Chapter 2

Chapter 2

Key issues relating to the Bill

2.1        This chapter summarises the key issues raised during the course of this inquiry that related to the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012.

Lifetime Health Cover loading amendments

Ensuring the Lifetime Health Cover loading acts as an incentive

2.2        The key argument put forward in favour of the Bill is that it ensures that the LHC loading acts as an incentive for people to take out private health insurance early in life. It was reported to the committee that the scheme has proved effective at encouraging young people to take out private health insurance:

We have seen a trend for some time now of more people taking out private health insurance, and the Lifetime Health Cover arrangements have been very effective in increasing the number of younger consumers who have private health insurance, which is, of course, what they were intended to do.[1]

2.3        The prospect of paying the Lifetime Health Cover loading is a strong incentive for people to take out private health insurance policies. By applying the health insurance rebate to the LHC loading that incentive is reduced. The Consumers Health Forum of Australia expressed its support for the Bill on the following grounds:

The LHC measures are intended as a deterrent, [the Consumers Health Forum] considers it inefficient to apply a rebate to the loading. The changes would also create a greater incentive to take up private health cover early and generate a higher opportunity cost for delaying private health cover.[2]

2.4        This point was expanded upon at the committee's public hearing:

In a nutshell, it is counterintuitive for the government to subsidise what is effectively a deterrent. It is inconsistent with the lifetime health cover loading policy rationale. It sends mixed signals to consumers, and it means that funds that could be better spent elsewhere in the health system are being used to subsidise a penalty. We believe the bill, which proposes to remove the rebate from the loading applied to a premium, would correct this anomaly.[3]

2.5        A strong incentive scheme to take out private health insurance at a young age is important for the sustainability of the private health insurance industry in Australia. Australia utilises a community rating system. The Department of Health and Ageing's (Department) website provides an explanation of the community rating system:

Private health insurance premiums are not risk rated like other forms of insurance, so that all consumers pay the same premiums as others for the same policy, regardless of their age or health status. As set out in the Private Health Insurance Act 2007, to ensure that everybody who chooses has access to health insurance, the principle of community rating prevents private health insurers from discriminating between people on the basis of their health or for any other reason.[4]

2.6        The Lifetime Health Cover loading is a principal cog in the policy machinery driving the sustainability of the community rating system, and therefore ensuring ongoing access to private health insurance to millions of Australians. The Consumers Health Forum of Australia clearly drew a link between the community rating system, access for consumers, and the importance of the lifetime health cover loading acting as an effective deterrent:

Consumers depend on the community rating system to keep private cover fair and affordable. With a risk rated model there would be nothing to stop insurers from denying consumers the cover they need if they were considered to be a bad risk. In order to maintain the community rating system, there needs to be a balance between older and younger policyholders. Private health insurance would be unsustainable if policyholders were predominantly high-end users of the health system. The lifetime health cover loading plays an important role in supporting community rating by encouraging people to sign up to private health insurance sooner.[5]

Increasing costs of private health insurance for individuals

2.7        The primary concern regarding the proposed amendments was that it would increase the costs of maintaining private health insurance policies. Estimates of the precise cost to consumers of the changes varied widely between stakeholders' individual modelling.

2.8        It was reported to the committee by GMHBA that:

The removal of the rebate on the Lifetime Health Cover loading component of Private Health Insurance premiums will result in a further 1% to 18% (average of 10.6%) price increase from 1 July 2013 for those with Lifetime Health Cover loadings. This will impact approximately 17.9% of GMHBA memberships (approximately 40 000 individuals. In simple terms the removal of the rebate means a 42% increase in the loading for these members.[6]

2.9        Presenting slightly different numbers, Hirmaa informed the committee that:

It has been estimated by a typical hirmaa fund that this impact will amount to an average 8.4% premium increase in the first year of implementation (commencing 1 July 2013). For those with significant loadings, the premium increase will be much higher.[7]

