Note: This page contains links to PDF files. For more information, see the web page on Accessing files.
National Health Amendment (Lifetime Health Cover) Bill 1999
25 AUGUST 1999
© Commonwealth of Australia 1999
ISSN 1440-2572 |
View the report as a single document - (PDF xxKB)
View the report as separate downloadable parts:
For further information, contact:
Committee Secretary
Senate Standing Committees on Community Affairs
PO Box 6100
Parliament House
Canberra ACT 2600
Australia
Membership of the
Committee
Members
| Senator Sue Knowles, Chairman |
LP, Western Australia |
| Senator Andrew Bartlett, Deputy Chair |
AD, Queensland |
| Senator Kay Denman |
ALP, Tasmania |
| Senator Chris Evans |
ALP, Western Australia |
| Senator Brett Mason |
LP, Queensland |
| Senator Tsebin Tchen |
LP, Victoria |
Participating Members
| Senator Eric Abetz |
LP, Tasmania |
| Senator Bob Brown |
Greens, Tasmania |
| Senator the Hon Rosemary Crowley |
ALP, South Australia |
| Senator the Hon John Faulkner |
ALP, New South Wales |
| Senator Michael Forshaw |
ALP, New South Wales |
| Senator Brenda Gibbs |
ALP, Queensland |
| Senator Brian Harradine |
Ind, Tasmania |
| Senator Meg Lees |
AD, South Australia |
| Senator the Hon Chris Schacht |
ALP, South Australia |
| Senator Natasha Stott Despoja |
AD, South Australia |
| Senator John Tierney |
LP, New South Wales |
| Senator John Woodley |
AD, Queensland |
REPORT
NATIONAL
HEALTH AMENDMENT (LIFETIME HEALTH COVER)
BILL 1999
1. THE INQUIRY
1.1 The National Health Amendment (Lifetime Health Cover) Bill 1999 (the
Bill) was introduced into the Senate on 21 June 1999. On 30 June
1999, the Senate, on the recommendation of the Selection of Bills Committee
(Report No. 11 of 1999), referred the Bill to the Committee for report
by 24 August 1999.
1.2 The Committee considered the Bill at a public hearing on 13 August
1999. Details of the public hearing are referred to in Appendix 2. The
Committee received 25 submissions relating to the Bill and these are listed
at Appendix 1.
2. THE BILL
2.1 The Bill amends the National Health Act 1953 to introduce
Lifetime Health Cover (LHC) into private health insurance. Under Lifetime
Health Cover, health funds will be required to set different premiums
depending on the age at which a member first takes out hospital cover
with a registered health fund.
2.2 Lifetime Health Cover is designed to address problems associated
with adverse selection, that is, the tendency of healthier members of
health funds to drop their health insurance, leaving a residual membership
of people with higher health risks, while maintaining the broad objectives
of community rating. Lifetime Health Cover, in concert with other reforms
to private health insurance, is expected to have a significant positive
impact on membership numbers and consumer behaviour. [1]
2.3 The reforms are based on a 1997 inquiry into private health insurance
conducted by the Industry Commission which recommended the introduction
of a lifetime community rating system. An extensive consultation process
with consumer and industry groups was undertaken during the formulation
of the proposals.
2.4 The Minister in the Second Reading Speech stated that:
Lifetime Health Cover encourages people to join a health fund early
in life and to maintain their membership and discourages `hit and run'
behaviour. All of which increases the stability of the industry and
helps to contain the rising cost of health insurance premiums…Lifetime
Health Cover complements the major reforms to private health insurance
already undertaken by the Government. It delivers another important
part of the Government's commitment to reform the private health insurance
industry and to maintain the balance between the public and private
health sectors. [2]
2.5 The main features of the proposed Lifetime Health Cover scheme are
as follows:
- persons who join a health fund before or at the age of 30 years will
pay the `base rate' premium, while all persons who join after the age
of 30 will pay a loading on top of the `base rate' premium (of 2 per
cent per year of the base rate). Existing members of health funds (of
whatever age) will not be subject to the loading.
- the loading will be capped at a maximum of 70 per cent above the premium
payable by a person who joined at the age of 30.
- a grace period of 12 months, from 1 July 1999, will be provided during
which people who are not members can join a health fund and be treated
as existing members.
- special provisions will allow people born on or before 1 July 1934
(those aged 65 and over on 1 July 1999) to join a health fund at any
time and still pay no more than the base rate premium.
- members of health funds will be permitted to cease membership for
a cumulative total of 24 months if travelling overseas or experiencing
financial hardship.
- regulations will specify that certain classes of persons, such as
members of the Australian Defence Force, for the purposes of the Lifetime
Health Cover are to be treated as if they had hospital cover.
- for the first two years after the introduction of the scheme, the
Minister for Health and Aged Care may determine, under hardship provisions
specified by regulation, that a person is exempt from liability to pay
additional contributions for late entry to the scheme.
- the rules for waiting periods and pre-existing ailments will not be
affected by the introduction of Lifetime Health Cover. [3]
3. ISSUES
3.1 Evidence received on the Bill, especially from industry and peak
consumer groups, indicated broad general support for the Lifetime Health
Cover scheme, although some submissions and witnesses raised issues related
primarily to details of the scheme's operation. [4]
The Institute of Actuaries of Australia, reflecting much of the evidence,
stated LHC `should make private health insurance more affordable, more
attractive and hence more popular, thereby enhancing the viability of
the private health insurance system and helping reduce pressure on Medicare'.
[5]
Consumer safeguards
3.2 Several groups argued that the consumer safeguards in the proposed
legislation were adequate and appropriate to protect consumer interests.
[6] The Private Health Insurance Ombudsman (PHIO)
stated that the Bill incorporates `a number of important safeguards',
including a twelve-month grace period prior to the introduction of the
scheme, provision for periods of absence from membership, special provisions
for people currently 65 and older and provisions for hardship cases. [7] Medibank Private noted that waiting periods and
pre-existing ailment provisions of the National Health Act will still
apply. [8] The Consumers' Health Forum of Australia
(CHF) stated that additional consumer protections that put the onus on
funds to provide plain language documents and to simplify their rules
were also needed in the Bill. [9]
3.3 PHIO stated that the twelve-month grace period before the new arrangements
take effect `should provide consumers with sufficient time to become aware
of the new system and decide on a course of action'. [10]
3.4 Regarding implementation of the scheme, the Department of Health
and Aged Care (DHAC) stated that an extensive information campaign will
be undertaken prior to the introduction of the scheme to ensure that all
Australians, including people of non-English speaking backgrounds and
other specific groups, are aware of the new LHC arrangements and how these
arrangements may affect them. [11]
3.5 The Committee suggests that this information campaign should commence
as soon as possible.
