House of Representatives

Explanatory Memorandum

Circulated by authority of the Minister for Health and Ageing, the Honourable Nicola Roxon MP

OUTLINE

This Bill provides for a number of amendments to the Private Health Insurance Act 2007 (the Act), and a range of other Acts, primarily for the purpose of regulating private health insurance more consistently and equitably.

All provisions included in the Bill will commence from the date on which it receives the Royal Assent.

Schedule 1 of the Bill contains amendments to the Australian Securities and Investments Commission Act 2001 (the ASIC Act), the Corporations Act 2001 (the Corporations Act), the Insurance Act 1973 (the Insurance Act) and the Insurance Contracts Act 1984 (the Insurance Contracts Act).

The amendments will remove the requirement for dual regulation of health-related business conducted through health benefits funds by the Private Health Insurance Administration Council (the Council) and the Australian Prudential Regulation Authority (APRA). Under the Act and the Health Legislation Amendment Act 2007, the Council regulates health insurance business and health-related business conducted through health benefits funds until 30 June 2008. From 1 July 2008, health-related business conducted through health benefits funds will be subject to dual regulation by the Council and APRA. Consultation with industry and the Council has revealed that dual regulation will be burdensome and costly. Consequently, the Bill seeks to amend the ASIC Act, the Corporations Act, the Insurance Act and the Insurance Contracts Act to ensure that health-related business that is conducted through a health benefits fund remains solely regulated by the Council.

Currently, in the Act there are several references to the constitutions of private health insurers who are or will be restricted access insurers. Schedule 2 of the Bill inserts the words "or rules" to these references to ensure that the relevant provisions of the Act can be satisfied by inclusion of statements in relation to membership in the rules or the constitution of the restricted access insurers.

Schedule 3 of the Bill amends the Act to require a body to be a company within the meaning of the Corporations Act in order to apply to the Council for registration as a private health insurer. The current legislation permits a registered body within the meaning of the Corporations Act to apply to the Council for registration as a private health insurer. While the majority of private health insurers are companies, some are registered bodies. The current requirements mean that there is potential for inconsistency and significant complexity in regulating private health insurers. Requiring all private health insurers to be companies within the meaning of the Corporations Act will mean that they are all subject to the same accountability standards and governance requirements.

Registered bodies will have until 1 January 2010 to make the transition from registered body to company. There is also a transitional provision which provides that in the unlikely event that a body that is not a company applies to become a private health insurer before the commencement of the Bill, the application ceases and a new application which complies with the requirement to be a company must be made after commencement. All private health insurers that were registered under the National Health Act 1953 that were not companies have been re-registered under the Act.

Schedule 3 of the Bill also ensures that registered bodies who become companies within the meaning of the Corporations Act for the sole purpose of registering as private health insurers under the Act during the transitional period will not be liable for stamp duty or other taxes by the States or Territories. This exemption will apply to those registered bodies who become companies for that purpose prior to 1 January 2010.

Schedule 4 of the Bill clarifies that offering a discounted premium for a corporate product does not constitute a breach of the principle of community rating. A corporate product is a policy offered at a discounted premium where a person covered by the policy is an employee of, or contracted to provide services to, a particular person or body. The proposed amendments also clarify that corporate products are open to all, however the discount may be available if the policy covers a person who is employed by, or contracted to provide services to, a particular person or body.

Schedule 5 of the Bill provides that conducting a pilot project in accordance with the Private Health Insurance (Complying Product) Rules does not constitute a breach of the principle of community rating. The amendments give the Minister for Health and Ageing powers to make rules that permit pilot projects as specified in those rules.

FINANCIAL IMPACT STATEMENT

This Bill has no financial impact for the Government.

REGULATION IMPACT STATEMENT: REQUIREMENT FOR PRIVATE HEALTH INSURERS TO BE COMPANIES UNDER THE CORPORATIONS ACT 2001

This Regulation Impact Statement (RIS) has been prepared by the Commonwealth Department of Health and Ageing (the Department) in accordance with the guidelines set out by the Office of Best Practice Regulation. Its purpose is to assist the Australian Government consider the reasons for, and impacts of, a proposed amendment to the Private Health Insurance Act 2007 (the Act) for regulation of private health insurers.

