Youth discounts fail to keep young people in private health insurance
Published at The Conversation, Tuesday 20 August
It was a key plank of what was dubbed the most significant package of private health insurance reforms in more than a decade. From April 1 this year, private health insurers have been permitted to offer a youth discount – lower premiums for people under 30.
But the early signs are not good. New data released today by the private health insurance regulator show 7,000 fewer young people (25 to 29 year olds) were insured on June 30, 2019 than three months earlier when the new discount regime started.
In the three years to June 30, 2018, an average of about 2,100 young people dropped private health insurance every month. For the first six months of this year, the decline was 1,700 a month.
So the new policy may have stemmed the bleeding, but young people are still leaving private health insurance. This does not augur well for the future of private health insurance.
It’s time to consider a bold option to encourage young people to stay in private health insurance, which reduces their premium costs based on their likelihood of getting sick.
As we pointed out in a recent Grattan Institute working paper, the industry fears a death spiral where young and healthy people drop out of insurance, forcing up premiums for everyone left, then more young and healthy people drop out, premiums go up again, and the cycle continues.
Australian private health insurance is based on community rating. This means insurers must charge all consumers the same premium for the same product: they are not permitted to discriminate based on health risk (such as age, gender, health status, or claims history); and they cannot refuse to insure an individual.
Community rating is designed to enable higher-risk people to take out private health insurance, by forcing lower-risk people to cross-subsidise them. It means lower-risk people have to contribute more than what their expected use would require.
But faced with a higher-than-fair premium, low-risk people – typically the young and the healthy – make an economically rational decision to drop their private insurance. Hence the death spiral.
Australia already has a so-called lifetime community ranking, under which people who take out private health insurance after their 31st birthday pay higher premiums – an additional 2% per year for each year they defer taking out insurance.
The April 1 changes introduced a reverse scheme, under which people can get a discount of 2% for each year they join before they turn 30, up to a maximum discount of 10%.
But even with the full 10% discount, a 25 year old will still be paying significantly more than they would with a risk-rated premium.
So the relentless downward trend continues. In the year to June 2019, the number of 25 to 29 year olds with private health insurance dropped 28,000, about 6%. The previous year it was also 6%. The year before that it was 5%.
In fact, for every quarter for the last four years there has been fewer 25 to 29 year olds insured at the end of each quarter than at the beginning of the quarter.
Although it may be too early to declare the new youth discount policy a complete failure, the government and industry need to consider bolder policies.
Community rating may have had its day, given that under Medicare, everyone who needs health insurance automatically has it through the public system.
It’s time to consider shifting to risk rating, starting with people under 30. A risk rating based on age could halve young people’s private health insurance premiums and encourage more Australians to stay in private health insurance.
People aged 25 to 29 use health care much less than the rest of the insured population. In 2018-19, the average benefit payments for that group were A$708 per member compared to A$1,363 per member for the whole population.
If there were no cross-subsidies from 25 to 29 year olds, their premiums would be 52% of the average, community-rated premium.
This would dramatically reduce premiums for young people and increase the attractiveness of private health insurance.
As 25 to 29 year olds only comprise 4% of the insured population, adjusting premiums for this group is unlikely to have a measurable impact on premiums for other people with insurance in the short run, and may have a long run benefit if it attracts people aged 30 to 39 into insurance.
Under this reform, funds would have to manage the transition from a risk-rated premium for a 29 year old to a community-rated premium for a 30 year old.
This might involve full risk rating for 25 year olds and a blended approach – partial risk rating – for people over 25, so that the rate for 29 year olds does not involve too big a jump to a community rated premium at age 30.
But if developing a phasing-in plan is beyond insurers’ skill set, then private health insurance is in even more dire straits than the trend data reveals.