Migrants
3.6 Some issues relating to the treatment of migrants under the Bill
were also raised in submissions and by the Committee at the public hearing.
3.7 The Tasmanian Government raised the issue of aged migrants, arguing
that the Bill will make health insurance premiums for this group expensive.
[12] DHAC responded, however, that migrants
born on or before 1 July 1934 (that is, 65 years and over) will benefit
from the special provisions for people in this age group. They will be
able to take out private hospital cover at any time and pay the base rate
premium with no additional loading for late entry. The Department noted
that for migrants aged up to the age of 65 there are no special provisions.
[13]
3.8 The Committee raised with DHAC whether the portability of benefits
between countries had been considered. In response, the Department while
noting the Committee's concerns, stated that portability is a `complex
issue' because the schemes vary from country to country and that `at this
stage in the design of the scheme we have not included that feature'.
[14] The Department indicated, however, that
it had liaised with the Department of Immigration and Multicultural Affairs
on the question of portability and in relation to information on health
insurance matters for prospective migrants. [15]
3.9 The Committee also raised the issue of humanitarian entry, especially
for those newly arrived migrants (usually aged around 30 years). [16]
The Department noted the Committee's concerns but stated that `we do not
want to have a system with rules that are more generous for newly arrived
migrants than for the Australian citizenry generally'. [17]
Hardship provision
3.10 Some groups sought clarification as to the operation of the hardship
provision in the Bill and argued that the provision that the Minister
may make determinations in cases of hardship only up to 1 July 2002 may
be too inflexible. [18]
3.11 In response, DHAC stated that the hardship provision `is intended
to ensure that in exceptional circumstances of demonstrated hardship during
the transition period people will not be disadvantaged by the introduction
of Lifetime Health Cover'. [19] The Department
noted that it is envisaged that exceptional circumstances of hardship
will be defined as instances where a person is aged between 60 and 64
or has been overseas or unemployed during the period of grace; and the
person was a previous long term member of private health insurance and
only recently dropped their health cover because of short term financial
hardship or overseas residence. [20]
3.12 DHAC stated that many health funds already agree to suspend a person's
membership under specified conditions such as a period of unemployment,
an overseas posting or extended overseas leave. The Department noted that
under LHC, funds will be permitted to continue this practice. [21]
3.13 The Committee also raised the issue of long-term members (for example,
with 30 years membership) who are not members of a health fund on 1 July
2000 due to unemployment or other financial circumstances. In response
DHAC stated that:
We consider that someone like that would be a key candidate for applying
to the minister up until 2002 to be granted an age of 30. Then they
would have the two-year period of absence, and then after that for each
year on top of that that they were away, they would be charged 2 per
cent on top of the 30-year-old premium. [22]
3.14 The Committee notes these concerns raised regarding the hardship
provisions and suggests further consideration of this matter.
Continuous membership
3.15 Some submissions argued that the scheme has the potential to weaken
the incentive for continuous membership of health funds. [23]
Under the Bill, people can join a health fund before 1 July 2000, attain
preferential contribution rights, and lapse after a month or so. Should
they eventually rejoin, they will only pay additional loadings based on
their period of absence. Some groups argued that a minimum period of membership
should be required of health fund members. [24]
3.16 In response, DHAC stated that the potential for this behaviour to
impact adversely on health fund finances will be tempered by the fact
that when these people drop their hospital cover, they will be aware that,
for each year after the first two years they are absent from private health
insurance, they will pay a 2 per cent loading if in future they rejoin
a fund – `this consideration will act as an incentive for them to
rejoin earlier than they might otherwise have done. If they do rejoin,
it is reasonable to assume that they will still, in aggregate, be healthier
than existing fund members of the same age. The health profile of fund
members will consequently improve, helping to dampen premium increases'.
[25]
3.17 The Committee suggests closer examination of the issue surrounding
new members taking out hospital cover during the period 1 January 2000
to 1 July 2000 and whether that should or should not lock in the right
to pay premiums at the base rate until they have had hospital cover continuously
for 12 months.
Impact on the public hospital system
3.18 Lifetime Health Cover is part of an overall plan for stabilising
the Private Health Insurance Industry and should be seen, not in isolation,
but as part of that broader perspective.
3.19 Submissions from State Governments/State Health Departments claimed
that LHC may encourage people to take out low cost private health insurance
but continue to use the public hospital system. [26]
Queensland Health stated that the `available evidence shows that it is
likely that the number of people with private health insurance electing
to be public patients is significant. Also, there is anecdotal evidence
that people are taking out front-end deductible insurance policies and
still using the public system as public patients'. [27]
3.20 DHAC responded, however, that LHC does not provide any incentive
for people to take out hospital cover that they do not intend to use –
`there is no point in securing a low certified age at entry for its own
sake. The only advantage to be gained by securing a low certified age
at entry is to enable a person to purchase private hospital cover at the
best possible price'. [28] DHAC advised the
Committee that if the Department finds evidence that the purchase of low
cost insurance products by people who do not use their insurance is having
an impact on public hospital funding the issue will be addressed. [29]
3.21 Some State Governments/State Health Departments also claimed that
if LHC results in increasing private health insurance coverage, funding
to the States and Territories under the Australian Health Care Agreements
(AHCAs) will decrease. This was perceived by the States as a `penalty'
on the public health sector. [30] Under the
AHCAs should private health insurance participation rates increase above
a threshold point (consistent with a national average level of 33 per
cent), funding under the Agreements will decrease by around $82 million
for each percentage point increase beyond that point.
