Key points

• The Bills support implementation of a 2021–22 Budget measure to modernise and improve the Private Health Insurance Prostheses List. Prostheses List arrangements determine the benefits paid by private health insurers for certain medical devices and human tissue products when used for privately insured patients with eligible health cover. The package of reforms is intended to place downward pressure on private health insurance premiums by reducing the costs associated with these products.
• Specifically, the Bills clarify the intended scope of the List by replacing the terminology of ‘prostheses’ with ‘medical devices and human tissue products’ and including definitions of these terms. This will facilitate the removal of some items currently on the List that do not meet the new definitions, with such items intended to be paid for under an alternate funding arrangement to be detailed in a separate legislative instrument from 1 July 2023.
• The Bills also provide for cost recovery arrangements consistent with the Australian Government Charging Framework, replacing current cost recovery arrangements that have been unchanged since 2009. This will increase costs to industry as the existing fees and levies charged do not reflect the minimum efficient costs of delivering the required services. Detail of the new fees and levy are to be set out in legislative instruments.
• Stakeholders appear to broadly support the changes although the medical technology sector has called for further detail on subordinate legislation to be made available.

Introductory Info

Date introduced: 1 December 2022
House: House of Representatives
Portfolio: Health and Aged Care
Commencement: For commencement details, refer to page 3 of this Bills Digest.

Purpose of the Bill

This Bills Digest relates to three Bills (collectively ‘the Bills’):

• the Private Health Insurance Legislation Amendment (Medical Device and Human Tissue Product List and Cost Recovery) Bill 2022 (the PHI Bill)
• the Private Health Insurance (Prostheses Application and Listing Fees) Amendment (Cost Recovery) Bill 2022 (the PHI Fees Bill)
• the Private Health Insurance (National Joint Replacement Register Levy) Amendment (Consequential Amendments) Bill 2022 (the PHI NJRR Bill).

The purpose of the Bills is to amend the Private Health Insurance Act 2007 (the PHI Act), the Private Health Insurance (Transitional Provisions and Consequential Amendments) Act 2007, the Private Health Insurance (Prostheses Application and Listing Fees) Act 2007 (the PHI Fees Act) and the Private Health Insurance (National Joint Replacement Register Levy) Act 2009 (collectively the PHI Acts) to implement the first tranche of legislative reforms related to the 2021–22 Budget measure, Modernising and Improving the Private Health Insurance Prostheses List.

Specifically, the Bills:

• replace various references to ‘prostheses’ with ‘medical devices and human tissue products’ to better reflect the types of products eligible for inclusion on the list of items for which specified benefits are to be paid by private health insurers (currently known as the Prostheses List, hereafter in this Digest generally referred to as the List)
• better define the products that may be eligible for inclusion on the List by inserting definitions for ‘medical device’ and ‘human tissue product’ that align (where relevant) to the Therapeutic Goods Act 1989
• amend the cost recovery arrangements authorised by the PHI Act and PHI Fees Act relating to the List, including statutory authority to establish cost recovery arrangements consistent with the Australian Government Charging Framework. 

Further legislative and administrative changes are anticipated to fully implement the Budget measure.

Commencement provisions

The PHI Bill commences on 1 July 2023.

Sections 1­–3 of the PHI Fees Bill commence on Royal Assent. Schedule 1 of the PHI Fees Bill and the whole of the PHI NJRR Bill will commence on the later of the day after Royal Assent and immediately after Schedule 2 and Schedule 1 of the PHI Bill respectively commence. However, the amendments will not commence at all if the PHI Bill does not commence.

Background

About the Prostheses List

The Prostheses List (the List) is a Schedule to the Private Health Insurance (Prostheses) Amendment Rules (No. 3) 2022 (Prostheses Rules) which set out minimum and maximum benefits that private health insurers are required to pay for listed items. The List includes products such as cardiac pacemakers and defibrillators, cardiac stents, hip and knee replacements, intraocular lenses, as well as human tissues such as human heart valves, corneas, bones (part and whole) and muscle tissue.[1] In 2021 there were more than 11,600 listed products.  

Subsection 72-1(2), Table Item 4 of the PHI Act requires private health insurers to pay benefits for prostheses that are included on the List:

• for which an insured person has appropriate cover
• that are provided as part of an episode of hospital treatment or hospital-substitute treatment
• for which a Medicare benefit is payable for the professional service associated with the provision of the prosthesis.[2]

For example, if a person with private health insurance has hospital orthopaedic cover and seeks a hip replacement as a private patient in either a private or public hospital, their health fund would be required to pay to the hospital the minimum benefit for any artificial hip on the List chosen by their surgeon.

