Private Health Insurance

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1 Private Health Insurance July 1999 Occasional Papers: New Series No. 4 Prepared for the Commonwealth Department of Health and Aged Care

2 Commonwealth of Australia 1999 ISSN ISBN This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from AusInfo. Requests and enquiries concerning reproduction rights should be directed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra ACT Department of Health and Aged Care Occasional Papers Series No. 1: National Leadership through Performance Assessment No. 2: Family and Community Services: When is competition the answer? No. 3: A Healthy Start for 0-5 Year Olds No. 4: Compression of Morbidity, Workshop Papers No. 5: An Overview of Health Status, Health Care and Public Health in Australia No. 6: Access/Remoteness Index of Australia Department of Health and Aged Care Occasional Papers: New Series No. 1: Reforming the Australian Health Care System: The Role of Government No. 2: Gambling: is it a health hazard? No. 3: Hospital casemix data and the health of Aboriginal and Torres Strait Islander peoples No. 4: Private Health Insurance This paper is also available on the Department s web site: For further information about this paper contact: Occasional Papers Department of Health and Aged Care Portfolio Strategies Division MDP 85 GPO Box 9848 Canberra ACT 2601 Publication approval number 2571

3 FOREWORD The Department of Health and Aged Care submission to the Senate Community Affairs Legislation Committee provides a comprehensive account of the potential impact of the Federal Government 30 per cent Rebate on private health insurance on the private health insurance industry. The private health insurance industry is under pressure. Since the introduction of Medicare in 1985, the number of Australians with private health insurance has fallen. This drop in membership numbers has in turn created pressure on the public hospital system. The Federal Government is determined to arrest this decline in private health insurance membership and ease the burden on public hospitals. The main goal is to strike a better balance between the private and public sectors, ensuring Australians have a level of choice as well as universal access to excellent health care. Five major initiatives form the basis of Government's strategy and address the main areas of concern, specifically affordability and industry stability. They are the: introduction of the 30 per cent Rebate on premiums; further promotion and implementation of simplified billing; development of no gap or known gap reforms; implementation by 2000 of Lifetime Health Cover, and review of reinsurance arrangements, which addresses industry stability and efficiency. The 30 per cent Rebate Since its introduction on 1 January 1999, the 30 per cent Rebate immediately improved the affordability of health insurance for all members of registered health funds who are also eligible for Medicare rebates. Early statistics on participation rates since the introduction of the Rebate show the highest positive result in over a decade and provide firm evidence that the Rebate has stabilised membership. The Government has reversed the long term trend of membership decline. These figures show a turnaround back to private health insurance, but it will take a full 12 months or more to evaluate fully the effectiveness of the Rebate and reform measures the Government has put in place. The Rebate complements and reinforces the effectiveness of the existing Medicare Levy Surcharge that encourages high income people to take up private health insurance. Further promotion and implementation of simplified billing Simplified billing is one initiative already up and running which addresses the serious problems of multiple bills and unforseen out-of-pocket costs for private patients. The Government amended legislation in April 1998 to encourage hospitals, doctors and health