Specifically, the RIS addresses the impacts that may be experienced by a small number of private health insurers if the registration requirements under the Act are amended such that all insurers must be companies within the meaning of the Corporations Act 2001 (Corporations Act) in order to be registered as private health insurers. The large majority of private health insurers are already companies within the meaning of the Corporations Act and the proposed amendment would therefore have no impact on them.

The RIS assesses the current regulatory environment, the inadequacies that have led to the proposed amendment and the benefits of all private health insurers being companies. It also outlines the outcomes of consultation on this issue, details concerns that have been raised regarding regulatory shift and considers options for addressing these concerns.

The RIS concludes that making it a regulatory requirement for all private health insurers to be companies would have a net benefit and therefore an amendment to the relevant legislation is recommended.

Background

New legislation in the form of the Act commenced on 1 April 2007.

A central tenet of the Act is that organisations must be registered as private health insurers in order to carry out health insurance business.

Part 4-3 of the Act deals with the registration of organisations as private health insurers by the Private Health Insurance Administration Council (the Council). Section 126-10 deals specifically with the types of entities that may apply for registration as follows:

126-10 Applying for registration

(1)

A body that is:

(a)

a company within the meaning of the Corporations Act 2001, or a registered body within the meaning of that Act; and

(b)

a *constitutional corporation;

may apply to the Council for registration as a private health insurer.

The Act replaced the provisions in the National Health Act 1953 (the NHA) relating to regulation of private health insurance. The NHA was amended in 2000 in response to concerns raised in the Industry Commission report on the private health insurance industry (Industry Commission Report No 57 of February 1997), particularly in relation to the "potential for conflicts of interest and lack of accountability and transparency in some current governance arrangements"^[1].

The NHA was amended to require that an organisation must be a company limited by shares, by guarantee, or by both shares and guarantee, in order to apply for registration as a registered health benefits organisation. The amendment included a provision requiring currently registered organisations that were unincorporated associations to transfer their health insurance business to a company within a time period specified by the Minister. While most insurers complied with the requirement and became companies, the fact that some insurers remain as registered bodies or have only recently become registered bodies indicates that these insurers were not followed up.

Of the 38 private health insurers in Australia, 34 are companies and four are registered bodies within the meaning of the Corporations Act.

Problem

Since the Act commenced the Council, as the prudential regulator of the private health insurance industry, has expressed its desire that all private health insurers be companies within the meaning of the Corporations Act, in order to regulate the industry effectively and consistently.

The Council has indicated that it will be difficult for the Council or the Department of Health and Ageing to enforce the Act in relation to the four insurers who are registered bodies in the event of breaches of solvency or capital adequacy or indeed breaches in relation to payment of benefits or inappropriate treatment of policy holders and insured persons.

For registered bodies under the Corporations Act who operate across state borders (as is the case with the four private health insurers who are registered bodies) the directors' duties provisions of the Corporations Act would only apply to the interstate part of the business. That provides a significant complexity for appropriate regulation where different parts of the same business would have to be treated differently for regulatory purposes.

Division 1 of Part 2D.1 of the Corporations Act imposes obligations on directors of companies to act with care and diligence, to act in good faith, and not to misuse information. However, a director of a registered body that is an incorporated association is subject to the directors' duties provisions of the Corporations Act only in respect of its interstate business and activities. This is because of section 190A of the Corporations Act, which provides:

"This Division does not apply to an act or omission by a director or other officer or employee of a corporation that is a registrable Australian body unless the act or omission occurred in connection with:

(a)

the body carrying on business outside its place of origin;

(b)

an act that the body does or proposed to do outside its place of origin; or

(c)

a decision by the body whether or not to do or refrain from doing outside its place of origin."

Regulation of directors in respect of the conduct of business in their home State or Territory is the responsibility of the authority in that State or Territory responsible for administering the incorporated associations legislation in that State or Territory.

