Explanatory Memorandum
(Circulated by authority of the Minister for Health and Aged Care, The Hon. Dr Michael Wooldridge, MP)Financial and regulation impact statement
FINANCIAL IMPACT STATEMENT
The Health Legislation Amendment Bill (No 3) 1999 will have no significant impact upon the finances of the Commonwealth.
REGULATION IMPACT STATEMENT
This Regulation Impact Statement relates to Schedules 1 and 2 of the above legislation.
The Office of Regulation Review has advised that no Regulation Impact Statement is required in relation to Schedule 3.
Background
In 1989 the Private Health Insurance Administration Council (PHIAC) was established under the National Health Act 1953 (the Act) to assist the Government in the prudential regulation of the private health insurance industry.
Problem
PHIACs powers are limited in that it is essentially an administrative and advisory body and may generally only make recommendations to the Minister for Health and Aged Care.
In February 1997 the Industry Commission delivered its report on Private Health Insurance to the Treasurer (Industry Commission Report No.57). In this report the Industry Commission raised a number of issues regarding the prudential regulation of private health insurance funds in Australia including concerns that there should be:
- -
- an independent regulator;
- -
- improved capacity of the regulator to respond in an effective way to health funds in financial difficulty; and
- -
- a stronger commercial focus to bring prudential regulation of the health insurance industry in line with other prudential bodies.
The report also expressed concerns in relation to the current reserve requirements of $1 million or two months contributions (whichever is greater).
Objectives
This legislation addresses these and a number of the other concerns raised by the Industry Commission Report No. 57. The changes are the result of the Departments subsequent investigation into the Industry Commission Report and address Government, consumer and health industry concerns regarding current inefficient regulation and the poor process in regulation.
Options
In response to the Industry Commission report and as part of the Governments microeconomic reform objectives to move towards minimum effective regulation, the Department undertook an investigation into the regulatory powers and functions of PHIAC and compared these arrangements with other prudential regulatory schemes.
After exhaustive investigation, three options were considered:
- 1.
- Maintain current arrangements.
- 2.
- Transfer all prudential regulatory responsibilities to PHIAC so as to ensure that PHIACs responsibilities are consistent with other Australian prudential regulation regimes and to:
- -
- enable PHIAC to set new, flexible solvency and capital adequacy standards that put private health funds on a more commercial footing;
- -
- streamline processes so that when a health fund is close to insolvency PHIAC can expediently appoint an Administrator who will work in the interests of the contributors; and
- -
- introduce new winding up provisions that give greater protection for contributors in the distribution of assets.
- 1.
- Transfer all prudential regulatory responsibilities to the Australian Prudential Regulation Authority and ensure that those responsibilities are consistent with other Australian prudential regulation regimes.
Impact analysis
In considering the impact of these changes three major groups were considered, the private health insurance industry, consumers (i.e. contributors to private health funds), and Government.
Option 1 - Maintain current arrangements
The current prudential regulation arrangements are ineffectual in relation to small and large health funds. Current arrangements are too inflexible and decision-making in regard to prudential regulation slow. In cases where there is a threat of insolvency the current arrangements are cumbersome and inefficient. To maintain and reinforce their confidence in private health funds other industry stakeholders e.g. contributors, are demanding a more responsive and relevant prudential regulation regime.
This option does not provide effective or efficient arrangements for adequate contributor protection as present minimum reserve requirements are not suitable for the wide range of organisations that run health funds.
Impact on the Commonwealth Government
This option is not supported by the Government because it would perpetuate the currently inefficient prudential regulatory regime.
Option 2 - Transfer all prudential regulatory responsibilities to PHIAC
Over time health funds have developed a sound relationship with PHIAC. They believe that PHIAC is best placed to respond to the prudential regulatory needs of both consumers (contributors), government and the industry. Further, with an ability to determine meaningful prudential standards, monitor adherence to those standards, and respond quickly and effectively to enforce those standards PHIAC is considered the most appropriate body to take on full regulatory functions.
This option will result in more efficient regulation of health funds no matter what their organisation type or size. By deleting minimum reserve thresholds and liquidity and diversification of reserve levels from the Act and allowing PHIAC to set new, more appropriate solvency and capital adequacy standards private health funds will be able to operate on a more commercial footing and be more market responsive. The impact of these changes will be particularly beneficial to small health funds that have customarily been required to seek exemption from the minimum reserve requirements.
Under the proposed administration arrangements PHIAC will be able to appoint an Administrator quickly when there is a risk of insolvency. The process will be more responsive and will better safeguard the interests of both the health funds and the contributors. Health funds will be able to voluntarily merge or wind up and, where there is a risk of insolvency and an Administrator has been appointed, enter into a voluntary deed of arrangement. In addition, PHIAC will have to obtain Court approval prior to merging or winding up a fund if the fund opposes such action.
There will be minimal change in the cost of compliance and little or no additional administrative burden for health funds.
This option will increase the likelihood that private health funds remain financially sound, more accountable, and able to meet their obligations to contributors. It will provide grounds for increased contributor confidence as funds will be regulated both under the National Health Act 1953 and Corporations Law.
In addition, the existing Judicial Management provisions of the Act will be replaced with a new administration regime that seeks to promote the most optimal outcome for contributors.
Impact on the Commonwealth Government
This option provides for a move towards minimum effective regulation of the private health insurance industry and will facilitate more efficient essential regulation.
Option 3 - Transfer all prudential regulatory responsibilities to the Australian Prudential Regulation Authority
There are currently sufficient differences between the health insurance market and general insurance market (eg the non-risk rated nature of health insurance) to make it impractical for a general insurance regulator to take control of the prudential regulation of the private health insurance industry at this time.
While this option offers the same benefits as option 2 in terms of increased contributor confidence it does not provide for a regulator with specific experience in acting with a comprehensive knowledge of the health industry and to work in the interest of health insurance consumers.
Impact on the Commonwealth Government
It is the Governments view that more time is required to allow the private health insurance industry to move to a more commercially oriented regulatory framework.
Consultation
The views of all relevant stakeholders were thoroughly canvassed through the inquiry conducted by the Industry Commission. Further, the Government has closely monitored the response of the industry, consumers (i.e. contributors) and investors to the Industry Commission inquiry.
The Government will continue to discuss and account for the views of all relevant parties in its implementation of the proposed arrangements.
Conclusion and Recommended Option
In view of the Industry Commissions recommendations and taking into consideration the impact on all stakeholders Option 1 is not considered a viable option.
Although Option 3 has merit, given the significant differences between the general insurance and private health insurance industries (i.e. the non-risk rated nature of health insurance), it is not considered immediately viable.
Option 2 is the preferred option as it is both viable and the most beneficial for all stakeholders at this time. It ensures essential regulation is flexible and tailored to market and client needs and that the regulator has effective market control. In addition, when there is a threat that a health fund may become insolvent, this option facilitates expedient action and an outcome that is in the best interest of contributors.
Implementation
The preferred option will be implemented through amendments to the National Health Act 1953 . In addition, in the lead up to PHIAC taking on the prudential regulatory role, any necessary additional support will be provided to PHIAC to ensure that it is prepared for its extended role. Health funds will be informed of new arrangements through consultation and Commonwealth Department of Health and Aged Care circulars.
Review
The Department of Health and Aged Care will review arrangements five years after the regulatory changes take effect to assess the status of health fund regulatory dependence.