2.10      The Department found that the average impact of the changes to a person subject to a lifetime health cover loading was around $116. The Department explained to the committee how they arrived at the aforementioned figure:

That $116 was formulated based on the average loading and the average rebate...the average loading is about 24 per cent and the average rebate was just over 30 per cent.[8]

2.11      In explaining the seeming discrepancy between the Department's predicted cost increases compared to other stakeholders, Departmental officials explained:

I think they are looking at people who are likely to have the greatest possible increase, whereas our figure is based on the average across all consumers. I note that just over three per cent of people who do have a Lifetime Health Cover loading are actually at the maximum.[9]

2.12      HBF argued that the proposed changes were a breach of good faith by the government with private health insurance policy holders who had made plans based on the government's commitment to provide a rebate on policy costs.[10] The committee heard a rebuttal of this argument by Consumers Health Forum Australia who noted:

There is already a time limit on how long consumers have to pay the loading – that is, the 10-year time limit if they have held cover continuously over a period of time – and we are not aware of any particular undertakings by government about ongoing payment of the rebate on the lifetime health cover loading that would make this particular change a breach of good faith.[11]

Impact on low income earners

2.13      It was put to the committee that the proposed changes would have a particular impact on low income earners. GMHBA Limited, a not-for-profit regional health insurer based in Geelong, Victoria, noted that there are a significant number of low income households with private health insurance:

According to Private Healthcare Australia, the Australian Taxation Office and the Australian Bureau of Statistics, 3.4 million people with private health insurance live in households with income less than $35 000 per annum. A staggering 5.6 million people with private health insurance live in households with gross annual incomes below $50 000.[12]

2.14      GMHBA argued that the proposed changes are:

[D]iscriminatory to lower income earners – all members with a Lifetime Health Cover loading are equally impacted by the change irrespective of their income levels. It is in fact highly regressive having the greatest percentage effect on the lowest income families.[13]

2.15      Hirmaa – the peak industry body representing five open access regional private health insurers and thirteen restricted access insurers – explained why those on lower incomes are more heavily impacted by the changes proposed in the Bill:

The impact increases with the higher the level of rebate policyholders currently receive, resulting in lower income earners (those not in the means tested tiers) being the most disadvantaged by the proposed changes.[14]

2.16      The committee heard evidence from the Australian Osteopathic Association arguing that those on low incomes are extremely price sensitive:

[E]specially for those on lower incomes, I think a $7 to $10 increase a week in their private health insurance for those on a lower income probably will be the difference for whether they stay or go.[15]

Increasing strain on public health infrastructure

2.17      It was also put to the committee that if the costs of private health insurance increases as a result of this policy, it will become less affordable and more consumers are more likely to drop or reduce cover thereby increasing demand of public health infrastructure.[16]

2.18      GMHBA Limited posited that the anticipated savings that will result from the amendments are unlikely to be realised due to increased demand on the public health system and therefore expenditure:

Whilst the Government claims that the removal of the rebate on the Lifetime Health Cover loading will result in savings to the Government of $386.3 million over four years, we believe that over time the cost to the public health systems from past and proposed changes will be much more as we see a shift to public over private due to a lack of support through a fair rebate.[17]

2.19      This view was also supported by the Australian Osteopathic Association which argued that a decline in the number of people with private health insurance would increase public health expenditure. This would offset savings made through the proposed amendment.[18]

2.20      This argument is dependent on a large number of people dropping their private health insurance coverage. While conceding that the changes would have some impact on the number of people who choose to take out private health insurance, Consumers Health Forum Australia contended:

We do not really know what the impact will be but we would expect it would a marginal impact, and, as I have said, we have seen successive policy and premium changes in recent times...We would not expect this policy to result in large dropouts, because it is a policy that is applied to the loading and not the premium itself, so we would not expect that it would lead to a huge impact.[19]

