Pearls and Irritations

In their first ‘Saving Private Insurance’ report in August, Stephen Duckett and Kristina Nemet from the Grattan Institute presented a most helpful framework for assessing the future role of private health insurance in Australia in the context of our universal public insurance scheme, Medicare.

The central argument was that the case for subsidising PHI rests entirely upon its role vis-à-vis that of Medicare:

• If PHI complements Medicare, by allowing members access to non-Medicare services, earlier access, the doctor of choice or better amenity, there is no case for taxpayer subsidy;
• If, however, PHI substitutes for part or all of Medicare by funding services otherwise paid for by Medicare, then a subsidy is justified to the extent of the substitution involved.

In a commentary in the Canberra Times, I welcomed the report and looked forward to Grattan providing further useful advice as it explored the issues and options consistent with this core point. I was hoping that Duckett, as perhaps our most knowledgeable health economist, would help to guide us out of the mess PHI policy has become (he and Nemet more kindly called it ‘a muddled system’).

Sadly, in their second ‘Saving Private Insurance’ report released in December  , Duckett and Nemet do not tease out the policy options that would flow from their first report’s conclusion. Instead, they focus on the problems caused by the ‘community rating’ of PHI (the regulations that try to equalise premiums despite the variations in risk according to age etc.). Those problems are real, but sustainable solutions surely must also address the central question of the relationship between PHI and Medicare. The reform proposals in the second report do not do so.

The report’s analysis of the community rating problems also glosses over some of the history, and understates other problems such as the increase in large and unexpected out-of-pocket expenses.

Community rating was the driver of the downward spiral of PHI coverage in the 1990s: the excessive premiums for young people given their low risks led to fewer taking out PHI, causing the premiums to increase, in turn reducing the attractiveness of PHI even further for young people. The Howard Government measures to increase subsidies so as to reduce net premiums failed to halt the spiral – coverage fell to 30%. Following a Productivity Commission inquiry, in 2000 the Government introduced Life Time Cover (LTC), a major variation to the way community rating was regulated. I was closely involved in its design. Like many others, Grattan describes LTC as imposing penalties on those who delay PHI membership (and on those who drop out and later return): in fact it does no such thing. It sets premiums on commencement of membership according to the person’s age, with increases of 2% a year after age 30 and up to age 65. Very broadly, this reflects the profile of increasing health care cost risks with age up to age 65 (actual risk profiles are far more complex, varying with gender as well as age, for example). LTC allows people to avoid these increases if they continue their membership, providing a carrot for young people to take up membership and for all those already insured to retain their membership.

This softening of the impact of community rating, allowing a degree of recognition of risks according to age, was extraordinarily successful – much more than we in the Department expected, increasing PHI coverage to over 45%. The increase in membership amongst young people, and the reduction in cross-subsidies, also helped to stabilise premiums. But significant cross subsidies remained, particularly from the failure to allow premiums to vary with age beyond 65 despite health care costs accelerating from age 70. Moreover, the problem was exacerbated when the Howard Government increased the PHI rebate for older Australians, so that their net premiums were actually below those of younger people despite the much higher risks.

The measures taken by the Rudd/Gillard Governments did not help either. The means-testing of the PHI rebate was a pure sleight of hand, because simultaneously the Medicare levy surcharge was increased with the result that the reward (subsidy) for PHI increased – the value of the levy surcharge exemption for those on higher incomes increased by more than the value of the PHI rebate they lost – and the new reward was more crude and opaque than the PHI rebate. (It was also a disguised tax increase for everyone on high incomes – the uninsured paid a higher levy, the insured lost their PHI rebate.) The increased subsidy via the levy surcharge exemption has meant that, for an increasing number of people, taking up PHI membership is more a means of limiting tax, and the funds do not need to pay as much attention to the value of the cover they are offering. And this attraction for PHI membership is likely to be greatest amongst older people on high incomes.

It was probably inevitable that the cross subsidies from young to old that still exist under LTC would eventually lead to a renewed vicious cycle of increasing premiums and reducing membership amongst the young, particularly given policy changes since LTC’s introduction in 2000.

As the Grattan report shows, the broader ageing of the Australian population has been adding to those pressures. Those broader demographic trends, however, are affecting Medicare as much as PHI, as are other health cost drivers such as new technology. The report (Figure 1.1) contrasts PHI increases with wage increases since 2011, but does not show how Medicare’s effective ‘premiums’ have increased over the same period: they have increased much faster than wages too, though not quite as fast as PHI premiums. It would be helpful if APRA or AIHW, as well as Grattan, regularly reported both the growth in Medicare ‘premiums’ and the growth in PHI premiums: that might allow the public to put in better perspective increases in PHI premiums.

