Private Health Insurance: focus on premiums ignores the cost of using it

Oct 17, 2017

Last week’s announcement from the Turnbull Government purported to be about making private health insurance “simpler and more affordable” but in fact delivered more for health insurance funds’ bottom lines than for Australians’ budgets and highlighted the contorted, confused and controversial logic that underpins the government’s push requiring taxpayers to contribute to the financing of both tiers of a two-tiered healthcare system.

For some time, Australians have been demonstrating their dissatisfaction with the rising cost of purchasing and using private health insurance. Premiums have increased 54.6 percent since 2009; the average premium increase in 2017 was 4.84 percent, 3.3 times the rate of general inflation in 2016. There were also simultaneous cuts to the private health insurance rebate (which decreases if average premiums increase by more than the CPI), so the cost increase of the average policy this year was actually 6.1 percent. Increasingly people are finding that they are substantially out-of-pocket when they use the private hospital system and that the set benefits of ancillary cover are lagging behind premium increases and the growing costs of services.

Too often the financial peace of mind and freedom of choice promised by insurance advertisements are illusionary. Small wonder there has been a significant increase in consumer complaints to the Private Health Insurance Ombudsman and people have been dropping or downgrading their insurance policies as budgets are stretched with the rising costs of basic living expenses such as energy, housing, food, transport and education.

While the larger health insurance funds have been reaping substantial profits, they are seeing their membership slipping and changing in ways that will soon impact on their profit margins. Young healthy people, whose contributions subsidise the cost of older members, are doing their financial accounting, recognising that they have other priorities, and leaving.

Consumer and industry concerns drove the government to establish a Private Health Ministerial Advisory Committee in September 2016, but in both composition and scope it was always going to be more focused on the needs of the insurance funds than those of consumers.  The  announcements last week substantiate this bias. These are hardly the major reforms promised and there is little to suggest that the proposed changes will have any real impact on consumer costs; industry will be mollified in the short-term, but long-term may find their members even more suspicious of the value of their products.

The central proposition of the announced reforms is aimed at getting more young people to purchase private health insurance to improve the risk pool – and insurers’ profits. Insurers will be able to discount premiums for hospital cover for those aged 18 to 29 years by 2 percent annually, up to 10 percent. The discount phases out when people turn forty. In reality, this will mean a very small incentive – perhaps as little as 70 cents a week – for young people who are already bearing the burden of education debts, under-employment and housing costs and who think that health-wise they are invincible.

Industry representatives believe this will attract 300,000 new policy purchasers – they need to get at least 50,000 young members to cover the cost of the new incentive, otherwise it will be passed on via higher premiums to older members; others are more sceptical and some have called this a “rip off for millennials” that will entrench people in a “two-tier” healthcare system earlier in life.

Changes that will allow people to upgrade their hospital cover to provide full mental health treatment without a waiting period have also been touted by the government as a benefit for young people. But it’s a benefit that can only be used if the policy holder (presumably in urgent need of mental health care) knows this is possible, has the money to purchase the upgrade and maintain it (because this is a once-only offer), and is able to access private in-patient care. It does not cover day-only mental health care. It has been suggested that this change was a back-room compromise to avoid a serious reform, such as banning mental health exclusion clauses.

On the other hand, it appears many young people are annoyed about the decision to end insurance cover for alternative and complementary therapies. They claim these are the very treatments they want and a key reason why they purchase private health insurance.

The decision to end the subsidies for a raft of “natural therapies” (17 in all) is a sensible move approved by most: it makes no sense for the government to subsidise these therapies for which there is no clear evidence of effectiveness. Natural therapies are widely used and not just by young people – they now comprise the fifth most-common claim on extras cover, with a growth rate of almost 1900 percent over the past 20 years. Yet none of these therapies would meet the benchmarks for treatments provided by the Pharmaceutical Benefits Scheme or Medicare.

However, this does represent a reversal of positions on the part of both the government and the insurers, so it will be interesting to see the extent to which the decision survives the lobbying campaign against it that is already gearing up.  Insurers have argued that these are preventive treatments and removing them would place a strain on public hospitals. The Turnbull Government initially rejected a 2015 set of recommendations to abolish the private health insurance rebate for these treatments, claiming this was a review commissioned by Labor as part of a “raid” on private health insurance rebates, and that it would not achieve significant savings.

The government has responded quickly to the push from health insurers to reduce their costs resulting from the failure to update the required pricing of implanted medical devices on the Prostheses List.  As a consequence, health fund members have been paying two to five times more than necessary for devices used in private surgery. The government has announced an agreement with the Medical Technology Association of Australia to lower the price of these medical devices from 1 February next year. This is expected to achieve savings to insurers of $300 million (some $100 million of which goes to the government) in the first year, rising to $1 billion over four years. It remains to be seen if all these savings will be passed on and how quickly that will happen.

