THE REVIEW OF THE HEALTH LEGISLATION (PRIVATE HEALTH INSURANCE REFORM) AMENDMENT ACT 1995

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CHAPTER 2 - The Health Legislation (Private Health Insurance Reform) Amendment Act 1995

Objectives and major provisions of the Reform Act

2.1 The Health Legislation (Private Health Insurance Reform) Amendment Act 1995 (the Reform Act) was designed to focus on strengthening consumer rights and address the following concerns:

• to reduce the cost of private health insurance premiums and reduce the ever increasing cost of private health hospitalisation and treatment;
• to provide better value for those who take out private health insurance;
• to encourage a wider range of private health insurance products so that consumers are offered more choice about the type of cover which best suits their needs which, it was intended, would be achieved by enabling health funds to enter into contracts with hospitals and doctors. [1]

2.2 The Reform Act amended the National Health Act 1953, the Health Insurance Act 1973 and the Health Insurance Commission Act 1973 to give effect to the Labor Government's policy for reform of the private health insurance arrangements. The main elements of the Reform Act provide:

• organisations with the capacity to achieve efficiency gains through the implementation of casemix episodic payments for hospitals and day hospital facilities to replace the current per diem payment system (to be fully implemented on 1 July 1997);
• for high quality and value for money products through purchaser-provider agreements with hospitals and doctors to eliminate unknown out-of-pocket costs; and
• consumers with access to information about health insurance issues. [2]

2.3 Amendments to the National Health Act contained in the Reform Act provide that health funds and medical practitioners may enter into contracts called Medical Purchaser-Provider Agreements (MPPAs), for the provision of medical services rendered in hospitals. The agreement allows the fund to pay medical benefits in excess of the Medicare Benefits Schedule (MBS) fees for that practitioner's services. However, without an agreement in place the fund is restricted to paying medical benefits up to a maximum of the amount between the Medicare rebate and the MBS fee. To date very few medical purchaser-provider agreements have been negotiated, with the resultant disadvantage for those private patients treated in hospitals where the fee charged by the medical practitioner is higher than the MBS fee. The higher fee charging occurs frequently. [3]

2.4 The Australian Medical Association (AMA) submitted that `there are virtually no medical purchaser-provider agreements in existence because doctors, en masse, have decided it is not in the patients', or their interest, to sign'. [4] A similar view was also expressed to the Committee by the Council of Procedural Specialists (COPS). [5]

2.5 The Reform Act also provides that health funds may enter into Hospital Purchaser-Provider Agreements (HPPAs) with hospitals on a voluntary basis. HPPAs are intended to generate competition between health funds and hospitals, resulting in improved efficiency; to link hospital funding to appropriate quality assurances and accreditation procedures; and to reduce restrictions on products offered. [6]

2.6 HPPAs provide that hospitals must specify the level of accommodation provided and the amounts which will be charged, render a single account for each episode of hospital treatment and inform patients covered under the agreement the amount of their out-of-pocket expenses. Hospitals must also provide the funds with information specified in the Hospital Casemix Protocol (HCP).

2.7 Medical and hospital purchaser-provider agreements are discussed in detail in Chapter 3.

2.8 The Reform Act also contains provisions which are intended to provide consumers with wider access to information about health insurance issues through the following initiatives:

• the establishment of the Private Health Insurance Complaints Commissioner to investigate complaints made by health insurance contributors, hospitals, health funds and medical practitioners concerning health insurance matters;
• a Private Patients' Hospital Charter to inform health fund contributors about what they can reasonably expect from their fund, doctors and hospitals on a number of key issues; and
• the Private Health Insurance Administration Council (PHIAC), an independent body, is required to provide information to consumers to assist them to make informed choices about private health insurance.