3.22 DHAC stated, however, that the current AHCAs `reflect acceptance
by the Commonwealth that reductions in the rate of participation in private
health insurance will result in increased demand on public hospitals,
and acknowledgment by the States that these demands will reduce should
the participation rate increase above a certain level'. [31] The Department emphasised that the States wanted
the specific provision relating to private hospital insurance participation
rates in the AHCAs – `so they must have understood what the implications
were if participation went one way or the other'. [32]
3.23 The Department also noted that any upward drift in private health
insurance participation rates will only become evident over the next two
to five years which will give the States and Territories the opportunity
to gauge the effects of LHC and to take such effects into account when
negotiating the next AHCAs in 2003. [33]
4. RECOMMENDATION
4.1 The Committee reports to the Senate that it has considered the National
Health Amendment (Lifetime Health Cover) Bill 1999 and recommends that
the Bill proceed following due consideration of the issues raised in paragraphs
3.14 and 3.17.
Senator Sue Knowles
Chairman
August 1999
Minority Report - AUSTRALIAN LABOR PARTY
NATIONAL HEALTH AMENDMENT (LIFETIME HEALTH COVER)
BILL 1999
1. Introduction
This Report reflects the views of the undersigned Senator who attended
the Community Affairs Legislation Committee hearings into the National
Health (Lifetime Health Cover) Amendment Bill 1999 on 13th August
1999.
Labor does not agree that the conclusions and recommendations contained
in the Committee majority report adequately respond to the issues raised
during the Inquiry.
The concept of unfunded lifetime community rating is sound. The private
health sector would be strengthened by well-designed reform of its premium
structure that reduces the large cross subsidies between younger and older
groups. However it does not reduce the need for other structural reforms
including reform of the re-insurance pool, elimination of gap payments,
cost control to end the upward spiral of premiums and a new consumer focus
to put value back into the product.
The Lifetime Health Cover scheme put forward by the Government is built
on the principles of lifetime community rating but various parts of the
design have been modified. Several of these modifications are poorly designed
and unfair in the way they impact on particular groups of people. Further
attention needs to be given to the issues raised during the Inquiry, which
are discussed below grouped under each of the Terms of reference for the
Committee.
2. Consultation
The Government claimed that it had consulted widely on the detail of
the Lifetime Health Cover. It was evident from the submissions that although
there had been consultation on the concept (through circulation of the
first Trowbridge report) there had been virtually no consultation on the
detail.
The later changes were substantial and had not been open to comment by
the groups most affected. For example, an arbitrary cut off was used to
excluding over-65 year olds without excluding other retirees on pensions.
There was no explanation of the decision to drop the recommended discounts
for young people and the penalty premium rate and starting date were changed.
Term of reference 1: To determine the impact of the proposed Lifetime
Health Cover on the viability of private health insurance and the flow
on impact for the public hospital system.
3. Short term impact on adverse selection
The Committee did not get a clear picture about the likely effect of
Lifetime Health Cover on overall membership. The actuarial consultants
used by the Government, Trowbridge Consulting, argued that there would
not be a “very large increase” in health fund membership but
foresaw a surge during the period of grace. [34]
The Department of Health and Aged Care admitted in its submission that
it had assumed that the aggregate health risk of these new joiners would
be less than the existing members and that the problem of adverse selection
would therefore reduce. [35]
This assumption may not be correct. The public officer for the Hospital
Contributions Fund (HCF) argued that there could be a sharp increase in
adverse selection during the initial grace period. [36]
MBF also argued that those joining during the initial grace period are
likely to be older than the age group normally recruited but did not foresee
“a dramatic increase in any one fund's claims”. [37]
Ian McAuley calculated that the scheme was most attractive to those between
57 and 65 during the grace period and that this group would have increasing
health needs in future years which would financially penalise the funds.
He foresaw a rush of older people joining which would be “a body
blow to the industry”. [38] In his view
young people were better off saving for their own needs.
Trowbridge has based its modelling on an assumption that participation
would increase to 35% by the end of the grace period (and above the trigger
point for reduction in public hospital funding). This level would require
a very strong response over the next nine months. None of the witnesses
could give any confidence about the public response. The Trowbridge modelling
may be too optimistic because it is based on a high assumption for the
participation rate.
It should also be noted that the comparisons to the existing case are
exaggerated because they assume that without Lifetime Health Cover participation
will drop to 20%.
4. Impact on the long term viability of private health insurance
A number of industry witnesses who previously had forecast large increases
due to the 30% rebate now were pleased that the rebate had simply stabilised
participation.
The Department of Health and Aged Care argued that the scheme was not
expected to increase participation but that it would reduce “churn”
due to people engaging in hit and run behaviour. [39]
Others, including Medibank Private thought that there were still sufficient
financial incentives for continued “hit and run” behaviour.
Ian McAuley highlighted that the groups most involved in “hit and
run” membership were people over 65 and young mothers. He pointed
out both groups were largely insulated from any impact of Lifetime Health
Cover.
MBF cautioned that medical gaps remained the major source of complaint
and dissatisfaction. It did not foresee any improvement in participation
until the gaps issue was resolved apart from the short-term impact during
the grace period.
A number of witnesses declined to directly answer the concern that the
funds would face insurmountable barriers to marketing their products to
older non-members after 1 July 2000.
Medibank Private expected a significant reduction in recruitment of members
over 30 and said its future marketing activities would focus on those
under 31 and those already in the industry. [40]
Clearly this would reduce future growth prospects substantially.
It is a serious concern that Lifetime Health Cover may have the effect
of inducing a short-term rush into the scheme followed by a virtual freeze
out of many consumers who would face high penalties to later change their
mind.
For example, private health insurance will become a very poor option
to new migrants to this country when compared to Medicare. The market
for selling private health insurance would be substantially reduced with
a new focus on those just turning 30 and those currently over 65.
Trowbridge considered a “worst case” scenario in which entry
to the funds effectively froze after the grace period because new members
were not prepared to pay penalty premiums and the proportion of 30 year
olds able to take up insurance was no higher than now.
On their analysis, this resulted in a 50% increase in premiums over 5
years and a “vicious cycle” of increasing contribution rates
and reducing membership.
Labor remains concerned that the health insurance industry is too complacent
about the difficulties they will face in getting new members under Lifetime
Health Cover. There has been a succession of “rescue plans”
for the industry, which have failed to deliver results. The industry must
understand that it cannot expect Government to bail them out of their
problems. Already we have seen $1.7 billion a year in subsidies go into
the industry for marginal effect. If the industry fails to achieve the
appropriate level of membership as a result of Lifetime Health Cover they
will have to rely on their own resources to sort out the current problems
with private health insurance.
