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 8 - Regulation impact statement
Specification of policy objective
8.1 The broad policy objective is to increase the proportion of the community covered by private health insurance for the purpose of reducing demands placed on the public health system. As announced by the Government in Tax Reform: not a new tax, a new tax system , this is to be achieved by providing a non-income tested financial incentive to families and individuals to assist with the cost of private health insurance.
8.2 The Government introduced PHIIS from 1 July 1997 as an incentive for persons to take out or maintain private health insurance.
8.3 When introduced on 1 July 1997, singles, couples and families received rebates of up to $100, $200, and $350 respectively for private hospital cover. Premiums for top private hospital cover averaged around $1,230 for individuals and $2,460 for families. Hence the PHIIS provided a subsidy of between 8% and 14% of the cost of private hospital insurance.
8.4 Features of PHIIS include:
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- it is income tested, ie. it is only available to individuals with a taxable income under $35,000 or to a couple or family with a combined taxable income under $70,000 (plus $3,000 for each dependent child after the first);
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- the benefit can be taken in the form of reduced premiums, or as an income tax offset claimable at the end of the income year [F1] - health funds are reimbursed for premium reductions;
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- a minimum premium must be paid to qualify for the benefit -depending on the type of cover provided by the policy; and
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- the annual incentive amount payable also depends on the type of insurance policy taken out, ie. whether the policy is for hospital cover, ancillary cover, or combined cover.
8.5 The measure involved amending the income tax law to provide for the tax offset and the introduction of a new Act ( Private Health Insurance Incentives Act 1997 ) to allow for reduced premiums.
8.6 As part of the Government's tax reform policy document, it was announced that a new private health insurance benefit is to take effect from 1 January 1999 and will replace PHIIS.
Identification of implementation options
8.7 There is only one feasible design of the incentive package to achieve the Government's broad policy objective: that is, from 1 January 1999, to introduce a 30% tax offset/benefit for appropriate health insurance cover.
8.8 The option ensures that private health insurance cover is more affordable both to individuals and families and is more accessible to a broader range of persons than under PHIIS, which is targeted at low and middle income earners.
8.9 A 30% tax offset/benefit is expected to provide a significant incentive for persons to retain or take up private health insurance and thus reduce the burden on the public health system.
8.10 An individual can claim the benefit by one of the following methods:
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- the direct payment option - an individual can claim reimbursement of the cost of the premium he or she has paid (a network of shopfronts will be available for people to lodge a claim);
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- the premium reduction option - an individual who is covered by the policy can register with a health fund to claim a reduced premium; or
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- an individual can claim the benefit as a refundable tax offset in their income tax return.
8.11 The premium reduction option was not included as an option in the Government's tax reform policy document. It was included following consultations with private health funds who expressed concerns that certain persons (such as aged persons and people in rural and regional areas) may have difficulty in claiming the direct payment from shopfronts. In addition, around 30% of current PHIIS participants pay their premium over the counter at their health fund. The premium reduction option allows individuals to avoid making an up-front payment of the full amount of the premium and then having to go to a shopfront to claim the direct payment. The reduced premium option also caters for people who do not usually lodge tax returns.
8.12 The direct payment or premium reduction option allows for immediacy of the benefit and the ability to claim the benefit as a tax offset/tax credit allows a person to reduce their income tax liability or claim a refund if the offset exceeds their tax liability. A choice was provided under PHIIS where the benefit could be taken as reduced premiums or a non-refundable tax offset.
8.13 There is no estimate of how many persons will claim the benefit by direct payment or reduced premium rather than as a tax offset. Under PHIIS around 65% of recipients claim their benefit as a premium reduction. It is expected that more individuals will claim the benefit by way of direct payment or reduced premium because of its immediacy.
8.14 The direct payment or refundable tax offset will be available only to individuals who actually make the premium payments to the health fund [F2] . This option is intended to encourage persons to make payments to health funds. It allows an individual to access the benefit provided under the scheme even though they are not covered by the policy taken out. Under the premium reduction option, any person other than a dependent child who is covered by an appropriate private health insurance policy can register to obtain a premium reduction. This is similar to what is available under the current PHIIS.
8.15 The new scheme has been designed so that persons who are currently able to benefit under PHIIS will not be worse off than if PHIIS had continued to operate.
8.16 The direct benefit and the premium reduction option will be administered by the HIC. The refundable tax offset option will be administered by the Commissioner of Taxation.
8.17 The implementation option for achieving the Government's policy also provides the following features:
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- the direct payment can be claimed from shopfronts, paid electronically or arranged through the mail;
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- the frequency of the payment of the direct benefit is linked to the frequency of payment of the premiums;
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- to claim a premium reduction, a person covered by the policy must register with a health fund on an annual basis - this requirement exists under PHIIS; and
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- claims for a direct payment can be made during the financial year in which a premium is paid, or up to 12 months after the end of the financial year in which the premium is paid.
8.18 The feature which allows the direct payment to be claimed from shopfronts requires the establishment of an agency network. Details of this arrangement are yet to be completed.