2.9 The Reform Act also requires that certain employers who provide health insurance to their employees must be registered. Amendments to the National Health Act effectively required those employers operating employee health benefits schemes to cease operation by 1 October 1995, or 1 July 1996 if the schemes were part of an enterprise agreement. The Minister has the power to determine that particular arrangements are not employee health benefits schemes, and this power has been used to exempt `top-up' schemes under which employers pay residual costs not met by private health insurance funds. The Department of Health and Family Services (DHFS) has assisted many employers to modify their schemes so that they complied with the definition of a top-up scheme. This has resulted in an estimated 30 000 additional people becoming members of registered health benefits organisations. [7]

 

Passage of the legislation through Parliament

2.10 The Health Legislation (Private Health Insurance Reform) Amendment Bill 1994 was introduced into the House of Representatives on 7 December 1994 and into the Senate on 28 February 1995. On 2 February 1995, prior to the bill's introduction into the Senate, the provisions of the bill were referred to this Committee for inquiry and report. The Committee reported to the Senate on 21 March 1995. [8]

2.11 Even though a considerable amount of evidence had been taken during the Committee's inquiry into the bill, the passage of the bill through the Senate was very protracted. The proposed legislation was extensively debated in the Senate Chamber over four sitting days.

2.12 The Committee originally received the current inquiry to monitor the implementation and operation of the Reform Act following a successful amendment moved by Senator Lees to the second reading of the bill. [9] The reference reflected concerns that the Senate had at that time with different aspects of the proposed reforms, particularly as to whether the provisions of the legislation would be flexible enough to adequately meet community and industry needs.

2.13 The bill was finally passed by the Senate on 11 May 1995 after prolonged debate and agreement to sixty-three amendments. The amendments were agreed to by the House of Representatives on the same date. However, during the consideration of the Senate's amendments in the House of Representatives, the now Minister for Health and Family Services referred to the extensive debate on the bill in the Senate and reiterated the Coalition's opposition to the legislation because concerns had not been met. [10] Recent evidence to the Committee suggests that, even though a considerable number of amendments were made to improve the flexibility of the legislation and some steps have been taken to improve the situation, objectives to improve private health affordability and accessibility are not being met. [11]

2.14 Related legislation to provide funding for the establishment and operation of the Private Health Insurance Complaints Commissioner was passed by Parliament at the same time as the reform bill. The Private Health Insurance Complaints Levy Act 1995, [12] which came into effect on 1 July 1995, imposed a levy on registered health benefits organisations conducting health insurance business based on the number of contributors to the health benefits fund.

 

Summary of the Committee's previous inquiry and report

2.15 Many of the arguments concerning private health insurance that were put to the Committee during its current review of the Reform Act were also advanced to the Committee in its March 1995 inquiry into the bill. In order to provide some background into the complexities of the legislation, and the main concerns relating to the proposed changes to the bill, the following is a summary of the Committee's previous inquiry and report.

2.16 The reason for the referral of the bill to the Committee was stated, by the Senate Selection of Bills Committee, to be for `consideration of the impact of this controversial bill, including industry concerns that the bill will not do what it sets out to do. [13]

2.17 The Committee's inquiry into the bill attracted considerable interest from parties involved in the private health sector, particularly the health funds, the medical profession, and the hospital industry. The Committee received eighty-three submissions and held four public hearings on the bill.

2.18 Although the series of measures proposed in the bill were intended to reform the provision of private health insurance, a number of organisations in their submissions, and also witnesses during the giving of evidence, indicated they were concerned that aspects of the bill had not been thought through in sufficient detail. It was considered that some of the basic principles and objectives of the proposed changes might not be met through the proposed measures, or were not the most important matters which needed to be addressed. A number of organisations complained of the lack of consultation, or insufficient consultation. [14] A range of views about specific aspects of the bill were presented to the Committee by various organisations and community groups which considered that, for the legislation to adequately meet community and industry needs, more flexible provisions were required. [15]

2.19 The proposal in the bill for contractual arrangements between medical practitioners and health insurance funds was a concern for members of the medical profession who considered that their prime concern was for their patients' welfare and it would not be in their patients' best interests if medical practitioners had allegiance to more than one party. [16] A further concern related to the issue of privacy in the collection and provision of data. The level of `identifiability' of the data was the subject of discussion in relation to statistical uses and the potential for misuse by the receiving organisation. [17] A number of organisations questioned the capacity of the former Trade Practices Commission (TPC) [18] to monitor or regulate issues that were a focal point of the legislation, such as contractual arrangements, the possible development of monopolies, and the exclusion of some parties from arrangements. [19]