5. “Join and Lapse” behaviour
Particular concern was raised at the hearings by Towers Perrin and HCF
that many people would join the fund for a short time in June 2000 to
get the benefit of being a member on the critical date. [41]
There is nothing to stop a person joining for just one month next June
to gain a permanent exemption from the impact of higher premiums. At little
cost a person of any age can acquire the nominal age of 30.
This is a potential rort that will be of great interest to accountants
looking for novel advice for their clients.
HCF described this as “join and lapse behaviour” and argued
it was a major flaw in the design of the scheme and one which would cost
the industry heavily in the future. [42]
The Department recognised that there was a problem but limited itself
to suggesting that regulations could be developed to set a minimum three
month membership period. This would seem quite insufficient to close the
loophole and the 12-month period suggested in the Majority report is still
inadequate.
For example a 60-year-old person who joined just prior to June 30th 2000
will benefit from avoiding a 60% penalty premium for every year that they
subsequently join. If this person joined later in life for a 10-year period
they would have saved (excluding price rises) around $4,800 on an $800
base premium after the rebate. The financial gains clearly outweigh the
cost of even a year's membership. The principle is that the system should
benefit those who are genuine long-term members and hence the minimum
period to gain an advantage should be more like 3 years.
6. Low value policies
Another potential rort is that there is no deterrent to a person buying
a low value policy and upgrading when they need to use a hospital (apart
from the normal waiting times).
This problem was raised by several witnesses who were concerned at the
extent of the trend that has developed since the introduction of the Medicare
Surcharge. PHIAC data shows that in the six months to June 1999 there
were 80,000 new policies taken out of which no less than 69,000 were either
exclusionary policies or ones with front end deductibles – or had
both features. Clearly there is a strong trend towards low cost products,
which has not been addressed.
These policies with large “front end deductibles” and exclusions
have become popular as a way to avoid the Medicare surcharge. Trowbridge
has commented that the industry statistics underestimate the situation
because they only include products with total exclusions.
Trowbridge raised a number of concerns about the growth in these products
including the extent to which they had undermined the principles of community
rating. The potential they saw for confusion over exactly what benefits
are included is confirmed by the complaints received by the Private Health
Insurance Ombudsman. This undermines the credibility of the industry.
Alan Brown proposed a detailed solution to this problem using the ratio
of the values of premiums in the calculation of the penalty to be paid
after an upgrade. [43]
The simplest way to curb misuse is to limit the extent of the front-end
deductible to a moderate amount such as $500 and restrict exclusionary
products. This approach would reduce both the incentives to manipulate
the Lifetime Health Cover system and dampen Medicare surcharge avoidance.
The principle should be that private insurance should offer a real insurance
product.
7. Reform of the re-insurance pool
The benefits of the proposed scheme would be largely cancelled out by
the current re-insurance pool arrangements. The consultant actuaries recommended
a new re-insurance system be adopted because the current arrangements
do not provide incentives to health funds to contain hospital costs.
Trowbridge argued that this reform could be delayed if necessary by up
to two years. [44] However, others argued that
earlier reform was desirable.
The Institute of Actuaries said that if adjustments were not made to
support Lifetime Health Cover, funds would have an incentive to seek new
uninsured elderly persons. [45] Change to the re-insurance pool may affect some
funds more than others and the risk is that if the Lifetime Health Cover
is introduced without fundamental reform of the re-insurance pool it will
lock in further distortion of the market.
8. Impact on public hospitals
The most significant side effect of the proposed new scheme is the negative
impact it could potentially have on the public hospital system. The private
health insurance sector is now heavily subsidised at the expense of public
hospital funding. It would be unsupportable if the introduction of Lifetime
Health Cover resulted in further cutbacks to public hospitals without
any demonstrated reduction in demand.
Each of the Australian Health Care Agreements contain a clause which
provides for the States to lose up to $200 million in funding if the participation
rate in private health insurance reaches 36%. The current participation
rate is 30.5% but this could rise if the Government's proposed advertising
scares people into joining. Trowbridge has assumed the participation will
jump to 35% by mid 2000.
Lifetime Health Cover targets young, healthy people and it will not produce
a significant drop in public hospital usage even if it succeeds in increasing
coverage. The clawback provisions were agreed prior to Lifetime Health
Cover being proposed and therefore they would have an unanticipated, punitive
effect on the States. The Department argues the States entered into the
agreement freely and that they can try to renegotiate in three years if
Lifetime Health Cover takes off.
The reverse should apply. As the States did not know of the Lifetime
Health Cover proposal when they signed the Agreements in 1998 they should
not suffer a penalty as a consequence. The Government first needs to demonstrate
that there has been a reduction in demand on public hospitals over the
first three years of Lifetime Health Cover. The principle is that the
Government should provide adequate funding for public hospitals up to
2003 based on the demand at those hospitals at the time.
Term of reference 2: To recommend consumer safeguards and other
amendments to ensure the scheme is viable and equitable
Groups in submissions and during evidence raised a range of concerns.
These suggest there are several areas where the design of the scheme should
be improved and anomalies removed. This would improve the overall fairness
of the proposed system.
9. Age exemption
The second Trowbridge report makes it clear that the selection of the
65-year cut off was arbitrary. [46] It highlights the comparative inequity between
those who are grandfathered and those who are not. The Department has
not clearly stated the foundation for choosing 65 as a cut off point.
However, it appears to have been a Government policy decision based on
the perception that 65 is the normal retirement age after which people
“ tend to be out of the workforce and have fewer means than others
who are younger to increase their incomes to pay for things like these”.
[47]
This is also the view argued by Medibank Private in support of the 65
year cut off. [48] The Consumer's Health Forum
said its members were concerned the scheme would discriminate against
elderly consumers. [49] Trowbridge points out that the Funds will have
a “perverse incentive” to attempt to avoid selling to people
in the grandfathered group.
Other motives mentioned are not to put older people under pressure during
the grace period and not to induce a sudden increase in adverse risk by
pushing large numbers of older people into private health insurance.
