INDUSTRY COMMISSION PRIVATE HEALTH INSURANCE REPORT NO. 57 28 FEBRUARY 1997 Australian Government Publishing Service Canberra © Commonwealth of Australia 1997 ISBN 0 644 47628 1 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial usage or sale requires prior written permission from the Australian Government Publishing Service. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, AGPS, GPO Box 84, Canberra ACT 2601. Enquiries Industry Commission Level 3, Nature Conservation House Cnr Emu Bank & Benjamin Way PO Box 80 BELCONNEN ACT 2616 Phone: (06) 240 3200 Acknowledgments In conducting its inquiry, the Commission benefited greatly from the participation of a wide range of people and organisations. The Commission is grateful to all those who provided written submissions or gave freely of their time to discuss issues in various forums. Commissioners would also like to express their appreciation for the sustained efforts and commitment of their research team, who assisted in the preparation of this report against severe time constraints. Forming the Productivity Commission The Industry Commission, the former Bureau of Industry Economics and the Economic Planning Advisory Commission have amalgamated on an administrative basis to prepare for the formation of the Productivity Commission. Legislation formally establishing the new Commission is before Parliament. Canberra Office Post Office Box 80 BELCONNEN ACT 2616 Level 3 Nature Conservation House Cnr Emu Bank & Benjamin Way BELCONNEN ACT 2617 Telephone (06) 240 3200 Facsimile (06) 240 3399 Head Office Telephone (03) 9653 2100 • • • • • • • • • • • • • • • • • • • • • • • 28 February 1997 The Honourable Peter Costello MP Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 7 of the Industry Commission Act 1989, we have pleasure in submitting to you the Commission’s final report on Private Health Insurance. Yours sincerely Gary Banks Helen Owens Brendon Kearney Executive Commissioner Commissioner Associate Commissioner (Presiding) CONTENTS Page ABBREVIATIONS xxi GLOSSARY xxiii OVERVIEW xxix RECOMMENDATIONS li 1 INTRODUCTION 1 1.1 Background 1 1.2 Scope of the inquiry 4 1.3 The inquiry process 6 1.4 Structure of the report 7 2 THE ROLE OF PRIVATE HEALTH INSURANCE IN 9 AUSTRALIA 2.1 Overview of the Australian health care system 9 2.2 Expenditure on health care 17 2.3 Role of private health insurance 22 3 THE REGULATORY AND INSTITUTIONAL 31 ENVIRONMENT 3.1 Community rating 32 3.2 Reinsurance 41 3.3 Registration requirements 46 3.4 Requirements about products 53 3.5 Waiting periods and transfers 64 3.6 Approval of rules (including premiums) 66 3.7 Reserves 68 3.8 Complaints Commissioner 72 3.9 Negotiation between funds, hospitals and doctors 73 Page v PRIVATE HEALTH INSURANCE 3.10 Rebates and levy 78 3.11 Issues relating to Medibank Private 91 4 STRUCTURE AND PERFORMANCE OF THE INDUSTRY 95 4.1 Structure of the industry 95 4.2 Nature of the ‘product’ 102 4.3 Financial performance 105 4.4 Product and service innovation 122 4.5 Governance 130 5 COMPETITION IN HEALTH INSURANCE 137 5.1 Introduction 137 5.2 Participants’ comments on competition 138 5.3 How do health insurance organisations compete? 139 5.4 Market characteristics 144 5.5 Relative ease or difficulty of entry 145 5.6 Concluding comments 154 6 USERS OF HEALTH INSURANCE 157 6.1 Introduction 157 6.2 An overview of health insurance membership 157 6.3 Outlook for demand 166 6.4 Determinants of demand 167 7 WHY ARE PREMIUMS RISING? 195 7.1 Introduction 195 7.2 Background to recent premium increases 197 7.3 The major cost components 200 7.4 The major cost drivers 203 7.5 Impact of changes in hospital usage 205 7.6 Impact of changes in hospital bed day benefits 213 Page vi CONTENTS 7.7 Medical gap and prostheses 238 7.8 Other underlying factors 242 7.9 Health fund management costs 246 7.10 Reserves 248 7.11 Government policy and cost transfers 249 7.12 Impact of cost drivers on premiums 251 8 IMPROVING EFFICIENCY AND CONTAINING COSTS 257 8.1 Cost containment and efficiency 257 8.2 Nature of the problem 258 8.3 Contracting arrangements 259 8.4 Incentives within the system 260 8.5 Scope for enhancing efficiency 268 9 THE BROAD POLICY CONTEXT 291 9.1 Introduction 291 9.2 The broad policy context 291 9.3 Challenges faced by the health care system 294 9.4 Systemic reform options 296 10 POLICY OPTIONS 313 10.1 Introduction 313 10.2 Community rating 314 10.3 Other price regulations 326 10.4 Product regulations 328 10.5 Pre-existing ailment rules 334 10.6 Reinsurance 338 10.7 Governance and conduct of health insurance funds 353 10.8 Reserves 360 10.9 Changes to deal with consumer concerns 367 Page vii PRIVATE HEALTH INSURANCE 10.10 Cost containment and efficiency strategies 372 10.11 Tax and rebate regime 379 10.12 A wider inquiry? 