According to the Department of Health and Aged Care (the Department), the purpose of the List is ‘to ensure that privately insured Australians have access to clinically effective prostheses that meet their health care needs’.[3]

Medical device manufacturers and suppliers apply to have items added to the List so that they may be reimbursed by private health insurers.

2021­–2025 reforms

The 2021–22 Budget provided $22 million over four years for the measure Modernising and Improving the Private Health Insurance Prostheses List. The measure is intended to ‘reduce the cost of medical devices used in the private health sector and streamline access to new medical devices, which will improve the affordability and value of private health insurance for Australians’.[4]

The measure encompasses multiple streams of reform activity, developed through a series of review and policy development activities.[5] While stakeholders broadly agreed that the Prostheses List arrangements required reform, they have divergent views on desirable reforms, reflecting their differing roles and incentives.[6] The reforms can be seen as attempting to balance these diverse interests and deliver a package that delivers on some but not necessarily all concerns for each stakeholder. The Department has undertaken several stakeholder consultations on various aspects of the reforms.[7]

Key components of the reforms, to be implemented progressively over four years from 2021, include:

• reducing the gap between List benefits and the price paid in the public hospital system
• clarifying the scope of the List by better defining which items are eligible for inclusion on the List and removing ineligible items
• regrouping the items on the List to better align devices with similar intended use or health outcomes
• streamlining the listing of new items and reviewing the functions of the Prostheses List Advisory Committee
• improving post-listing activities, including reviews and compliance activities
• updating cost recovery arrangements to align with the Australian Government Charging Framework.

The Bills progress the reforms to clarify the scope of the List and to update cost recovery arrangements. Information on the progress of additional reforms is available on the Department’s Prostheses List reform webpage. Further legislative and administrative changes, including through legislative instruments, will be required to fully implement the Budget measure. A review of the reforms will be conducted in 2024.

Committee consideration

Senate Selection of Bills Committee

In its report tabled 1 December 2022 the Senate Selection of Bills Committee deferred consideration of the Bills until its next meeting.[8]

Senate Standing Committee for the Scrutiny of Bills

The Senate Scrutiny of Bills Committee has yet to consider the Bills.

Policy position of non-government parties/independents

While the Opposition does not appear to have expressed a view on the legislation, the Bills support implementation of a Budget measure announced by the previous Coalition Government.

Position of major interest groups

According to the Explanatory Memorandum, the Department consulted selected stakeholders on Exposure Drafts and ‘The overall outcome of this consultation was support for the legislative changes noting that the detailed changes to legislative instruments will require significant consultation’.[9]

The Medical Technology Association of Australia (MTAA), representing the medical device industry, has stated that it ‘cannot support the legislation unless there is clarity on reforms to be introduced under the subordinate legislation’.[10] Where the specific issues identified by the MTAA directly relate to the legislation, they are discussed under Key Issues.[11] The MTAA states that it ‘will continue to work with the government on these issues, but further scrutiny and consultation is required especially before the legislation can be supported’.[12]

In March 2022, the then Minister for Health signed a Memorandum of Understanding (MoU) with the MTAA setting out agreement on certain aspects of implementation of the Budget measure, in particular, the schedule of price reductions. The MoU does not contain any commitments specifically relating to the scope of the List or cost recovery arrangements that are the subject of the Bills.

While the private hospital sector does not appear to have commented on the Bills, the Department has previously noted that private hospitals and device companies generally oppose confining the scope of the List.[13]

Private Healthcare Australia (PHA) represents most private health insurers, including the largest insurers. PHA has not commented specifically on the legislation but for some time has been calling for substantive reform to the Prostheses List (and in particular, for more extensive reform than is being pursued by Government).

Members Health (the peak industry body for 26 not-for-profit, member-owned or community based health insurers) also has not commented specifically on the Bills but welcomed the Government ‘so quickly getting work underway on draft legislation that will for the first time hold the big powerful multinational medical device industry to account and protect Australian families’.[14]

The Australian Medical Association (AMA) has not commented specifically on the Bills but is engaged in the broader reform process with a focus on ensuring planned changes will not impact negatively on patients or clinician choice. The AMA has described the reform package as ‘complex, once-in-a-generation reforms’ that ‘strike the right balance, having gone through extensive consultation before implementation’.[15]

Financial implications

The Explanatory Memorandum to the Bills notes that the 2021–22 Budget measure linked to the Bills committed $22 million over four years.[16] The financial impact of regulatory costs of the measures in the Bills is estimated to be a maximum of $1.81 million per year.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.