2.20 Although the Committee's majority report to the Senate recommended that the bill proceed, noting that amendments would be moved on the floor of the Chamber, [20] Senators Herron and Patterson dissented from the majority report by recommending that the bill not proceed, and that further submissions be sought from the public. [21] The dissenting Senators believed that there had not been adequate consultation on the bill; that health insurance premiums would not be reduced; that reform of the health insurance industry was necessary as evidenced by the rapid decline in private health insurance coverage; and that there had been minimal input from patients who were the ones most likely to be affected by changes to the legislation. [22]

 

Concerns raised in debate during the bill's passage through Parliament

2.21 Arguments advanced against the bill during debate in the Senate Chamber were that the reforms being proposed failed to adequately address the reasons why many people were continuing to leave the private health insurance system, would not result in a reduction in insurance premiums - only slow their increase, would end community rating, and would encourage funds to provide reduced coverage, reduced services or reduced choice. [23] Other concerns expressed were that the legislation would deliver the private hospital industry into the hands of large private health insurers and that the authorisation process permitting hospitals and doctors to negotiate agreements in groups would be costly and time consuming. The power of the TPC to arbitrate between competing bodies was also questioned. [24] In relation to this issue, a former Chairman of the TPC commented that:

There is a need to reflect on the considerable damage that might be caused in a very short time by the misuse of market power, or other unfair conduct which might occur in a scenario where the Commission, and others, will find that the Trade Practices Act does not offer the kind of protection that has been assumed will be available to the relevant participants. [25]

2.22 The provision of adequate privacy protection of the data received by DHFS and PHIAC from private hospitals and private insurers was identified during the bill's passage as being of the utmost importance. [26] Amendments to the National Health Act now require that hospitals and day hospital facilities transfer the information specified in the HCP to their contracted funds. Since 1 October 1995 casemix information on separations of privately insured patients has been collected by private hospitals and transferred to contracted health insurance funds as part of their contracts. Health funds are required to forward this data, together with extra billing information, to the Department. [27]

2.23 The terms of reference for the Committee's review of the Reform Act identify in particular the Committee's responsibility to monitor the management of privacy protection on data collected under the legislation. The issue of privacy protection and other matters of concern are considered in detail in Chapters 3 and 4 of this report, particularly in relation to whether the matters raised have been vindicated over the period of the Reform Act's operation.

 

Continuing decline in private health insurance fund membership

2.24 The numbers of Australians with private health insurance cover has continued to decline even though the reform measures were designed to provide a better value for money product. The reforms were intended to place the health insurance industry in a position to achieve efficiency gains and pass on the benefit of those gains to their members in the form of lower premiums and better controlled costs. [28] In 1982 the proportion of Australians who held private insurance was 68 per cent, but this figure had dropped dramatically to 34.3 per cent in the December quarter 1995 and has continued to fall. [29] Figures for the March 1996 quarter were down to 33.9 per cent, and during the three months to the end of June 1996 a further 30 000 people had dropped out of private health insurance, leaving only 33.6 per cent of the population with private health cover. [30] If this trend is to be reversed the Committee considers that greater co-operation is required by the medical profession, private hospitals, and the private health insurance industry in order to provide equitable and beneficial health packages which will encourage people to purchase private health cover, or to help retain those who still have private insurance.

2.25 Although consumers may have received some benefits as a result of the reform measures, evidence provided to the Committee during its review of the implementation and operation of the Reform Act has confirmed that there are still fundamental problems facing the private health sector which need to be addressed. The intention of the legislation was that improved private health insurance products should be made available to consumers which provided better value for money. However, premiums have continued to rise and, as a result, membership of health insurance funds has continued to decline. Many people consider that not only is private health insurance too costly but it does not represent value for money.

