House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Health and Ageing, the Honourable Tony Abbott MP)

REGULATION IMPACT STATEMENT: PRIVATE HEALTH INSURANCE - OPTIONS TO REINFORCE THE LEGITIMACY OF PRIVATE HEALTH CARE

BACKGROUND

1. Private health insurance supports individuals' private financing of hospital care and ancillary services such as dental and optical services. It sits alongside Medicare and free public hospital treatment that is available to all Australians. Private health insurance helps consumers to finance and to have choice in their health care. It also improves the capacity of the public health system to provide health care to the Australian community.

2. In recent years, the Government has introduced several initiatives to improve the attractiveness of and participation in private health insurance for consumers. These include:

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introducing the 30 % Private Health Insurance Rebate;

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increasing the rate of the Private Health Insurance Rebate for older Australians;

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initiating Lifetime Health Cover (LHC);

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introducing the No Gap/Known Gap scheme;

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introducing the Medicare Levy Surcharge;

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protecting consumers' health interests entitlements through broadening the powers of the Private Health Insurance Ombudsman (PHIO); and

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encouraging efficiencies in service delivery through the Hospital Outreach Program.

3. Under these measures:

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those who purchase private health insurance have 30 per cent of their premium subsidised by the Australian Government, with rebates of up to 40 per cent for older Australians;

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Australians are encouraged to take out private health insurance when they are younger (as under the Lifetime Health Cover arrangements a loading is added to the cost of a premium where a person takes out cover from the age of 32);

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patients will not have out-of-pocket expenses, or will be better informed about prospective out-of-pocket expenses under the No Gap/Known Gap schemes;

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consumers can be assisted more by the PHIO when there are disputes about benefits payable for services; and

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more patients will be able to benefit from hospital services delivered in their own homes.

4. While these initiatives have increased PHI participation from 30 per cent to 43 per cent (2001-02 to 2004-05 PHIAC A Report), the participation rate has been stagnant for the last few years. To address concerns about the participation rate, the value and attractiveness of the PHI product and to explore opportunities to invigorate PHI, the Government conducted reviews of the PHI industry throughout 2005 to:

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examine the impact on private health insurance premiums, coverage and costs of a range of measures to make health insurance more attractive;

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identify any required changes to reinsurance flowing from these measures;

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review the impact on premiums of default benefit arrangements; and

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identify further options for reviewing and updating the PHI legislation to provide a more efficient regulatory framework.

PROBLEM

5. Current PHI arrangements inhibit health insurers from developing flexible health care products that better meet consumers' needs and expectations.

6. The Australian Government considers choice in health care as intrinsically valuable and has developed policies to encourage Australians to take out PHI and to support them when they do. However, analysts such as Standard and Poors consider that, under the current policy settings, there is little scope for growth in the Australian private health insurance market. Standard and Poors have forecast a slow and inevitable decline in the local market over the next five years.

7. Research also shows that consumers want a wider range of services covered by private health insurance, particularly services that support people to maintain good health or prevent hospitalisation. These views came through strongly in consumer surveys undertaken on behalf of the Department of Health and Ageing and in broader studies of consumer behaviour.

8. It has also been a long held view across the private health insurance industry and the Department of Health and Ageing that the current private health insurance legislation is unwieldy, out of date, and difficult to interpret and consequently leading to inefficiencies for industry and consumers.

9. Arguably, the Government needs to reset parts of the regulatory framework so that it can:

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continue to meet its policy objectives;

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encourage the private health sector to deliver health services more efficiently;

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assist Australians to participate further in private health insurance;

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enhance the value of private health insurance for the Australian community; and

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improve the long term sustainability of the industry.

10. In order to help private health insurance meet the requirements of consumers the following issues need to be addressed:

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improved product design and value of the PHI product;

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enhanced consumer protection under PHI;

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the financing arrangements that underpin PHI; and

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updating the PHI framework so that it supports efficient regulation.

Objective

11. The objective of Government action in changing the regulation of Private Health Insurance is to:

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give Australians greater choice in health care;

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ensure a sustainable and balanced health system by supporting a viable private health sector that complements the public health system; and

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make private health insurance more competitive and attractive to consumers.

12. There are three key components to achieving these objectives:

Component 1 : improving private health insurance products;

Component 2: enhancing private health insurance choices; and

Component 3: ensuring there is appropriate regulation of private health.