The Government considers that the Bills are compatible as they do not raise any human rights issues.[17]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights had not yet commented on the Bills

Key issues and provisions

Clarifying scope

Replacing ‘prostheses’ with definitions of ‘medical device’ and ‘human tissue product’

Currently, neither the PHI Act nor the Prostheses Rules contain an explicit definition of a prosthesis. The Prostheses List: Guide to Listing and Setting Benefits for Prostheses, published by the Department, defines the types of prostheses covered by the Prostheses List as those that meet certain criteria:

Essentially, this is only those devices that are surgically implanted; or are essential to, and specifically designed as an integral single-use aid for, implanting such a product; or are critically important to the ongoing function of a surgically implanted product. Human tissue items such as corneas, bones and heart valves are also covered by the Prostheses List, as are insulin infusion pumps, cardiac loop recorders and cardiac home/remote monitoring systems. External prostheses, such as external legs, external breast prostheses, wigs and other such devices are not included on the Prostheses List.[18]

As explained in the Explanatory Memorandum: ‘the lack of a legislated definition of a “prosthesis” … can result in items being listed which could be better funded by other avenues or are already funded through other means (‘double funded’)’. The Explanatory Memorandum notes this ambiguous scope has also led to an increase in complexity, with a tenfold increase in the number of items on the List between 1997 and 2021, to over 11,600 billing codes.[19]

In 2020, the Department commissioned Ernst & Young to undertake a Review of the General Miscellaneous Category of the Prostheses List, in part initiated due to concerns about whether products listed in this category met the Prostheses List criteria. The Review further explained there was concern that ‘using [the Prostheses List] as a funding mechanism (which guarantees that insurers will pay a set amount for every item used) for low cost high usage items may not send a direct price signal to the clinicians and hospitals’ and so usage over and above the minimum level necessary is not disincentivised, and/or there may be higher than necessary usage of more expensive versions of equivalent products (pp. 1­–2).

The Review recommended:

• certain groups of items be transitioned away from the Prostheses List and instead funded through case based or bundled fee arrangements
• amending listing criteria to specify the overall intention of the Prostheses List and remove ambiguities.

The Bills attempt to address this ambiguity by amending and better defining the terminology used to describe products covered by List arrangements. The Bills replace the references to ‘prostheses’ throughout the relevant PHI Acts with ‘medical device or human tissue product’.

Item 17 of the PHI Bill inserts definitions for medical device (proposed section 72-11) and human tissue product (proposed section 72-12). The definitions broadly mirror the definitions contained within the Therapeutic Goods Act 1989 for ‘therapeutic good’ and ‘biological’ respectively,[20] except that they do not include devices or products used for diagnostic purposes or testing, as these kinds of devices are not intended to be subject to List arrangements.[21] In addition, both definitions include some flexibility for additional items to be specified in the Rules as medical devices or human tissue products to allow for medical innovation, as well as supporting the transition to new arrangements.[22]

The Department has identified a list of nearly 500 general use and consumable products for removal from the List because they either do not meet the current criteria for listing or because they will not meet the new definition or listing criteria. These items are to be removed on 1 July 2023, alongside commencement of the relevant PHI Bill provisions. According to the Department, a Clinical Implementation Reference Group confirmed these products could be removed from the List with no clinical implications or adverse outcomes to patients, as long as the products are still available for use by doctors under a different funding agreement.

Alternative funding arrangement

The Government has committed to an alternative funding arrangement for items to be removed from the List, to take effect on 1 July 2023.[23] Default benefits for general use bundles are to be mandated through changes to the Private Health Insurance (Benefit Requirements) Rules 2011.

The new arrangement will be informed by the Advice on Bundling Arrangements for General Use Items on the Prostheses List provided to the Department by the Independent Health and Aged Care Pricing Authority (IHACPA) in December 2022. IHACPA consulted stakeholders in the development of its proposal and the Department has stated it will consult stakeholders to help develop the implementation details of this new arrangement early in 2023.

The AMA welcomed the Government’s announcement of a new mandated funding arrangement as ‘removing a significant point of contention between insurers and private hospitals that, if left unresolved, could have left patients with increased out of pocket costs and impacted on clinician choice’.[24]

The MTAA has expressed significant concerns as to whether the funding now being calculated by IHACPA will be sufficient.[25]

Re-naming the Rules and Prostheses List

Section 333-20 of the PHI Act sets out the private health insurance rules that may be made by legislative instrument providing for matters as specified in the Act. Item 18 of the PHI Bill replaces the reference to the Prostheses Rules in this section with the Private Health Insurance (Medical Devices and Human Tissue Products) Rules, reflecting the types of devices and products intended to be covered by these arrangements. The Bills update references to these Rules throughout the PHI Acts. 

