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Private health insurance policy: a dog’s breakfast?

(Introduction by Croakey)

Health and consumer groups have called for a comprehensive Productivity Commission inquiry into Government assistance to the private health insurance industry, to investigate its overall costs and benefits.

They want private health insurance reforms that centre equity and the public interest, rather than industry profits and inequitable policies.

The call – from the Consumers Health Forum, Australian Healthcare and Hospitals Association, CHOICE, Public Health Association of Australia and the National Rural Health Alliance – follows media reports suggesting the Federal Government is unlikely to end so-called “junk” policies.

The joint statement by health and consumer groups (download it here) calls for “substantial reform to health insurance given the trend toward continually rising premiums and rapidly diminishing value of many health insurance policies”.

The groups urge the Federal Government to:

  • Abolish tax breaks for very low value policies that only provide cover for a handful of procedures;
  • Continue to provide consumers with standardised policy information (SIS) and improve the presentation of this information with consumer testing;
  • Keep community rating and ensure no measures undermine it;
  • Make out-of-pocket costs for treatments more transparent and make it easier for consumers to shop around for the best value treatment.

The complexity of the challenges facing health insurance reformers are illustrated in the #LongRead below by health policy analyst Margaret Faux (which might form a useful submission to any Productivity Commission inquiry).

Banning junk policies would likely have unintended consequences, she says, and “is only one piece of a much bigger puzzle” that requires careful and comprehensive attention.


Let’s talk about junk!

Margaret Faux writes:

If you were in the unfortunate position of needing to call your Private Health Insurance (PHI) provider today to say, “I’ve just been diagnosed with cancer, am I covered?” – your PHI would not be able to tell you.

Margaret Faux
Margaret Faux

The reasons are complex and not easily remedied, and so-called junk insurance policies are part of this picture.

Junk insurance policies themselves are not the cause of this phenomenon but are an inevitable outcome of it, and whilst recent speculation suggests sweeping reforms to PHI in Australia are imminent, banning junk policies overnight may not lead to private health nirvana.

There is no standard or clear definition of what constitutes a junk policy, but Choice offers several benchmarks such as policies that cover accidents and ambulance only, policies that only provide public hospital cover and those that provide cover for a small number of procedures.

A review of health insurance markets around the world makes clear there is no magic formula for a perfect health system; however, some key ingredients for success hold true – community rated, mandatory coverage with tightly regulated minimum benefits and no direct payments at the point of need.

Australia’s public Medicare system provides all these ingredients and much more (although out-of-pockets are becoming a real concern) and remains one of the best public health systems in the world.

But our PHI system is in trouble and the reasons are complex.

Why is PHI in trouble?

Medicare in Australia is mandatory but our PHI system is not. It would not be possible to sustain two mandatory systems, yet the mandatory component of any health system is critical.

For a health insurance market to function well, it needs young, healthy people in it, and making it mandatory for an entire population achieves that end.

Our children subsidise the costs of our health needs now and their children will do the same for them when it’s their turn.

To put it in context, the average claims costs for a privately insured 20-30 year old Australian are currently $645 per annum, but for a 75-79 year old. it’s $4,600.

Instead of being mandatory, in Australia we encourage and entice young healthy people to take up PHI with incentives including the Medicare Levy Surcharge and Lifetime Cover loading.

But with other financial pressures, young people are increasingly motivated to spend the least they can with the objective of doing nothing more than getting the tax benefit. The incentives just aren’t cutting it anymore.

Where do junk policy funds go?

Australian PHI is community rated as opposed to being risk rated.

This means that PHIs are not permitted to charge more for higher risk individuals. Every insured person in Australia pays the same rate for the same PHI product regardless of age, gender or health status.

Any community rated, private health insurance market will fail if people are permitted to join only when they become sick, so various mechanisms are typically employed to alleviate the burden for insurers, such as waiting periods and pre-existing condition provisions.

Australia also utilises a risk equalisation system, which is the linchpin of keeping Australian PHI viable. It basically spreads the costs of older and sicker people’s care across every insured person.

The Private Health Insurance (risk equalisation policy) rules set out the formula applied by the Australian Prudential Regulation Authority to calculate the amount, which PHIs must contribute to risk equalisation.

It is a zero sum game. The total amount paid into the pool will be divvied up and paid out across the PHIs based on the profile of their policyholders.

Currently, each single insured Australian contributes $750 p.a. or $14.40 a week to the risk equalisation pool and this means that even if they have a junk policy, these people are actually playing an important role in keeping costs down for all privately insured Australians.

It’s unpalatable, I know. But for example, a cheap policy from one PHI fund (which many would likely call junk) is currently advertised at $15.57 a week (with a 25.934 percent rebate – so $19.61 at full price without rebate), and 73 percent of that premium must be paid directly into the risk equalisation pool.

Here is the breakup of where the law provides that money must go if the policy is issued in NSW:

MFTABEL

In addition to risk equalisation, Australian PHIs must comply with strict prudential regulations that require adequate underwriting margins and capital.

Then there are ambulance levies and management expenses, the combined effect of which leaves a net profit margin of between three to six percent. On the above actual example, the profit margin is five percent or 98c.

