Private health funds fight the death spiral

By Leith van Onselen

Commentators often talk about the electricity “death spiral”, which arises when demand for power declines, due in part to customers taking up solar, leading to higher prices to cover fixed network costs. That is, the more people that take-up solar power, the faster decline in electricity demand, and the more fixed costs must be spread over a smaller volume of electricity, raising costs for everyone else.

A similar phenomenon seems to be in play with Australia’s private health insurance system.

Back in August, actuary Jamie Reid claimed many Australians may soon find it cheaper to pay the Medicare Levy Surcharge than to have private health insurance. The surcharge is meant to penalise high-income earners who do not have health insurance, but Reid noted that the combination of higher insurance premiums and a reduction in the impact of the health insurance rebate is making paying the surcharge an increasingly attractive alternative. As a result, more people may opt out of health insurance, placing more pressure on the public health system.

Today, The AFR reports that health funds are trying to fight the death spiral by offering younger Australians premiums at a discounted rate in a bid to arrest falling memberships and ensure the overall financial viability of the system:

Health funds are examining offering customers discounted premiums for life as an incentive to take out cover in their 20s in a bid to arrest plummeting rates of membership.

Amid soaring complaints about declining affordability, insurers and their lobby group Private Healthcare Australia are working on a plan that would reduce premiums by 2 per cent a year, capped at 10 per cent after five years.

Dubbed a “reverse Lifetime Health Cover”, a member would continue to have cheaper premiums for as long as they remained in a fund.

While the proposal is in its embryonic stages with market research still being conducted, the industry has briefed the government on the proposal.

The government is looking at reforms to private health insurance as members question whether they are still getting value for money following above-inflation premium hikes and policy exclusions.

From a peak of 47.3 per cent of Australians holding hospital cover in June 2015, membership has been slipping and was at 46.1 per cent in June this year.

Private Healthcare Australia chief executive Rachel David said more was needed to attract younger members… “There is a struggle to attract a new generation,” she said…

Dr David believed older members would not resent discounts because the influx of young and healthy members who hardly use their policy cross subsidised the sick and elderly who make claims more frequently.

“Under the community rating system their premiums are lowered by this. That is something we would have to communicate effectively,” she said.

The inherent issue with all universal private healthcare systems (including Australia’s) is that they can only remain solvent if enough young and healthy people (the so-called “invincibles”) agree to sign-up. They are the ones who are likely to pay more into the system than they take out. And in the absence of risk-based pricing, the only incentive for the invincibles to sign up is to avoid penalty (i.e. the medicare levy and the lifetime health cover surcharges).

The risk is that healthy invincibles may perceive that it is cheaper to simply pay the penalties than hold private health insurance, which could see an exodus from the system. Thus, the private health system would be left with a larger proportional of unhealthier, older, expensive users of the system, forcing premiums up and leading to a further exodus of the invicibles, and so on.

The above proposal by health funds could, therefore, help to arrest the the death spiral.

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  1. I’m one of those invincibles, private health is a joke – just pay what you would in premiums into a high interest account if you’re that concerned. My parents have cottoned-on now, too. At least when you pay the levy it goes to healthcare instead of just lining corporate pockets.

    • There is also still value in PHI for large families. Only 2 incomes but potentially 4,5,6+ consumers of medical services.

      Luckily Australian housing situation means that there aren’t many large families.

    • Your mention of corporate pockets got me thinking, what percentage of the health industry’s gross value added is attributable to profits?

      To my surprise, the profits (or gross operating surplus, to be more accurate) of the health industry have shrunk from ~18% of the industry’s gross value add in the mid-1990s to about 13.2% now.

      It’s not profits that are the problem, it’s doctors and pharmacists who are putting pressure on the system. I suspect that’s why they’re keeping their mouths shut during this whole debate

      • Jumping jack flash

        The reason we have this ridiculous system in the first place is not directly because of the doctors, but they sure wanted it.

        It was their reward for fixing Howard’s unemployment problem.
        If anyone was watching at the time, you’d have noticed a massive spike in the number of disability pensioners around the same time. And who had the control over who got DSP in the olden days? Yep. Doctors!

        Just two forms, one filled in by your GP. A stamp. A couple of keyboard clicks. Hopeful long-term unemployed with heads full of… dreams and lofty ambitions… were set for life.

        And quietly dropped out of the UE statistic… Its all about the statistics, you know.

      • Even StevenMEMBER

        “To my surprise, the profits (or gross operating surplus, to be more accurate) of the health industry have shrunk from ~18% of the industry’s gross value add in the mid-1990s to about 13.2% now.”

        Not sure I understand what those %’s mean when you talk about ‘value add’? Are you talking health industry or private health insurers (two different things). Private health insurance industry make a profit margin of around 5% (on premiums collected). And yes, it has come down from years/decades earlier.

