Explanatory Memorandum
(Circulated by authority of the Minister for Health and Ageing, the Honourable Tony Abbott MP)COST-BENEFIT ANALYSIS OF OPTIONS TO REINFORCE THE LEGITIMACY OF PRIVATE HEALTH INSURANCE
Component 1: improving private health insurance products
Cost-benefit analysis of Option 1A - Status Quo (Existing arrangements remaining)
This table represents the reference model for comparison options 1B and 1C
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers would not be able to offer a comprehensive product | The cost of regulation compliance is currently $81.28 million. This represents 1% of benefits paid | No change to current arrangements | |
| Service providers | Providers are not able to develop efficient alternatives to hospital services as these services do not attract a PHI benefit | Nil | No change to current arrangements | |
| Patients and consumers | Consumers are limited by PHI for some out of hospital services, notably oncology services | Gaps in cover for some services that are part of an episode of hospital care or which substitute for or prevent hospitalisation will remain | No change to current arrangements | |
| Govt / taxpayers | Burden of regulation would continue unchanged | Cost of 30% Rebate is approximately $2.8 billion, which is paid for hospital and ancillary cover | No change to current arrangements | |
| Option 1A net benefit | No net benefit |
Cost-benefit analysis of option 1B - Broadened hospital product
Options 1B and 1C are measured against the Reference model above . Modelling of the costs and benefits of the following options under Component 1 was undertaken by the Department of Health and Ageing . The following table represents the best available information along with qualitative information .
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers are able to offer a more comprehensive product
While the demand for services is expected to increase this would be offset by reduced costs due to the substitution to lower cost out of hospital services |
The cost of regulation compliance is currently $81.28 million (1% of benefits paid) | Insurers support this measure | Insurers are able to provide products that cater to consumers' needs |
| Service providers | Providers are able to develop efficient alternatives to hospital services as these services attract a PHI benefit | Nil | Service providers support this measure | Service providers are better able to reflect current health practices and not be restricted by funding and regulatory restrictions |
| Patients and consumers | Consumers can choose to be covered for services that are part of an episode of care or which substitute for or prevent hospitalisation | Negligible impact on premiums | Consumers have more choice | Consumers are able to purchase products that cater to their needs |
| Govt taxpayers | Legislation would need to be amended | Would have negligible effect on the Rebates | ||
| Net benefit | Improved PHI products that reflect the contemporary delivery of health services |
Cost-benefit analysis of option 1C - Removing Lifetime Health Cover loadings
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers would need to administer the changes to premiums for which the loading could be removed | The total cost of regulation compliance is currently $81.28 million (1% of benefits paid) | Consumers have more reason to retain their insurance | Insurers retain members who benefit from the 10 year loyalty arrangement |
| Service providers | Negligible impact | Nil | Nil | Nil |
| Patients and consumers | Consumers with premium loadings will pay less for their premiums in the future relative to prices that they were charged in the past | More than 300,000 people pay loadings. Up to 60,000 consumers each year (after year 10 -11 of membership) will benefit. | Consumers perceive the current arrangements as an unfair penalty. They will now see a relief mechanism | Consumers will benefit from the 10 year loyalty arrangement. Insurers will retain members |
| Govt / taxpayers | Supports Govt's policy of supporting PHI and encourages participation.
Legislation will need to be amended |
Cost of the 30% Rebate is approximately $2.8 billion | ||
| Net benefit | Retention of consumers |
Component 2: Enhanced private health insurance choices
Cost-benefit analysis of Option 2A - Status Quo (Existing information arrangements remaining)
This table represents the reference model for comparison for options 2B and 2C
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers do not need to change their existing information arrangements | Insurers also view the Key features Guide and other information requirements as not helpful for consumers and costly to produce | No change to current arrangements | |
| Service providers | Service providers do not need to change their current information arrangements | Nil | No change to current arrangements | |
| Patients and consumers | Consumers will not be able to compare products easily. The Key Features Guide is too complex | Difficult for consumers to see the value of the product they purchase | No change to current arrangements | |
| Govt taxpayers | Govt agencies will continue to receive correspondence from aggrieved members of the public who have become aware of deficiencies in their PHI product | Nil | No change to current arrangements | |
| Net benefit | No net benefit |
Cost-benefit analysis of Option 2B - Providing Standard Product Information
The following options under Component 2 are measured against the Reference model above
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers will have to adapt their marketing information | Negligible as insurers change products in the normal course of business and would have to change promotional material | ||
| Service providers | Service providers will have to be clear about service pricing with insurers so that gap information can be published | Nil | ||
| Patients and consumers | Consumers will be able to compare numerous products across funds more easily | Nil | Consumers will be able to understand which product offers the best choice for them.
