House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP and the Minister for Health and Aged Care, the Hon Dr Michael Wooldridge, MP))

Chapter 3 - The incentive payments scheme

Explanation of the amendments

3.1 Chapter 2 of the PHII Bill sets out how an individual who has paid, or whose employer has paid, as a fringe benefit, premiums for private health cover can claim the direct payment provided for under the scheme. It sets out which individuals are eligible to claim the payment, how the payment is calculated and how claims can be made. The Chapter also sets out notification requirements imposed on claimants and health funds.

Entitlement to payments and claims

3.2 Division 4 of Part 2 of the Bill sets out which individuals are entitled to receive payments under the scheme and how the payments are calculated.

Who is entitled to receive payments?

3.3 Under the scheme an individual is entitled to receive a payment if the individual has paid or the individual's employer has paid, as a fringe benefit, premiums for an appropriate private health insurance policy for the 1998-1999 financial year or a later financial year. [New subsection 4-5(1)]

3.4 The term fringe benefit is defined by reference to the FBTAA 1986 to include benefits provided not only to an employee but also to associates of an employee. Premiums paid by an employer can thus be paid in respect of a policy which provides private health cover not only for an employee but also an associate of an employee. ( Associate is defined to include relatives of an employee.)

Example 1:

Joe, a baker, pays premiums to a private health insurance fund for health cover for his employees and their families. Under the FBTAA 1986, the premium payments are a fringe benefit. Each of Joe's employees are entitled to the direct payment in respect of premiums paid on his or her behalf provided the premium payments are made in respect of an appropriate private health insurance policy.

3.5 However, new subsection 4-5(2) provides that an incentive payment is not available to the extent that a premium reduction has already been obtained in respect of a premium.

Meaning of appropriate private health insurance policy

3.6 An individual is only entitled to a direct payment for premiums paid in respect of an appropriate private health insurance policy. This is defined in new section 20-5 as a private health insurance policy which meets the following criteria:

•

the policy provides hospital cover , ancillary cover or combined cover (see descriptions of these terms in the table below); and

•

each of the persons covered by the policy is a person who is eligible to claim benefits under Medicare.

3.7 The term private health insurance policy is defined in new section 20-5 as a contract of insurance entered into by a health fund in the course of carrying on a health insurance business within the meaning of section 67 of the National Health Act 1953. A health fund is defined in new section 20-5 to mean a registered organisation within the meaning of Part VI of the National Health Act 1953 .

3.8 The terms hospital cover, ancillary cover and combined cover are defined in new section 20-5 as follows:

Example 2:

Joyce, a resident of New Zealand, pays premiums to a health fund in Australia for a private health insurance policy which provides health cover to her son Paul and his family who reside in Australia. Paul and his family are eligible to claim benefits under Medicare. Joyce is entitled to claim the direct payment as she is making payments in respect of premiums paid in respect of an appropriate private health insurance policy.

Calculation of the amount payable

3.9 An individual's entitlement to the direct payment for an amount paid under a policy depends on whether or not a person is registered or entitled to be registered under the PHIIA 1997 in respect of the policy before 1 January 1999. A person would be taken to be entitled to be registered before 1 January 1999 if he or she satisfied the eligibility criteria and started to pay premiums before that date. The entitlements are calculated so that the benefit available under the new scheme is no less than that which would have been available under PHIIS had a person been registered or entitled to be registered (see paragraph 4.37) in respect of a policy under that scheme in the 1998-99 financial year.

Premiums paid under a policy for the 1998-99 financial year

3.10 An individual's entitlement to a direct payment for premiums paid in respect of a policy for the 1998-99 financial year is determined as follows:

•

if no person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, the individual's entitlement is 30% of the premiums paid;

•

if a person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is the greater of:

-

30% of the premium paid, or if, under PHIIS, the premium was reduced by an incentive amount, 30% of the premium that would have been payable if it had not been reduced; and

-

the incentive amount for the policy for the financial year (see paragraph 3.16). [New subsections 4-10(1), (2) and (3)]

Example 3:

John paid a premium of $901.85 on 1 December 1998 in respect of a family policy to provide cover for the 6 month period 1 January 1999 to 30 June 1999. John had registered under PHIIS to claim a premium reduction, so the premium was reduced from $1,125. The reduction under PHIIS was calculated as the annual incentive amount ($450) pro-rated for half the financial year $450 * 181/365 ($223.15). Under the new scheme, John is notionally entitled to a direct payment which is the greater of:

(i)

30% of $1,125 ($337.50); and

(ii)

the incentive amount of $223.15;

therefore, he is entitled to $337.50.

However, note that under new section 4-10 John's entitlement to the direct payment will be reduced by $223.15, ie. the amount that has already been received under PHIIS.