2.26 The Association of Independent Retirees stated in its submission that, whilst retirees were aware of the importance of the retention of community rating, it was felt that there had not been any significant steps taken to encourage the funds to offer value-for-money products. This sector of the population are heavy users of hospitals and a survey of Association members in mid-1995 indicated that 90 per cent belonged to a private health fund. However, retirees have become increasingly concerned about private health insurance rising costs, particularly those who have been in a fund for a number of years and find they can no longer afford health insurance. [31]

2.27 The social impact of private health insurance rising costs is an important consideration. The Australian Catholic Health Care Association (ACHCA) point out that, although the price factor of health insurance is obviously important for people in the older-age group and the chronically ill, so too is the security of access and continuity of medical attention. [32]

2.28 In its submission, the National Association of Nursing Homes and Private Hospitals (NANHPH) point out that for family health insurance coverage the cost is the same, regardless of whether the family consists of two or ten members. NANHPH believe that cost consideration is a major issue where there are no or few dependents in a family, and in these cases many families were opting out of health insurance because they felt they were receiving little value for money. Instead they were choosing to cover costs for treatment for minor episodes of care, eg day surgery, and relying on the public health system for `catastrophic' health problems. [33]

2.29 In relation to the utilisation of the public hospital system, the Council of Procedural Specialists argue that one of the major problems which `impede fair and affordable health care delivery' is that `arrangements which offer all citizens totally free un-means tested access to public hospitals create overwhelming disincentives for the population to maintain private health insurance'. [34] This argument is supported by the Australian Private Hospitals Association (APHA) who are of the opinion that healthy people are unwilling to pay for private health cover when a public health system is available at no discretionary cost. [35]

2.30 Medical Benefits Fund of Australia (MBF) consider that the current situation in relation to private health insurance is that:

The "reforms" have had no effect at all on improving "value for money in private health insurance". Over 90 per cent of health fund contributions (a much higher proportion than applies in general or life insurance) is used in the payment of claims. This was the situation before the reforms and it remains the situation following the reforms. [36]

2.31 Even though such a large percentage of contributions is paid out for claims, a recent survey by the Australian Consumers' Association (ACA) found that 31 per cent of the people surveyed were more likely to be dissatisfied with the size of the payment received from their health fund than with other aspects of the fund's performance, such as payment time and staff helpfulness. [37]

2.32 The Committee acknowledges that there are a number of problems confronting the private health sector which need to be addressed as a matter of urgency. The Reform Act measures have failed to halt the rapidly declining level of participation in private health insurance. This declining participation has had an effect on the public health system. The Australian Society of Otolaryngology Head and Neck Surgery stated that:

This [public hospital] sector is clearly incapable of coping with this demand as evidenced by the growing public hospital waiting lists together with closures of wards and facilities due to inadequate finance. [38]

2.33 The Australian Society of Anaesthetists (ASA) also expressed concern at the falling numbers of people with private health insurance. ASA wrote that:

This puts an enormous load on the public health system. A system which should be caring for the financially disadvantaged, rather than the present situation where many people who are not financially disadvantaged are utilising the public health resources, leaving so much less for those truly in need. [39]

2.34 Evidence provided to the Committee from parties involved in the private health sector the medical profession, private hospitals, and health benefit organisations and also evidence from consumer groups, indicates a recognition by all parties that there are fundamental problems which need to be addressed by the private health sector to overcome the continuing decline in private health membership.

2.35 To enable all parties to work co-operatively to provide a better private health product, the AMA stated that it had given careful thought to a proposal which meets the commonest objections and requirements of the four components of the private health industry the hospitals, the doctors, the insurers and the patients:

There is a recognition of the problem of gaps. There is a recognition of the strongly held views of the medical profession against the signing of individual contracts with health funds or hospitals. There is a recognition of the need to inform the patient in advance of the likely charges and to improve the billing process. There is a recognition of the need for doctors to have regard to the resource implications of their treatment decisions a matter which if agreed, would have a greater impact on premiums than de facto control of doctors fee levels. [40]