A registered private health insurance organisation, Goldfields, which was an incorporated association in Western Australia, failed in December 2002. Policyholders were transferred to another health fund and they were protected from that failure. The claims were paid and their membership has continued.

The Council identified a number of breaches of the NHA and what would appear to have been breaches of the Corporations Act. However, as Goldfields was an incorporated association, the directors could not be held accountable under the Corporations Act. The Council referred the matter to the state Government for action.

While the four insurers remain as registered bodies, the Council is hampered in its ability to achieve its legislated objectives of:

•

fostering an efficient and competitive health insurance industry;

•

protecting the interests of consumers; and

•

ensuring the prudential safety of individual private health insurers.

Protecting the interests of the members of the four insurers would be particularly problematic, as the Council would have limited power to take appropriate action in respect of breaches of prudential regulation that may result in a loss for consumers.

Health funds are in a competitive marketplace and the same rules should apply to all participants. Most insurers started as incorporated associations and over time have incorporated under the Corporations Act.

There is a considerable public subsidy through the private health insurance rebate. Taxpayers are entitled to be assured that all insurers that receive that subsidy are publicly accountable in an identical manner. This ensures appropriate levels of competition and transparency.

Objectives of government action

The objectives of the proposed change are:

•

to ensure consistency of accountability standards and governance requirements for private health insurers; and

•

to ensure that the regulator has the capacity to appropriately investigate and address, with any insurer, issues such as solvency, capital adequacy and care and diligence, as they arise.

Options

Option 1: Status quo

Under this option, an insurer can be a company or a registered body within the meaning of the Corporations Act and be able to apply to register as, or be registered as, a private health insurer.

Option 2: Regulate to require private health insurers to be companies

Under this option, the legislation would be amended to require that insurers must be companies under the Corporations Act in order to apply for, or be registered as, private health insurers.

Impact analysis

Option 1: Status Quo

Impact on Government

If the status quo remains, the Council and the department would continue to have limited capacity to investigate and address matters relating to the operations and governance of the private health insurers who are not companies. These insurers will not be subject to the same legal and financial accountability requirements as the large majority of insurers who are already incorporated as companies.

While the four insurers remain as registered bodies and under different accountability requirements, the Council is hampered in its ability to achieve its legislated objectives of:

•

fostering an efficient and competitive health insurance industry;

•

protecting the interests of consumers; and

•

ensuring the prudential safety of individual private health insurers.

Impact on private health insurers

Currently the playing field for regulation of private health insurers is not level, as the four insurers who are registered bodies are subject to different and less stringent regulation than those who are companies. It is unfair for the insurers that have become companies that they are subject to more stringent legal and financial accountability requirements than the insurers that are registered bodies.

Impact on consumers

While the four insurers who are registered bodies are subject to less stringent regulation and scrutiny, there is greater risk for persons insured by them of improper use of funds, insufficient funds being available to pay benefits and failure of the fund.

Option 2: Regulate to require private health insurers to be companies

Impact on Government

All insurers would be regulated equally and held to the same high standards of accountability and reporting.

There would be increased likelihood of successful prosecution in relation to breaches of relevant legislation.

The Council would be better able to achieve its legislated objectives:

•

fostering an efficient and competitive health insurance industry;

•

protecting the interests of consumers; and

•

ensuring the prudential safety of individual private health insurers.

With improved capacity to regulate them, the Council would be better placed to reduce the risk of failure of the four insurers, due to the higher standards of reporting and accountability.

There are no cost implications for the government.

Impact on private health insurance industry

Only four private health insurers of 38 are not companies under the Corporations Act:

•

Latrobe Health Services Inc - 0.6 percent market share

•

Health Insurance Fund of WA - 0.4 percent market share

•

HBF Health Funds Inc - 7.5 percent market share

•

South Australian Police Employees' Health Fund Inc - 0.3 percent market share.^[2]

Together, these insurers represent approximately 8.8 per cent of the market.

The four insurers who are not incorporated as companies have a competitive advantage through a lack of transparency compared with their competitors. Their directors are less accountable and there is a lower likelihood of a successful prosecution in relation to breaches of accountability in relation to the organisation's operation if they are not health insurance related breaches which are dealt with under the Act.