The logic of these arguments has just as much force when applied to others
who are retired and living on limited incomes– most notably women
over 60 receiving the Aged pension and those on Veterans or Widows pensions.
They are in the same situation as other people over 65 because in just
the same way the recent emergence of Lifetime Health Cover was unanticipated
and they are unable to adjust their plans to accommodate joining earlier
than they ought.
From an actuarial viewpoint there is also no benefit to the funds if
this group is left exposed and pressured into joining a fund during the
grace period. If there was a surge of such members it would create a distorted
age profile and over time their claims would exceed their contributions
weakening the funds viability –not strengthening it.
10. Youth
The National Youth Initiative submitted that the reaction of young people
was most likely to be adverse. [50] They argued that most young people with health
insurance did so because their parents had been members or that they were
in the minority who had disposable income to afford it. They reported
strong support for universal health care through Medicare and disinterest
in private health insurance because the cost structure was weighted against
young people. They concluded that the Bill “is well intentioned but
likely to miss its target”.
The purpose of the scheme is to give incentives for young people but
it fails to deliver this. Contrary to the original design there is no
discount for people who join at a young age even though they are contributing
far in excess of their demand on the insurance pool.
In the original scheme there were to be actual discounts for people under
the age of 35. In the same way that older people were to be charged a
penalty premium for late joining, younger people were to be given a discount
of 2.5%. Trowbridge emphasised this would make Lifetime Health Cover “attractive
relative to the existing system”. [51] The long-term strength of the funds depends on
young people joining and it is unrealistic to expect them to do so when
insurance offers such poor value to young people.
It would be feasible to retain the original structure recommended by
Trowbridge by giving those under 30 a 2% discount for each year prior
to 30 that they join. The financial cost to the funds would be offset
if more young people join or otherwise by a fractionally higher premium
increases over the years. Overall it would further reduce the extent to
which young people cross subsidise older groups.
MBF approved the central age of 30 but raised concern that, in the absence
of discounts it gave a signal that young people had no need to consider
private health insurance any younger than this. [52]
Other witnesses raised the concern that in the absence of discounts the
threshold age would effectively become the minimum age for joining.
Discounts were removed from the final plan on the grounds that they could
result in a rise in premiums for other members. [53]
The extent of this difference is not quantified but Trowbridge reports
that the flow on increases would be small.
Removing discounts also overlooks the whole point of the scheme, which
is to give young people an incentive to join. The evidence presented demonstrated
that young people made very low claims and even with a discount would
be providing a cross subsidy to older members.
There seems little logic in imposing such a contribution level on young
people when they are financially stretched. If the concept is to give
an incentive then there must be something tangible to attract people when
they are healthy and facing numerous other financial demands at a time
of typically low income.
The only counter argument advanced was the claims pattern of young women
for obstetrics which peaks in the early 30's. [54] This suggests that the funds should re-examine
the pricing of the products and the benefits for childbirth rather than
denying all young people a product at a reasonable price free of cross
subsidy to older groups.
The conclusion reached in the Trowbridge second report is:
“The absence of discounts below the threshold of 35 is financially
possible but may compromise one of the criteria for the ULCR scheme, namely
reinforcing the value of new members joining early and existing members
retaining their membership.” [55]
11. Long term members
The Bill treats harshly those who have been long-term members but have
let their membership lapse. For example a 59 year old retiree who held
membership for a total of 20 years in their working life but did not have
it on 1 July 2000 would get a penalty premium of (59-30) x 2%= 58%.
By contrast, a person with the same record under Lifetime Health Cover
would only get a penalty premium of 18%. There is no sound reason to reward
future loyalty and to leave past loyalty unrewarded.
There has been no justification given why future periods of membership
are to be included in the calculation of the penalty premiums but that
past ones are not. Older people without current coverage feel justifiably
aggrieved that their past loyalty counts for nothing under the new arrangements.
12. Hardship provisions
The current provisions for hardship are limited to approval by the Minister
under special circumstances notified within 2 years of commencement of
the scheme determined in accordance with regulations. This is unduly restrictive.
It is likely that the Minister will not personally consider hardship
cases and the question will be determined bureaucratically in accordance
with fixed regulations. This seems a most inappropriate manner to resolve
questions of hardship.
This is particularly the case given that there is already a Private health
Insurance Ombudsman who would seem to be equipped to consider such subjective
issues as might be raised by the complex personal circumstances of particular
individuals. It is not hard to imagine there will be unforseen cases where
there is conflict between the rules and an individual's circumstances.
For example where people were out of Australia at key times, when important
information was not provided to them, when Guardians acted against the
contributors long-term interests or membership lapsed at the critical
point in time.
Labor would like to see a wider power for the Private Health Insurance
Ombudsman to make a determination of hardship at any time.
There is also a need to look more closely at the arrangements that apply
when there is a dispute about the correct age of a person, when documentary
evidence of birth is not present or where it is unclear what prior history
of membership the person has. Remember that many people will have to demonstrate
that they were born prior to 1 July 1934 in countries for which records
at that time may not now exist.
13. Refugees
The design of Lifetime Health Cover gives no special treatment to migrants
to Australia. On the basis that they have not made a prior contribution
to Australia's health system they are given the same penalties as those
who chose not to join private health insurance– even though they
did not have the opportunity to participate earlier.
The situation is particularly difficult because new migrants are denied
membership of Medicare for 2 years after arrival and 10 years in the case
of aged parents. This means that they are denied access to the public
system and now will be subject to substantial penalty premiums to get
private health insurance for the additional components covered by private
health insurance.
The Private Health Insurance Ombudsman argued the rules applying to migrants
as a whole were too harsh and some provision should be made for people
who have shown a commitment in their country of origin. He also pointed
out some funds recognise people transferring from overseas funds by dropping
the waiting periods. [56]
The application of this principle to refugees and people on humanitarian
visas seems particularly harsh. These people are being given refuge in
Australia and come here by necessity not choice. The argument put forward
by the Department in evidence was that they were concerned that new entrants
should not be treated better than an Australian resident. The reverse
applies equally. New entrants should be treated no worse and they should
be rated on the basis of whether they joined at the first opportunity
they had to do so after their 30th birthday.