The industry has previously stated that every $200 million in reduced prostheses costs would deliver a one percentage point reduction in premium increases, but no fund has yet guaranteed that next April’s premiums will rise by less than 4 percent. Moreover, the ultimate choice of prostheses lies with the surgeon, with few patients in a position to argue about the selection and price of their artificial hip or knee joint or lens for cataract surgery. There is currently a shocking (and unexplained) variation in prostheses costs: for a knee replacement these vary from $5,000 to $19,000. In addition, private hospitals may look to replace their lost profit on prostheses with increased bed day charges. So despite the proposed cost reductions, some patients could still find they face substantial out-of-pocket costs for this surgery.

The primary cause of unexpected out-of-pocket costs for consumers using their private health insurance comes because an increasing number of people have (often unwittingly) purchased cheaper policies which have excess payments, deductibles and exclusions. The government now seems intent on compounding this problem rather than addressing it by allowing an increase in the maximum excess (from $500 to $750 for singles and from $1000 to $1,500 for couples and families). The media release from the Health Minister said, with no apparent irony, “We know that many people would like to be able to select a higher excess in exchange for lower premiums.” But likely the only people who will benefit from this provision are those individuals earning over $80,000 and families with incomes over $180,000 who do not have hospital cover and who, for the first time, may see insurance as a cheaper option than paying the Medicare Levy Surcharge.

The financial implications around decisions to purchase and then use private health insurance are increasingly arcane and complicated. The government has promised greater simplicity and transparency, but it’s not clear how and if these will be delivered by the new requirements for policies to be categorised as either gold, silver, bronze or basic. This system will provide some sort of alert that a gold policy costs more and delivers more benefits than a basic policy, but people will still have to read the fine print. The promised upgrade of the website to make it easier to compare insurance products will not help those least able to make these checks.

The response to date from consumer groups and policy wonks is that these reforms are unlikely to slow substantially the increase in premium costs and they will drive an increase in the number of low-value, junk policies which, egregiously, will still be allowed to be sold. It is estimated that some 13 percent of policies currently on the market fall into this category and more than 560,000 Australians have such policies.

It is foolish economics and tortured logic to allow junk policies that attract the full private health insurance rebate and offer only treatment in a public hospital. This is happening despite claims (not substantiated) that private health insurance relieves the pressure on public hospitals and even as insurance funds are campaigning to prevent public hospitals from attracting private patients and there are moves to limit the ways in which private insurance can be used to access care in public hospitals.

There are a number of other issues that remain unaddressed. These include those relating to equity and out-of-pocket costs. True, the ability of insurers to now offer cover for transport and accommodation cost to people in rural areas will help them travel for private care – but only if they have been wise enough and rich enough to purchase this cover before it is needed.

But out-of-pocket costs – which are currently being investigated by a Senate committee and arguably should have been at the top of action agenda – have been pushed on to yet another committee (a sure sign it’s too hot for this government to handle) and there will be more committee work to look at risk equalisation and funding mechanisms for rehabilitation and day-only mental health care.

Most tellingly, we should consider the rhetoric around these issues. For those concerned about the erosion of the universality of Medicare and the declining level of federal support for public hospitals, it provides some chilling insights. The Health Minister continues to assert that private health insurance is “a fundamental object of faith for the vast majority of Australians and for the Coalition and that “private health is fundamental to choice, it’s fundamental to the ability of Australians to have peace of mind”.

The modus operandi appears to be to starve the public system of funds and use fear of longer waiting times to drive more people to the private sector. This is just what insurers want. The head of one large fund has a vision for the future where 70 percent of the population have private health insurance (that’s a level only seen prior to the introduction of Medibank).

The only healthcare cost that is never up for scrutiny is the burgeoning federal support for private health insurance, estimated to cost $6.43 billion this financial year ($10.64 billion if taxation revenue that is foregone is included). That goes to support the healthcare costs of just 46.1% of the population; for the most part these are people whose health and finances are better than average.

Australia is going backwards. We watch aghast as President Trump attempts to tear down the Obamacare reforms, but Australians have been slow to see how our own healthcare system has been eroded, has become increasingly inefficient and inequitable and is now downgraded internationally because it is two-tiered. To date the focus of government policy has been limited to the cost of purchasing private health insurance when what is needed is work to address the cost – to individuals, the healthcare system, and society – of using it.

Dr Lesley Russell is an Adjunct Associate Professor at the Menzies Centre for Health Policy at the University of Sydney.

This article was also posted on Inside Story

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