384 11 IMPLEMENTATION AND EFFECTS 387 11.1 Implementation strategies 387 11.2 Broad impacts 389 11.3 Impact on cost drivers 390 11.4 Impact on stakeholders 392 11.5 Summing up 399 APPENDICES A Terms of reference 401 B Participation in the inquiry 403 C Rating schemes 411 D Reinsurance 439 E Taxation issues 465 F Mandatory cover 475 G Scale economies in health insurance 483 H Hit and runs 491 I Health insurance costs 495 REFERENCES 519 BOXES 1.1 The private health insurance incentives 2 1.2 The vicious circle of falling membership 3 1.3 COAG and health system reform 5 2.1 Rationales for government involvement in health care 10 2.2 Medicare Principles 13 2.3 Roundtable remarks on the role of private health insurance 24 Page viii CONTENTS Boxes (cont’d) 3.1 Overview of regulation 32 3.2 The regulators 33 3.3 Community rating 33 3.4 Recent changes in the interpretation of community rating 34 3.5 APHA on the effects of community rating 35 3.6 SGIC on community rating in practice 37 3.7 Registration requirements 47 3.8 Product coverage and the 1995 amendments 53 3.9 Waiting periods for hospital cover 64 3.10 The Department’s preferred approach to solvency and 70 diversification 3.11 Complaints about health insurance received by the 74 Complaints Commissioner 3.12 Forms of contractual arrangement 75 3.13 The Trade Practices Act 77 3.14 Estimating the possible budgetary savings and costs of 88 the rebates/surcharge arrangements 4.1 Health insurance organisations 96 4.2 Mergers, acquisitions and closures 103 4.3 Types of cover 105 4.4 Front end deductibles and excesses 123 4.5 MBF’s revised governance arrangements 134 4.6 HCF’s governance arrangements 135 5.1 Legislative review provisions of the Competition Principles 137 Agreement 6.1 An illustration of risk pooling and risk aversion 168 6.2 Consumer submissions relating to affordability of insurance 176 during old age Page ix PRIVATE HEALTH INSURANCE Boxes (cont’d) 6.3 “Dear Commissioner” ... Consumers speak out 192 7.1 Summary of factors underlying increases in hospital 196 insurance premiums 7.2 How a health fund sets its premiums 199 8.1 Competitive pressures — participants’ views 261 8.2 Charges for in-hospital medical services 266 8.3 Casemix classifications 280 8.4 Competing views on case payment 281 8.5 Taskforce on quality in Australian health care 286 8.6 Potential savings from coordinated care 289 9.1 Reform to private health insurance: a ‘pimple on 293 a pumpkin’? 9.2 Participants’ comments on systemic reform 298 9.3 Coordinated care trials 300 10.1 Problems affecting private health insurance 314 10.2 A tale of two people 316 10.3 Elective surgery products (ESPs) 329 10.4 The introduction of a no claim bonus? 333 10.5 The impact of reinsurance on catastrophe insurance 343 10.6 A takeover mechanism proposed by SGIO 356 10.7 The payments experience 368 10.8 A bigger role for public hospitals in providing elective 378 surgery to private patients? C.1 Modelling lifetime rating 415 C.2 Exit mechanisms for funded lifetime rating 419 C.3 Participants’ views on lifetime community rating systems 421 x CONTENTS Page Boxes (cont’d) C.4 Calculation of premiums under an unfunded lifetime 426 rating scheme C.5 Participants’ comments on differential waiting periods 431 C.6 The Singapore system of medical savings 435 C.7 Participants’ views on medical savings accounts 437 D.1 FED simulation model 454 I.1 A computer algorithm for solving the linear interpolation 501 method FIGURES 1.1 Private health insurance coverage and premiums 2 2.1 Linkages between health care consumers, payers 11 and providers 2.2 Another participant’s weighing up of the costs and benefits 16 of private health insurance 2.3 Australia’s health expenditure as a proportion of GDP 17 2.4 International comparison of expenditure per person, 1993 19 2.5 Expenditure by source of funds 1993–94 20 3.1 Hospital and ancillary claim rates (per SEU), by age 39 4.1 Major insurers’ share of members by state/territory, 100 30 June 1996 4.2 Concentration (as per cent of members) of three largest 101 insurers by state, June 1991 and June 1996 4.3 Trend rates of growth in financial indicators of registered 106 health insurance organisations, 1984–85 to 1995–96 4.4 Trend rates of growth in benefits paid, 1989–90 to 1995–96 107 4.5 Profit/loss ratios of health insurance organisations 108 4.6 Reserve to benefits ratio, 1984–85 to 1995–96 110 4.7 HCF’s investments, 1996 111 xi PRIVATE HEALTH INSURANCE Page Figures (cont’d)