Why private health cover is bleeding to death
Published by Australian Financial Review, Thursday 14 November
Last week’s shock announcement from Medibank that its costs are increasing faster than expected is but the latest symptom of the underlying private health malaise. The litany of problems in the past few months suggests that current policies won’t stop the industry’s death spiral.
The touted 10 per cent discount on premiums now offered to young people has not stopped the youth exodus. The reform of the prostheses schedule did not stop prosthesis cost growth.
The rationalisation of products into Gold, Silver, Bronze and Basic, designed to simplify people’s choices, actually left consumers confused – and then led to scams with “Silver +” policies that cost more than Gold products but came with fewer benefits.
A handful of greedy specialists are charging egregious fees, leaving patients with massive out-of-pocket costs after treatment in private hospitals and contributing to dissatisfaction with the whole private system.
Even with government jaw-boning, private health insurance premiums are scheduled to rise, yet again, by significantly more than inflation in 2020.
The responses to this crisis so far have been of two kinds. The federal government has adopted the ostrich position: deny there is a problem or, if forced, suggest that existing policies have it fixed. “Move along, nothing to see here” is the mantra.
The different industry players have different interests – doctors, device suppliers and hospitals want more spending for each hospital admission, insurers want less. But this hasn’t stopped them agreeing on one thing – there is no problem that bigger government handouts can’t fix. The industry lobbyists cannot open their mouths without asking for an extra $1 billion of taxpayers’ money, here or there, directly or indirectly, on top of the $9 billion the industry gets each year at present.
However, there is a third option: industry reform.
Private health insurers are wrapped up in red tape which creates perverse incentives and hinders industry responses to changed market conditions. Their premiums are regulated. Funds are forced to pay for every type of private hospital treatment other than cosmetic surgery, whether it is warranted or not, and regardless of whether it could just as safely and effectively be provided in a patient’s home or in a specialist’s office.
They are forced to price in huge cross-subsidies from younger to older members, reducing their ability to design products that will stem the youth exodus. These cross-subsidies are designed to protect the system of community rating – where all pay the same for a product regardless of their age or health status – but they also almost eliminate the benefits a fund gets from investing in prevention and new out-of-hospital models of care because the fund meets all the costs of prevention and innovation but benefits are shared among all funds in line with “risk equalisation” rules.
Private hospitals have their share of red tape too – both from government and health insurers. Each fund has a different way of structuring payments, creating administrative inefficiencies for hospitals. The negotiations with insurers lead to additional paperwork because each has their own favourite way of measuring hospital performance. Private hospitals can’t respond easily to the shift to out-of-hospital care because of government red tape and different rules from each fund for these programs.
The system is complex and so are the solutions. But any solution must start from the perspective of the patients. What they want is a single bill with known upfront costs.
Unlike all other forms of insurance, which reduce customers’ out-of-pocket costs, private health insurance actually increases patients’ out-of-pocket costs. An agreed excess should be a maximum, as with other insurance products, not a minimum.
The government should cut a lot of the red tape that is strangling the private health sector. This would enable the industry to lift its game and become more efficient. The industry should stop asking for more government handouts, and get on with the job of offering a better deal for patients. That’s how we expect other industries to behave; private health should be no different.
Without reform of this kind, the industry death spiral will continue.