Private health insurers facing “demographic death spiral”

The Grattan Institute has released another report warning that Australia’s private health insurance industry is facing a “demographic death spiral” from an exodus of younger, healthier members, which requires urgent action to resolve.

Below is the report summary, along with key graphics:

The Australian private hospital insurance system is unsustainable in its present form. The system faces a death spiral – younger and healthier consumers get a bad deal, so they’re dropping their insurance, which means premiums need to rise, so even more young and healthy people drop out, and the cycle continues.

This youth exodus means the recent moderation of premium increases is likely to end, and premiums will probably return to increasing at 5 per cent or more each year. By 2030 private health insurance is likely to cover less than 40 per cent of the population.

Private health insurers are strangled by red tape. The government requires that insurers charge everyone in each state – young and old, sick and healthy – the same insurance premium, under the ‘community rating’ principle. Insurers’ incentives are blunted by regulation. If an insurer bargains hard with hospitals, acts to keep members healthy, or innovates to reduce treatment costs it loses much of the benefit to other insurers through a process called risk equalisation.

The Commonwealth spends nearly $5 billion a year subsidising private hospital insurance – and another billion or so on ‘general’ or ‘extras’ insurance – at questionable value for money. Subsidising private health care might be worth it if it takes the pressure off the public system. But the evidence suggests that the cost of the subsidy to the budget is much larger than the amount it saves in public health care.

This report proposes policies that will help the private health insurance industry become sustainable as the population ages. Change is needed, but a gradual industry transition will ensure there is no disruption to the health care, including the public system.

Young people’s premiums have to get cheaper. In the short term, a cost-neutral reshuffling of the Private Health Insurance Rebate among the age groups will help. In the longer term, more structural reform is needed. Australia should move further along the spectrum away from community rating – where all insured people pay the same premium for the same product – towards a system where premiums vary by age.

Premiums should be partially deregulated, with insurers free to charge younger people less than older people for the same level of coverage. Premiums should remain regulated, and should not vary by age, for people aged 55 and over. The private hospital insurance rebate should be redirected towards older patients. The rebate should not be increased and should be withdrawn from low-coverage policies. The general (‘extras’) insurance rebate should be withdrawn. Part of the proceeds should fund dental care and part should keep hospital insurance premiums for older people at acceptable levels.

Overall, the net premiums paid by older people would rise a little, while younger people would pay less. If the proposals in our previous report are implemented, older people will pay less too.

Lifetime Health Cover and the Medicare Levy Surcharge should be gradually phased down. Risk equalisation among funds should be reduced so that insurers can keep more of the benefits of any efficiency gains they’re able to achieve, helping to keep costs down.

Private health insurance is an important industry facing challenging times. Innovation in the industry has been stifled by excessive regulation and a handout mentality. The industry should rely more on customers seeing value in their product, rather than being prodded into taking out insurance. Just as in any other industry, private insurers should compete based on the value they provide to their customers.

Rather than applying band-aids to the private health insurance industry, policy makers need to justify why taxpayers continue to provide subsidises given “the Commonwealth spends nearly $5 billion a year subsidising private hospital insurance” and “the evidence suggests that the cost of the subsidy to the budget is much larger than the amount it saves in public health care”.

International evidence also does not support the contention that private health insurance keeps medical costs down:

ScreenHunter_1766 Mar. 20 14.45

Surely it’s time for policy makers to evaluate whether the $5 billion of annual private health insurance subsidies would be better spent in the public system?

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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