4 funds to work together to simplify the billing process and make sure that patients are clear about any out-of-pocket costs they may have before they go into hospital. Although simplified billing is in the early implementation stages within the private health industry, more and more hospitals and doctors are starting to provide the service to patients. It is intended that simplified billing become the normal way of doing business in the private health sector. The Government is working towards further measures to reduce gaps or make them known to patients before treatment, in consultation with doctors and the private health industry. Development of no gap or known gap products The Government is continuing to search for practical solutions to uncapped medical bills charged by practitioners to privately insured patients. The Government is working with the private health sector to promote no gap and known gap health insurance products. This Government has done more to reduce the incidence of gap fees than any other government. The commitment to addressing gap fees was strengthened in the legislation for the 30 per cent Rebate which stipulates that funds must offer one or more policies with no or known gaps by 1 July 2000 if they wish to offer the Rebate as a premium reduction. The last eighteen months has seen major successes in these endeavours including: the establishment of Mediplus Ezyclaim which aims to cover an agreed gap between what a practitioner charges and what Medicare pays. To date in excess of 300,000 services have been paid through Ezyclaim, saving patients hundreds of dollars as well as enabling no, or known, gaps. The project at the Melbourne Private Hospital which provides a no-gap option for their patients. The scheme was put forward by some of the doctors working at Melbourne Private out of concern for their patients. Lifetime Health Cover Lifetime Health Cover is a new system of private health insurance which allows health funds to offer lifetime rates of hospital cover. People taking out hospital cover early in their lives will pay lower premiums than those taking it out later in life. The new system therefore rewards membership loyalty and early joining. The premium paid by people entering private health insurance will be based on the age at which they first join and, once set, remains at that rate relative to premiums for people entering at different ages. For example, someone joining at the age of 30 and maintaining their membership will always pay a lower premium for the same product compared to someone who has delayed joining until age 55. Lifetime Health Cover is a major structural reform designed to ensure long term stability of the health insurance industry and affordability for members. The benefit for all members, both new and existing, is that it will encourage more younger and healthier people to take out health insurance. This increase in healthier members will improve the risk profile of members overall and have the effect of reducing the costs of premiums for everyone. 2

5 Lifetime Health Cover will also deter short term members who make high claims in comparison to their contributions, which adds to the cost of premiums for all members. Legislation to support this system was introduced in Parliament on 2 June Review of reinsurance arrangements The private health insurance reinsurance arrangements are a system for sharing the hospital and medical costs of high risk members admitted to hospital, between health funds. Health funds with a greater proportion of low risk members (generally the young) pay contributions to a pool which then distributes the income to funds with a greater proportion of high risk groups (the chronically ill and the aged). The reinsurance arrangements are essential to supporting community rating by increasing the industry's stability despite some funds having more high risk members than others. The Government has initiated a review of the reinsurance arrangements. It is specifically investigating reforms which will provide better incentives for health funds to manage their costs; encourage the use of cheaper, out-of-hospital care where appropriate; and more fairly reflect the costs of high risk groups that are not currently recognised. The results of the review will be announced this year. Other reforms addressing affordability, product innovation and industry efficiency In addition to these major areas of reform the Government is currently considering further reforms to build on the improvements already achieved. These include: reduction of in-hospital pharmaceutical gap fees; discounted premiums; loyalty bonus schemes; private sector trials of co-ordinated care and early discharge programs; and private health insurance consumer information service. Conclusion The reform agenda outlined above is comprehensive and picks up many of the recommendations of 1997 Industry Commission Inquiry into private health insurance. Most importantly, the individual strategies are mutually reinforcing and the combined effect will go a long way toward improving the affordability, stability and efficiency of the industry. Equally important, these reforms lay the groundwork for further, potentially more far reaching change to health insurance by the industry itself. The combined effect of Lifetime Health Cover, the private sector co-ordinated care trials and the establishment of reinsurance arrangements that recognise out-of-hospital care have the potential to realign private health funding to a whole range of more appropriate and cost effective care settings. The efficiency 3

6 gains and product innovations that will arise will significantly benefit the industry and consumers. 4

7 Senate Community Affairs Legislation Committee Inquiry into Private Health Insurance Incentives Bill 1998 Private Health Insurance Incentives Amendment Bill 1998 Taxation Laws Amendment (Private Health Insurance) Bill 1998 Submission by the Department of Health and Aged Care 5

