Aged and confused: why the private health insurance industry is ripe for reform

Among a number of reviews announced by Health Minister Sussan Ley is a comprehensive review of private health insurance. This will include consultative round tables for industry, consumer groups and academics, as well as a survey designed to gather consumer opinion about health insurance policy.

The survey, which opened yesterday, has generated extensive commentary over whether private health insurers should be able to vary their premiums to charge more based on member characteristics such as age, gender and smoking status.

But there are other questions that ask about the consumer experience of health insurance, which may be the most productive area for reform.

Pressure for change

Private health insurance in Australia is a peculiar hybrid. It has a love-hate relationship with private hospitals and, despite the name “private”, is heavily regulated and subsidised by government.

The government subsidy is one reason for the renewed focus on the industry. The Commonwealth subsidy for private health insurance is expected to grow 7% in real terms over the period 2015-16 to 2018-19, up to A$7.3 billion in 2018-19.

This is much faster than Commonwealth health spending growth overall (3.2%), and faster than growth in Commonwealth support for public hospitals (6.7%).

Pressure for change is also coming from consumers. A recent report from the Australian Competition and Consumer Commission shows a significant increase in complaints about private health insurance from consumers facing significant out-of-pocket costs when using their insurance, despite having paid premiums for decades.

The report concluded that:

some consumers find it difficult to understand the extent of their cover, the costs they are likely to incur if they use a health service and determining who to seek information from (insurer or health provider).

How does the system work?

There are two broad types of private health insurance products: hospital and general (ancillary) insurance.

About 47% of the population has hospital insurance and about 55% has general insurance. The market dynamics for the two types of insurance are quite different.

Hospital insurance is a true insurance product. People take out insurance just in case they might need admission to a private hospital some time in the future. They mostly have no control over whether (or when) they’ll need it.

General insurance is quite different. It covers much more discretionary services including allied health services, dental services (including preventive dental services) and natural therapies (including hypnotherapy). People with this type of insurance may want to make sure they get their value for money by using services up to their limits.

In addition to subsidies, there are penalties on middle- to high-income earners who don’t have private hospital cover. Single people with an income over A$90,000 a year (families over A$180,000) pay a 1% levy on their taxable income if they don’t have hospital insurance; higher-income earners pay a higher levy.

For higher-income earners, private hospital insurance is effectively free, since the cost of hospital insurance is lower than the tax they would pay if they did not have it. For people in this situation, private health insurance purchase becomes a tax-minimisation strategy.

Obviously, the cost to the consumer of private hospital cover can be reduced by taking out a product that provides lesser coverage, either by “reduced cover”, requiring the consumer to pay money up front if they use the policy (a deductible), or by specifying exclusions from the policy.

The vast bulk of policies now have deductibles or exclusions or both – only about one in eight policies provides full coverage without deductibles and exclusions. Ten years ago about 40% of policies had no deductibles or exclusions.

The greater the proportion of people facing deductibles and exclusions, the greater the risk that people will not know what their coverage actually is, and be dissatisfied with their level of insurance when they do.

Private health insurance policy hasn’t kept pace with this change in composition of the insured. The high level of complaints suggests that consumer protection provisions need to be strengthened.

Everything is on the table

Almost 50 years ago the last major review of private health insurance found that “private health insurance is unnecessarily complex and beyond the comprehension of many”. It appears we are back in that same position.

The Australian Competition and Consumer Commission report, together with a similar overview of health insurance complaints put together by the Private Health Insurance Ombudsman, point to the key changes necessary.

First, product information needs to be simplified and standardised. Consumers rightly complain about the unexpected; limitations on coverage should be explicit and easy to find. Enforceable limitations should no longer be able to be buried deep in the fine print.

Second, the Private Health Insurance Ombudsman should be funded to undertake more regular advertising of its fund comparison website and to include more information on the website about complaints.

Third, funds already provide their contributors an annual tax statement. Funds should be required to provide contributors a statement about the fund’s performance prepared by the Private Health Insurance Ombudsman at the same time. This would help consumers decide whether they should switch funds. Over time, this statement could become more sophisticated, warning consumers about particular exclusion clauses that are causing grief.

Fourth, the Australian Competition and Consumer Commission should be more aggressive about pursuing false and misleading claims by private health insurers and, if necessary, consumer protection legislation should be strengthened to capture the dodgy practices outlined in the commission’s reports.

Finally, we should not have to wait 50 years for another serious review of consumers' health insurance experience. Some form of review of the effectiveness of consumer protection provisions should be undertaken at least every five years.

The review must aim to strengthen consumer protection so Australians can make informed choices about the products they buy.

Stephen Duckett has private health insurance as a tax minimisation strategy.