Insurers Stretching For The Health Dollar
Sydney Morning Herald
Friday October 25, 1996
PRIVATE health funds have had it tough in the past decade.
As more people have found private health insurance is a luxury they can no longer afford, the percentage of Australians with private cover has dwindled to 33 per cent of the population, compared with 50 per cent a decade ago, and it continues to decline by 1 per cent each year.
Now, many funds are fighting back, with previously unthinkable innovations such as loyalty programs and highly focused packages.
Most funds have developed restricted products, so a young and healthy person isn't paying to be insured for expensive procedures such as hip replacements and cardiac cover, or a childless couple is not paying for obstetrics.
Relative newcomer, National Mutual Health, has been at the vanguard of some of the changes. Its latest move is to offer an insurance package strictly for couples. It targets childless couples, including single-sex, and older couples. By excluding obstetrics cover it is able to bring contributions in 15 to 20 per cent cheaper than the family rate.
Another of National Mutual's innovations was to phase out the excess on its mid-range product over four years, effectively providing a loyalty bonus. And last year the company extended insurance cover for children to age 23, to include tertiary-age offspring.
On October 1 the Government loosened the leash slightly on private health funds by allowing them to market products to four categories of contributors instead of two.
This came as a result of National Mutual Health applying to the Government to approve its marketing strategy.
Until the change, the contribution rate for singles was set at exactly half that of families. With four categories of rates - family, single family (one parent and one or more children), couples and singles - National Mutual says contributors are more likely to be paying only for the insurance cover they need.
Not all health funds will jump on the multi-category wagon. Mr Phil Soden, general manager of HCF, says there are a lot more sums to do before he would be convinced to take that route.
The reason single cover is half the cost of family is that, with many older people categorised as single, the cost of claims more or less falls that way, says another health expert.
"The overwhelming factor that dominates all the conduct in the industry is community rating and what they are trying to do is to design products that appeal to particular groups of people and deliver price benefits to those people in the expectation that high-claiming members won't choose those products," says Mr Peter Carroll, an actuary specialising in health.
The system of community rating means everyone is charged the same rate, regardless of age or whether they are in a higher health risk group. This has led to the common complaint that, in the private system, the young and healthy subsidise the old and infirm.
Mr Carroll says funds have been ingenious in what they have been able to offer within the system's rigid regulatory framework.
HCF's most successful product is its Family Care package, which cuts back on benefits included in its more expensive products, such as hip replacement and some dental services, and includes orthodontics and school accident cover. While the cover is a not nearly as comprehensive as full family cover, premiums are less than half the full rate, and cost has been found to be the biggest cause of withdrawal from funds.
In its hospital cover, MBF offers a "menu" of premiums, so if you are willing to take a higher excess you can pay a lower premium. The excess can range between $100 and $1,000, so you can choose the level of excess you are willing to absorb.
While putting big deductibles or excesses onto a product can work for the consumer by lowering premiums, there is another motive for the insurance company.
"These cheap products are basically designed with big front-end deductibles and selected covers so that they just focus in on young and healthy people who don't expect to use private hospitals very much," Mr Carroll says.
For someone not expecting to claim, the savings on premiums over a year or two could more than compensate for the excess you would have to pay if you went to hospital.
"Experience shows that as soon as you ask people to pay something out of pocket, up front, then you find that the people who joined the fund expecting to claim avoid those products," says Mr Carroll.
The Howard Government has announced two initiatives to try to stem the flow from private funds. The first is a rebate for lower-income earners with private health insurance and second a 1 per cent surcharge for high-income earners who opt out of the private system.
"Fifteen years ago it was considered a sign of financial maturity and independence that you joined a super fund and took out health insurance," says Mr Carroll. However, people under the age of 35 have grown up with Medicare and the idea that health care is free.
The problem with this is nobody knows what things cost in the system. "If you go into a public hospital neither you nor the hospital know the cost of the services you are getting. In some ways the private health industry is trying to compete with Medicare which has all these illusory elements in it."