2.21      In the Parliamentary Library's Bill Digest, Amanda Briggs observed that:

While financial considerations also affect consumer behaviour and cannot be ignored, [private health insurance] (PHI) membership levels have remained robust in the face of a number of policy changes affecting PHI affordability. Means testing of the rebate and increasing the Medicare levy surcharge for higher income earners did not result in membership levels falling, as some had warned it would.[20]

2.22       Although the Department recognised that there are a large number of individuals impacted by the amendment, (1 077 372 as at September 2012) it was argued that most individuals would only see minor increases in private health outlays as a result of the amendment which are unlikely to impact overall private health insurance membership levels.[21] As it is not anticipated that there will be a decline in the number of people with private health insurance, it should not add to the burden on the public system:

We do not believe that this will lead to a reduction in private health insurance [coverage]. Therefore, if that is correct, there would be no flow-on to the public sector.[22]

2.23      The Department also emphasized for the committee that the proposed changes only impact on hospital policies, not general treatment or extras cover.[23]

Informing consumers of the impacts of the Bill

2.24      The committee heard from both those who supported the Bill and those who opposed it that it was important to ensure that affected individuals were made aware of the changes proposed in the Bill. The Consumers Health Forum of Australia argued that:

It [is] essential that any changes to the cost of premiums are clearly communicated to consumers. We recommend the development of consumer information on the changes to the LHC arrangements, including a rationale for the proposed changes and case studies that illustrate the impact of any changes...In some cases, the changes may also result in consumers making a decision to discontinue their cover, and consumer information should clearly outline the consequences of such decisions.[24]

2.25      The Department informed the committee that private health insurers would inform affected clients of the impact of the changes:

As is currently the case, private health insurers provide information to their members in relation to their loading and what their premium costs are, and that will continue to occur. That will show what any change is.[25]

Incentive Payment Scheme amendments

2.26      The proposed changes to the Incentive Payment Scheme were well supported by submissions that made mention of these amendments.[26] Hirmaa's comments are representative of those received:

Ceasing the [Incentive Payment Scheme] claiming option is a simple and low cost option to reduce the administrative burden on insurers, the Department of Human Services and the Australian Taxation Office.[27]

2.27      At the committee's public hearing the Department assured the committee that affected members of the public would be provided with information regarding the changes via written information distributed by the Department of Human Services, private health insurers, and information on the Department's website.[28]

2.28      The committee heard that if a claim is lodged through the IPS before 1 July 2013 their claim will be processed as normal, but the Department of Human Services will not accept any new claims from 1 July 2013 onwards.[29]

Committee View

2.29      The committee considers that the proposed amendment would ensure that the Lifetime Health Cover loading acts as an incentive for people to take out private health insurance early in life, thereby helping to underwrite the community rating system on which ongoing, affordable access to private health insurance policies relies. On the grounds that this Bill will increase the incentive value of the Lifetime Health Cover loading, the committee supports the proposed amendments.

Recommendation 1

2.30      The committee recommends that the Bill be passed.

Further changes to private health insurance in Australia

2.31      Several stakeholders from the advocacy, business, and non-profit sector urged the committee to consider these changes in light of other proposed and recent changes to private health insurance in Australia.[30] For example, private health insurer GMHBA noted that:

...this Bill cannot be viewed in isolation of the changes that have already been made to income test the rebate or those proposed in the [Mid-Year Economic and Fiscal Outlook] to link the rebate to [the Consumer Price Index].[31]

2.32      At the committees public hearing the Australian Osteopathic Association also highlighted the interaction between the amendments in the Bill and other proposed changes to Commonwealth support for private health insurance policy holders.[32]

2.33      The committee's terms of reference for this inquiry are limited to an examination of the provisions of the Bill. However, the committee would like to assure stakeholders that it is aware of the concerns raised during the course of this inquiry regarding other proposed changes. 

 

Senator Claire Moore
Chair

Navigation: Previous Page | Contents | Next Page