Second Reading Speech
The Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Bill 2012 will amend the Private Health Insurance Act 2007 and make minor consequential amendments to the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 and the Taxation Administration Act 1953.
The Bill provides for two categories of amendments to the Private Health Insurance Act 2007.
Firstly, the Bill proposes amendments to the Private Health Insurance Act 2007 to remove the rebate on private health insurance from the Lifetime Health Cover loading part of affected premiums.
The Bill will ensure that rebate recipients are treated consistently, regardless of whether they have a Lifetime Health Cover loading or not. The Bill will also improve the effectiveness of the Lifetime Health Cover incentive for a person to take out private health insurance earlier in their life and maintain it. This will provide greater support to a fundamental component of the Australian health system, the principle of community rating in private health insurance.
The rebate is currently payable on the entire cost of a person's policy, including any Lifetime Health Cover loading payable. It is for this reason that removing the rebate from the Lifetime Health Cover loading will also contribute to ensuring the sustainability of the rebate. These changes will commence on 1 July 2013.
The second aspect to the Bill is that from 1 July 2013, claiming the rebate through a Department of Human Services Service Centre under the Incentive Payments Scheme will cease.
Background
On 22 October 2012, as part of the 2012-13 Mid-Year Economic Fiscal Outlook, the Treasurer announced the private health insurance measure `Private Health Insurance rebate - removal of rebate on lifetime health cover loading'.
The private health insurance rebate is a significant component of Australian Government health expenditure. There has been a higher take up of private health insurance despite the Australian Government's introduction of the rebate tiers last year. The changes proposed in this Bill, combined with the income testing of the rebate which was introduced on 1 July 2012 and the proposal also announced by the Treasurer as part of the 2012-13 Mid-Year Economic Fiscal Outlook being to index the rebate from 1 April 2014 on the lesser of the Consumer Price Index or the premium increase, will deliver continued consumer protection and enable the Government to continue to provide a sustainable incentive for consumers.
Lifetime Health Cover
Under current Lifetime Health Cover arrangements, people who take out hospital cover before 1 July after their 31st birthday and maintain their membership pay lower premiums relative to people who delay joining.
Lifetime Health Cover is designed to encourage people to join hospital cover earlier in life and to maintain their membership. Thereby boosting and improving the risk profile of health insurance membership.
People who delay taking out hospital cover pay a financial loading of 2 per cent for every year they are over the age of 30, up to a maximum of 70 per cent, on the hospital portion of their premium.
Under existing arrangements, the Government pays a rebate as a percentage of the premium paid, which includes any applicable Lifetime Health Cover loading. If the Australian Government continued to subsidise a proportion of the Lifetime Health Cover loading the incentive to take out hospital cover is diminished.
Lifetime Health Cover is a key component in supporting community rating in private health insurance, keeping private health insurance affordable for all Australians, regardless of age, illness or potential health risk. Community rating means that insurers are not permitted to differentiate the premiums charged according to an individual's health risk characteristics. Community rating arrangements keep private health insurance affordable by keeping premiums lower for the aged and sufferers of illness who pay premiums lower than they would be if adjustments were made based on their health status. The principles underlying community rating are strongly supported by the Government on equity grounds and are considered a fundamental component of the Australian health system.
It is irrational to have a Lifetime Health Cover loading that encourages people to take out private health insurance at an earlier age and maintain it, and then have the Government pay a portion of this loading. This is also unfair to those taxpayers who do take out private health insurance earlier in life.
This Bill restricts the rebate to a percentage of the premium only, excluding any increase to the premium because of Lifetime Health Cover. The result of this is that the full amount of the Lifetime Health Cover loading is passed on to the policyholder, thereby improving the effectiveness of the Lifetime Health Cover incentive. This improves support for community rating.
These changes are equitable in that it ensures that all people who purchase hospital cover receive the same rebate relative to the premium paid, their age and income level.
Impact of the bill
According to data released by the Private Health Insurance Administration Council, as at 30 June 2012 there were 1,052,994 people paying Lifetime Health Cover loadings; this represents 13.8 per cent of adults with hospital cover, or 4.7 per cent of the total Australian population. Only those consumers currently receiving the rebate will be impacted by this measure.
Ceasing the Incentive Payments Scheme
The second component to the Bill is to cease, from 1 July 2013, claiming the rebate through a Department of Human Services Service Centre, otherwise known as the Incentive Payments Scheme. The Incentive Payments Scheme option is seldom used. Over 99.9 per cent of rebate claims are made via the Premium Reduction Scheme and tax offset claiming options. The Premium Reduction Scheme is the most popular method, providing the immediate benefit of an upfront premium discount to policyholders.
The Incentive Payments Scheme is the least used claiming option and requires claimants to pay the rebate amount to their health insurer before it can be claimed back from the Department of Human Services. Incentive Payments Scheme claiming is likely to further decline as the Department of Human Services Service Centres became 'cashless' with effect 1 July 2012, and people can no longer get their rebate as 'cash in hand' via the Incentive Payments Scheme. The evidence we have to date is that the use of the Incentive Payments Scheme has declined since 1 July 2012.
As these figures indicate, this amendment will not have a major impact on policyholders; rather it will encourage a more efficient way to claim the rebate. Ceasing the Incentive Payments Scheme claiming option is a simple and low cost option to reduce the administrative burden on insurers, the Department of Human Services and the Australian Taxation Office.
Minor consequential amendments are also made to the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 to remove references to the Incentive Payments Scheme.