8 Terms of Reference The Community Affairs Legislation Committee is conducting an inquiry into legislation introducing the Government s 30% rebate on private health insurance premiums. The Committee wrote to the Department on 27 November 1998 inviting it to provide a written submission by 1 December The Committee has suggested that the Department s submission should address three principal issues: to consider the large expenditure that this rebate involves, in particular the subsidy to high income earners, and to investigate evidence for the Government s claims that this scheme will improve Australia s health system and reduce waiting lists in public hospitals; examine the competing priorities for health funding and to consider the advantages and disadvantages of making private health insurance a higher priority for funding than some other critical areas of need, such as rural health services, indigenous health services and public hospitals; and examine the impact of the proposed rebate on overall health expenditure, health outcomes, and access and equity to quality health care for people on low incomes. This submission from the Department of Health and Aged Care addresses each of these issues. Before doing so, the Department would like to draw the Committee s attention to some broader issues about the nature of Australia s health system and to provide some background to the introduction of the 30% rebate. Introduction Australians believe in their right to have a choice about their health care. Government policy clearly supports a mixed model of health care, which balances public and private sector roles and ensures both universal access and choice. Indeed, the Government is committed to: the provision of high quality health care for every Australian; Medicare as a universal health care system; and the public hospital system in this country. A record $31.34 billion of funding for public hospitals through the Australian Health Care Agreements - which represents a 16.5% increase (or 19.2% increase including veterans) in funding in the next five years, compared to is a clear indication of the Government s support for the public hospital system. However, the Government realises that this additional funding for public hospitals will not be enough to maintain the integrity of the Australian health care system if nothing further is done to support the viability of the private health sector and to address the underlying reasons for the drop-out of people from private health insurance. 6

9 When Medicare was introduced, it was generally accepted that the proportion of the population covered by private health insurance would fall (which it did from 50% in ), but that a relatively broad mix of high and low cost individuals would be fund members, underpinning effective community rating through insurance tables. Coverage remained relatively steady for the first few years of Medicare but began to deteriorate markedly from about This coincided with decisions which inflated the health funds net costs either through the withdrawal of direct and indirect subsidies or by requiring the funds to provide benefits for new or expanded categories of service / care. As the Industry Commission noted, the full impact of these additions to net costs led to the beginning of the price rise-membership fall cycle, which has been a constant feature since Attempts to stabilise membership focused mainly on strategies to improve consumer information and support, including simplified billing and informed financial consent, and to foster contractual relationships between funds and providers which would reduce and/or eliminate out of pocket costs over time. The current Government sought also to address the price of premiums through an incentives scheme targeted at low income people the Private Health Insurance Incentives Scheme which provides up to $450 assistance to a family with both hospital and ancillary cover (smaller levels of assistance are provided for singles and couples, and for those contributing to only one form of hospital or ancillary cover). However, despite the slowing of the decline, membership has continued to fall and private health insurance now covers only 30.3 percent of the population. If private health insurance is not to become a residual part of the system, and choice is to remain, there is a pressing need to fix a membership floor underneath the private health insurance system and to avoid further declines. Declining private health insurance membership not only threatens the existing balance between the public and private system, but also undermines the viability of the public system as well as the private system. Falls in health insurance membership impact: on the public system by increasing demand for public hospital services; and on the private system by limiting its main source of consumer finance: at some stage, the amount of money represented by private health cover will not buy all the available private hospital beds, and the viability of private hospitals will thus be at risk. The principal reason that people are dropping their private health cover is the on-going problem of the high and rising cost of the premiums and related concerns about value for money from the product. The Government s 30% rebate is designed specifically to deal with the cost issue. However, the initiative is only the first step in stabilising private health insurance membership. Medium term initiatives, which improve the flexibility and efficiency of the industry and build on the quality of the product and contain its price and out-of pocket expenses, are all part of the strategy to stabilise membership and achieve equilibrium in the balance between public and private care. 7

