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

By 30 June 2000, the government had introduced its private health insurance 'carrot and stick' reforms, providing a 30 per cent rebate for contributions, but specifying a two per cent per year of age contribution increase for people over age 30 who deferred taking out private health cover. As was expected, the percentage of Australians covered for private hospital insurance jumped to 43 per cent in 2000, and as high as 44.9 per cent in 2001.

By June 2002 the decline had restarted, and coverage is down to 44.1 per cent as the downward spiral kicks in again, health funds apply for further contribution increases and the government is stuck with a 30 per cent rebate for an increasing contribution cost.

Health insurance is expensive. A 'middle of the road' cover will cost a couple without children around $2,500 per annum after deduction of the 30 per cent government rebate. In other words, around $3,500 per annum without the government subsidy. But for the maximum cover, a couple could expect to pay about $4,170 per annum after the subsidy, or nearly $6,000 without the it. This is a high-cost item in most people's household budget, and can be expected to be subjected to a rigorous value-for-money test. This is particularly so where increases regularly exceed CPI, no matter what the reason.

A System In Crisis

It is hardly surprising, then, that an increase about seven per cent, which will cost a further $175 per annum for a couple, should cause much financial re-evaluation and the probability of further decline in private health coverage. Anyone who regularly claims more than the cost of their contributions is likely to stay with private health insurance. People who pay more than they claim will continue to re-evaluate their membership. If the cost is regularly more than the return, and if there is a perception that the system does not provide adequate cover and the product is confusing, people will opt out. To date, there appear to be no proposals for negating the seemingly inexorable spiral of mounting private health insurance contribution costs.

Miles Kemp, in an article titled "A Greedy System" in the Adelaide Advertiser,14 January 2003, said:

"The spiralling cost of insurance premiums is a measure, critics say, of the recent Federal Government policies designed to revive the industry… What the government didn't bank on was that insurers couldn't translate the additional members into profits. The insurers are blaming increased costs. Critics blame bad management and the competition for market share and the miscalculations of fund managers."

We appear to be heading back into a position where, even with a government subsidy of around $2.5 billion, some health insurance funds (including, ironically, the government-owned Medibank Private) continue to make losses.

The PHIAC Commissioner's Annual Report for 2001-2002 contains the ominous comment:

"Benefit payments increased significantly by 15.8 per cent following the expiry of qualifying periods for new memberships resulting from Lifetime Health Cover and, if this trend continues, it will put upward pressure on contribution rates. Factors such as the medical indemnity crisis, increased wages for nurses and other health professionals, increased use and cost of prosthetics, technology costs and consumer expectations all have effects on benefits paid by health funds. These financial pressures are likely to continue over the next twelve months."

No comment is made about fund management standards. The same pressures that have contributed to a general downturn in investment income in a post-September 11 environment will have affected private health insurance fund investment income. However, it is also hard to see how any government can justify continued subsidies to organisations that continue to lose money. The $2.5 billion that goes to subsidise health funds at the expense of the public system can now hardly be withdrawn from the private system, unless the government is prepared to accept the almost certain collapse of private health insurance as we know it.

Paradoxically, there is no evidence to suggest that the public hospital system is benefiting in any substantial way from the money paid into the private health insurance system. The government had expected that the public system would benefit either by removing services from the public to the private system, or by privately insured patients claiming the cost of public treatments from the funds. This latter expectation conveniently ignores the fact that any privately insured Australian is firstly a Medicare contributor, entitled to the benefits of the 'free' public system.

The time is ripe for a full-scale re-evaluation of the whole system of health funding and all the assumptions and myths that underlie it. Not the least the sanctity of private health insurance in general and community rating in particular.