Lifetime Health Cover

An Unfunded Lifetime Community Rating Model
For Private Health Insurance

Discussion Paper - March 1999

A Submission To The Department Of Health And Aged Care

Content

• Introduction
• Comments on design of lifetime health cover
• Transition arrangements (p10)
• Financial viability (p11)
• Reinsurance and competition (p12)
• Summary

Introduction

Australia has a health financing system under considerable pressure. On the one hand funds for the public system are being squeezed by Governments with lean fiscal targets. On the other hand the private health funds are struggling to maintain members (especially the younger and healthier) as more and more people opt to rely on the public system (or pay direct) if they need treatment.

Older members are not opting out, however, because they are worried that they will not receive timely, high quality treatment in the public system. In a random survey of members of COTA with a mean age of 61, it was found that 52 per cent held private health insurance, despite 57.4 per cent relying on the pension as their only source of income. Only 11.8 per cent were not receiving any pension. In the survey, only 6.6 per cent had an understanding of lifetime community rating.

Older people do not see private health insurance as an optional extra but rather an essential payment which they need to make to ensure access to health care. Bearing this in mind, it is a sad state of affairs that older people's confidence in gaining access to public health care has been so eroded that they will give up essentials of life to buy private health insurance – a product which should be discretional not essential. PHI will continue to retain older higher risk contributors so long as the universal system is perceived to be unable to provide acute access and waiting periods are of an unreasonable length.

According to the Industry Commission, between 1989-90 and 1995-96, ageing of the membership base contributed a relatively small proportion, at 7.6 per cent, to the rising costs of premiums while adverse selection contributed 17.4 per cent. In contrast, a shift from public to private hospital usage contributed 27.4 per cent and increased private hospital costs contributed 39.7 per cent (p254).

The unfunded life-time community rating proposal (renamed Lifetime Health Cover in the discussion paper) was one of the Industry Commission proposals to stabilise the membership base of private health insurance - that is to say, to encourage younger healthier people to take up and stay in private health insurance. As such it is a public policy tool that addresses but one small part of the problem of premium increases.

The Government, from 1 January 1999 selected to inject significant subsidies into the PHI industry to make it more affordable and to encourage a wider demographic in its membership. However, this is a very expensive and uncertain mechanism for achieving membership stability. Younger people may still not view private health insurance as a desirable product and that is why we understand the Government may have an interest in additional measures to achieve its policy goals of stabilising private health insurance and to encourage a much broader spectrum of membership.

For COTA, the proposal for Lifetime Health Cover is of considerable interest. We see that it has some potential benefits:

• it will reward long term membership

• it will discourage "hit and run" memberships resulting in higher premiums for loyal contributors

• it may help keep costs down for long term members

• it may lessen the demands on industry assistance from the tax payer.

While we wish to register our interest in the proposal, we wish to state that we have a strong commitment to the public health system and Medicare. We believe that the public system is:

• more efficient

• delivers better care under adequate funding conditions

• subject to more cost restraint

• more cost-effective

• and is less likely to be driven by inflationary demand driven cost pressures.

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Older people on low incomes desire a system, unlike the present one, where they have access to treatment within a reasonable time period. It is COTA's view that the skewing of the PHI membership base could be improved by improving older people's confidence in Medicare. We believe that Medicare generally works well but that there are some problems, generally caused by underfunding and poor resource allocation, that have generated a perception that it is no longer a reliable and accessible system for older Australians, particularly those with chronic conditions.

We are strongly of the view that while Lifetime Health Cover may address some problems for the membership base of PHI, it does not address the more significant cost drivers in the PHI industry.

Lifetime Health Cover would be more attractive to COTA if it was being developed in the context of other Government initiatives to address the systemic problems in health financing (noting that the Government is trying in some of these areas but is being thwarted by sectional interests). Other Government initiatives should include:

• improving confidence in Medicare through adequate funding and better resource allocation including attention to waiting times, discharge practices and access to those medical specialists who are in short supply in the public system

• addressing cost drivers in private hospitals, medical specialist fees etc.

• improving the administrative costs of the PHI industry (around 12 per cent compared to 3.5 per cent for Medicare)

• eliminating exclusion products from PHI

• addressing the problem of gap payments.

COTA recognizes that PHI is an ongoing component of health financing in Australia but the question is how best it can operate to deliver a desirable and affordable product without Government subsidies. PHI will be a continual drain on Government until such time that it has stabilized.

