Operations of the Private Health Insurers. Annual Report

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1 Operations of the Private Health Insurers Annual Report

2 Operations of the Private Health Insurers Annual Report Report required by section of the Private Health Insurance Act 2007

3 Commonwealth of Australia 2010 ISSN ISBN (Volume 2) ISBN (Set) This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General s Department, National Circuit, Barton ACT 2600 or posted at < Suggested citation: Private Health Insurance Administration Council (PHIAC) 2010, Operations of the Private Health Insurers Annual Report , PHIAC, Canberra Cover design and layout by Meta Design Studio Printed by Paragon Printers Australasia ii Operations of the Private Health Insurers ANNUAL REPORT

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5 Table of Contents About the Private Health Insurance Administration Council vi Review of the industry 1 Snapshot of the industry 4 About this report 6 The private health insurance industry in Australia 6 Participation in private health insurance Evolution of industry A consumer perspective Who pays for treatment? Legislation and supervision of the industry Performance review outcomes 20 Financial outcomes for The financial position of the Industry Membership and coverage Service usage and benefits paid General treatment Outlook for the industry Statistics, indexes and glossary 31 Statistical tables Legislation index Glossary Index of figures and tables Index Contact details iv Operations of the Private Health Insurers ANNUAL REPORT

6 Abbreviations ABS BHC CDMP COAG HIB HRB Insurer LHC Minister, the MLS Australian Bureau of Statistics Broader Health Cover Chronic Disease Management Program Council of Australian Governments Health insurance business Health-related business private health insurer Lifetime Health Cover Minister for Health and Ageing Medicare Levy Surcharge PHI Act Private Health Insurance Act 2007 PHIAC PHIO RETF Symbols Private Health Insurance Administration Council Private Health Insurance Ombudsman Risk Equalisation Trust Fund - nil or rounded to zero % percent not available 000 thousands $ 000 thousands of dollars Note: most monetary amounts shown in tables and figures have been rounded to the nearest thousand dollars. Where numbers have been rounded, discrepancies may occur between sums of component items and totals. However, actual figures have been used in respect of the membership statistics reported. v

7 About the Private Health Insurance Administration Council The Private Health Insurance Administration Council (PHIAC) was established in 1989 under section 82B of the National Health Act 1953 as the prudential regulator for Australia s private health insurance industry. PHIAC continues in existence by force of section of the Private Health Insurance Act 2007 (the PHI Act), subject to the provisions of the PHI Act. PHIAC is an independent statutory authority that reports to the Minister for Health and Ageing (the Minister). PHIAC works closely with other regulatory bodies including the Private Health Insurance Ombudsman (PHIO) to ensure that consumers have access to a well-run and competitive private health insurance industry. In carrying out its regulatory and supervisory functions, PHIAC is required by the PHI Act (section 264 5) to achieve an appropriate balance between three objectives: fostering an efficient and competitive private health insurance industry protecting the interests of consumers ensuring the prudential safety of individual private health insurers. Full details concerning the operations of PHIAC are contained in a separate report, the Private Health Insurance Administration Council Annual Report This report is required under section 9 of the Commonwealth Authorities and Companies Act 1997 and can be obtained from PHIAC s office and is also available at PHIAC s website < vi Operations of the Private Health Insurers ANNUAL REPORT

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9 viii Operations of the Private Health Insurers ANNUAL REPORT

