Are the health funds' bubbles bursting?

CEO George Savvides sounded off in the Age on 20 March, complaining that state governments and their public hospital administrators were harvesting patients with private health insurance so they could bill their insurers for medical cover given in the public system.

Mr Savvides claimed that the rate of growth in members' claims coming from public hospitals had been 50% higher than the growth in claims for patients treated in private hospitals. He expressed concern that patients in public hospitals were not being properly informed about the potential consequences of using their insurance in that way. The article didn't explain what the potential consequences were.

Given the huge churn rate in health insurance policies being cancelled and replaced by cheaper alternatives or downgraded, it seems as though Mr Savvides may be preparing Medibank Private Ltd for a potential profit downgrade. Given that all of this would or should have been known to Mr Savvides before Medibank Private Ltd's recent float, it appears to be a variation of the old game of CEOs blaming their predecessors. It also displays a weakness in the health insurance fund business model.

Elsewhere, Mr Savvides complained about government downgrading of rebates to private health insurance during the term of the previous Labor government. This was certainly well known before the Medibank Private IPO, and further highlights the weakness of Medibank Private's business model.

Medibank Private received approval to lift its premiums by 6.59% against the health fund average fee premium hike of 6.18%. As these increases were well above the rate of inflation it added impetus for members to check whether there were cheaper options within their own fund or whether they should switch to another fund.

It is clear that the health funds are suffering with respect to health insurance cover. It has long been known that they sought to partially paper over this weakness by persuading the public to take ancillary (general) insurance cover and rationing the benefits offered under ancillary policies. They were able to manipulate benefits in order that they could provide a guaranteed profit in the ancillary cover business which, in the case of mutual funds, was then held in fund reserves to subsidise hospital cover insurance, which at times came dangerously close to a loss-making situation. However, this approach showed scant respect for ancillary benefits members, particularly those who had ancillary benefits but not hospital cover.

The 22% skim

Recently the ADA president has publicly identified the skim as representing 22% of ancillary cover, again raising the serious question of 'why do members choose to belong to ancillary benefits tables?' This in turn reveals a serious weakness in health funds' business models. Since health fund administrative costs are 8.5% on average, ancillary benefit contributions are getting back on average 78% in claim rebates, paying 8.5 cents in the dollar administratively for the privilege of having their money recycled and contributing 13.5 cents per dollar to somebody else's pocket; it sounds like a great deal to avoid.

High income earners don't need ancillary cover to escape the tax surcharge, requiring only hospital insurance. Furthermore, the hospital cover could be one with the lowest cost options.

Choice says 'drop it'

Consumer group Choice's spokesman, Tom Godfrey, has indicated that people would be better off keeping the premiums in their bank accounts and paying their own ancillary health bills. He advised that if you are struggling with the 1 April health fund price hike you should consider dropping your extras (ancillary) cover.

PHIAC chief says extras cover is 'irrational'