Crude measures to contain PHI premium increases have other unintended impacts, as the Grattan report mentions but might have highlighted more. In particular, after some success with some PHI reforms other than LTC in the early 2000s, particularly while Dr Wooldridge was the Minister, the incidence of large and unexpected out-of-pocket costs have increased, and more people are choosing products with exclusions and high excesses. The measures orchestrated by Wooldridge included ‘aggregate billing’, to halt the practice of each clinician and the hospital separately issuing bills to patients for the one episode of care, and ‘no co-payment or known co-payment’, requiring that patients receive advice of any out-of-pocket expense before agreeing to any procedure. These reforms do not seem to have been sustained, and the value of PHI even for those with ‘gold’ cover has declined. New action is needed to press funds to contain out-of-pocket expenses, including via agreements with doctors and hospitals, supported by the AMA and medical colleges.

Grattan’s recommendations focus on the re-emerging problems associated with community rating. Broadly, they involve:

• Removing cross-subsidies from those under 55 to those over 55;
• Limiting the increase in premiums for those over 55 by increasing the PHI rebate for them;
• Offsetting the reductions in premiums for those under 55 by removing their eligibility for the PHI rebate;
• Removing community rating entirely for those under 55, allowing funds to set premiums according to the risks involved (including risks associated with age and gender);
• Retaining full community rating amongst those over 55.

LTC would phase out, as would the Medicare levy surcharge and the associated exemption arrangements. Grattan suggests that its package would be broadly budgetary neutral.

Some of these suggestions are attractive, but they almost totally ignore the central issue raised in the first report. In particular, the new report fails to explain:

• The justification for (even higher) government assistance for those over 55; and
• The basis for its view that no government assistance should be provided to those under 55.

The report includes some discussion of whether PHI currently takes any pressure off Medicare but draws no firm conclusion. That is not surprising, as the extent of any offset almost certainly varies widely both with the PHI product and with the behaviour of PHI members. It is hard to believe, however, that there is no offset at all from young members’ PHI and a very large offset from older members’ PHI.

Returning to the core point in the first report, there are two coherent long-term directions for PHI policy that are fully consistent with the principles of Medicare:

• The direction advocated over many years by Menadue and McAuley based on PHI complementing Medicare, so that no government assistance is required, nor is any community rating needed, with those who value what PHI offers (in addition to Medicare) paying the premium that matches the risks they want covered; or
• The direction I have generally favoured (strongly recommended by Dick Scotton and also suggested by the Health and Hospitals Commission via its ‘Medicare Select’ option), where PHI substitutes for Medicare, taking responsibility for some or all the risks now covered by Medicare and receiving in exchange assistance equal to the Medicare ‘premiums’ involved. If that assistance were in the form of each insured person’s risk-rated premium under Medicare, once again no community rating of PHI would be required.

While Duckett has previously indicated a preference for moving in the first direction, leaving PHI to play a more residual role as it does in the UK, this Grattan report seems to accept that neither major political party is willing to go that way. In which case Grattan should be exploring options that would move in the second direction.

The first step should be to clarify the risks PHI covers that substitute those Medicare covers, and to make management of these the condition for government assistance. The best way to do this in my view is to require PHI funds to meet their members’ public hospital costs as well their private hospital costs, removing the current blurring and cost-shifting between PHI and Medicare (sometime later consideration could be given to allowing PHI to manage Medicare’s out-of-hospital services as well). The PHI rebate and the Medicare levy surcharge exemption could then be replaced by transparent subsidies linked to the hospital costs Medicare covers for similar people. To the extent those subsidies can be in the form of individual risk-rated premiums, current community rating arrangements could be withdrawn.

This step would have other major advantages:

• Removing the uniquely Australian question in emergency rooms, ‘do you want to go public or go private?’ which privately insured people can rarely answer with confidence. Instead, the entitlement would be made clear in the PHI product the person had selected;
• As a result, removing the (distorting) incentives for funds to encourage members to go public, for public hospitals to encourage people to go private, and for members to buy junk PHI products;
• Making more even the playing field amongst public and private hospitals whether treating insured or uninsured patients.

I appreciate such a step involves many challenges, including the need to adjust funding between the Commonwealth and the States (because the State public hospitals would gain additional revenue from insured patients and the Commonwealth would have increased costs via the risk-rated premiums paid to the funds). So more work needs to be done to tease it out, and some experimentation might be useful.

But one can see some similarities to the Grattan prescription, notwithstanding my concern that the authors are ducking their own questions: government assistance would be much higher for older PHI members than younger ones; the crude Medicare levy surcharge exemption arrangement would disappear; and cross-subsidies within PHI could be removed.

Andrew Podger was Secretary of the Australian Department of Health and Aged Care from 1996 to 2002. He is now Honorary Professor of Public Policy at ANU.

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