10 Nature of Australia s Health System The Australian health system is relatively efficient and effective: health outcomes in terms of life expectancy, infant mortality, risk of communicable disease etc, are generally high compared to other OECD countries; access to health services is universal; quality of health care services is generally high, with a particularly high reputation for medical research for a country of our size; and total spending as a percentage of GDP, at 8.5%, is about the OECD average. Amongst countries providing universal access, Australia has a relatively high level of private spending, private health insurance accounts for around 11% of total recurrent expenditure on health services (10.9% in ). Around one in three of the population has some form of private health insurance. This arrangement may be contrasted with those in some other countries: in the UK and Canada, private health insurance is limited to providing supplementary benefits to those available through government-funded universal access services (though in Canada, people can also choose to opt out by paying for services across the border). As a result, private health insurance represents a smaller proportion of total health spending in those countries; in the US, in the absence of universal cover, private health insurance (and similar private health management organisations), is the main source of health care cover for employees and their families, and increasingly is being contracted to provide health care services under Medicare and Medicaid. As a result, private health insurance represents a large proportion of total health spending; and by contrast, Australia s system offers both universal access and choice. Private health insurance is not just a means of giving supplementary benefits, but also allows people to choose an alternative to Medicare s public hospital care. These different models reflect in many ways the different theoretical approaches identified in the Productivity Commission s 1997 Report on Private Health Insurance: a residual model limited to supplementing Medicare benefits, a substantial model providing the main means by which the majority gain health care cover, a mixed model under which private health insurance complements Medicare. (Another mixed model identified by the Commission would have private health insurance contracted to deliver Medicare benefits.) Government policy clearly supports the mixed model, balancing the public and private sector roles, and ensuring both universal access and choice: these are seen to be complementary, rather than alternatives. This complementarity role flows through to the financial nexus. Increased private health insurance membership, reflecting more people choosing private 8

11 health care must reduce demand for publicly funded hospital services in particular, and viceversa. It is a matter for judgement what the level of Government incentives should be provided for private health insurance. The proposed rebate is substantially less than a full subsidy, being comparable to the level of indirect support for private health cover available in the mid 1980 s. The rebate will, nonetheless, reduce substantially the price of private health insurance and thus increase the attractiveness of the product and, in turn, the private system. The rebate alone, however will not fully address the challenges facing private health insurance as identified in the Productivity Commission report. Other challenges include the need for greater competition, the problem of adverse selection and the incidence of gap payments. These are being addressed separately. Why Have a Rebate? The main arguments for the 30% rebate are summarised below: 1. Sustaining Private Health Care Services There are a number of pressures in the external environment that are affecting both the public and the private health systems. These include: the ageing of the population; the increased demand created by new and costly technological enhancements in medicine; significantly increased consumer expectations about what the health care system can deliver and the level of amenity available to consumers using hospital services; and greater choice in health care delivery modes. In addition, the private sector is experiencing particular financial pressures from the move by private patients out of public facilities and into private hospital beds. The private health insurers are also dealing with the financial burden of a membership base which is becoming increasingly skewed towards the older and sicker member as younger and healthier members drop out. The rebate is designed to support the private health sector. 9

12 The following table shows how private health insurance membership has declined over the last eleven years. Movements in coverage of hospital insurance tables: FINANCIAL YEAR DROP OUT RATE % % % % % % % % % % % % % % AVERAGE DECLINE AVERAGE DECLINE % 1.89% The current Private Health Insurance Incentives Scheme (PHIIS) has assisted in slowing the membership decline, but there remains a fall-out rate of almost 2% per annum. Declining private health insurance membership could threaten the existing balance between the public and the private system, and undermine the viability of the public system as well as the private system. This is because falls in health insurance membership impact on the public system by increasing demand for services. At some stage, private health cover will not match private hospital places and the viability of private hospitals might also be at risk. The graph at Attachment A maps membership falls against premium price rises. The rebate recognises the nexus between private health insurance participation, the demand for publicly funded hospital and medical services, and the value of the private sector complementing to the public sector. Each and every fall in the private health insurance coverage, feeds directly through into the public system as more and more people become entirely reliant on the public system for their health care. This imposes considerable cost pressures on the state health system, and makes public decision making on such matters as individual s access to elective surgery more paramount. 2. Reducing the Cost of Health Insurance by 30% The Government s 30% rebate will provide assistance to people who purchase private health insurance by lowering the cost of their insurance by almost a third. 10