Stability will not be achieved only by avoiding adverse selection. The supply side component of private health care must be addressed in a systematic and consistent way. If not, the costs of private health insurance will continue to spiral. This will mean that Lifetime Health Cover would quickly become an irrelevant system and liable to dismantling by governments in the future. It will also mean that private health insurance will remain undesirable for many groups in the community including younger, healthier people who will see it as a product which is poor value for money and older people who will not be able to afford it.

The discussion paper identifies a number of reasons to introduce Lifetime Health Cover. The first, to increase total health insurance member numbers, is obvious. But no attempt is made to define what is a stable mix of contributors and no discussion is entered into regarding the number of private beds that would be supported by private health insurance.

Lifetime Health Cover will reward long-term members and this is an important factor for older people who have contributed to private health insurance for most of their lives. While noting the proposed scheme is not fully funded, there is an emotional component for people who believe that even if it is unfunded, their loyal support of PHI is rewarded.

The lifetime health cover proposal has a major risk. It is feasible during the grace period of one year, large numbers of older people will take out PHI while younger people will not. PHI will remain unstable. This is a real risk given the lack of confidence of older people in being able to access the public system.

Comments on design of lifetime health cover

Selecting the age step (p7)

COTA has no better advice on the choice of 35 as the threshold age. Annual premium increases of 2.5 per cent seem reasonable.

Introducing 2.5 per cent discounts below the threshold age of 35 would be an incentive for younger people to make a longer term commitment to PHI. Diversion of funds from the rebate would provide the resources to pay for the transition.

Selecting the maximum loading (p8)

COTA believes that the maximum loading should be 100% and certainly not any higher

Changing contribution categories (p8)

COTA would support the proposal to base premiums on the individual age of entry of each partner of a couple. The individual certified age at entry would then follow the individual in the event of their partner dying or separating.

Waiting periods (p8)

COTA supports the continuation of waiting periods to reduce the incentive for strategic entries.

Pre-existing ailment rules (p9)

COTA agrees that there does not appear any justification to change the pre-existing ailment rules.

Upgrade of benefits (p9)

COTA agrees that the better option with respect of the upgrade of benefits is to enable members to upgrade while retaining the same age at entry but with waiting periods and pre-existing ailment rules in place..

Periods of absence (p9)

While recognizing the recommendation that there be periods of up to 12 months when contributors can cease paying premiums, COTA believes there should be hardship provisions that deal with exceptional circumstances where an individual has not been able to pay their premiums for more than a year.

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Transition arrangements (p10)

A grace period of one year would be reasonable to enable people to make decisions on whether to join private health insurance before the introduction of Lifetime Health Cover. Exceptional circumstance provision should exist to extend the grace period for individuals.

Financial viability (p11)

Exclusion benefits (p11)

COTA holds a strong objection to exclusion products as they do compromise community rating principles. People cannot predict their health and, with the exception of gender-specific exclusions, are a risky way of trying to keep premiums low. COTA believes very strongly that no more exclusion products should be offered and that the existing exclusion products should be wound down and eventually eliminated. The time to do this is at the time of the introduction of ULCR which provides an alternative way of providing incentives for membership for younger people.

Deductibles & co-payments (p12)

COTA does not agree with the assumption that only healthy people, particularly younger healthy people would tend to purchase products with larger deductibles if these were adequately marketed. The deductible product is, or should be, attractive to people with some level of cash who are prepared to take a risk in return for lower premiums. The front-end deductible means there is a solid price signal.

Reinsurance and competition (p12)

COTA agrees that it would be sensible to adjust reinsurance arrangements at the same time as the introduction of ULCR. COTA agrees that health funds should have the maximum incentive to contain hospital costs and not behave like traditional insurers where premium increases follow increased claim costs. PHI without the ability to impose cost controls will prove inflationary. The private health financing system contrasts dramatically with the public health system which is subject to severe cost restraint.

Portability (p13)

COTA agrees that there is no obvious reason to change the current ability of contributors to move between funds without penalty as they are able to do at present.

Summary

COTA welcomes the release of the discussion paper on Lifetime Health Cover. It is an encouraging initiative as there is a very strong need to find ways to stabilise private health insurance. This will be achieved through systemic changes rather than untargeted subsidies which may, in the short term, stem the departure of low risk people from PHI but will prove unsustainable in the longer term.

However, we believe that the Lifetime Health Cover should be one of range of health care reforms which:

• improve confidence in Medicare

• address cost drivers in private hospitals, medical specialist fees etc.

• improve the administrative costs of the PHI industry (around 12 per cent compared to 3 per cent for Medicare

• eliminate exclusion products from PHI

• address the problem of gap payments.

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