10 Review of the industry Review of the industry 1

11 Australian Health Management Group Pty Ltd AHM Open For-profit Market Share: 2.95% BUPA Australia Health Pty Ltd BUPAAH Open For-profit Market Share: 9.70% Cessnock District Health Benefits Fund Ltd CDH Open Not-for-profit Market Share: 0.05% The Doctors Health Fund Ltd DHF Restricted Not-for-profit Market Share: 0.12% HBF Health Ltd HBF Open Not-for-profit Market Share: 7.64% Healthguard Health Benefits Fund Ltd H guard Open Not-for-profit Market Share: 0.48% Private Health Insurance Industry at 30 June 2010 Open access or Restricted access, For-profit or Not-for-profit Market Share: Based on total policies nationally 1 < ACA Health Benefits Fund Ltd ACA Restricted Not-for-profit Market Share: 0.08% BUPA Australia Pty Ltd (formerly MBF Australia Pty Ltd) BUPAAPL Open For-profit Market Share: 15.68% CUA Health Ltd CUA Open Not-for-profit Market Share: 0.41% GMHBA Ltd GMHBA Open Not-for-profit Market Share: 1.65% Health Care Insurance Ltd HCI Restricted Not-for-profit Market Share: 0.07% For-profit Open Restricted 0 13 Not-for-profit Australian Unity Health Ltd AUHL Open For-profit Market Share: 3.02% CBHS Health Fund Ltd CBHS Restricted Not-for-profit Market Share: 1.27% Defence Health Ltd Defence Restricted Not-for-profit Market Share: 1.52% Grand United Corporate Health Ltd GUC Open For-profit Market Share: 0.33% Health Insurance Fund of Australia Ltd HIF Open Not-for-profit Market Share: 0.50% Health Partners Ltd H Partners Open Not-for-profit Market Share: 0.65% 1 For group holdings, parent market share excludes subsidiaries. 2 Operations of the Private Health Insurers ANNUAL REPORT

12 The Hospitals Contribution Fund of Australia Ltd HCF Open Not-for-profit Market Share: 9.04% Manchester Unity Australia Ltd MU Open For-profit Market Share: 1.25% Mildura District Hospital Fund Ltd Mildura Open Not-for-profit Market Share: 0.26% Navy Health Ltd Navy Restricted Not-for-profit Market Share: 0.25% Queensland Country Health Fund Ltd QCH Open Not-for-profit Market Share: 0.24% Latrobe Health Services Ltd Latrobe Open Not-for-profit Market Share: 0.69% MBF Alliances Pty Ltd MBF Alli Open For-profit Market Share: 1.72% National Health Benefits Australia Pty Ltd NHBA Open For-profit Market Share: 0.08% Phoenix Health Fund Ltd Phoenix Restricted Not-for-profit Market Share: 0.11% Queensland Teachers Union Health Fund Ltd QTUH Restricted Not-for-profit Market Share: 0.42% Lysaght Peoplecare Ltd Lysaght Open Not-for-profit Market Share: 0.38% Medibank Private Ltd MPL Open For-profit 2 Market Share: 28.36% NIB Health Funds Ltd NIB Open For-profit Market Share: 7.33% Police Health Ltd Police Restricted Not-for-profit Market Share: 0.29% Railway & Transport Health Fund Ltd RT Restricted Not-for-profit Market Share: 0.42% Reserve Bank Health Society Ltd RBHS Restricted Not-for-profit Market Share: 0.04% Transport Health Pty Ltd Transport Restricted Not-for-profit Market Share: 0.07% St Luke s Medical & Hospital Benefits Association Ltd St Luke s Open Not-for-profit Market Share: 0.39% From 1 October 2009, more than 70% of the industry was for-profit Teachers Federation Health Ltd TFH Restricted Not-for-profit Market Share: 1.76% Westfund Ltd Westfund Open Not-for-profit Market Share: 0.79% 2 MPL converted to for-profit status on 1 October Review of the industry 3