13 Thus, the rebate will not only encourage people to join private health insurance, it will also help them to retain their membership and to take full advantage of it over a long period of time. This will address the immediate pressures on the system as a result of membership falls due to high premiums and ensure that private health insurance coverage is returned to around 33 per cent. 3. Community Rating The effective price reduction afforded by the 30% rebate is also intended to potentially attract others into the system, particularly the young and healthy, but also more higher income earners. Under Australia s community rating system, the viability of health funds depends on a membership profile that includes younger and healthier members to share the risk with older and sicker members. This cross-subsidy element of the Australian private health insurance sector works to relieve pressure on premium levels. 4. Providing Choice A key element of a consumer-oriented health system is choice. Many people want the right to choose their own doctor, to choose the hospital and the amenity it provides, and when they will have elective treatment if it s required. For many older people, in particular, who face long waiting lists for certain health care, it is especially important as a means to provide leverage to gain earlier access to services that may not be essential but are certainly highly desirable and beneficial. To the extent this choice reduces demand for public hospital care, there is strong case for Government support: without it, such choice would be discouraged. Through the rebate, the Government will restore a large part of the funding removed by the previous Government from the private health system and this will increase people s opportunities to choose their preferred system of health care. (This is dealt with in greater detail later in this submission). It is also a matter of efficiency and cost effectiveness for the health system to maximise the use of existing acute care capital stock both public and private. The rebate is not simply a commitment to private health insurance in its own right. Rather, the rebate reflects the fact that private health insurance is the way most favoured by Australians to gain access to the hospitals and doctors of their choice. It is also, through community rating, a more equitable way of facilitating choice than reliance on self insurance. 5. The Government Supports Self-Provision Australians overwhelmingly support Medicare and its universal access to public health services. Yet, at the same time, around one in three of the population still has some form of private health insurance, ie 2.7 million members covering 5.7 million people. It is reasonable for the Government to support their choice of care and the financial sacrifices they have made to support that form of health care. The private health insurance rebate was announced as part of the overall tax reform package, which provides a number of taxation concessions in the health sector. The tax rationale behind the 30% rebate is that it is a horizontal tax equity measure, which responds to the additional costs borne by taxpayers across the entire income range for private health cover, 11

14 irrespective of their level of income. The rebate also provides a partial solution to the perception that people with private health insurance have to pay for their health care three times: through the tax system, through their insurance premiums and through out-of -pocket costs which are experienced by many people when they use their insurance. A related reason for encouraging the continued use of private health insurance is the important goal of encouraging self-provision where possible. Using taxation policy to encourage self-provision is well entrenched and accepted in Australia. For example, taxation concessions for superannuation have been in place for some time. The superannuation tax concessions cost approximately $8.5 billion per year, while aged pension costs are approximately $13.2 billion per year. The expected savings from these concessions, however, are in the future, where more Australians will be able to provide for themselves in retirement at a greater level of comfort than would be available on the aged pension. Similarly, private health insurance allows for the self-provision of some health care, which relieves pressure on the public system. 6. Private Health Insurance Industry Over the last fifteen years premiums collected have increased by 213%. During the same period benefits have risen by 235%. Over the last five years the relativities have been the same premiums collected have increased 15.6%, benefits paid have increased 18.9%. At the same time industry reserves fell by 2.5% ( ). Net operating loss for the industry is $6.6 million (Attachment B). As a result of the above cost pressures (outlined under 1), the industry has been performing poorly no industry can sustain falling reserves, net operating losses and outgoings exceeding income. Recent figures in where premium income exceeded growth in benefits for the first time in three years (and against the fifteen-year trend) are a positive sign that cost controls in the industry may be having an effect. At this stage it appears that the greater use of agreements between hospitals and funds may explain some of this welcome change. 12