13. The options to achieve these objectives will be analysed with reference to directly affected parties, including:

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private health insurers;

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patients/consumers;

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health service providers;

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the Australian Government; and

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taxpayers.

14. The private health industry was unable to supply detailed costs. Instead, educated assumptions have been made to consider the financial impact of compliance.

15. The Office of Small Business' model for costing compliance was also considered.

COMPONENT 1 - IMPROVED PRIVATE HEALTH INSURANCE PRODUCTS - PROPOSED ACTIONS/OPTIONS

Option 1A - status quo

16. Under this option, the current regulatory and financing arrangements would remain. No changes would be made to: the structure of hospital and ancillary benefits tables; reinsurance arrangements; the requirements to provide consumers with product information; or the legislative framework by which private health insurance is regulated.

Option 1B - broadening the private hospital insurance product

17. Under this option, the range of services that can be covered by private health insurance would be broadened to include services that form part of an episode of hospital care or substitute for or prevent hospitalisation. In this way, insurers would be able to pay benefits for some medical services that can safely and effectively be provided outside of hospital. This would potentially include services such as domestic nursing assistance, allied health services, dialysis and chemotherapy, which would give insurers more flexibility in working with service providers to design products that better suit consumer needs and expectations.

18. The legislation would not list all the services that could be included in a broader health product. However, some exclusions would apply, such as general practice services and the costs of accommodation in an aged care facility. Services that substitute for or prevent hospitalisation would be eligible for reinsurance subject to meeting criteria set out in subordinate legislation. Broadened hospital products would be subject to the community rating arrangements and would continue to attract the rebate on premiums.

Option 1C - removal of Lifetime Health Cover loadings for members with ten years continuous membership

19. The current Lifetime Health Cover arrangements are designed to encourage Australians to take out private health insurance whilst they are relatively young - by the time a person turns 31 years of age. If people take up private health insurance for the first time when or after they turn 32 loadings are added to the premiums they pay. The older a person is when he or she purchases private health insurance, the greater the percentage of loading applies to the premium to be paid.

20. Under this proposal any loadings which applied to a person's premium as a result of the Lifetime Health Cover arrangements would be removed if the person maintained private health insurance continuously for ten years. This would be a "reward" for continuous cover, as the cost of a person's premium would drop, and an incentive to maintain cover now that the cost was lower.

Option 1D - introducing safety and quality standards for all private health providers

21. Under this option insurers would need to ensure that all service providers meet safety and quality standards. There is no impact on any of the parties under this option as many service providers already conform to a system of accreditation or attain suitable qualifications. A cost-benefit analysis will therefore not be needed.

Impact Analysis

22.

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Under option 1A - maintaining the status quo - there would be no opportunities or incentives for insurers or providers to finance or develop more comprehensive products which could cover more efficient alternatives to hospital services. Additionally, the Government would have to continue administering complex and, in some contexts, unwieldy legislation. The cost of compliance for insurers would remain at 1% of benefits paid (currently $81.28 million) and the cost of private health insurance rebates to the taxpayer would remain at approximately $2.8 billion. No benefits would accrue to any party to offset current costs, resulting in no net benefit for any party under this option.

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The impact under option 1B - broadening the private hospital insurance product - would be the complete opposite of option 1A for private health insurers, service providers and consumers. The Government would need to change current legislation with the costs of compliance and the rebates remaining the same. The benefits of more flexible products and services would provide a net benefit to all the parties of improved private health insurance products covering contemporary health services.

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The impact of option 1C - removing Lifetime Health Cover loadings for members with ten years continuous membership - on private health insurers will be ensuring all service providers meet safety and quality standards (although many already do). Consumers will need to be aware of safety and quality standards for providers and the Government will need to change legislation. The net benefit of this option is that consumers will benefit from the improved private health insurance product.

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The impact of option 1D - see paragraph 21.

23. The cost benefit analysis of Options 1A, 1B, and 1C is at Appendix A.

Consultations

24. Formal consultations have taken place in relation to all of the options canvassed above. These consultations have included representatives from both individual private health insurers and their industry representatives (AHIA and HIRMAA), private hospitals and their industry representatives (APHA and CHA), the AMA, the PHIAC, the PHIO, CHF and central agencies. All of the industry representatives have expressed strong support for the types of improvements proposed under these options. Consumer representatives were also supportive, though wary of options which might increase costs for consumers.

25. Further details on the organisations involved in the consultation process can be found at Appendices B and C.

Conclusion

26. All of the industry representatives have expressed strong support for the types of improvements proposed under these options. Consumer representatives were also supportive, though wary of options which might increase costs for consumers.

