Private health insurance premium increases

The private health insurance sector has begun its annual process of negotiating premium increases with the federal government. To most, the process of—and indeed the need for—negotiating premium prices with government is a little mysterious. A Background Note prepared by the Parliamentary Library provides an overview of the current process for seeking premium increases. Under the Private Health Insurance Act 2007, private health insurance funds must seek the Minister for Health and Ageing’s approval for all premium increases; and the Minister must publicly disclose reasons for not approving an increase.

According to an article in the Australian Financial Review on 19 November 2010, this year the industry is seeking premium increases as high as 7 per cent, which is double the inflation rate. The article highlights some of the arguments that may be used to refuse premium increases of this size. They are:

• the private health insurance industry was strongly profitable in the 2010 financial year
• the value of the funds’ capital investments increased by 8.5 per cent in the last year and
• private health insurance membership has continued to grow,  resulting in increases in premium incomes of 8.3 per cent over the last year.

The funds, however, make the case that their costs have been growing rapidly; their costs mainly come from paying out benefits to members who make claims. According to Bruce Levy, Chief Executive Officer, of Medibank Private’s Private Health Insurance division, claims have been growing at 10 per cent across the private health insurance industry. The factors driving up health care costs in the health system as a whole—the rapid roll out of high cost technology, rising fees and prices for health goods and services, and higher service utilisation—affect the private health insurance industry as well.

After this year’s negotiations are over and premium increases are announced, accusations will inevitably be made that the funds sought, and were granted, excessive premium increases. What this negotiation process hides is the underlying problem with the private health insurance industry—the funds have very little power to control the cost of premiums.

The serious problems with continually rising premiums were aired more than a decade ago by the Industry Commission, the Productivity Commission’s predecessor. In its 1997 report on private health insurance, the Commission explained that the private health insurance industry held an 'ambiguous position within Australia’s health care system' as it was a voluntary form of insurance and sat alongside a compulsory, tax-funded competitor, Medicare. It also explained:

The most direct cost drivers behind premium increase are thus not under the direct control of the funds. They reflect decisions by governments, doctors, patients, and hospitals about what treatment occurs, where it takes place and at what price. (pp. xxxvii)

While the Howard Government’s changes to private health insurance between 1996 and 2007 did revive fund membership, they made little difference to the funds’ ability to control premiums. An Access Economics report in 2005 argued that the private health insurance industry in Australia still had problems, despite the Howard Government’s reforms, because it operated 'primarily as a financing system, rather than a genuine insurance market', and was a 'passive payer' in the health system (pp. 3).

There are several reasons why the funds face difficulties when it comes to controlling premiums. First, funds are unable to refuse people membership based on their health status; they are, however, allowed to delay providing coverage for a defined period of time for some pre-existing illnesses. Second, funds are prevented from charging members premiums based on their risk of ill health. Funds with a high proportion of members with chronic illnesses are likely to have relatively high claim costs, although there are some mechanisms in place to equalise risk across funds. And third, because private health insurance funds do not cover all health services, they have relatively little capacity to significantly improve their members' health status, reduce health care utilisation and, therefore, the number of claims made. Funds, for example, are prevented from covering general practitioner services, and many do little in the way of prevention and health promotion (although this is beginning to change).

In this era of health reform, the Government may be prompted to rethink the underlying structural problems in the private health insurance industry in Australia. Part of this exercise will be to tackle the thorny issue of the role private health insurance should play in the context of Medicare.

Image sourced from: http://www.abc.net.au/news/stories/2009/05/18/2573013.htm