15 First Term of Reference: Nature of the Rebate 1. To consider the large expenditure that this rebate involves, in particular the subsidy to high income earners, and to investigate evidence for the Government s claims that this scheme will improve Australia s health system and reduce waiting lists in public hospitals. 1.1 Size of the rebate Over $40 billion ( ) is spent on health care in Australia every year with $12.1 billion from the private sector, $21 billion from the Commonwealth and $7.9 billion from other levels of Government. Australia s health and aged care spending is about the OECD average at 8.5% GDP. The private health rebate will cost the Government an additional $1.1 billion in the first full year of operation : $m $m $m $m Gross cost Less PHIIS savings Add MBS flow through Net cost as per EM The size of the rebate approximately equals the financial support removed from the private sector over the decade to 1994 and the contribution made by private health insurance to public hospitals: the Commonwealth used to subsidise the private health insurance reinsurance pool with around $100 million per annum. This contribution assisted funds with the costs of members subject to long periods of hospitalisation. It was gradually phased out between 1983 and Access Economics has estimated that this measure would have cost $220 million in 1996; the Commonwealth used to provide a bed-day subsidy for private hospital utilisation, at a cost of around $135 million. It ceased in September Access Economics has estimated that this measure would have cost $235 million in 1996; in , the Commonwealth reduced the Medicare rebate for in hospital services from 85% to 75% with the funds being required to cover 25 %. This represented a saving to the then Government of $105 million in a full year (in dollars). Access Economics has estimated that this measure would have amounted to $216 million in 1996; and 13

16 the Medicare agreements of 1993 provided the States with incentives to increase public patient throughput at the expense of private patients: thus pushing private patients into private hospitals with increased costs to the insurance funds. Access Economics has estimated that this had increased costs for the funds by $175 million per annum by Access Economics has calculated the combined effect of these measures, including the shift from public to private hospitals, as costing the funds $846 million (in 1996 dollars) which represents a 39% rise in premiums. Using a GDP deflator the total savings withdrawn from the private system from these measures would be $879 million in today s dollars. Accordingly the rebate funding is, firstly, restoring previous levels of indirect support for private health services and, secondly, providing additional funding to encourage more Australians to take up this form of health cover. On the other hand, health funds also paid $273 million in hospital benefits for private patient care in public hospitals in Health funds contribute to the cost of medical services for private patients in public and private hospitals ($228 million) but the contribution for private patients in public hospitals cannot be separately identified. Another important aspect of the nature of the rebate is its simplicity at a time when Australians appear to be confused about private health insurance arrangements. Under the Private Health Insurance Incentives Scheme (PHIIS) many people were unsure of their eligibility and the amount of assistance available to them given the complexity of the application process and this was complicated by the need for annual eligibility checks which were necessary because the incentive was means tested. The Government has sought to rectify these problems with the new rebate. The rebate is set at the level of 30%, and it provides in effect a tax credit so that lower income people who would otherwise not be able to access fully a tax concession gain the full benefit. It covers all forms of private health insurance and there is no limit on the concession available. The rebate is to cover all forms of private health insurance as 76% of all people with health insurance have both hospital and ancillary cover. There is obviously a strong link between the different types of cover. People who take out hospital cover believe that ancillary cover is important. This may well be because ancillary products cover many services that are not available under Medicare. As a result, a large number of people rely on private health insurance to access these types of services ie: dental, optometry, emergency ambulance transport, speech therapy, hearing aids, chiropractic/osteopathy, non-pbs pharmaceutical prescriptions and physiotherapy. Without health insurance, many of these people would not be able to afford these services, although some might qualify for publicly provided services to low income groups (ie: State funded public dental services) thus adding to waiting lists/ times. 1.2 Non means tested rebate Australia's private health insurance system complements our system of universal access, with around 80% of private hospital care funded through private health insurance. It is entirely reasonable for those exercising that choice to retain a substantial part of the funding from the public system they would otherwise draw upon. 14