If all private health insurers were required to become companies, they would be subject to the same accountability. Instead of being regulated under two different regimes, all insurers would be regulated equally under the Corporations Act.

Impact on the private health insurers affected

One-off costs

The department consulted with insurers affected by this measure and an insurer that has recently become a company to investigate the pathway to becoming a company, and the likely costs for their organisations. Steps in the pathway include:

•

Changing the organisation's constitution or operating rules

•

Informing members of the intention to become a company

•

Seeking approval of members for the change to the constitution, via a special resolution at an annual general meeting (if required)

•

Changing stationery, brochures, etc, to reflect the organisation's changed status

•

Applying to the Australian Securities and Investment Commission to become a company.

The proposed "deadline" for currently registered private health insurers to become companies is 1 January 2010. This will give them ample time to incorporate some of the steps above into their regular activities, such as an annual general meeting, advice to policyholders of premium changes and regular review of stationery and brochures. This means that there will be little, if any, additional cost resulting from becoming a company in relation to these areas.

Insurers will need to get legal advice on matters relating to the change to a company, including changes to the organisation's constitution and the status of current contracts and agreements.

The fee to apply to ASIC to be registered as a company is currently $330.

The department estimates that becoming a company will impose similar compliance costs on all four insurers. These costs may have more of an impact on the smaller insurers as they are spread over a smaller client base. However the department believes that these costs will not be onerous.

Two of the insurers involved, including the largest of the four, have investigated the pathway to becoming a company and agreed that a reasonable estimate of the cost of becoming a company is about $200,000, largely comprised of legal fees. The other insurers have provided conservative estimates of $450,000 to $700,000 and $500,000. Neither of these insurers has fully investigated the steps involved in becoming a company, and the department considers that some of the costs they have included may be associated with actions and issues that are not directly related to the task of becoming a company.

The two insurers based in Western Australia have significant concerns about stamp duty and other State and Territory taxes that may be imposed on them if they incorporate as a company under the Corporations Act. The policy of the Government is that private health insurers should be exempt from paying stamp duty or any other form of tax that may arise under State and Territory law as a result of complying with the requirement to be a company in order to be registered as a private health insurer. The proposed amendment will therefore include a provision that stamp duty or any other tax imposed under a law of a State or Territory is not payable by a body in relation to registration as a company in order to comply with the requirements to register as a private health insurer.

Ongoing costs

There is an annual review fee of $212.

There should be no other significant ongoing costs associated with these insurers becoming companies.

Competition

The department also considered whether there would be any impact on competition. The proposed change would apply equally to the four insurers affected, so there are no issues of competition between them. The insurers that are already companies under the Corporations Act have been exposed to the costs of becoming a company at some time in the past, so there is no issue of competition between the affected insurers and those who are already companies.

Impact on Consumers

If the costs involved in incorporating as a company can be kept to a minimum, there should be no discernable impact on consumers.

Policy holders of the four insurers can be more confident that their insurers will be more financially accountable and more transparent in their governance. They can also be more confident that there will be less risk of the insurers failing due to the higher standards of reporting and accountability.

Consultation

The department consulted widely with the private health insurance industry in drafting and implementing the Act. An exposure draft of the Private Health Insurance Bill 2006 was released; however it included the requirement that bodies should be companies or registered bodies although the issue of insurers becoming companies was specifically raised.

The Council strongly supports the requirement for all health insurers to be companies.

The department has also consulted specifically with the affected insurers to ascertain the impact of the proposed change on their business. Most accept that the proposed change is inevitable. One CEO was critical of the time and resources that the insurer had already committed to learning about the private health insurance reforms and the consultation process; however this related to the introduction of the Act and not to becoming a company.

Conclusion and recommended option

The recommended option is to mandate that all insurers be companies under the Corporations Act.

While there would be some immediate impacts on the small number of insurers that would need to change their status, it is believed that these would not be ongoing. It is also considered that these short term impacts can be ameliorated to some degree by not requiring that registered private health insurers become companies until 1 January 2010. The impacts will be more than offset by the benefits of uniform accountability requirements across all private health insurers - benefits that would accrue to insurers as a whole, the Australian Government and, in turn, the wider community.

