Private health insurance: the sad history of a system in crisis

A disappointing aspect of recent concerns with private health insurance has been the Government's willingness to prop up a faltering system at significant cost to every Australian, without initiating a review of its workings.

Private health insurance in Australia has a very long history, starting in the early 1800s with the importation of friendly societies from Britain. We may think of the Free Gardeners, Foresters, Odd Fellows and Druids as no more than quaint remnants, but until the end of WWII they played a major role in providing medical insurance through a capitation system payable to the "Lodge doctor".

In the late 1930s commercial bodies started offering cover over hospital costs. In South Australia, the Mutual Hospital Association Ltd was established in 1937 with 100 persons each subscribing a nominal sum to the company's initial capital. Similar organisations started in other states under the broad banner of 'Blue Cross Funds', reflecting the major funds that were developing in the USA

From the outset, these were companies limited by their share capital, notwithstanding some special requirements which permitted such organisations to operate as non-profit health funds. At the same time, these shareholders had no right to any control over the organisation. The fundamental distinction between a 'for profit' and a 'non-profit' fund is that a 'for-profit' fund may pay dividends to shareholders while a 'non-profit' fund may not. There are also differences in their taxation status.

In 1952, Earle Page, Minister for Health in Menzies' coalition government, introduced the National Health Act, which, through many amendments, has governed the private health insurance industry over the past 50 years. Health insurance funds, principally the Blue Cross Funds in each state, the remaining friendly societies, and other organisations registered under the Act were then able to offer cover over medical costs, some ancillary treatments (although dental cover was not introduced until the 1970s), and hospital costs.

Health insurance differs in many respects from general insurance. A non-profit health fund is not allowed by law to make a profit, but the reality is that the term 'surplus' is substituted for 'profit'. Importantly, private health insurance funds are not, in fact, insurers in the generally accepted sense of the term. They are closer to co-operatives, all members' contributions being pooled and substantially paid out as benefits.

Private health insurance is quite a complex product, made more so by the funds themselves. One of the biggest criticisms of health funds has been that they do not make clear what particular levels of cover provide. (I should emphasise that my comments are primarily aimed at private hospital cover. This is the benchmark used by the industry, governments and commentators. Ancillary cover, for dental, optical, physiotherapy and the like, is not seen as having the crucial funding context applicable to hospital cover.)

There is a useful document published by the Private Health Insurance Administration Council (PHIAC), called Insure? Not Insure?: Your Quick Guide to Private Health Insurance', (pdf, 310Kb). PHIAC is the government body that oversees private health insurance funds in accordance with the National Health Act.

A central concept in the provision of private health insurance has been that of community rating. This is the principle that all contributors to a particular table offered by a health insurance fund shall pay the same contribution irrespective of their state of health or claims experience save that a family shall pay at twice the rate of a single person. There are no 'No Claims Bonuses', no reductions for different classes of contributors, just one rate for all members.

It can be argued that this principle is unfair to people with a low level of claims and unreasonably subsidises those with a high level, particularly the aged and chronically ill. Nevertheless, this principle, embedded in the National Health Act, is accepted by both major political parties and has been since 1952. This is why health insurance funds are legally unable to offer concessions to individuals. Over recent years, attempts have been made to make this rather less rigid.

Most funds now offer "Front End Deductible" tables for hospital insurance, where the member pays the first part of a hospital charge (commonly $100, $200 or $500) in return for a lower contribution rate. Medibank Private in particular has been active in promoting tables that exclude certain conditions, eg cardiac surgery, mental health hospitalisation etc, again in return for lower contributions.

With community rating, contribution costs reflect the whole spread of members' claiming patterns. People who make no claims, or whose benefits are lower than they might expect, are effectively subsidising members whose claims experience is higher. Where members see that this is the case, they are more likely to drop health insurance cover.