Private health cover is in a death spiral - Grattan Institute

Published by the Australian Financial Review, Monday 29 April

The future of the private health insurance industry looks bleak. Premiums are rising and people are dropping their cover, especially the young and the healthy.

Those who are left are more likely to need health care, which drives insurance costs up further. About 100,000 fewer Australians have private hospital cover today than a year ago.

Private health insurance in Australia faces a reckoning. Labor has promised that if it wins the May 18 federal election it will order a comprehensive Productivity Commission review of the private health sector. The Coalition should match that promise.

Rising costs per person have placed private health insurers under increasing pressure. Premiums have risen faster than inflation, and more people are downgrading their cover by opting for products with deductions and exclusions.

The age divide is ominous. The number of people covered by private health insurance has declined in every age group up to age 60. This drop is biggest among 20-39-year-olds.

Meanwhile, the number of people with private health insurance is rising for every age group over 60, particularly among 70-79-year-olds. There are almost 100,000 fewer 20-39-year-olds and 360,000 more people over 60 insured now than five years ago.

A vicious cycle

Australia’s “community rating” rules require insurers to charge all people the same premium regardless of age. It’s a vicious cycle. The young and healthy (low users of health services) cross-subsidise the old and sick (high users of health services), which makes health insurance more attractive to the elderly and less attractive to the young.

As the cross-subsidy from young to old increases, private health insurance becomes increasingly poor value for younger Australians. Their rational response is to downgrade their cover or opt out completely.

This worsens the insurers’ risk profile, because a greater proportion of high-cost users remain in the pool, placing further pressure on premiums.

The incentives to encourage young people to take out private health insurance are losing their effect.

Lifetime Health Cover, introduced by the Howard government in 2000, modified the community rating rules by allowing funds to charge higher premiums for people joining after age 30 (the penalty disappears after 10 years of continuous private health insurance cover). This boosted membership in the short term, but now the declining trend has resumed.

Funds are finding it increasingly difficult to entice today’s financially savvy Millennials and Generation Zers to buy their product.

Self-insurance is becoming a more attractive option for young people who seem less concerned about future costs.

The fine print debacle

From April 1 this year, insurers have been able to offer 18-29-year-olds a discount on hospital insurance premiums of up to 2 per cent a year, up to a maximum of 10 per cent, phased out by age 41.

But it is unlikely to prove a big enough discount to encourage significant numbers of young people to take out health insurance, especially given that many do not have stable employment.

In response to rising premiums, consumers of all ages are downgrading their level of cover. In 1997 about two-thirds of all private health insurance policies were top cover, with no deductions, excesses or exclusions.

The “top cover proportion” is now around one in eight. This has meant a massive transfer in who bears the risk of the costs of hospital admissions – from the private health insurers to the insured person.

Too often the product definitions have been opaque, or hidden in the small print, so that what a patient thinks the excess will be, and what the actual excess is, are quite different things.

Surgeons, for example, are now often imposing booking fees and other charges not known to the private insurer, nor covered by them.

The government’s response to the fine print debacle, and the resultant increased public cynicism about private health insurance, has been to standardise product definitions into four broad categories: gold, silver, bronze and basic.

Insurers have only themselves to blame

But the goal of making things simpler for customers has been undermined by the creation of “plus” categories (eg, “Basic plus”) which provide more than the category minimum.

These plus products differ from insurer to insurer, recreating the very product proliferation that the standardisation policy was meant to eliminate.

The shift in risk has not been accompanied by any public education campaign to improve health literacy and help consumers make informed health insurance choices. So consumer dissatisfaction has increased yet again.

The private health insurance industry faces a vicious cycle and the time is now right to step back and address industry fundamentals.

A Productivity Commission review – or some other form of industry deep dive – is now essential. A do nothing, say nothing policy is clearly not the answer.