8.19 As with PHIIS, the implementation option involves amending the income tax law to provide for the tax offset and the introduction of new legislation to allow for direct payments and reduced premiums.
Assessment of impact (cost and benefits) of the measures
8.20 The measure will primarily affect existing members of private health insurance funds who will gain a significant benefit from the reduced cost of private health insurance. [F3] It will encourage these people to retain their health fund membership. It will also affect persons who are encouraged by the new measure to join a private health insurance fund because of the reduced cost of membership.
8.21 The broader access to the incentive is expected to lead to a significant increase in membership of private health insurance funds. [F4]
8.22 Private health insurance funds will benefit because of the positive impact the incentive will have on fund membership. The measure will also have a positive impact on private hospitals, owners of private hospitals and providers of services in private hospitals.
8.23 The measures will affect the HIC which will administer the direct payment and reduction premium options in the new scheme. The HIC will, after 31 December 1998, no longer be required to administer PHIIS.
8.24 The measures will affect the ATO which will administer the refundable tax offset option.
8.25 The measures will also affect the Government via the budgetary cost of the scheme.
8.26 The compliance costs for persons seeking benefits under the new scheme would generally be the same as under PHIIS. Persons seeking reduced premiums must lodge an application form on an annual basis with the health fund that issued the policy. This is the same requirement as under PHIIS. Persons claiming a direct payment must lodge a claim form.
8.27 Compliance costs will generally be the same for existing members of health funds and those persons who take up membership of a private health insurance fund as a result of the introduction of the new scheme.
8.28 Persons will need to obtain information to determine their eligibility and make a decision whether to claim the incentive as a direct payment, reduced premium or an offset. Presumably, it will take an individual approximately 5 to 10 minutes to read about and understand the payment options, and decide how they should claim it. An explanation of the tax offset for private health insurance and the accompanying rules will be contained in Taxpack.
8.29 Under both schemes, persons have the compliance cost of notifying events that change their entitlement to the direct payments or reduced premiums. The notification requirements are significantly less onerous under the new incentive because it is not income tested, ie. it is not necessary to advise the HIC of changes in or make estimates of income for the relevant income year.
8.30 The main compliance cost for a person claiming the tax offset is the time involved in determining the amount of premiums paid in the income year and including this information on the return form. The calculations for part-year claims are less onerous under the new scheme. This is because no apportionment of the maximum offset is necessary because the offset is based on the amount of premiums paid in the income year.
8.31 Under PHIIS, health funds are required to register applications and provide information to the HIC on applications for registration or matters affecting claims. Under the new scheme the health funds will still have this function in relation to claims for reduced premiums. Health funds will have the administrative cost of claiming monthly reimbursements from the HIC.
8.32 The health funds will have the compliance cost of providing information to the Commissioner of Taxation as required from time to time.
8.33 The HIC will be responsible for administering the direct payment and premium reduction option and the ATO for administering the tax offset option.
8.34 The administrative costs of the HIC will increase as a result of it having to administer the direct payments. This will require new systems and administrative arrangements. The payments will be made through shopfronts which will require additional resources.
8.35 In relation to the premium reduction option, the HIC will perform the same administrative functions as under PHIIS. These functions include the cost of monitoring applications for reduced premiums and other information received from health funds, providing monthly reimbursements to health funds, and the recovery of payments. The administrative costs of these functions can be expected to increase compared to PHIIS because the scheme is open to a broader range of persons. The HIC will also determine which funds are eligible to participate in the scheme.
8.36 The ATO will incur additional costs to administer the tax offset. There is already a system in place to provide for the tax offset available under PHIIS. However, this system will need to be modified as a result of the introduction of the new scheme.
8.37 The expected administrative costs of the new scheme are:
| 1998-99 $m | 1999-2000 $m | 2000-01 $m | 2001-02 $m |
|---|---|---|---|
| 14.6 | 7.8 | 7.5 | 7.5 |
8.38 The budgetary impact resulting from the new measures is:
| 1998-99 $bn | 1999-2000 $bn | 2000-01 $bn | 2001-02 $bn |
|---|---|---|---|
| -1.09 (1) | -1.18 | -1.27 | -1.36 |
| (1)The costing in 1999-2000 differs slightly from that contained in Tax Reform: not a new tax, a new tax system due to a revision of the estimate of the savings flowing from the abolition of PHIIS. | |||
8.39 The start date of 1 January 1999 influences both revenues and outlays and is estimated to have a part-year budgetary cost of around $330m in 1998-99. The fiscal impact includes the removal of PHIIS and the anticipated outlays under the new initiative.
8.40 Treasury and the Department of Health and Aged Care have consulted with private health funds on the development and implementation of the measures. Following consultations with the funds, the premium reduction option has been included as a design feature. The private health funds are in agreement with the new scheme.
8.41 The new method of implementing the Government's policy objective (of encouraging more people to take out private health insurance) is not expected to involve any significant change in the compliance and administrative costs currently incurred under the PHIIS.
8.42 The Government will monitor the new scheme to ascertain its effectiveness. It is expected that any difficulties with the implementation of the scheme will be raised with the relevant Government Departments.