14. Administrative issues
The Private Health Insurance Ombudsman approved of a number of features
of the scheme that he believed would retain consumer rights as they presently
existed. However he did recommend that, on the basis of his experience
with complaints, that it would be important for Funds to be required to
notify non contributors when their partner stops making payments. [57]
Concern was also raised that the rules on suspension were unclear and
that there was potential for funds to distort their suspension rules in
order to obtain a commercial advantage.
The Ombudsman also recommended that the legislation should contain a
review mechanism, suggesting the Productivity Commission be asked to report
within 5 years.
15. Conclusion
The problems identified with the detail of the proposed Lifetime Cover
Scheme clearly need to be addressed before the proposed Bill becomes law.
These problems are significant and have the potential to undermine the
objective of the Bill.
Senator Chris Evans
(ALP, Western Australia)
Supplementary Report
by the Australian Democrats
National Health Amendment (Lifetime Health Cover) Bill
1999
The Democrats support the principle of industry reform for the private
health insurance industry. The Democrats have argued previously for industry
reform measures to be introduced to encourage competition and innovation
among private health funds, rather than subsidies that can often entrench
existing inefficiencies and anti-competitive practices.
The Democrats support the underlying principle of this Bill, which seeks
to encourage a sustainable level of private health insurance membership.
However, the Democrats have a number of concerns about aspects of the
proposed Lifetime Health Cover scheme, including consumer issues, the
impact of the proposed scheme on the public health system and the risk
of future financial liability for the Government.
The Democrats understand that the Government is addressing a number of
issues raised during the Senate Inquiry through amendments to the Bill
or through regulations. The Democrats will introduce amendments in those
areas (outlined below) that are not addressed through Government amendments.
Migrants
The Democrats recognise the concerns raised during the Inquiry about
the treatment of migrants under this Bill. The Bill specifies that migrants
over 30 arriving in Australia who wish to take out private health insurance
will have to pay a loading on the base level premium.
As migrants are required to wait for two years before they are entitled
to receive Medicare services, they are dependent on the private health
system to provide their health care during this period. This policy was
vigorously opposed by the Democrats and is causing significant hardship
in many migrant families. We therefore believe that is inappropriate and
discriminatory to create additional barriers to accessing health services
for new migrants. The Democrats are concerned that the Bill makes no provision
for migrants who have contributed to a private health insurance fund in
their country of origin for many years. Likewise, no consideration has
been given for migrants from countries that do not have private health
insurance and who therefore did not have the opportunity to contribute
in their country of origin. The Democrats do not believe that migrants
over the age of 30 are in the same position as Australian-born residents
who were able, but chose not to take out private health insurance before
the end of the grace period, and believe that this should be reflected
in the Bill. The Democrats are also concerned about refugees and migrants
who have little or no money when they arrive in Australia and who struggle
to be able to afford the essentials of life during their first few years
in Australia. These people already face significant hardship and should
not be penalised through additional barriers to accessing private health
insurance when they become established. Migrants contribute greatly to
the economic and social fabric of Australian life, including paying taxes
to support Medicare and the 30% private health insurance rebate. The Democrats
do not believe migrants should be discriminated against in accessing these
schemes due to their status as migrants.
Other Consumer Groups
The Democrats are concerned about other sectors of the community who
may be disadvantaged by the proposed scheme. For example, prisoners who
during a period of incarceration are unable to pay their insurance premiums
and who after their release wish to take out private cover will be required
to pay the premium levy. People living in rural areas where there are
few, if any, private health services available are unlikely to need private
health insurance. Yet if they move to a city will be required to pay the
levy if they want to take out private cover. The long-term unemployed
are another example of people who may be unable to afford private health
insurance for an extended period and who then may face considerable penalties
when they get a job and wish to take out private cover. People with chronic
illnesses and disabilities are another economically marginalised group
who already face considerably higher health care expenses than the general
community. Many cannot afford private health insurance in addition to
their day to day living expenses. The Democrats do not believe that people
who are unable to take out private health insurance for reasons of economic
hardship, unemployment, illness or disability, or other factors largely
outside their control, should be penalised due to government policy changes.
In particular, people who are unable to afford private health insurance
because of high health care expenses not met through existing Government-funded
programs, should not face additional barriers to obtaining private health
cover if their circumstances change.
The Democrats recognise the hardship provisions currently outlined in
the Bill but do not believe that these are adequate to ensure that consumers
are not disadvantaged by the proposed scheme. Given the substantial amount
of public funds (approximately $1.6 billion per annum) that are used to
subsidise private health insurance premiums, the Democrats believe that
the Government has an obligation to ensure that disadvantaged groups are
not `locked out' of private health insurance by the implementation of
Lifetime Health Cover.
Impact on the Public Health System
The Democrats are concerned about the impact that this scheme may have
on the public health system. In particular, the Democrats are concerned
about increasing the risk profile (and therefore increasing the cost of
care) of people in the public system and decreasing the risk profile (and
therefore the cost of care) of people in the private system. Lifetime
Health Cover aims to attract more young healthy people into private health
insurance on the basis that they are less likely to need health services
and will therefore be able to cross-subsidise higher level users. If this
is successful, the risk profile of the public system will increase without
any additional funding being provided. In fact, if sufficient numbers
take out private health insurance, public hospitals will lose money under
the terms of the current Medicare Agreements. This can occur without any
evidence of a reduction in demand on the public system, a reduction that,
in any event, is unlikely if a large proportion of people taking out private
cover are young and healthy. It should also be noted that when the state
and territory governments signed the Medicare agreement this policy had
not been announced. They therefore cannot be expected to have anticipated
the implications of this significant policy change on the terms of the
agreement. The Democrats are extremely concerned that the public health
system, that is already under considerable stress, will face additional
funding cuts due to the implementation of this policy.
