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.