Consumer representatives support this option |
|
| Govt taxpayers | Govt would specify in legislation the information that insurers must provide to consumers | Nil | ||
| Net benefit | Improved information for consumers |
Cost-benefit analysis of Option 2C - Private Health Insurance Consumers Website
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers will be required to provide up to date information and data to the PHIO | Minimal impact as there would be a small increase in the PHIO levy to be shared proportionally across 40 funds | More information on products will lead to increased competition between insurers | |
| Service providers | Service providers may provide information to the PHIO | Nil | ||
| Patients and consumers | Consumers will be able to compare numerous products across funds more easily | Negligible impact on premiums | Consumers will be able to make better purchasing decisions.
Consumer representatives support this option. |
|
| Govt taxpayers | Govt would specify in legislation the information that insurers must provide to the PHIO | Estimated at $1.4 million in development and start up costs in the first year | ||
| Net benefit | Consumers will be better informed |
Component 3: appropriate regulation
Cost-benefit analysis of Option 3A - Status Quo (Existing reinsurance arrangements remaining in place)
This table represents the reference model for comparison for options 3B and 3C
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Limitations of the model continue to affect products offered by insurers. This model is administratively complex | $164 million moves between funds from the reinsurance pool. There is an average effect of zero but it can affect funds' cash flows | No change to current arrangements | |
| Service providers | This arrangement continues to affect products offered by service providers | Nil | No change to current arrangements | |
| Patients and consumers | The community rating principle continues to apply | Nil | No change to current arrangements | |
| Govt / taxpayers | No change to current arrangements | Nil | No change to current arrangements | |
| Net benefit | No net benefit |
Cost-benefit analysis of Option 3B - PHI industry risk equalisation model
Options 3B and 3Care measured against the Reference model (3A) above . Modelling of the costs and benefits of the following options under Component 1 was undertaken by the Department of Health and Ageing . The following table represents the best available information along with qualitative information .
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | This model has improved pooling of risks and includes a new arrangement for high cost claims | $154 million would move from funds to risk equalisation pools. Average effect would be zero, but effects on cash flow may be slightly less | Insurers support this model, which includes a new arrangement for high cost claims | Industry supports moving to this model |
| Service providers | Should not have a direct impact on service providers | Nil | ||
| Patients and consumers | Will accommodate broadened hospital products | No significant increase in premiums as reinsurance is a zero sum operation | This model supports the community rating principle | |
| Govt / taxpayers | Administratively simpler | Negligible effect on the 30% Rebate | ||
| Net benefit | Industry supports this model |
Cost-benefit analysis of Option 3C - Demographic risk equalisation model
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | This model has improved pooling of risks of funds
Industry does not support this model |
$189 million would move from funds to risk equalisation pools. The average effect would be zero. There will be a marginal negative effect on cash flows.