Example 4:

Stephanie took out a single policy for hospital cover as from 1 July 1998. The premiums payable under the policy are $260 per annum or $10 per fortnight. In the financial year 1998-99, Stephanie was registered under PHIIS to claim a reduction in premiums. If PHIIS had continued from 1 January 1999 she would have been entitled to a reduction of $100 (ie. the annual incentive amount for a single policy providing hospital cover is $100) for the 1998-99 financial year. However, Stephanie would have received only $50.41 through fortnightly premium reductions up to 31 December 1998 when the PHIIS closed, assuming her last fortnightly payment was for cover up to 31 December 1998. Under the new scheme Stephanie is entitled to a payment of the greater of:

(i)

30% of $260 * 181/365 ($38.68); and

(ii)

the incentive amount of $100 * 181/365 ($49.59).

Under the new scheme, Stephanie is, therefore, entitled to payments of $49.59 for the period 1 January 1999 to 30 June 1999.

Premiums paid under a policy for a financial year after 1998-99

3.11 An individual's entitlement to a direct payment for premiums paid in respect of a policy for a financial year after the 1998-99 financial year is determined as follows:

•

if no person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is 30% of the premiums they have paid;

•

if a person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is the greater of the following two amounts:

-

30% of the amount of the premium they have paid; and

-

the incentive amount for the policy for the financial year (see paragraph 3.16). [New subsections 4-10(4), (5) and (6)]

Example 5:

On 1 May 1999, Greg renews a twelve month family policy for combined cover for himself and his dependent child. The premium paid is $1,400. Greg was registered under PHIIS to claim a premium reduction in the 1998-99 financial year. For the 1998-99 financial year Greg's entitlement to the payment is calculated as the greater of:

(i)

30% of $1,400 * 61/365 ($70.10); and

(ii)

61/365 * $450 ($75.21).

For the 1999-2000 financial year the payment is the greater of:

(i)

30% of $1,400 * 304/365 ($349.81); and

(ii)

304/365 * $450 ($374.79).

The total payment to which Greg is entitled is $75.21 + $374.79 ($450).

Example 6:

Tom and Sylvia, who have a couple policy providing combined cover in the financial year 1999-2000, pay a premium of $100 per fortnight. Tom and Sylvia were ineligible to claim a benefit under PHIIS in 1998-99 because they did not satisfy the income test under that scheme in that year. Tom makes the premium payments out of his fortnightly salary. From 1 January 1999, Tom would be entitled to a direct payment of 30% of the premiums he pays, ie. $30 per fortnight.

Entitlement reduced where tax offset has been claimed

3.12 If an individual claims the incentive as a tax offset under new Subdivision 61-H of the ITAA 1997, the direct payment an individual is entitled to claim is reduced by the amount of the tax offset that has already been claimed. [New section 4-10(7)] This circumstance will only arise after an individual has lodged his or her tax return. The provision ensures than an individual cannot claim the benefit twice, ie. as a payment and a tax offset.

3.13 As discussed previously, under new subsection 4-5(2) a person cannot claim a direct payment in respect of a premium that has been reduced by the premium reduction scheme.

Entitlement where premiums relate wholly or partly to a period before 1 January 1999

3.14 New subsection 4-10(8) is a transitional measure that deals with premiums paid for an appropriate private health insurance policy that relates to a period before 1 January 1999. An individual who has paid the premium will not be entitled to a direct payment to the extent that the premium relates to a period before 1 January 1999. Where a premium relates to a period both before 1 January 1999 and after 31 December 1998, entitlement to the direct payment must be determined on a pro rata basis.

Example 7:

On 1 May 1998 Ted's employer makes a premium payment of $1,400 for an appropriate private health insurance policy that provides private health insurance cover for Ted as a fringe benefit for the period 1 July 1998 to 30 June 1999. There is no entitlement to a premium reduction or tax offset under PHIIS. Ted is entitled to a direct payment under the scheme in relation to the period 1 January 1999 to 30 June 1999. The amount that can be claimed is 30% of $1,400 * 181/365 ($208.27).

Effect on entitlement where premium was reduced under PHIIS

3.15 New subsection 4-10(9) is a transitional measure that applies to premiums paid on or before 31 December 1998 for an appropriate private health insurance policy and the premium has been reduced under PHIIS. If the reduced premium relates to a period after 31 December 1998, the amount of the direct payment to which an individual would otherwise be entitled is reduced by the premium reduction that relates to the period after 31 December 1998.

Example 8:

On 1 May 1998 Dennis pays a twelve month premium for a family policy covering Dennis and his dependent child. The premium is $2,400. Dennis is registered under PHIIS and his premium is reduced by the annual incentive amount of $450 to which he is entitled, ie. the premium is reduced to $1,950. Dennis is entitled to claim the direct payment under the new scheme for the period 1 January 1999 to 30 April 1999.

The amount to which Dennis is notionally entitled is 30% of $2,400 * 120/365 ($236.71). This amount is reduced by 120/365 * $450 ($147.95), as this is the amount of the benefit that Dennis has already received by way of premium reduction under PHIIS. Dennis is entitled to a direct payment under the new scheme of $236.71 - $147.95 ($88.76).