Implementation and Review

Legislation

It is planned to implement the recommended option through a legislation amendment bill currently being prepared.

The bill will amend the relevant sections of the Act to:

•

require existing health insurers to be companies under the Corporations Act by 1 January 2010;

•

require bodies applying to be registered as private health insurers to be companies under the Corporations Act; and

•

exempt bodies becoming companies under the Corporations Act in order to comply with the registration requirements for private health insurers from incurring stamp duty or any other taxes imposed by State or Territory law.

Informing health insurers

The department will advise the four registered private health insurers of the requirement to become a company under the Corporations Act, and the timeframe for them to comply, by writing to the Chief Executive Officer of each body.

The department will advise other registered private health insurers of the change in legislation by way of an industry circular.

Information about the requirement to be a company under the Corporations Act will be provided to each potential new insurer who seeks registration as a private health insurer.

Informing consumers

The department anticipates that members of the four current private health insurers affected by this measure will be advised by the insurers.

Review

The department and the Council will monitor the four currently registered private health insurers to ensure that they comply with the amended legislation.

The success of the proposed regulation in achieving the desired outcome will be evident if and when the Council or the department need to take action in respect of a breach of accountability or reporting requirements.

NOTES ON CLAUSES

Clause 1 - Short Title

This clause provides that the Bill, when enacted, may be cited as the Private Health Insurance Legislation Amendment Act 2008 (PHILA Act).

Clause 2 - Commencement

This clause provides that the Bill will commence on the day on which the PHILA Act receives the Royal Assent.

Clause 3 - Schedule(s )

This clause provides that each Act that is specified in a Schedule to this Bill is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item has effect according to its terms.

Schedule 1 - Health-related business

Australian Securities and Investments Commission Act 2001

Item 1 Paragraph 12BAA(7)(d )

Item 1 repeals the current paragraph 12BAA(7)(d) of the ASIC Act and substitutes it with a new paragraph specifying that health insurance provided as part of a health insurance business or a health-related business that are conducted through a health benefits fund is excluded from being considered a contract of insurance and, therefore, is not a financial product for the purposes of Division 2 of Part 2 of that Act. Health insurance business is defined in section 121-1 and health-related business is defined in section 131-15 of the Private Health Insurance Act 2007.

Item 2 After paragraph 12BAA(8)(b )

Item 2 inserts a new paragraph 12BAA(8)(ba) into the ASIC Act specifying that insurance provided as part of a health-related business that is conducted through a health benefits fund is not a financial product for the purposes of Division 2 of Part 2 of that Act.

Corporations Act 2001

Item 3 After paragraph 765A(1)(c )

Item 3 inserts a new paragraph 765A(1)(ca) into the Corporations Act specifying that insurance provided as part of a health-related business that is conducted through a health benefits fund is not a financial product for the purposes of Chapter 7 of that Act.

Insurance Act 1973

Item 4 Subsection 3(1) (after paragraph (j) of the definition of insurance business)

Item 4 adds a paragraph (ja) into subsection 3(1) of the Insurance Act specifying that the meaning of insurance business for the purposes of the Private Health Insurance Act 2007 (the Act) does not include health-related business carried on by a private health insurer through a health benefits fund.

Insurance Contracts Act 1984

Item 5 After paragraph 9(1)(b )

Item 5 inserts a new paragraph 9(1)(ba) into the Insurance Contracts Act specifying that that Act does not apply to or in relation to contracts of insurance entered into, or proposed to be entered into, by a private health insurer in respect of its health-related business that is conducted through a health benefits fund.

Schedule 2 - Restricted Access Insurers

Private Health Insurance Act 2007

Item 1 Subsection 55-5(3 )

Item 1 inserts the words "or *rules" after the word "constitution" in subsection 55-5(3) of the Act to specify that discrimination by a restricted access insurer is not improper discrimination to the extent that the restricted access insurer ensures that its complying health insurance products are not made available to persons to whom its constitution or rules prohibit it from making the products available.