A year ago, the Government approved a move to 100-per-cent private hospital cover so that, like Medicare, there are no out-of-pockets for hospital visits. Not surprisingly, this has caused an escalation in the cost of claims for those funds which had not signed agreements with hospitals over costs.
Mr Carroll estimates 60 to 70 per cent of private patients are now choosing private hospitals over going to a public hospital as a private patient. This doubles the cost for the insurer: private hospitals can cost up to $500 a day, compared with $200 for private patients in public hospitals.
Health is arguably the most complex and highly politicised area of the insurance industry.
In terms of how it operates, private health insurance can hardly be uttered in the same breath as other forms of insurance.
The regulation and structure of private health insurance in Australia has kept big international companies like Cigna, Aetna and Norwich Union out of the market, as well as most of the large Australian insurers.
All but two of the 48 health insurance funds, National Mutual and FAI, are non-profit organisations, with the sole source of capital coming from the members themselves.
"It is therefore impossible for them to offer any kind of financial guarantee," according to Mr Carroll.
With other types of insurance, you pay your premium and rest easy that you won't have to pay any more until the next premium is due. With private health insurance it could increase at any time and, even if you pay yearly in advance, you will be hit with the increase unless the insurer wears the cost.
While the rest of the industry comes under the regulation of the Insurance and Superannuation Commission (ISC) and has a relatively free rein in pricing and product design, private health funds are closely monitored by the Government. All applications for increases to contribution levels have to be approved by the Department of Health, Treasury and the Prime Minister, in that order.
"It is out of kilter with the rest of the insurance industry," says Mr Carroll. "The issues of access and equity don't dominate the regulation of those (other insurance) sectors." He argues that health insurance should be regulated under the ISC and community rating relaxed.
But there are supporters of community rating who feel it is the only way to provide private services to the aged and very ill. "There needs to be something to protect the aged and chronically ill if private health is deregulated, otherwise they will be priced out of the market," say Ms Mary Perrett, Private Health Insurance Complaints Commissioner.
Most people don't understand how the private health industry works, says Ms Sandy Halley, commissioner of the Private Health Industry Advisory Council (PHIAC).
It is heavily regulated, to the point that if an insurer falls below the requirement of two months' reserves or $1 million they have to apply to the Government to keep trading.
An inquiry into the private health insurance industry by the newly formed Productivity Commission (the result of a merger between the Bureau of Industry Economics, the Economic Planning Advisory Commission and the Industry Commission) is seeking to clarify the state of private health, its regulatory framework, and how to encourage competition and innovation among insurers while ensuring contributors benefit from the Government's financial incentives.
The Private Health Insurance Complaints Commission, formed in March, has fielded 800 complaints so far.
The commission first sends the case to the fund to rectify and, if they are not satisfied with the result, will then investigate it.
"Sometimes the customer doesn't know what sort of cover they had but if they have been mislead we will pursue it," says Ms Perrett.
"The funds, by and large, have been willing to do the right thing by the member."
A GAME PLAN FOR BUYING HEALTH INSURANCE
* Give careful consideration to your budget and individual health needs. Buying a cheaper product is false economy if it excludes bypass surgery or hip replacements and you are in your 70s.
* Don't buy on the basis of advertising. Do your own thorough market research and read the fine print in the brochure. What one fund highlights as a limited benefit may be unlimited in another fund but tucked away in the fine print.
* Be careful about exclusions. Some of the latest medical innovations are likely to be excluded but may not be listed in the brochure.
* Don't assume anything. Always check with your health fund before an expensive procedure.
* Check waiting periods. Don't get caught out by advertising that says it will waive waiting periods. If there is a one-year waiting period on pre-existing ailments this is likely to still apply, despite the special offers.
* Look into how the excess is calculated. Some funds calculate it on the anniversary of joining the fund, others on the calendar year or the financial year.
* If you plan to travel overseas, check if you can suspend your payments for the duration of your absence.
* If you have joined a fund and you realise it is not the right one for you, it is not too late to change. You can transfer funds without serving any new waiting period.
© 1996 Sydney Morning Herald