Some of the larger funds would be contributing to the risk equalisation pools whereas before they were drawing from them |
This option encourages funds to find efficiencies in product development, claims managements and contractual arrangements | |
| Service providers | Should not have a direct impact on service providers | Nil | ||
| Patients and consumers
Will accommodate broadened hospital products |
There would be no direct impact on patients | No significant increase in premiums as reinsurance is a zero sum operation | Consumers may benefit from a reduction in premiums | |
| Govt / taxpayers | Administratively simpler | Negligible effect on the 30% Rebate | ||
| Net benefit | Best option for the long term |
Cost-benefit analysis of Option 3D - Status Quo (Existing regulatory arrangements remaining in place)
This table represents the reference model for comparison for options 3E and 3F
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | The burden of regulation would continue unchanged. New entrants to the market may be deterred | 1 per cent of benefits paid across the industry | No change to current arrangements | |
| Service providers | No impact | Nil | No change to current arrangements | |
| Patients and consumers | Compliance costs would continue to be factored into premiums | Nil | No change to current arrangements | |
| Govt / taxpayers | The existing regulatory arrangements are complex to administer | Departmental resources would continue to be diverted to discuss legislative interpretation | No change to current arrangements | |
| Net benefit | No net benefit |
Cost-benefit analysis of Option 3E - Clarifying and simplifying the existing legislative framework
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Compliance costs would be expected to reduce due to legislation being easier to understand and interpret | Nil | It is expected that compliance costs could be reduced to under 1% of benefits paid | ||
| Service providers | Providers are not able to develop efficient alternatives to hospital services as these services do not attract a PHI benefit | Nil | No change to current arrangements | |
| Patients and consumers | Potential downward pressure on premium prices if compliance costs reduce | Nil | Potential for premium prices to be moderated | |
| Govt / taxpayers | Govt policy will be more transparent | Departmental costs to rework the legislation | Simplified legislation. Policy objectives would be more apparent | |
| Net benefit | Potentially reduced costs . More efficient regulatory framework |
Cost-benefit analysis of Option 3F - Clarifying and simplifying the existing legislative framework and adding measures from option 1B
| Stakeholders | Impact | Costs | Benefits | Net Benefit |
|---|---|---|---|---|
| Private health insurers | Insurers would be able to develop more innovative products in a more efficient regulatory framework | The cost of regulation compliance is currently $81.28 million (1% of benefits paid) | ||
| Service providers | Service providers would be able to develop more innovative products in a more efficient regulatory framework | Nil | ||
| Patients and consumers | Consumers would have access to more innovative products and be able to get information more easily about the range and benefits of individual products | Nil | More flexible products and better, mandated forms of information | |
| Govt / taxpayers | Government policy would be more transparent | Departmental costs to rework the legislation | Simplified legislation. Policy objectives would be more apparent | |
| Net benefit |
Improved business opportunities
.
More efficient regulatory framework |
Options - consultations with stakeholders
The Department of Health and Ageing conducted confidential consultations on private health insurance issues. Feedback from stakeholders has informed the development of the Regulation Impact Statement.
Formal consultations have taken place in relation to all of the options canvassed below with:
- •
- Insurance industry
- Individual private health insurers and their industry representatives (Australian Health Insurance Association and the Health Insurance Restricted Membership Association of Australia);
- •
- Service providers
- Private hospitals and their industry representatives (Australian Private Hospitals Association, Catholic Health Australia and the Australian Health Services Alliance), and the Australian Medical Association;
- •
- Statutory bodies
- The Private Health Insurance Advisory Council and the Private Health Insurance Ombudsman;
- •
- Consumers
- Consumers Health Forum.
Components - Stakeholder comments
| Components | Insurance industry | Service providers | Consumers | Statutory bodies |
|---|---|---|---|---|
| Options recommended for action in the RIS - in the context of a package of measures | Broadly supported those proposals in Components 1, 2 & 3 which are recommended | Broadly supported those proposals in Components 1, 2 & 3 which are recommended | Broadly supported those proposals in Components 1, 2 & 3 which are recommended | Broadly supported those proposals in Components 1, 2 & 3 which are recommended |
| Component 1 - improved private health insurance products | ||||
| Option 1A - status quo | ||||
| Option 1B - broadened hospital product | Supported this option which would increase the flexibility of product design and better meet consumer needs and expectations | Cautious about the boundary between broadened hospital tables products and ancillaries | ||
| Option 1C - removing lifetime heath cover loadings | Expressed some support for | Considered favourably | ||
| Option 1D - introducing safety and quality standards for all service providers | Interested in how these standards would be identified or determined | Ranging levels of support across the industry | Supported this option | |
| Component 2 - enhanced private health insurance choices | ||||
| Option 2A - maintain status quo | ||||
| Option 2B - providing standard product information | Considered how some standard information might be gathered and the need for efficacy in the information | Some support for this option. Interested in considering the practicalities for collecting information | Supported the option. Agencies consider that such information should assist consumers in identifying products that best meet their individual needs | |
| Option 2C - private health insurance consumer website | ||||
| Component 3 - appropriate regulation | ||||
| Risk equalisation | ||||
| Option 3A - status quo | ||||
| Option 3B - industry model for risk equalisation | Support for industry model | Noted that industry favoured its own model | ||
| Option 3C - demographic risk equalisation | Less support for this model | |||
| Appropriate regulation | ||||
| Option 3D - status quo | ||||
| Option 3E - simplifying regulation | Supported this approach | Supported this approach | ||
| Option 3F - simplifying regulation and new measures added | Supported this approach | Supported this approach |