Another matter brought to the attention of the Committee was the recent
growth in policies with large `front end deductibles' (excesses). These
policies have been marketed to young and healthy people who are unlikely
to need hospitalisation and who pay significantly reduced premiums as
a trade-off for a large excess when they enter hospitals. Anecdotal evidence
suggests that these policies are often taken out by young people who wish
to avoid the additional Medicare surcharge for high income earners and
have been described as `basically a donation to a health fund'. Given
the high excesses, holders of these policies have an incentive to use
the public system if they require hospital treatment. While the Democrats
support the right of all Australians to use the public hospital system,
we are concerned about the rapid growth in these policies and the impact
that this could have on the clawback of funding for public hospitals under
the Medicare Agreements. Given that Lifetime Health Cover provides an
additional incentive for younger people to take out low-cost policies,
the Democrats urge the Government to address this issue through restricting
the size of the excess allowable under policies with `front end deductibles'
and/or removing the clawback provision in the Medicare Agreement.
Advertising Campaign
The Democrats are concerned about the proposed advertising campaign for
this scheme. There have been a number of examples in recent years where
the advertising of private health insurance and related products has been
misleading and has caused confusion among consumers. The most recent example
is the Federal Government's campaign promoting the 30% rebate for private
health insurance which incorrectly stated that all policy holders would
pay 30% less in premiums than they were paying prior to the rebate. The
Democrats frequently receive calls and correspondence from consumers who
are not aware of their entitlement to free public hospital care and who
believe that they are unable to take out private health insurance due
to a pre-existing condition. In view of the complexity of the lifetime
health cover scheme and the lack of knowledge of the health system among
many consumers, the Democrats believe that the advertising campaign should
be comprehensive and in particular:
- State that all people are entitled to receive free public hospital
treatment;
- Avoid any negative connotations about the public health system, including
any implications that it is unable (or will be unable in the future)
to meet demand for treatment;
- State that health insurance funds are not able to refuse an application
for membership from someone with a chronic illness or disability;
- Include information about maximum waiting times for pre-existing conditions;
- Include information in a range of languages and formats suitable for
people from diverse linguistic backgrounds and people with disabilities;
and
- Include information outlining the criteria for hardship provision
and the procedure for applying for consideration under this provision.
Other Issues
The Democrats also have concerns about the compulsory nature of the scheme.
The Democrats share the concerns of Mr McAuley who made the following
comment to the Committee in relation to the financial risks faced by the
Government in introducing this policy:
What happens if this policy does not work? What happens if …it
attracts a fair few people in the older age group – say 50 to 65
– and the risk pool of those in private health insurance generally
gets worse? Will they then turn around to whatever government is the
government of the day and say `We need bailing out. It was you, the
government, who provided us with this notion of a lifetime rating, and
you need to bail us out'? There are tremendous fiscal risks associated
with that.
The Democrats believe that this risk should be avoided so that future
governments are not liable for any costs incurred by private health insurance
funds as a result of this policy. The compulsory nature of the scheme
requires health funds to charge higher premiums in accordance with age,
does not allow funds the flexibility to reduce their premiums for older
people if, in the future, they wish to do so. The Democrats believe that
if this scheme were voluntary it would not leave the Government open to
the fiscal risk of bailing out health funds facing financial hardship.
It would also enable funds to be more flexible and competitive in changing
their practices to meet consumer demand.
The Democrats are also concerned about the implications of this scheme
in relation to privacy and confidentiality of health data. If private
health insurance funds have the discretion to enforce the premium levy
for individual consumers, there is an incentive for funds to waive the
levy for healthy consumers to encourage them to join, and to enforce the
levy for unhealthy consumers, thereby discouraging them from taking out
private cover. This has the potential to create a `backdoor' system of
discrimination towards people with illnesses and disabilities. It also
has implications for existing regulations governing access to health and
health-related data on individual consumers, as funds may want to access
this data in order to differentiate between good and bad risks and assess
likely future health care costs.
The Democrats also note that one of the major barriers to increasing
private health insurance membership is the issue of gap payments. Consumers
continue to face unpredictable, large and open-ended expenses when they
use their health insurance. This can cause financial hardship and stress,
particularly to people on low and fixed incomes and is a major reason
for people dropping their health insurance. Until the issue of gap payments
can be resolved, measures such as lifetime community rating are unlikely
to cause many people to take out private health insurance.
Senator Andrew Bartlett
Australian Democrats Senator for Queensland
Appendix 1 - Submissions received
by the Committee
| 1 |
Mr Ian McAuley
–Additional Information , dated 13 August 1999 |
| 2 |
National Youth Initiative |
| 3 |
Consumers' Health Forum of Australia |
| 4 |
Private Health Insurance Ombudsman |
| 5 |
Private Health Insurance Administration Council (PHIAC) |
| 6 |
Mr Alan Brown |
| 6A |
Mr Alan Brown (Supplementary Submission) |
| 7 |
Australian Medical Association Limited (AMA) |
| 8 |
Towers Perrin |
| 9 |
Department of Health and Aged Care |
| 10 |
Australian Health Insurance Association Limited |
| 11 |
National Seniors Association |
| 12 |
Medical Benefits Fund of Australia Limited |
| 13 |
Medibank Private |
| 14 |
Health Insurance Restricted Membership Association
of Australia |
| 15 |
Association of Independent Retirees Inc |
| 16 |
Catholic Health Australia |
| 17 |
Brent Walker Actuarial Services Pty Limited |
| 18 |
NSW Health Department |
| 19 |
Australian Consumers' Association |
| 20 |
Victorian Government |
| 21 |
Queensland Health |
| 22 |
Institute of Actuaries of Australia |
| 23 |
Tasmanian Government |
| 24 |
Mr David Watson, Hospitals Contribution Fund of Australia |
| 25 |
Reverend Fr R Ayles |
Appendix 2 - Public hearing
A public hearing was held on the Bill on 13 August 1999 in Senate
Committee Room 2S3.