Item 2 Subsection 126-20(6 )

Item 2 inserts the words "or *rules" after the word "constitution" in subsection 126-20(6) of the Act in order to allow a restricted access insurer to include the statements described in paragraphs (a), (b) and (c) of subsection 126-20(6) of that Act in its constitution or rules in order to be registered as a private health insurer.

Item 3 Paragraph 185-5(e )

Item 3 inserts the words "or *rules" after the word "constitution" in paragraph 185-5(e) of the Act to specify that the requirement to include a provision in the constitution or rules to comply with subsection 126-20(6) of the Act is an enforceable obligation.

Item 4 Paragraphs 200-1(1)(e) and (2)(e )

Item 4 inserts the words "or *rules" after the word "constitution" in paragraphs 200-1(1)(e) and 200-1(2)(e) of the Act to specify that the Minister or the Private Health Insurance Administration Council (Council) may give a direction to a restricted access insurer to modify the provisions included in its constitution or its rules in order to comply with subsection 126-20(6) of the Act.

Schedule 3 - The requirement for private health insurers to be companies

Part 1 - Amendments

Private Health Insurance Act 2007

Item 1 Paragraph 126-10(1)(a )

Item 1 omits the words "or a registered body within the meaning of that Act" from paragraph 126-10(1)(a) of the Act so that a body must be a company within the meaning of the Corporations Act to apply for registration as a private health insurer.

Item 2 At the end of subsection 126-45(1 )

Item 2 adds a new paragraph (c) at the end of subsection 126-45(1) of the Act specifying that the Council must cancel the registration of a private health insurer if the insurer is not a company within the meaning of the Corporations Act on or after 1 January 2010.

Part 2 - Transitional provisions

Item 3 Applications for registration for which decisions are pending

Item 3 provides that an application for registration as a private health insurer made before the commencement of this item by a body that is not a company within the meaning of the Corporations Act, and which has not yet been decided by the Council under section 126-20 of the Act, will not be a valid application under section 126-10 of the Act.

Item 4 Exemption from stamp duty etc. relating to certain private health insurers becoming companies

Item 4 protects bodies from the imposition of stamp duty, or any other tax, otherwise imposed under a law of a State of Territory, in respect of a thing done for the purpose of registering a body as a company if:

a)

it is done after the commencement of this item and before 1 January 2010; and

b)

at the time the body is a private health insurer; and

c)

the registration of the body as a company was done solely for the purpose of avoiding the body's registration as a private health insurer being cancelled under paragraph 126-45(1)(c) of the Act.

Also, (2) in this item defines the meaning of company and private health insurer for the purposes of the item.

Schedule 4 - Corporate products

Private Health Insurance Act 2007

Item 1 At the end of section 55-5

Item 1 adds a new subsection (4) at the end of section 55-5 of the Act to specify that, despite subsection 55-5(2) of the Act, a private health insurer who discriminates on the basis of employment does not improperly discriminate to the extent that the effect of the discrimination is that the premiums payable under an insurance policy are discounted (providing that the premiums meet the requirements in section 66-5 of the Act).

Item 1 also adds a new subsection (5) at the end of section 55-5 of the Act to clarify that the discrimination described in new subsection 55-5(4) is improper discrimination if the insurer directly or indirectly causes the insurance policy to be cancelled for the reason that a person ceases to be employed by, or under contract to provide services to, a particular employer.

Schedule 5 - Pilot projects

Private Health Insurance Act 2007

Item 1 At the end of Division 55

Item 1 adds a new section 55-15 at the end of Division 55 of the Act specifying that the principle of community rating in section 55-5 is not breached if a private health insurer discriminates for the purpose of conducting a pilot project in accordance with the Private Health Insurance (Complying Product) Rules.

Item 1 also adds a new subsection 55-15(2) to the Act providing that Private Health Insurance (Complying Product) Rules can be made to permit pilot projects of a kind specified in the Private Health Insurance (Complying Product) Rules to be conducted by private health insurers in accordance with the requirements specified in the Private Health Insurance (Complying Product) Rules.