Private health insurance premiums are set to rise on October 1, an increase companies have delayed for six months due to the COVID-19 pandemic.
But 2020 has been a year like no other. And some of the reasons insurance companies are using to justify this price rise don’t stack up.
Theseincludeincreasing costs of hospital and health care, more claims, an increase in chronic health conditions, and an ageing population.
At a time when many policy-holders are facing financial stress and many elective surgeries or treatments suspended or delayed, this week’s price rise isn’t justified. With a further price rise already set for April 2021, it would be fairer to delay any fee hike until then.
1. Increasing costs of hospital and health care — false
Costs of hospital and health care paid by private insurers have reduced substantially in 2020, not increased, according to the latest figures from the Australian Prudential Regulation Authority. That’s because many elective surgeries and routine extra care (such as dental check-ups) were suspended.
Private insurers paid reduced hospital treatment benefits in two consecutive quarters. They dropped 7.9% in dollar terms in the March 2020 quarter, compared with the December 2019 quarter. They fell another 12.9% in the June 2020 quarter, compared with the March 2020 quarter.
Private insurers’ payments for general treatment (also known as ancillary or extras) benefits dropped even more. They fell 32.9% in the June 2020 quarter, compared with the March 2020 quarter.
Some may argue the reduction in benefits paid is because substantially fewer people had private insurance in 2020. But this is not true.
While there was a small drop in the number of people with private health insurance in the first half of 2020, this was by less than a percentage point: the number of hospital memberships fell by only0.4 percentage points. There was a similar drop in the number of people with extras cover.
2. Increase in claim frequency — false
Another reason for the price rise is there have been more claims over a given time, or an increase in claim frequency. This, again, is not true this year.
Private insurers paid for 16.7% fewer hospital treatments in the June 2020 quarter compared with the March 2020 quarter. That’s a 4.1% reduction in the 12 months to June 2020.
Private insurers paid out 28.4% fewer extras claims in the June 2020 quarter, compared to the March 2020 quarter. This was a 9.8% fall over the 12 months to June 2020.
In Victoria, services are only gradually returning to full capacity from November. So it will be a long while before claims return to pre-pandemic levels.
People have also been avoiding seeking needed health care because they are afraid of contracting the coronavirus, or cannot afford out-of-pocket costs due to increased financial stress. This would be another reason for the numbers of claims decreasing, not increasing.
Someinsurers are already providing discounts for families in financial hardship, such as people receiving JobSeeker or JobKeeper. Others offer discounts or waive price rises to people who pre-pay their policies for up to 12 months. More insurers should do this.
Providing financial relief and delaying the October premium increase will not only help customers but also help private insurers in the long run.
Increasing premiums twice in six months (October 2020 and April 2021) during an unprecedentedly difficult time can backfire, especially if the reasons to support the increase do not stack up.
When premiums increase, young people are more likely to drop private health insurance. This will drive up premiums further for everyone. This in turn will lead to more young and healthy people dropping their cover.
Consequently, it may cause a “death spiral”, driving private health insurance out of business.
Every year private health insurers raise premiums and every year we rue the hit to our hip pocket. This cycle is heavily regulated: insurers apply to the health minister who must approve premium hikes unless deemed contrary to the public interest. Premiums then change on April 1.
Australians have come to expect that come April 1 each year, their private health insurance costs will go up – often by a lot.
These increases have been substantially more than wage growth or inflation. Between 2011 and 2019, the cumulative growth in nominal premiums (before rebates) was 49%. Over the same period wages grew by 21% and CPI by 16%.
Insurers have justified the growth in premiums by pointing out that benefits – the money private health insurers pay out when we go to hospital or have treatment – have also grown substantially.
Growth in benefits is due to both higher medical costs and more claims. In fact, benefits per service have hardly changed since 2014 and have actually fallen for prostheses (such as hip and knee replacements), which highlights the importance of growth in number of claims.
Insurers are also facing growing cost pressure due to the exodus of young people from insurance and an ageing insurance pool.
Traditionally young people have cross-subsidised the higher expenses of older people, but increasingly they are deciding that private insurance is a bad deal. In the past 12 months, the number of people aged 20-34 with private hospital cover has declined by almost 50,000.
Insurers can point out that their profit margins are not unusually high compared to other forms of insurance. Figures from the Australian Prudential Regulation Authority show that in 2019 after-tax profits were 9.5% of premium revenue for general insurers. Meanwhile, after-tax profits for private health insurers were 5.6% (6.4% for for-profit funds).
Insurers can also point out that their net margins and benefits-to-premiums revenue ratios have been relatively stable over the past decade. Against this, growth in premiums has mostly acted to sustain profit margins rather than extend them.
But does this really matter for assessing price hikes? While shareholders would like to maintain the margins they’re accustomed to, there’s nothing intrinsically meaningful about historical figures.
The profits in one sector also don’t entitle insurers to the same profit in a different sector.
Ultimately, it’s hard to know what the “right” level of profit is. For now, private health insurance remains a relatively profitable industry.
What will the price increase mean for you?