        “It’s not profits that are the problem, it’s doctors and pharmacists who are putting pressure on the system. I suspect that’s why they’re keeping their mouths shut during this whole debate”

        Correct. The AMA is staying extraordinarily silent. Hopefully it self destructs as the infighting between surgeons (massively overpaid) and GPs (ok paid, but comparatively underpaid) develops. One can hope. The surgeons in particular are a greedy bunch (as a whole). Almost make CEOs look good. Almost.

  2. There are several problems:
    1) You don’t really know what you are covered for. I had eye surgery a few months ago. It involved fixing the back of the eye but also, the lens had to be replaced because messing with the back of the eye always causes cataracts eventually. My private health “insurers” would not pay for all of the operation because they said I wasn’t covered for cataracts – even ones I didn’t yet have……
    2) The ridiculous gap. On top of the surgeon’s bill, I had to pay the anaesthetist $300 in cash! Yes, used notes. You would be a fool to question your anaesthetist just before an operation……
    The key to fixing the system is:
    a) Clearly document the cover;
    b) At least allow companies to make some allowance for existing risks; and most importantly:
    c) Cap the huge fees being charged for medical & dental work. That mob are making lawyers look cheap.

    • “……..I had to pay the anaesthetist $300 in cash! Yes, used notes. …”
      I hope you asked for and got a receipt.

    • Unfortunately, after ACCC just lost a case to Medibank for changing their clause without telling the members, the insurer can and will change what is covered on a whim. The only way to fix the issue is for the government to mandate coverage on what qualifies for the health care debate. Right now it covers hospital stay ,but not much else.

    • I’m sure your cover is very clearly documented in the fine print.

      The real problem is that you ultimately don’t know what cover you need, until after you needed it.

      You can take a punt beforehand and hope you’ve made the right selections from the menu, but that’s about it. And the insurance company has a much better idea of what problems you’re likely to have than you do, and will price their menu appropirately.

      So they engineer complexity into their systems to push you towards the higher, more expensive cover for everything, that you most probably don’t need.

      Then – like the talking head on 7:30 last night – they have the gall to try and call it “simple”.

      This is why healthcare needs to be universal and publicly funded.

      Imagine if the justice system was run like the health system:

      “Oh, I’m afraid while you were insured for assault – really overinsured, if anything, hardly anyone uses baseball bats here – you hadn’t selected coverage for rape. So we won’t be able to fund any investigation into or prosecution of your case because you were only threatened by the knife, not actually stabbed by it, and you apparently didn’t struggle so there’s no bruises or scratches demonstrating evidence of physical assault. You can, of course, choose to pay for your own investigation and prosecution if you choose to.”

      • It is. It is called family law and you pay in 6 minute increments for everything. Even the lawyerly mistakes and misunderstandings.

    • The problem is it is not really insurance. It is difficult to find any insurer that will allow you to simply pay an excess so that people don’t take the piss, and get covered for everything above that excess. The closest I found was CUA but I just noticed they restructured everything without my knowledge and I am no longer covered for the major treatments I was initially covered for. The system is pathetic.

      • Even StevenMEMBER

        The problem is in fact the doctors. They are legally permitted to charge whatever fee they want. You think your private health insurer should just pay whatever the doctor you selected charges? Hmmm… can’t see any problems arising from that… not.

  3. They are assuming that the levy wont increase, which it can and most likely will to try and keep people forced in private health

  4. the feature on 730 last night said it all…

    Boomer needs uber-expensive surgery, cannot afford to pay for it privately, public system wait too long, so signs up for private ‘insurance’ that covers it, waits the token 12 months and has said surgery at the expense of all other’s premiums the following year.. Yep, I cannot understand why healthy young Aussies don’t want to be a part of this private health communism!

    • Not as much communism as the ole’ neoliberal thinking “privatise the gains, socialise the losses” otherwise known as “heads I win, tails you lose”

    • That’s why I mentioned existing risks above when you join a health fund. If on the other hand you have been paying your premiums for 20 years that’s something else.

  5. 10% saving capped!!!


    Eaten up in 1.5 years of price rises

    Only 3 things in life are certain, make that 4

    1. Taxes
    2. Death
    3. PHI rises of 6% a year
    4. Melbourne FC perenially f#cking hopeless

  6. Jumping jack flash

    They’ll need to fix the youth labour market first.
    While businesses continue to use cheap imports instead of training young people, there is no way that young people will be able to afford PHI.

    In fact given that youth wages are traditionally low if they are even able to get work, there is absolutely no incentive for them to take it on, given the bar until the MLS kicks in is set quite high. (and rightfully so).

    Why spend 30% of their drinking money (income) on PHI when they probably wouldn’t even use it? Its just not going to happen and even the smoothest-talking salesperson isn’t going to be able to convince any but the most basic of youth to do it.

    There are two courses of action to fix this “problem”.

    1) lobby the crap out of the government to lower the bar. Make MLS kick in at 30K!
    2) give up and go back to where they came from.

    I’m for option 2. Australia just doesn’t need it and we can’t support any real competitive market for it.