This reflects the intention to no longer refer to the Prostheses List. Instead, it is intended that the renamed Rules contain a schedule to be known as the Prescribed List of Benefits for Medical Devices and Human Tissue Products.[26]

Cost recovery arrangements

The PHI Act requires application fees, initial listing fees and ongoing listing fees to be paid by those applying to have a kind of prosthesis placed on the List.[27] Further detail on the imposition of fees is set out in the PHI Fees Act (as the fees are currently a form of taxation) and the specific fees are detailed in the Private Health Insurance (Prostheses Application and Listing Fee) Rules 2018.[28]

As explained in the Explanatory Memorandum, the current arrangements are inconsistent with the Australian Government Charging Framework (which includes the Cost Recovery Guidelines)[29] as they do not reflect the minimum efficient costs of delivering the services.[30] Rather, they are based on a historical model that has been unchanged since 2009,[31] with sections 5 and 6 of the PHI Fees Act currently providing a maximum cap on the fees that can be charged to applicants.

To address this situation, Schedule 2 of PHI Bill will amend the PHI Act to provide statutory authority for the Minister for Health and Aged Care to establish fee-for-service cost-recovery arrangements in line with the Cost Recovery Guidelines (see pages 16–21 of the Explanatory Memorandum for further information). The details of these fees will be set out in the Private Health Insurance (Medical Devices and Human Tissue Products) Rules and will not amount to taxation (proposed section 72-15).

The Government is also proposing to introduce a new cost-recovery levy which will be applied annually to the ongoing listing of each item on the Protheses List. In prescribing the Levy, the Minister must be satisfied that amount is no more than the Commonwealth’s costs in connection with the ongoing listing of each item on the List. The PHI Fees Bill will amend the PHI Fees Act to provide for the imposition of the levy (including changing the name of the PHI Fees Act to the ‘Private Health Insurance (Medical Devices and Human Tissue Product Levy) Act 2007’), with the details to be set out in the renamed Private Health Insurance (Medical Devices and Human Tissue Products Levy) Rules (currently the Private Health Insurance (Prostheses Application and Listing Fee) Rules 2018).

Of note, item 4 of the PHI Fees Bill specifies that the new levy will first be imposed in the financial year beginning 1 July 2024 and will be based on the likely costs of administering the List in the 2024–25 financial year. As noted in the Explanatory Memorandum, this will mean ‘a gap between the old fees and new levy, in that the actual administration costs incurred in 2023–24 will not be recovered via the new levy’.

The revised arrangements are expected to result in higher costs for applicants. Alongside the changes to charging arrangements, the Department is intending to redesign and streamline application and assessment pathways[32] which may in part reduce costs relative to current actual expenses.

Some information on proposed cost recovery arrangements has been made available to date. In September 2022, the Department released a consultation paper on the proposal for cost recovery, including an indicative fees list. This shows the intention to replace the current set of fees (namely, an application fee of $600 per application, initial listing fee of $200 per prostheses and an ongoing listing fee of $200 paid every six months for as long as a prothesis remains on the List) with a combination of cost recovery fees and a cost recovery levy.[33] Potential cost recovery fees include (but are not limited to) an application fee (indicative fee $1,310) and tiered assessment fees scaled to the level of effort by the Department associated with assessing the application (indicative fees range from $2,874 to $27,900). The proposed cost recovery levy (indicative levy of $73 per year) would be payable for each item on the List and would charge the industry for costs which cannot be assigned to a specific sponsor such as administration, depreciation of IT systems, compliance activities and post-listing reviews.[34]

In its analysis of stakeholder responses to this consultation, the Department reported that stakeholders considered that these measures should ensure appropriate levels of resourcing that increase efficiency and responsiveness in managing the listing process. Stakeholder concerns identified include that:

• cost recovery fees may act as a barrier to sponsors investing in the submission, raising risks of limiting prospective patient access to particular devices or human tissue products
• additional costs from cost recovery fees may be passed on from device manufacturers to suppliers
• fees associated with compliance should not be charged entirely to sponsors and should be shared amongst all stakeholders that derive some form of commercial benefit through the List arrangements.[35]

Per the Cost Recovery Guidelines, a Cost Recovery Implementation Statement (CRIS) would be required before charges commence and annually thereafter. A CRIS provides key information on how cost recovery is to be implemented and is required to include detail on stakeholder engagement. In December 2022, the MTAA stated that ‘further detail on the pathways and the cost recovery is required if the legislation is to be supported’.[36]