Forty-four percent of Australians have private hospital cover and 53% have general treatment cover for things like dental and optical. For these Australians, the health minister estimates singles will pay an average of A$35 more per year (A$0.68 per week) and families A$103 more per year (A$1.99 per week).
It’s important to recognise that the 2.92% figure is a weighted industry average. Some policies will increase by more (and less) than 2.92%. You will find out by how much your plan is increasing early next year.
Those facing large price increases might downgrade their cover and some may drop it altogether. If healthier people drop out of insurance, that will put upward pressure on premiums in the future.
So, is the 2020 premium increase justified?
With the information at hand, 2.92% seems reasonable by historical standards. Growth in benefits has been declining since 2017 and this should flow to premiums.
Going forward, the government will need to do more than crack down on premium-setting if it wants to arrest growing costs. The biggest pressures are from rising hospital and medical fees and an ageing insurance pool.
Private health insurance premiums will increase by an average of 3.25% in 2019. These increases are relatively modest, as premiums have been rising at between 4% and 6% per annum for more than 10 years.
But in the current environment, above-inflation premium rises are not unexpected.
For comparison, consider the public health system, where spending increased at nearly 7% per year in the decade to 2017.
Out-of-pocket spending by patients also had an above-inflation trend of 5.1% per year over the past decade.
So both public and private expenditure on health are increasing substantially. Driving this is the increased usage and price of health care. Hospital visits are growing at 4% a year, and health price inflation is a further 2% per year.
Many hospital procedures such as cardiothoracic surgery, colonoscopies, hip and knee replacements, are increasing in volume by over 5% a year. So as patients use their health insurance more, it’s reasonable for the price to rise.
Most Australians with private health insurance receive a rebate from the Australian government to help cover the cost of premiums.
Means testing of rebates along income tiers was introduced in 2012. This sees individuals and households with higher incomes receive lower subsidies.
From 2014, the government began indexing rebates every year, using a formula that is calculated as a difference between the consumer price index, and the industry weighted average increase in premiums.
For example, this means in 2013/14, a person aged 65 or below earning less than $88,000 (base tier) would have received a 30% rebate. Today, a person of the same age in the base tier would receive a rebate of just over 25%.
For a typical family policy that covers both hospital and extras (with premiums approximately A$140 a fortnight), the decrease in the rebate translates to a very small rise in premiums of A$1 a fortnight.
Basic, bronze, silver or gold?
One key initiative starting on April 1 is the introduction of four tiers of private health insurance coverage: basic, bronze, silver, and gold. This is distinct to the income tiers we talked about above.
In this case, each tier mandates the minimum set of treatments (defined by clinical categories) that insurers must cover.
For instance, policies in the “basic” tier are required to cover rehabilitation services, hospital psychiatric services, and palliative care.
Insurers can include other types of treatments which are not mandatory under the basic tier, if they choose to do so. Each additional tier covers a wider range of treatments, in addition to services mandated in lower tiers.
This simplified categorisation of policies is designed to help consumers understand how comprehensive their cover is, and enable them to more easily compare products offered by different health funds.
While this initiative provides consumers with greater clarity on the types of services covered by each type of health insurance product, it still does not standardise care completely.
Health funds can offer to cover, in lower tier products, treatments that are mandated only in higher tiered policies (such as providing coverage for pregnancy in a basic policy).
This may confuse patients if they assume their policy covering pregnancy will also cover other costly private procedures such as joint reconstructions (bronze), or back, neck and spinal surgery (silver).
From April 1, health funds will be able to offer discounts on premiums of 2% for each year a person is under the age of 30 when he or she takes up private health insurance. Premium discounts are capped at a maximum of 10%. The discount is retained until the person reaches the age of 41, after which it will be gradually phased out.
This initiative is being introduced to encourage young Australians to purchase private health cover and to stem the decline in private health insurance ownership among younger people. From September to December 2018, the largest net decrease in insured persons was recorded in people aged 25 to 29.
These discounts on premiums for young people complement the Lifetime Health Cover policy introduced in 2000, which was designed to encourage Australians to take up private hospital insurance earlier, and also to maintain cover.
Under the Lifetime Health Cover policy, which is still in force, people above the age of 30 without private cover are required to pay a 2% loading on premiums for each year they are over 30, if they choose to take up private cover later on.
Another key change is that health funds are permitted to offer private hospital policies with a higher excess, in return for lower premiums. The maximum permitted excess is increasing from A$500 to A$750 for singles, and A$1,000 to A$1,500 for families.
Travel and accommodation benefits will be allowed to be included in hospital insurance plans for customers living in regional and rural parts of Australia. This will assist patients and their carers to meet the additional costs of having to travel to urban centres or capital cities to receive specialised treatment.
Natural therapies such as yoga, naturopathy, pilates and reflexology will no longer be covered under a general treatment policy. A total of 16 natural therapies are excluded. A review undertaken by the National Health and Medical Research Council concluded there is no clear evidence of the efficacy of these therapies.
Finally, to strengthen consumer protection, the role of the private health insurance ombudsman will be expanded, giving the agency new powers and greater capabilities to address issues and complaints.