    Besides, it was simply a gift from Howard to the AMA for fixing the unemployment problem anyway. A private system thrust into a well-functioning public one for the sake of making a few doctors rich for pre-filling out the DSP forms for their long-term unemployed patients. I’m sure nobody remembers by now, and all those doctors have long retired and been replaced by cheap imports.

    Then after we drive out the insurance companies, and wipe away the tears of the AMA, we can reform Medicare.

  7. Private health insurance is deliberately complicated so that people have difficulty comparing apples with apples to choose the best apple. The fundamentals of it are also poorly understood.

    There’s been a few comments about doctors’ and pharmaceutical expenses. These are actually the responsibility of Medicare via the MBS and PBS respectively. Most health insurers offer “known-gap” schemes where they contribute about as much as Medicare does to the doctors’ fees for in-hospital services (they’re not allowed to for out-of-hospital services), so the lines have become a bit blurred and the confusion increased. This was a sort of hand-shake deal between the government and the insurers in exchange for bringing in the PHI rebate. Out of pocket gaps were getting very big because doctors would put their fees up with inflation and Medicare wouldn’t, and so this shifted some of the burden from the government (financial burden as well as the burden of negative PR when “gaps” persist) to the insurers. There is no legal obligation for the insurers to do this, and some don’t.

    What private hospital cover is actually supposed to cover is the cost of the bed-stay, the theatre fees and consumables, and the implants. This combination for a hip replacement will be somewhere between $20,000 and $30,000, some operations are significantly more. Even diagnostic tests are generally billed by radiologists or pathologists, which are the responsibility of Medicare (until the lines were blurred – see above). In the case of elective surgery it basically allows you to get it done privately (call this queue jumping if you want), and not in a teaching hospital, ie, you won’t have trainees managing your case.

    Hospital cover should be thought of the same as house insurance – you hope that you pay for it all your life and never need to use it, but if you do you’re glad you’ve got it because you don’t have $50,000 sitting around.

    Extras is even more confusing. I don’t consider it insurance, hence I don’t have it. The problem is that so many people who have extras cover use it each year (imagine if 1/3 of all insured cars were written off in crashes every year), and that the amount that they will pay for a specific service (optical/ dental/ physio etc) is capped at a certain amount each year or for a lifetime (eg, orthodontics). Therefore the premiums are so high compared with the potential benefits that you are better off saving the money instead, and secondly if you do get a really big bill (eg, an expensive dental reconstruction) then it won’t cover you for most of it anyway.

    The other thing about extras is that it generally doesn’t take pressure off the public system – there isn’t much public dental, physio, optical etc. anyway.

    As for the potential “death spiral” – I’ve got no idea how to prevent this. I’d exclude extras from the 30% rebate (just as there is no rebate on home, car, & contents insurance), and I’d exclude all “young and healthy” policies from the rebate – only include policies that cover everything. The government could approve the policies that they rebate for on an individual basis – the policies must meet simple but comprehensive guidelines to be included. That way everyone that is insured is covered for everything (unless they make the conscious decision to be covered with a cheaper policy that the 30% rebate doesn’t apply to). This would broaden PHI’s “community rating” credentials.

    One of the main reasons that PHI is increasing more than inflation (not the only reason) is that for every 1000 members there might have been 100 over 65s twenty years ago and 200 over 65s now, and these guys need more services on average per year. If under-65s then say “this is too expensive, I’m dropping it”, then there’ll be 300 over-65s for every 1000 members. I don’t know if there’s a solution to this.

    Obama’s solution (very simplistically in a very different system) was to make private health compulsory for everyone but to subsidise people who would have difficulty paying for it. I’m not sure that this is an acceptable solution in Australia either.

  8. innocent bystanderMEMBER

    I eventually dropped my PHI after humming and ahhing for a good while.
    Reasons being:
    I couldn’t understand the proposals/cover – maybe the fine print is better after you sign up? I dunno. But the complexity is obviously intentional.
    If I can’t understand something I shouldn’t buy it.

    Some other reasons contributed to my disenchantment:
    – being single and paying half the family rate.
    – PHI seems to encourage private “suppliers” to increase their fees.

  9. Yep, 15/16 FY paid roughly $1k for private cover. Received 1 fully covered physio visit, and the next 20min visit was $68 while they covered the $30 gap. Bargain!
    So, I no longer have PHI. Unsure why it doesn’t allocate a pool of credit for any treatment needed, instead of limiting the rebate to the initial step in the course of treatment you require.

  10. Reading through this article, the comments – isn’t the most rational conclusion to abolish private health insurance? All this difficulty about getting people into the system and keeping them there – this is not an issue in the single payer public system? I mean from what I can tell the private system is not really helping to keep medical costs down anyway (my local dentist car park is full of luxury European cars).

  11. Too bad this era of hyper individualism/self love degeneracy is leading to poorer and poorer outcomes for peoples health at ever younger ages. Less young “invincibles” and those that are have no money anyway. I am sure the transkids won’t be burdens later in life either ^_^

  12. PHI, absolute Ponzi scheme.
    It’s amazing the ability of baby boomers to scavenge money from the younger generations.

    Unfortunately, the easu