Committee Members in attendance
Senator Sue Knowles (Chairman)
Senator Andrew Bartlett
Senator Chris Evans
Senator Brett Mason
Senator Tsebin Tchen
Witnesses
Australian Health Insurance Association
Mr Russell Schneider, Chief Executive
Health Insurance Restricted Membership Association of Australia
Mr Michael Bassingthwaighte, Secretary
Medibank Private
Mr Matthew Moore, Manager, Strategy
Ms Lorelle D'Arcy, Manager, Policy and Information
Hospitals Contribution Fund of Australia
Mr David Watson, Public Officer
Catholic Health Australia
Mr Francis Sullivan, Executive Director
Australian Medical Association Limited
Dr David Brand, President
Dr Robert Bain, Secretary General
Mr John O'Dea, Director, Medical Practice
Towers Perrin
Mr Robert Paton, Principal
Institute of Actuaries of Australia
Mr Jock Rankin, Executive Director
Mr David Torrance, Councillor
Mr Ian McAuley, University of Canberra
Australian Consumers' Association
Ms Nicola Ballenden, Senior Policy Officer, Health
Consumers' Health Forum of Australia
Mr Matthew Blackmore, Executive Director
Mr Brooke Alexander, Senior Policy Officer
Department of Health and Aged Care
Ms Lynelle Briggs, First Assistant Secretary, Portfolio Strategies Division
Dr Robert Wooding, Assistant Secretary, Private Health Industry Branch
Ms Georgia Tarjan, Director, Insurance Reforms Section
Mr Charles Maskell-Knight, Assistant Secretary, Financing & Analysis
Bch
Mr Barry Rafe, Trowbridge Consulting
FOOTNOTES
[1] Submission No.9, p.2 (DHAC).
[2] Minister's Second Reading Speech.
[3] Explanatory Memorandum, pp.1-2; Submission
No.9, pp.4-5 (DHAC).
[4] Committee Hansard, 13.8.99, pp.1-2,
6-7,10,14,17,32. See also Submission No.3, p.3 (CHF); Submission No.10,
p.1 (AHIA); Submission No.11, p.1 (NSA); Submission No.12, p.1 (MBF);
Submission No.14, p.1 (HIRMAA); Submission No.16, p.3 (Catholic Health
Australia); Submission No.22, p.2 (Institute of Actuaries of Australia);
Submission No.24, p.1 (HCF).
[5] Submission No.22, p.2 (Institute of Actuaries).
[6] Submission No.7, p.2 (AMA); Submission No.10,
p.7 (AHIA).
[7] Submission No.4, p.2 (PHIO). See also Submission
No.13, pp.2-4 (Medibank Private). See also Committee Hansard, 13.8.99,
p.14 (AMA); p.36 (DHAC).
[8] Submission No.13, p.2 (Medibank Private).
[9] Committee Hansard, 13.8.99, p.32
(CHF).
[10] Submission No.4, p.2 (PHIO).
[11] Submission No.9, p.17 (DHAC); Committee
Hansard, 13.8.99, pp.35, 41 (DHAC).
[12] Submission No.23, p.5 (Tasmanian Government).
[13] Submission No.9, p.15 (DHAC); Committee
Hansard, 13.8.99, p.42 (DHAC).
[14] Committee Hansard, 13.8.99, p.42
(DHAC).
[15] Committee Hansard, 13.8.99, p.41
(DHAC).
[16] Committee Hansard, 13.8.99, p.41.
[17] Committee Hansard, 13.8.99, p.42
(DHAC).
[18] Submission No.3, p.2 (CHF); Submission
No.4, p.16 (Catholic Health Australia). See also Committee Hansard,
13.8.99, pp. 31-32 (ACA/CHF).
[19] Submission No.9, p.16 (DHAC). See also
Committee Hansard, 13.8.99, p.39 (DHAC).
[20] Submission No.9, p.16 (DHAC).
[21] Submission No.9, p.15 (DHAC). See also
Committee Hansard, 13.8.99, p.39 (DHAC).
[22] Committee Hansard, 13.8.99, p.40
(DHAC).
[23] Submission No.22, p.3 (Institute of Actuaries);
Submission No.20, p.2 (Victorian Government); Submission No.24, p.2 (Mr
D. Watson, HCF)
[24] Submission No.24, p.3 (Mr D. Watson, HCF);
Submission No.22, p.3 (Institute of Actuaries).
[25] Submission No.9, p.11 (DHAC).
[26] Submission No.20, p.1 (Victorian Government);
Submission No.18, p.2 (NSW Health Department); Submission No.21, p.3 (Queensland
Health); Submission No.23, p.2 (Tasmanian Government). See also Submission
No.16, p.6. (Catholic Health Australia); Submission No.24, p.4 (Mr D.
Watson, HCF).
[27] Submission No.21, p.3 (Queensland Health).
[28] Submission No.9, p.8 (DHAC). See also
Committee Hansard, 13.8.99, p.1 (AHIA).
[29] Submission No.9, p.8 (DHAC).
[30] Submission No.18, p.4 (NSW Health Department);
Submission No.21, p.4 (Queensland Health); Submission No.23, pp.1-2 (Tasmanian
Government). See also Submission No.1, p.4 (Mr McAuley).
[31] Submission No.9, p.8 (DHAC). See also
Committee Hansard, 13.8.99, p.40 (DHAC).
[32] Committee Hansard, 13.8.99, p.41
(DHAC).
[33] Submission No.9, pp.8-9 (DHAC).
[34] Trowbridge Consulting “Unfunded Lifetime
Community Rating – Preferred Model for Australia” November 1997
– called the “first Trowbridge report” – pg 3
[35] Department of Health and Aged Care (DHAC)
Submission 9 pg 6
[36] Public officer of Hospitals Contributions
Fund (HCF), Submission 24,
[37] MBF Submission 12 pg 2
[38] Ian McAuley Submission 1 pg 3
[39] DHAC Submission 9 pg 6
[40] Medibank Private, Submission 13, pg2
[41] Hansard CA 11 and 24
[42] Public Officer of HCF, Submission 24
[43] Allan Brown Submission 6
[44] Trowbridge first report pg 17
[45] Institute of Actuaries, Submission 22,
pg 5
[46] Trowbridge, “Update report on Introduction
of ULCR” March 1999 - called the “second Trowbridge report”
[47] Hansard CA 39, Ms Briggs in evidence
[48] Medibank Private, Submission 13, pg 3
[49] Consumers Health Forum Submission 3 pg
1
[50] National Youth Initiative Submission 2
pg 1
[51] Trowbridge second report pg 26
[52] MBF Submission 12 pg 2
[53] Department of Health and Aged Care Submission
9, pg 13
[54] Department of Health and Aged Care Submission
9, pg 13
[55] Trowbridge second report, pg 16
[56] Private Health Insurance Ombudsman Submission
4 , pg 3
[57] Private Health Insurance Ombudsman Submission
4 , pg 3