13 Snapshot of the industry Hospital treatment membership, General treatment memb Insured people 9,973,864 Policies General treatment membership, services (ancillary), ,541, June ,822,120 65,945, June 2010 As at 30 June % of Australians were covered by hospital treatment insurance, 51.6% Insured people 11,541,70 Hospital treatment membership, Hospital treatment episo 9,973,864 by general treatment insurance. 9,973,864 Hospital treatment membership, June June ,538,621 4,822,120 4,822,120 nt membership, General treatment membership, ,973,864 11,541,701 Insured people Policies Insured people Policies 30 June 2010 Insured people Policies 30 June 2 Hospital treatment membership, General treatment membership, General treatment 11,541,701 services (ancillary), June 2010 Premium 65,945,825 revenue and b 65,945,825 3,238, $14, ,822,120 $1, , ,822,120 5,538,621 9,973,864 Hospital treatment episodes, June 2010 Investment revenue and profit (millions), $444 ple Insured people Policies Policies 5.0% General treatment services (ancillary), nt services (ancillary), ,945, ,945,825 Investment revenue Profit before tax Hospital treatment episodes $14,170 Investment revenue and profit (millions), ,238, ,238, $1,175 Premium revenue Premium revenue and benefits (millions), Investment revenue and profit (millions), During , General treatment services 6.6% General treatment services (ancillary), Insured Insured people people Policies Policies Hospital treatment episodes, Hospital treatment episodes, $444 $1,175 $12,227 Investment revenue Profit before tax Investment revenue 4 and profit Operations (millions), of the Private Health Insurers Premium revenue $444 ANNUAL and benefits REPORT (millions), $14, $1, $12,227

14 p, Investment revenue and profit (millions), $ June 2010 $1,175 During , Investment revenue General treatment membership, $527 million Pre-tax profit Premium revenue and 11,541, June 2010 $770 million $ Investment revenue 4,822,120 Profit before tax Premium revenue 5,538,621 Policies cillary), ,945,825 Insured people Hospital treatment episodes, Policies As at 30 June 2010, 14.3% of the insured population were over the age of 65 and accounted for 46.2% of hospital benefits paid in the previous year. 3,238,686 millions), Profit before tax During , $1,175 Premium revenue 8.4% Total benefits 7.7% Premium revenue and benefits (millions), $14, $12,227 Premium revenue Benefits Review of the industry 5

15 About this report This report is prepared pursuant to section of the PHI Act. The report is based on statistics and other information collected by PHIAC, provided mostly by insurers in the course of PHIAC s regulation of the industry. This report mainly comprises summary statistics for the industry. Most statistics referenced in this report are derived from PHIAC s quarterly statistics publications, with the exception of the insurers individual fund financial details, which are published in this report only. After consultation with industry stakeholders, the full range of statistics usually published in this report has been modified. However, all of PHIAC s statistical information, including information published in previous reports, is available on PHIAC s website. The private health insurance industry in Australia The private health insurance industry is an important component of Australia s health care system, assisting insured people with the costs associated with treatment in the hospital setting, treatment outside hospitals that serve as alternatives to hospital treatment, and for general treatment more commonly known as ancillary healthcare needs such as dental treatment, eyecare and physiotherapy. Private health insurance provides for all, or part, of the costs associated with these treatments, sharing some costs with the Commonwealth Government (through Medicare) and some with patients/policy holders through out-of-pocket costs. Private health insurance may only be offered by insurers registered under the PHI Act. Registered private health insurers are regulated by PHIAC. PHIAC s objective in regulating the industry is to protect the interests of consumers of private health insurance by ensuring a well-run and competitive industry. The private health insurance industry changed substantially during the previous decade with the introduction of government incentives aimed at boosting participation, a new framework and legislation governing insurers and, more recently, uncertainty in the economic environment. At the same time consumers of private health insurance have become more informed about their health insurance options. The introduction of the website < has played an important role in ensuring consumers have reliable and timely information about the industry and the full range of health insurance products which are available for purchase by consumers. The website is maintained by PHIO. Participation in private health insurance Participation rates in the private health insurance industry have been growing for much of the last decade and as at 30 June 2010, the total number of hospital treatment policies on issue was 4.82 million, covering 9.97 million people or 44.6% of the Australian population. This was a 2.5% increase for those covered by a hospital treatment policy over the year According to figures released in March 2010 by the Australian Bureau of Statistics (ABS), the Australian population grew by 1.8% over the 12 months to March Growth over the same period in persons covered by hospital treatment shows an increase of 2.2% evidence that the take-up of private health insurance has more than kept pace with the overall growth in the population. Figure 1 plots hospital treatment coverage as a percentage of the population since 1971, and includes key events that have had a significant impact on the industry. In the 15 years between 1984 and 1998, participation rates halved to just over 30% of the population. Those people leaving the industry tended to be younger, less-inclined-to-claim members, whereas those who stayed were the higher risk, more-inclined-to-claim members. Between 1989 and 1998, the number of insured persons under the age of 65 decreased by 29.1%, whereas the number of insured people over the age of 65 grew by 12.0%. This changed the percentage of persons covered over the age of 65, which increased significantly from 9.9% in 1989 to 14.8% in 1998, substantially increasing the risks associated with the demographic profile of the industry. 6 Operations of the Private Health Insurers ANNUAL REPORT

