Australia operates a mixed public and private healthcare system. Under
this system, Australians have the freedom to choose whether they wish to use
the public health insurance provided by Medicare or if they wish to be treated privately.
Since the late 1990s, the Commonwealth Government has encouraged
Australians to take out private hospital cover and remove pressure on public
hospitals by providing tax and financial incentives.
In the Senate Community Affairs References Committee's (committee) Price
regulation associated with the Prostheses List Framework inquiry, the
committee received evidence from industry stakeholders that private health
insurance was becoming increasingly unaffordable for consumers.
Submitters to this inquiry confirmed that some consumers are
experiencing difficulty to pay private health insurance premiums and/or
In 2015–16, Australians paid $11.4 billion for private hospital policies and
$4.5 billion for general treatment policies. Australians also
paid $483 million in excesses and co-payments for hospital services and $706
million out-of-pocket for medical services. For general treatment,
Australians paid $4.7 billion out-of-pocket. These amounts do not
include the substantial contributions of Commonwealth, state and territory
Private health insurance premiums have become less affordable at the
same time that exclusions and co-payments have increased. The number of
Australians covered by a policy with a co-payments or exclusions increased from
seven per cent in June 2007 to 40 per cent in 2017.
The increase in premiums and the increase in the number of exclusions in
policies has eroded the value of private health insurance and led some people
to drop or downgrade their cover.
Trends in policy coverage
Graph 1.1 provides a brief overview of the reforms that have influenced
individuals to take up private health insurance. As Graph 1.1 demonstrates,
Australia has historically enjoyed high levels of private health coverage which
declined until the late 1990s. At that time, the Commonwealth Government
introduced three measures to encourage Australians who could afford to do so to
take up private health insurance and therefore take pressure off public
In 1997, the Medicare Levy Surcharge (MLS) was introduced as a surcharge
tax on high income earners who were not covered by a private hospital policy.
In 1999, a 30 per cent private health insurance rebate was introduced.
On 1 July 2000, the Lifetime Health Cover (LHC) loading was introduced.
The LHC allows a private health insurer to charge a loading of two per cent of
the premium per year that the person was not covered by a private hospital
policy after the person turns 30. The insurer may continue to charge the
loading for ten years.
Together, these incentives stabilised private health insurance coverage
at approximately 50 per cent of the population as Graph 1.1 demonstrates.
Graph 1.1—Hospital treatment coverage as a per cent of
Source: Australian Prudential
Regulation Authority, Private Health Insurance Membership Trends,
These incentives and their efficacy in encouraging Australians to
maintain levels of coverage is discussed in greater detail in Chapter 3.
A number of previous inquiries have considered aspects of private health
In 2007, the Senate Standing Committee on Community Affairs reported on
the Private Health Insurance Bill 2006 [Provisions] and 6 related bills.
The committee recommended the bills be passed with amendment.
In 2014, the Senate Community Affairs References Committee reported on
its inquiry into Out-of-pocket costs in Australian healthcare.
The report considered private health insurance, but made no specific recommendations.
In 2015, the Productivity Commission delivered its Efficiency in
The Productivity Commission recommended that the Minister for Health conduct a
review of private health insurance regulation and that trials be conducted of
different private health insurance products.
In September 2016 the Hon. Sussan Ley MP announced the establishment of
the Private Health Ministerial Advisory Committee (PHMAC).
The then Minister for Health tasked PHMAC with investigating reforms that would
increase competition and provide value for money for consumers.
Therefore, the former minister would conduct a review.
On 13 October 2017, the Minister for Health, the Hon. Greg Hunt MP (Minister)
announced the results of the PHMAC review.
The reforms announced included developing 'gold', 'silver', 'bronze' and
'basic' categories for classifying private health insurance products,
developing standard definitions of medical procedures across products and
allowing travel and accommodation benefits to be included in hospital policies
to assist consumers living in regional and rural areas.
These reforms are discussed in Chapter 5.
Role of private health insurance
The private health insurance industry in Australia is based on a system
of 'community rating', which enables all consumers to access private health
insurance—regardless of age or likelihood to make a claim—and an insurer cannot
refuse to insure an individual.
To facilitate the community rated private health insurance model, a risk
equalisation mechanism is utilised to pool high-cost claims and distribute them
between insurers. This ensures that insurers with a higher risk consumer
profile, such as older consumers, are not competitively disadvantaged.
To keep private health insurance premiums low, insurers need to attract
younger and healthier members to balance out the risk profile of older, more
costly, members of the existing pool.
Attracting younger healthier members places downward pressure on premiums by
balancing the risk profile of the pool with lower-risk claimants.
This report is presented in five chapters:
this first chapter provides a background to the committee's
inquiry and an overview of the value and affordability of private health
insurance and out-of-pocket medical costs in Australia;
Chapter 2 examines the challenges faced by consumers in
terms of the affordability and out-of-pocket medical costs associated with
private health insurance, including trends in the decline and downgrading of
Chapter 3 examines the economic structures of private
health insurance, including factors which increase and constrain premiums;
Chapter 4 examines the role of private health insurance in
different health contexts, including public hospitals, private and day hospitals,
dentistry, allied and primary health care;
Chapter 5 concludes the committee's considerations and
Conduct of the inquiry
On 29 March 2017, the Senate agreed that on 1 June 2017 it would refer
the value and affordability of private health insurance and out-of-pocket
medical costs to the committee for inquiry and report, with particular
- private and public hospital costs and the interaction between the
private and public hospital systems including private patients in public
hospitals and any impact on waiting lists;
the effect of co-payments and medical gaps on financial and health
private health insurance product design including product exclusions and
benefit levels, including rebate consistency and public disclosure
the use and sharing of membership and related health data;
the take-up rates of private health insurance, including as they relate
to the Medicare levy surcharge and Lifetime Health Cover loading;
the relevance and consistency of standards, including those relating to
informed financial consent for medical practitioners, private health insurance
providers and private hospitals;
medical services delivery methods, including health care in homes and
the role and function of:
medical pricing schedules, including the Medicare Benefits Schedule, the
Australian Medical Association fee schedule and private health insurers' fee
the Australian Prudential Regulation Authority (APRA) in regulating
private health insurers, and
Department of Health and the Private Health Insurance Ombudsman in regulating
private health insurers and private hospital operators;
the current government incentives for private health;
the operation of relevant legislative and regulatory instruments; and
any other related matter.
On 16 November 2017, the Senate granted an extension of time for
reporting to 15 December 2017.
The committee presented two interim reports on 15 December 2017 and 18 December
2017 advising that the committee would present its final report on
19 December 2017.
The inquiry was advertised on the committee's website and the committee wrote
to 108 stakeholders inviting them to make submissions.
The committee invited submissions to be lodged by 28 July 2017.
The committee received 293 submissions. A list of submissions provided
to the inquiry is available on the committee's website and at Appendix 1.
The committee held two public hearings: one in Canberra on 5 July 2017
and one in Sydney on 31 October 2017.
A list of the witnesses who provided evidence at the public hearings is
available at Appendix 2.
Note on references
Some references to Committee Hansard in this report are to the proof
transcripts. Page numbers may vary between the proof and official transcripts.
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