Meaning of incentive amount

3.16 New section 20-10 provides a meaning for the term incentive amount . This is the same as the annual incentive amounts included in section 5-4 of the PHIIA 1997. The amount of the incentive depends on whether premiums are paid for the whole or part of the financial year:

•

if the premiums are paid for the whole of the financial year the incentive amount is as follows:

•

if the premiums are paid for part of a financial year, the incentive amount is calculated on a pro rata basis. The amount is calculated using the formula in new subsection 20-10(2) . The result of the formula is that the full year incentive amount applicable to the circumstances is apportioned according to the amount of the year (ie number of days) the premiums cover.

How to make a claim

3.17 An individual can only get a payment if he or she makes a claim for a payment. [New section 4-15] The rules for making a claim are set out in Division 6 of Part 3 .

Making a claim

3.18 An individual who is entitled to claim a direct payment under new section 4-5 must make a proper claim before he or she can be paid an amount. [New section 6-5] If more than one individual is paying premiums for the same policy, then each individual will need to make a separate claim for the payment.

What is a proper claim?

3.19 To be a proper claim the claim must:

•

be in a form approved by the HIC which may be an electronic form;

•

provide any information, together with such documents (if any), as required by the form;

•

be sent to or lodged at an office of the HIC or a place approved by the HIC; and

•

be lodged either in the financial year in which the premium is paid, or before the end of the next financial year. [New subsection 6-10(1)] This will allow a person to apply retrospectively for a direct payment benefit, provided the application is made within 12 months after the end of the income year in which the premium is paid.

3.20 The information that the HIC may require to be shown on the approved claim form could include:

•

the claimant's full name;

•

the claimant's address;

•

the claimant's Medicare number;

•

the annual premium payable under the policy;

•

the amount of premium being claimed;

•

names of individuals claiming in respect of the same premium; and

•

the frequency of the payments made in respect of the annual premium and the amounts of those payments.

3.21 The HIC must not approve a form under new paragraph 6-10(1)(b) that requires an individual to provide the tax file number of any individual. [New subsection 6-10(2)]

Withdrawal of claim

3.22 An individual making a claim may, at any time, withdraw a claim, by notifying the HIC in writing. The notification must be sent to or lodged at an office of the HIC or a place approved by the HIC. [New section 6-15]

Determination of claim and payment of amount

3.23 The HIC must grant or refuse a claim. [New subsection 6-20(1)] The HIC might refuse to pay a claim where, for example, the information provided by the individual does not match the information available to the HIC. Refusals to grant a claim are reviewable by the Administrative Appeals Tribunal.3.24 If the claim is granted, the HIC must pay the amount to the individual. [New subsection 6-20(2)] 3.25 If the HIC refuses the claim, it must issue a written notice to the claimant which sets out reasons for the refusal. [New subsection 6-20(3)]

Obtaining information under the scheme

3.26 Division 8 of Part 4 of the Bill sets out information requirements imposed on claimants and health funds in relation to the direct payment option.

Notification requirements for claimants

3.27 If an individual has lodged a claim in respect of a particular policy and a certain event happens so that the individual is no longer eligible to claim, or a change occurs in the amount or frequency of premium payments, the individual must advise the HIC within 30 days of the event or change. [New subsection 8-5(1)] 3.28 If the individual fails to notify the HIC as required, then the individual is guilty of an offence and may be liable to a maximum penalty of 60 penalty units. [New subsection 8-5(2)] 3.29 Section 4K of the Crimes Act 1914 does not apply to the obligation to provide information for the purpose of new subsection 8-5(1) .

Notification requirements for health funds

3.30 The HIC may, in writing, require a health fund to provide certain information relevant to the operation of the new measures about a person who:

•

is covered at any time during a financial year specified in the notice by an appropriate private health insurance policy issued by the fund; or

•

paid premiums under such a policy. [New subsection 8-10(1)]

3.31 The information that the HIC can require the fund to provide includes:

•

the name, residential address and date of birth of each individual covered by the policy, or the person who paid premiums under the policy;

•

the fund membership number of the policy;

•

the name, residential address and date of birth of the individual covered by the policy whom the health fund treats as the contributor in respect of the policy;

•

the name, residential address and date of birth of any individual who is a partner of a person covered by the policy;

•

whether the policy provides hospital cover, ancillary cover or combined cover;

•

the date on which the policy was issued;

•

whether the policy has terminated or been suspended, and if it has, the date on which it terminated or was suspended;

•

the amount of the premium payable under the policy;

•

the period to which the premium relates;

•

any increase or decrease in the premium payable under the policy; and

•

whether a payment in respect of a premium under the policy that was due within a period specified by the HIC was not paid. [New subsection 8-10(2)]

3.32 A health fund must provide the information in a form (including an electronic form) approved by the HIC within a period as shown on the notice issued by the HIC. [New subsection 8-10(3)]

3.33 The health fund is guilty of an offence if it fails to provide the information within the time as specified on the notice issued by the HIC. The maximum penalty for the offence is 20 penalty units. [New subsection 8-10(4)] The obligation to provide information is a continuing obligation and a health fund is guilty of an offence for each day, after the period specified in the notice, until the information is provided.