers provide
information to their members in relation to their loading and what their
premium costs are, and that will continue to occur. That will show what any
change is.[25]
Incentive Payment Scheme amendments
2.26
The proposed changes to the Incentive Payment Scheme were well supported
by submissions that made mention of these amendments.[26]
Hirmaa's comments are representative of those received:
Ceasing the [Incentive Payment Scheme] claiming option is a
simple and low cost option to reduce the administrative burden on insurers, the
Department of Human Services and the Australian Taxation Office.[27]
2.27
At the committee's public hearing the Department assured the committee
that affected members of the public would be provided with information
regarding the changes via written information distributed by the Department of
Human Services, private health insurers, and information on the Department's
website.[28]
2.28
The committee heard that if a claim is lodged through the IPS before
1 July 2013 their claim will be processed as normal, but the
Department of Human Services will not accept any new claims from 1 July 2013
onwards.[29]
Committee View
2.29
The committee considers that the proposed amendment would ensure that
the Lifetime Health Cover loading acts as an incentive for people to take out
private health insurance early in life, thereby helping to underwrite the
community rating system on which ongoing, affordable access to private health
insurance policies relies. On the grounds that this Bill will increase the
incentive value of the Lifetime Health Cover loading, the committee supports
the proposed amendments.
Recommendation 1
2.30
The committee recommends that the Bill be passed.
Further changes to private health insurance in Australia
2.31
Several stakeholders from the advocacy, business, and non-profit sector
urged the committee to consider these changes in light of other proposed and
recent changes to private health insurance in Australia.[30]
For example, private health insurer GMHBA noted that:
...this Bill cannot be viewed in isolation of the changes that
have already been made to income test the rebate or those proposed in the
[Mid-Year Economic and Fiscal Outlook] to link the rebate to [the Consumer Price
Index].[31]
2.32
At the committees public hearing the Australian Osteopathic Association
also highlighted the interaction between the amendments in the Bill and other
proposed changes to Commonwealth support for private health insurance policy
holders.[32]
2.33
The committee's terms of reference for this inquiry are limited to an
examination of the provisions of the Bill. However, the committee would like to
assure stakeholders that it is aware of the concerns raised during the course
of this inquiry regarding other proposed changes.
Senator Claire Moore
Chair
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