27. Options 1B to 1D taken as a package will provide improvements to private health insurance products and so are recommended. Options 1A will not. Ultimately, Option 1A may inhibit the expansion of the private health sector and dampen the community's participation in private health insurance.

Implementation

28. Legislative or other regulatory changes would be introduced during 2006 and early 2007 to implement the options and give insurers time to adapt their business practices. The Government will continue to consult the private health industry generally as it develops the details of the options, including identifying the preferred process for accrediting services.

COMPONENT 2 - ENHANCED PRIVATE HEALTH INSURANCE CHOICES - PROPOSED ACTIONS/OPTIONS

Option 2A - status quo

29. Under this option there would be no change to the current arrangements for providing information to consumers about products. The focus of current regulation is on having service providers provide a level of informed financial consent, for example, private hospitals are required to have a private hospital patient charter. However, current regulation is not effective at helping consumers compare the relative merits of products very easily.

Option 2B - providing standard product information

30. There are a myriad of private health insurance products available to consumers. Finding a neat, easy way for consumers to compare all health insurance products and understand their entitlements has been a perennial problem.

31. Under this option Government would specify in legislation the information that private health insurers have to provide to consumers about every product they offer in the market. The proposed standard pieces of information would cover the cost of premiums, waiting periods, exclusions, gaps and excesses.

Option 2C - private health insurance consumer website

32. This website will allow consumers better product comparison. The website would include the standard product information (see Option 2B above) - information that is currently provided on the Rules Application Processing System and further information to be developed following consultation with the private health insurance industry and market testing. The PHIO would be responsible for the maintenance of the website.

Impact analysis

33.

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Under option 2A neither insurers nor service providers would need to change their current information arrangements. Consumers would continue to have difficulties comparing products easily and the Government would continue to receive correspondence from aggrieved members of the public about deficiencies in their private health insurance product. The costs of the current arrangements are principally in the difficulties for insurers and consumers as neither are satisfied by them. This option presents no benefits to any party.

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Under option 2B insurers will need to adapt their current marketing arrangements and service providers will need to be clear about service pricing with insurers so that gap information can be published. The Government will need to change legislation but consumers will be able to compare products more easily. The overall net benefit of this option is improved information for consumers.

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Under option 2C insurers will be required to provide up-to-date information to the Private Health Insurance Ombudsman. Service providers may need to do the same. The Government will need to change legislation but consumers will be able to compare products more easily. The overall net benefit of this option is that consumers will be better informed.

34. The cost- benefit analysis of Options 2A, 2B and 2C is at Appendix A.

Consultation

35. Formal consultations have taken place in relation to option 2B and 2C. These consultations have included representatives from individual private health insurers and their industry representatives (AHIA and HIRMAA), private hospitals and their industry representatives (APHA and CHA), the AMA, the PHIAC, the PHIO, CHF and central agencies. All of the industry representatives and consumer representatives have expressed strong support for options and 2B and 2C which offer better information to consumers about private health insurance products.

36. Further details on the organisations involved in the consultation process can be found at Appendices B and C.

Conclusion

37. Option 2A (the status quo) will not resolve existing problems for consumers to get clear, unambiguous information about the relative merits of the many different private health insurance products on the market. Option 2B (providing standard product information) will provide a mechanism to standardise the presentation of key pieces of information about products. This will be a useful tool for consumers whilst not placing an additional financial burden on insurers, other than their regular cost for advertising their products and providing written or web-based information to potential customers. Option 2C (PHI consumers website) will provide comprehensive private health information for consumers and will enable an easy comparison of the many PHI products. Consequently, Options 2B and 2C are recommended and Option 2A is not.

Implementation

38. Legislative changes would be made during 2006 and early 2007 to provide for standardised product information. The standard information will be available to consumers from 2007-08.

39. The website would be operational from 2007-08.

COMPONENT 3 - ENSURING THERE IS APPROPRIATE REGULATION OF PRIVATE HEALTH - PROPOSED ACTION / OPTIONS

40. Components 1 and 2 focus on improving private health insurance products and enhancing consumers' private health insurance choices. Component 3 considers the new and necessary financial and regulatory changes which are needed to support the Government's private health insurance policies.

41. There are two core elements to this component on appropriate regulation of private health:

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inter-insurer financing - i.e. risk equalisation; and

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reframing the current regulatory regime.

