Pearls and Irritations

For the past two decades, there has been an annual process in which private health insurers in late spring submit proposed premiums to the Minister for Health, who may disallow them if she or he considers they are not in the public interest. After some ritualised haggling the Minister announces the outcome – usually when the public’s mind is fixed on their summer holidays – and the premium rises take effect on 1 April.

The announced average increase for 1 April this year is 2.74 per cent – the lowest since 2001 (when there was no increase) following the surge in the number of people insured as Lifetime Health Cover was introduced. The announced average premium increase of course conceals variation across and within insurers. The Department of Health publishes a table showing the variation across insurers, which this year went from 0.50 per cent to 5.47 per cent. The two for-profit behemoths Bupa and Medibank had increases of 3.21 and 3.25 per cent respectively. Of the other big five, not-for-profit HBF and HCF were 0.94 and 2.95 per cent, while listed NIB was 4.36 per cent.

Unfortunately there is no public information on variation at a policy level. However, in the past, it has not been uncommon for many insurers to increase premiums for some policies by twice the average for the insurer in response to claims experience.

While the average 2.74 per cent increase is the lowest for over 20 years, wages growth over calendar 2020 at 1.4 per cent was also historically low. Although this was clearly affected by the disruptions to the economy caused by Covid-19, it still means that the announced average premium increase for working households is almost double the rate at which their incomes are increasing.

However, the announced 2.74 per cent rise understates the actual premium increase faced by most policyholders because of the way in which the premium rebate is calculated. The Gillard government in the 2012-13 MYEFO made a decision which effectively indexes the premium rebate by CPI. While the Liberal Party promised in the 2013 election to restore the full value of the rebate when fiscal circumstances allowed, restoration has not yet taken place.

As a result, the “30 per cent rebate” received by families earning under $180,000 (and singles under $90,000) in 2020 was actually only 25.06 per cent. The “40 per cent rebate” for over 70s was 33.41 per cent. From 1 April 2021, these rates will decrease to 24.60 per cent and 32.812 per cent respectively.

This means that a family with a policy with a gross cost of $5,000 a year will currently be paying $3,747 net of the rebate.  After a premium increase of 2.74 per cent plus the rebate reduction, it will be paying $3,873 – a 3.4 per cent net increase. An over 70-year-old with a gross premium cost of $2,500 will face a 3.7 per cent net increase. If the family and the over 70-year-old have “average” NIB policies, they will face net premium increases of 5.0 per cent and 5.3 per cent respectively.

Price increases for a discretionary product at a rate of two, three or four times the rate of increases in people’s income is likely to lead to more people dropping their insurance. And if the people who leave are healthy, total benefits will not be reduced.  Insurers will then have to raise the same amount of money from fewer policyholders, leading to even larger premium increases. This was the story of private health insurance in the 1990s, and there are signs that the pattern may be recurring.

What of the future? APRA data on the operations of private health insurers for calendar 2020 shows that Covid-19 reduced the number of insured hospital episodes in 2020 by 7.6 per cent compared with 2019. General treatment services (e.g. dental, physiotherapy, optical) also fell by 8.0 per cent. However, the benefits paid per hospital episode increased by 2.7 per cent from $3,369 to $3,459. While this is slightly above the long term trend (perhaps because Covid-19 resulted in an increase in average complexity, as more discretionary and less costly procedures were deferred while major surgery for cancer or other severe conditions proceeded) it is not wildly inconsistent.

This suggests that once normal utilisation patterns are resumed the growth in benefits per policy will return to the trend of between 3 and 4 per cent per year, or 1-2 per cent above inflation. In the absence of a policy response from the government, this will result in announced premium rises in line with increases in benefits – and actual rises of rather more. Premiums will take up a greater proportion of household budgets every year.

The premium setting process always involves a mix of actuarial and political considerations. Many private health insurers have sought relatively low premium increases in recent years in response to clear messages from the Health Minister and his office.  Partly as a result, net private health insurance assets dropped slightly during the 2019-20 financial year for the first time in many years. While many insurers continue to hold high levels of reserves, boards are unlikely to accept the erosion of these reserves as an ongoing strategy to mitigate premium increases.

However, there is some good news associated with private health insurance. On 24 February, Medibank Private announced a dividend in respect of the second half of 2020 of 5.8 cents a share, or a total of $173 million. This followed NIB’s announcement two days earlier of a dividend in respect of the same period of 10 cents a share, or $46 million.

A 70-year-old with 880 NIB shares could use her dividend to pay her premium increase.