2.36 The Consumers' Health Forum (CHF), stated that key concerns for consumers were informed financial consent for private medical fees, significant out-of-pocket medical expenses for privately insured patients, and the `irrational and fragmented' billing process for private hospital patients. This organisation believes that lack of informed financial consent is an issue which places consumers using private medical services in a very vulnerable position, and that a co-operative approach is needed to overcome problems:

The whole sector needs to get together and encourage specialists to work towards giving consumers a chance to give proper informed consent to the out-of-pocket costs they will incur. [41]

2.37 The issue of continued out-of-pocket medical expenses for private patients, which was linked to the informed financial consent issue, and to the failure of the medical profession to move towards MPPAs also concerned CHF. `This and the lack of progress towards informed financial consent is very uncompetitive behaviour and should not be tolerated in this environment'. [42]

2.38 Following the Reform Act's requirement that consumers be provided with wider access to information about health insurance issues, Medibank Private has claimed that consumer awareness of medical specialist charging practice has been heightened, including the fact that despite private health insurance, the full cost of medical charges cannot be met. The receipt of multiple accounts by consumers also draws attention to out-of-pocket costs. Medibank Private believes the industry should continue to explore opportunities for co-operation to support the establishment of MPPAs so that funds can offer nil or known out-of-pocket expenses for in-hospital medical services. [43]

2.39 The ACHCA drew attention to the evolution of the health system. The Association noted that the nature of the health system is becoming more integrated in its focus with reduced length of stay in hospital, episodic case payments and the pursuit of continuums of care. ACHCA further commented that:

the role of the private sector will also alter towards a more integrated provider of health care services. Some organisations will limit involvement to acute, high technological care. Others will seek more comprehensive and integrated roles.

Funding mechanisms will need to facilitate this development. Governments will also need to ensure that particular categories of patients are not disadvantaged.

established interest groups will need to adapt to these changing circumstances and ensure that access is not restricted or made conditional.

If cost containment is to be a mutually shared responsibility, then flexibility amongst the funders and providers must prevail. [44]

 

The need for co-operation

2.40 In general, co-operation between all players (insurers, doctors, and private hospitals) has been minimal. Part of the reason for this was the nature of the public debate leading to the passage of the Reform Act.

2.41 The Committee reiterates its view that, in order for the current situation to improve, greater co-operation is necessary between all parties involved in private health care to ensure a competitive health system which provides informed financial consent and freedom of choice for all parties.

2.42 To make real progress in resolving issues regarding this legislation, and other private health issues, these parties need to work together to identify points of agreement and compromise. A number of the parties acknowledged the need for such co-operation in their submissions, giving undertakings of their preparedness to work together to achieve reform in the health care system. The AMA indicated that:

The profession is prepared to work with the funds and private hospitals to enhance efficiency, for example, at a simple practical level, to look at such issues as lengths of stay for various procedures, the use of ancillary services etc. An efficient private health sector is in the interests of all parties involved. [45]

2.43 In considering methods to improve the provision of private health care APHA commented that it is important to recognise that `health is not a perfect market', and there is a need for service providers (especially doctors and hospitals) to co-operate to ensure the quality of care. [46]

2.44 Funds provided similar comments as exemplified by MBF which believes that:

the medical profession, private hospitals and funds can work co-operatively to provide a better health product but are unlikely to be able to do so in the threatening environment created by this legislation.The apparent lack of cooperation between the medical profession, the private hospitals and health funds is a result of the perverse incentives which discourage genuine cooperation. This must change. [47]

2.45 The Committee believes that all the parties involved should be held accountable to their rhetoric supporting co-operation. To assist in achieving such co-operation, the Committee calls on the Government, wherever possible, to use its influence to bring this about.

2.46 Many of the issues identified in this review were raised by the relevant parties prior to passage of the legislation. The Committee recognises the efforts that have recently been made towards progress in promoting discussion between doctors, private hospitals and health funds. The AMA referred to recent discussions between the parties which acknowledged that it was `going to require some fundamental changes' to solve the problem of declining private health insurance membership. [48]

2.47 The Committee believes that it is important that all parties, including government, recognise that sectional interests should not be put ahead of the interests of patients and health fund contributors.