17 The rebate is, in essence, a tax concession designed to reflect the extra cost burden borne by people across all income levels for private health insurance, which is not borne by others who rely solely on the public system. It is a universal concession by intention: not only is it intended to support poorer families to maintain their health cover, but it is also intended to make health insurance tax effective for middle and higher income earners so that they might be drawn more into the private system. While the Department concedes that the greatest relative burden from private health insurance is borne at lower income levels, the rebate s relative value is also greatest at low income levels where it is equivalent to a higher proportion of their income. The Department notes that Government support of this kind is found in other socially valuable privately provided areas, such as support for private schools and for superannuation. The universal nature of the proposed rebate reflects the universal nature of Medicare the alternative that private health insurance investors have chosen to supplement. Every taxpayer (with an income above the applicable threshold) pays the Medicare levy, some of which contributes to free hospital care as a public patient whether the taxpayer uses this or not. From July last year, people earning over $50,000 and families with incomes over $100,000 who do not have private health insurance pay an extra 1percent of their taxable income for the Medicare Levy Surcharge in addition to the normal 1.5 percent Medicare levy. The nonmeans tested rebate, on the other hand, may be described the carrot to reward middle to higher income earners if they take out private health insurance. Means testing the rebate would also have an adverse impact because there is evidence that the largest falls in health insurance participation have been in the middle to higher income bracket, and these appear to have been lower risk members of the funds who are significant net contributors to the internal balancing of costs essential to effective community rating. 15

18 The following table indicates the proportion of the population with private health insurance, contributor units by income percentile and by age from 1983 to (a) Contributor unit type (b) Single person Sole parent with dependants Couple without dependants Couple with dependants Gross family income quintile First Second Third Fourth Fifth Age of head (years) and over (a) (b) 1995 figures based on projections from National Centre for Social and Economic Modelling s private health insurance data set A contributor unit includes all persons coverable by a health insurance policy. For example, a couple with dependants unit type would include both parents and all dependant children. (c) The third quintile covers gross family income ranging from $20,000 to $32,500. The fourth quintile covers gross family income ranging from $32,500 to $55,000. The fifth quintile covers gross family income ranging from $55,000. (Source: Schofield et al.1997) The table indicates that the greatest falls in private health insurance participation have been in the third and fourth income quintiles and amongst those aged 15 to 54. While the lowest income groups and the aged, have experienced the smallest membership declines. A closer analysis shows that since 1986 the largest decline in health insurance membership has been in the top three income quintiles (ie. among the 60% of taxpayers with the highest incomes), while membership has been relatively more stable in the bottom two income quintiles and has actually risen in the bottom quintile. 16

19 Gross family Income Quintile PHI Participation 1986 (%) PHI Participation 1995 (%) Change Change from 1986 First % Second % Third % Fourth % Fifth % This suggests that while participation in lower income quintiles is not particularly pricesensitive, the decline in higher income quintiles has been especially related to the cost of premiums. This is very clear when examining the patterns of decline since 1992: Gross family Income Quintile PHI Participation 1992 (%) PHI Participation 1995 (%) Change Change from 1992 First % Second % Third % Fourth % Fifth % There is, therefore, good reason to provide an incentive to encourage middle to higher income earners to take up or maintain private health cover. Indeed, it is specifically these people that it would be desirable to encourage to take up private health cover. There is typically a close relationship between a person s income and their health status (ie: higher relative incomes and relatively good health, on average, go hand in hand). Under Australia s system of community rating, healthier members support sicker members (which are typically relatively more elderly). That is to say, those that have relatively poor health, or are in high-risk groups, effectively have their private health insurance premiums cross-subsidised by younger and lower risk members. Means testing runs the risk of eroding this cross subsidy by encouraging younger, relatively better off, lower risk people to drop their private cover. This would leave the relatively older, poorer, higher risk people in private health insurance. These people tend to draw more in benefits than they put in, resulting in further pressures for premiums to rise. This is the vicious cycle that health funds are currently in. Last year, reinsurance benefits paid to the over 65s accounted for more than half of all benefits paid by the industry. This is a clear sign that, due to the drop out of younger, healthier members, the population that is community rated in private health insurance is increasingly old, ill and costly. The following table illustrates the relationship between income levels and health status; ie people in lower income deciles require greater health expenditure because of their relatively poorer health. 17

20 Health Status and Costs by Income All Australians Ratio to national average % fair/poor health Health expenditure ($) per capita Equiv. family income decile Ratio to national average % fair/poor health Health expenditure ($) per capita Equiv. family income decile 18

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