There is no question that controlling profit margins in PHI markets via tight regulation is a critically important consumer protection because it ensures insurers pay out as much as possible from premium revenue in claims.

And it is also true that management expenses can include, frankly, offensively huge executive salaries.

But it is nonetheless interesting to note that the huge profits being made by some PHIs are, in reality, mostly derived from investments made on the net margin and other business lines – but that’s another discussion.

Industry challenges

Risk equalisation is not without its downsides.

Currently, the way it works in Australia there is no incentive for PHIs to become more efficient and reduce the amount they spend on say, management expenses.

It is ironic that a PHI with an older, sicker population that is making substantial benefit payments has no incentive to improve internal operating efficiencies because all the claims it pays out will be paid straight back to it from the risk equalisation pool.

By contrast, a PHI insuring a younger, healthier demographic will end up as a net contributor to the risk equalisation pool.

It must sometimes feel to some PHIs that they exist just to subsidise their competitors.

Another major issue arising from community rating is that people who genuinely need higher coverage (such as a 55-year-old who is more likely to require cover for heart procedures) cannot be induced or forced to take out higher cover, even if it is clear a junk policy is completely inappropriate.

It is completely understandable that a consumer, having paid into an inappropriate policy for years, will not be happy when the PHI refuses to pay them.

And in defence of the PHIs, they actually do provide policy documents disclosing policy exclusions when people join and annually thereafter – because both are legal requirements.

But, let’s face it, no one reads these documents.

Tricks and tactics

So whilst it is fair to say that Australian PHIs do have a unique and challenging operating environment, it is also true that they can be their own worst enemies.

Those of us who transact health dollars know well their tricks and tactics.

They delay, destroy and deny legitimate claims and impose ridiculous red tape in the hope providers will give up.

One PHI currently only allows three claims to be queried on any one phone call – they literally hang up after that. In our organisation we call straight back, wait another 40 minutes on hold before politely enquiring about another three claims.

This goes on all day, every day, wasting everyone’s time and money.

In addition, there are the daily calls we receive from confused and angry consumers who say they feel they have been misled into thinking they were covered for everything.

We have become very skilled at explaining to patients that their PHI should not have told them that the doctors’ fees would be covered because doctors in Australia have a constitutional right to charge whatever they want – you cannot insure the uninsurable.

The issue of high specialist fees is a pain point for PHIs, and there is no question it is a legitimate area of concern that needs addressing for the benefit of consumers.

However, any suggestion the PHIs provide elegantly simple no-gap alternatives is incorrect. There is nothing simple about navigating more than 30 different no-gap and known-gap schemes, in which every PHI applies a different set of rules and fees.

One unified national no-gap scheme with one set of rules that really was simple would save everyone, including the Government, millions.

Whilst the likelihood of achieving one unified set of no-gap rates is low (particularly given the shareholder interests of some PHIs), a unified set of rules – effectively one set of terms and conditions across the board – should be achievable.

But all of this aside, the reality is that Australian PHIs are basically passive payers, and are to a large extent hamstrung by the MBS, because when a policy holder calls and asks, “I have cancer, am I covered?”, they cannot answer.

This is because Medicare operates on service codes not disease codes and it is not possible for anyone to know in advance which of the approximately 6000 Medicare services may be required as a result of a cancer diagnosis.

Australia also uses another coding framework (with disease codes) to pay our hospitals (as opposed to paying doctors). Whilst the two frameworks are linked, the linkage only adds to the confusion, because there is still no consensus on some very fundamental definitions and descriptions.

Let’s say your PHI policy covers ‘eyes’ and you have a brain tumour and it causes blindness, is that covered?

What exactly is covered under an eye policy – the long-term consequences of blindness, the surgery to remove the brain tumour or both? But wouldn’t that be neurosurgery not eyes? Or is it cancer, so neither neurosurgery nor eyes? Perhaps it’s covered if you have a cancer policy but not an eye policy.

What would happen if we banned junk policies?

We all want PHI policies that are low cost but which provide whatever we agree is an acceptable minimum benefit package.

However, it is important to acknowledge the enormous complexity in achieving this.

Health insurance products and pricing is an extremely complex science and an immediate ban on junk policies would probably have a net negative effect on our health system, both in terms of access and affordability.

It may stop some individuals from being disappointed when they can’t claim for procedures they wish to, and would also protect Australians who should be buying higher levels of cover due to their age or health conditions.

But it will also make the lowest health insurance coverage options much more expensive than they are now.

The flow on effect will be that young people will drop their cover and be removed from the risk equalisation pool, meaning the remaining older sicker population will have to pay more. The flow on effects from there are obvious.

The last people we should be pushing out of health cover are low claiming individuals because they subsidise those who require more treatment. So “a steady as she goes” approach is needed here.

Creating simple tiered PHI products will be a gargantuan task, and banning junk policies is only one piece of a much bigger puzzle.

• Margaret Faux would like to thank Lisa McPherson for her contribution to this article.

• Margaret Faux is a lawyer, the founder and managing director of one of the largest medical billing companies in Australia and a registered nurse. She is a research scholar at the University of Technology Sydney. Follow on Twitter at @MargaretFaux. Read her previous Croakey articles here.