2.48 The continuing decline of private health fund membership since the passing of the Reform Act in May 1995 is itself evidence enough to show that private health is at the crossroads. This review has offered the parties an opportunity to pause and take stock of where they are going, and to come together in a positive way to seek solutions in the best interests of all Australians.

 

Recommendation 1:

The Committee recommends that it continue to monitor the operation of the Health Legislation (Private Health Insurance Reform) Amendment Act 1995 and report to the Senate on or before 1 July 1998.

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FOOTNOTES

[1] Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, Minister's Second Reading Speech, Senate Hansard, 28 February 1995, p.1069.

[2] Department of Human Services and Health, HBF Circular No.410, PH Circular No.222, 30 June 1995, pp.2, 10, 12.

[3] Parliamentary Library, Bills Digest Service, No.13/1994, 7 December 1994, p.5.

[4] Submission No.27, p.6 (AMA).

[5] Submission No.23, p.1 (COPS).

[6] Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, Minister's Second Reading Speech, Senate Hansard, 28 February 1995, p.1069.

[7] Submission No.45, p.1 (DHFS).

[8] Senate Community Affairs Legislation Committee, Report on the Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, March 1995; Parliamentary Paper No.486 of 1995.

[9] Senate Journals, No.155, 30 March 1995, p.3219.

[10] House of Representatives Hansard, 11 May 1995, p.395.

[11] Transcript of Evidence, pp.182-3 (CHF); Submission No.10, p.3 (PDA); Submission No.11, p.1 (MBF).

[12] Act No.40 of 1995; date of Assent 29 May 1995.

[13] Journals of the Senate, No.136, 2 February 1995, p.2847.

[14] Senate Community Affairs Legislation Committee, Report on the Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, March 1995, pp.3-4.

[15] ibid., pp.7-10.

[16] ibid., p.12.

[17] ibid., pp.10-11.

[18] Now the Australian Competition and Consumer Commission (ACCC).

[19] Senate Community Affairs Legislation Committee, Report on the Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, March 1995, p.13.

[20] ibid., p.15.

[21] Senate Community Affairs Legislation Committee, Report on the Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, Dissenting Report, March 1995, p.17.

[22] ibid.

[23] Senate Hansard, 30 March 1995, pp.2610, 2615 and 11 May 1995, pp.263-4.

[24] ibid., p.264. See also Chapter 3 of this report.

[25] Letter from Mr Bob Baxt dated 27 March 1995, House of Representatives, Hansard, 11 May 1995, p.397.

[26] Senate Hansard, 11 May 1995, p.265.

[27] Submission No.45, p.1 (DHFS).

[28] Health Legislation (Private Health Insurance Reform) Amendment Bill 1994, Minister's Second Reading Speech, Senate Hansard, 28 February 1995, p.1069.

[29] Australia's Health 1996, Fifth biennial health report of the Australian Institute of Health and Welfare, AGPS, June 1996, pp.129-31.

[30] Minister for Health and Family Services, Press Release, 19 August 1996.

[31] Submission No.4, p.1 (Association of Independent Retirees).

[32] Submission No.29, p.4 (ACHCA).

[33] Submission No.6, pp.1-2 (NANHPH).

[34] Submission No.23, p.1 (COPS).

[35] Submission No.25, p.3 (APHA).

[36] Submission No.11, p.10 (MBF).

[37] Submission No.37, p.3 (ACA).

[38] Submission No.13, p.1 (The Australian Society of Otolaryngology Head and Neck Surgery Ltd).

[39] Submission No.14, p.1 (ASA).

[40] Submission No.27, p.6 (AMA).

[41] Transcript of Evidence, pp.182-3.

[42] ibid., p.183.

[43] Submission No.51, pp.3-4 (Medibank Private).

[44] Submission No.29, p.12 (ACHCA).

[45] Submission No.27, p.9 (AMA).

[46] Submission No.25, p.4 (APHA).

[47] Submission No.11, pp.18, 20 (MBF).

[48] Transcript of Evidence, p.13 (AMA).