42. Within these two broad themes there are several options.

Risk equalisation

Option 3A - Status quo

43. Under this option the current reinsurance arrangements would remain. The limits of this option continue to affect products offered by insurers.

Option 3B - PHI industry model of risk equalisation

44. This option was proposed by the Australian Health Insurance Association (AHIA) and is based on the current reinsurance arrangements with the following changes:

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Benefit equalisation will be explicitly separated from so called "true reinsurance" or protection against catastrophic claims. High cost claims would be dealt with in a compulsory high cost pooling arrangement;

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Each quarter, the portion of hospital benefits paid into and from the renamed "Benefit Equalisation Pools" will be calculated on a sliding scale that starts with 15% of benefits paid for 55 year-olds up to 82% of benefits for the 95+;

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Allows for ancillary benefits paid for appropriate out-of-hospital services, according to criteria to be agreed with PHIAC to be included in the benefits pooled for the elderly; and

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Accommodate single parent policies as one single equivalent unit.

Option 3C - demographic risk based capitation model

45. Under this option, risk equalisation would involve risk sharing arrangements based on applying industry average age/sex utilisation rates and costs to the demographic profile of individual funds. This model would see funds with a younger, healthier membership provide reinsurance support to funds with an older sicker membership. However, the support is based on the risk that a particular fund will incur larger than average payments. This risk is calculated by comparing the demographic composition of each fund's membership to the average of all funds.

46. This risk based model would differ from the current reinsurance system by enabling financial transfers between funds on the basis of their membership risk profiles but does not cross subsidise the actual benefits paid. Therefore, funds that are more efficient in the provision of health services are able to retain cost savings. The proposed model rewards funds that are more efficient and will encourage all funds to have better claims management, contractual arrangements and/or preventative programs.

Impact Analysis

47.

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Under option 3A the impact on insurers would be that they continue to suffer the limitations of current administratively complex arrangements. At present, these result in $164 million moving between funds from the reinsurance pool. These arrangements would continue to affect what services providers were able to offer, although community rating arrangements would remain. There would be no impact on Government and no change to service providers' or consumers' current costs. Overall there are no net benefits to the status quo.

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Under option 3B, which is the industry preferred approach, insurers would benefit from an improved pooling of risk and access to a high cost claims pool. The cost of this option would be $154 million. There should be no direct impact on service providers. The impact on Government would be administratively simpler arrangements. Consumers would have broadened hospital products covered. Little cost is expected to these parties with the benefit of continuing support for community rating.

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Under option 3C, the impact on insurers would also be improved pooling of risk funds. However, industry does not support this model. The costs would be $189 million moving into the reinsurance pool, with marginal effects on cash-flows and some larger funds contributing to the pool where currently they are drawing out of it. The impact and costs of this option on Government, service providers and consumers are the same as option 3B. The Government considers that this is the best strategic option for the long term.

48. The cost-benefit analysis of Options 3A, 3B and 3C is at Appendix A.

Consultations

49. Formal consultations have taken place with private health insurers in relation to options 3A, 3B and 3C. The insurers reached agreement during consultations during 2005. The insurers have expressed opposition to option 3C being implemented immediately whereas all funds have expressed support for option 3B being the shorter term solution.

50. Further details on the organisations involved in the consultation process can be found at Appendices B and C.

Conclusion

51. Formal consultations have taken place with private health insurers in relation to options 3A, 3B and 3C. The insurers reached agreement during consultations during 2005. The insurers have expressed opposition to option 3C being implemented immediately whereas all funds have expressed support for option 3B being the shorter- term solution.

52. The private health insurers view the current risk equalisation system as inflexible but do not support demographic risk equalisation in option 3C. Option 3B will bring a measure of improvement to reinsurance and so it is recommended for the immediate term. The Government will continue to consult with industry about the potential for option 3C to be implemented in the longer-term. Option 3B is the recommended option.

Implementation

53. It is anticipated that the new risk equalisation arrangements will be introduced in 2006-07. The risk equalisation arrangements would be reviewed in 2010.

Appropriate regulation

Option 3D - status quo

54. There would be no change to the current regulatory regime under this option.

Option 3E - clarify and simplify the existing legislative framework

55. Currently, the regulatory regime for private health insurance is expressed in nine primary Acts, nine sets of regulations, several schedules to Acts and numerous determinations. Under this option this existing regulation (with the exception of the taxing provisions) would be consolidated into one primary Act, which will set out the requirements for the conduct of private health insurance business, one primary set of regulations and a systematic, uniform approach to developing and expressing subordinate legislation.

56. The proposed new legislation would:

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maintain the Government's current policy thrust for private health insurance but recast the now higgledy-piggledy order of provisions into five broad themes covering insurance products, consumer protection, information, prudential supervision; and compliance;

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co-locate and consolidate provisions which address aspects of the same element of private health insurance business (e.g. provisions relating to loyalty bonuses are to be found in four different places within the current primary and secondary legislation);

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remove any redundant provisions, for example removing provisions which do not clearly express current policy (this is an issue for provisions concerning portability - when consumers may wish to change funds but purchase a similar level of benefits) or provisions which are no longer operative; and

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update the penalties in the offence provisions to reflect contemporary tariffs.

57. The proposed new legislation would shift the regulatory focus from principally imposing conditions of registration on private health insurers to achieve a range of outcomes to one where the outcomes the Government wants to achieve would be stated directly in the legislation.

58. Under this option:

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at least a dozen provisions could be deleted as they are either redundant or inoperative;

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over 50 provisions would be relocated to improve the collocation of like provisions;

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newly collocated provisions would be examined further with a view to expressing regulatory requirements more efficiently.

Option 3F - clarify and simplify the existing legislative framework plus incorporating recommended options

59. Under this option all of the amendments proposed under option 3E would be undertaken along with new regulation required to support the recommended options. This proposal reframes the legislation so that it focuses on insurance products not health insurance fund activities. It would incorporate new provisions to allow:

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PHI rebates to attach to complying health insurance products;

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the expansion of the scope of hospital table coverage and the ability of hospital tables to pay for out-of-hospital treatment;

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greater transparency and prudential oversight of health benefits funds (which are required under the existing legislative arrangements) through a framework for their establishment, operation, merger and termination;

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improved risk equalisation arrangements to include different pooling of benefits arrangements;

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consumers to make a better comparison of products by stipulating specific, uniform types of information that private health insurers need to provide about their products, and the form in which it is to be given; and

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the safety and quality of services provided or supported by all providers in the private health industry to be interrogated.

Consultations

60. Consultation with key industry participants, the AMA, AHIA, APHA, PHIAC and central agencies has taken place in relation to simplifying the legislation framework. The industry supports Options 3E and 3F as they would lead to a more efficient industry.

61. Further details on the organisations involved in the consultation process can be found at Appendices B and C.

Impact Analysis

62. These options explore ways of clarifying and simplifying the existing legislative framework.

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Under option 3D the current regulatory arrangements would remain in place. The impact on insurers would be that the regulatory burden and current compliance costs would remain and new entrants may be deterred from entering the market. Whilst there would not be an impact on service providers, the costs of compliance would still be factored into consumers' premiums. Departmental resources would still be diverted to discuss legislative interpretations with insurers. There would not be any net benefits in this option.

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Under option 3E the existing legislative framework would be clarified and simplified. The impact on insurers would be reduced compliance costs, possibly less than 1% of benefits paid, as the legislation became easier to understand. However, service providers would still not be able to develop efficient alternatives to hospital services as these would not attract a private health insurance benefit. The impact on consumers may be downward pressure on the price of premiums if compliance costs are reduced. The impact on Government will be more transparent policy but there would be costs in redrafting the legislation. The net benefit would be potentially reduced costs and a more efficient regulatory framework.

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Under option 3F the existing regulatory framework would be clarified and simplified and new measures recommended in component 1 would be included. The impact on insurers and service providers would be that they could develop more innovative products and services in a more efficient regulatory framework. Consumers would have access to these products and be able to get more information about them. Government policy would be more transparent. Whilst there would be costs to Government to redraft the legislation, the net benefit would be improved business opportunities and a more efficient regulatory framework.

63. The cost-benefit analysis for Options 3D, 3E and 3F is at Appendix A.

Conclusion

64. Maintaining the status quo would mean that the current complexity and inefficiency in the legislation is maintained. Option 3E addresses the complexity of the current legislative arrangements. Option 3F is recommended as it will ensure that consumers are well informed, allowing innovative product design and increased market efficiency.

Implementation

65. Legislation to give effect to these measures would be introduced in 2006 by the Minister for Health and Ageing. An exposure draft of this legislation is proposed to be provided to stakeholders for comment.

66. PHIAC will continue to prudentially oversee the PHI industry.