16 Figure 1. Hospital treatment coverage (insured persons as a % of the population) 90.00% 80.00% 70.00% 60.00% Commonwealth medical benefits at 30% flat rate restricted to those with at least basic medical cover from September 1981 Introduction of Medicare from 1 February 1984 Introduction of Lifetime Health Cover from 1 July 2000 Higher rebates for older persons from 1 April % 40.00% 30.00% 20.00% 10.00% Medibank began on 1 July A program of universal, non contributory, health insurance it replaced a system of government subsidised voluntary health insurance. 1 July A Medicare Levy Surcharge (MLS) of 1% of taxable income is introduced for higher income earners who do not take out private health insurance. 31 October Increase in MLS income thresholds, subject to annual adjustment. Introduction of 30% Rebate from 1 January % Jun-71 Jun-74 Jun-77 Jun-80 Jun-83 Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 In order to arrest the decline in membership that occurred up until 1998, and boost the take-up of private health insurance, the then government introduced a number of initiatives: In 1997 a 1% Medicare Levy Surcharge (MLS) was introduced for higher income earners who did not take out private health insurance. In 1999 a 30% premium rebate was introduced as an incentive for people to take out private health insurance. In 2000, Lifetime Health Cover (LHC) was implemented. LHC imposes additional premium charges on people who take out private health insurance after the age of 30. As can be seen in Figure 1 above, the combination of these policy measures resulted in the participation rate increasing by over 14 percentage points between 1998 and 2001, as consumers returned to the private health insurance market. Figure 2 shows the pecentage of insured persons aged over 65 from 1989 to Figure 2 illustrates the dramatic impact that the government initiatives had on the age profile of the industry the percentage of insured persons aged over 65 dropped significantly as a result of increased take-up rates in private health insurance in all age groups, but particularly the younger age groups. Since that time, the percentage of persons aged over 65 has nearly returned to the levels seen prior to the introduction of the government s initiatives. The trend in the ageing of the membership is an important characteristic of the industry, but also reflects the general ageing of Australia s population. National population estimates from the ABS show that between 2005 and 2010, the proportion of people aged over 65 years was projected to increase from 12.9% to 13.7%. Over the same period of time the proportion of persons aged over 65 covered by private health insurance increased from 12.7% to 14.3%. The industry s ageing membership is a key driver behind increases in benefit outlays and it is expected that, as this trend continues, more pressure will be exerted on insurers to find new ways to manage the health risks of their membership to curtail growing costs while continuing to offer attractive products in terms of features, cover and price. Another aspect of these trends is the difference in the rate of uptake for hospital treatment and general treatment cover; the take-up of general treatment has been increasing at a slightly faster rate. As at 30 June 2010, million people, or 51.6% of the population, held general treatment cover. This was an increase of 342,957 people, or 3.1%, when compared to the previous year. Review of the industry 7

17 Figure 2. Percent of insured persons aged over 65 16% 14% 12% 10% 8% 6% 4% 2% 0% Figure 3. Net annual change for in persons covered by hospital treatment and general treatment cover by age cohort 40,000 35,000 30,000 General treatment Hospital treatment 25,000 20,000 15,000 10,000 5, , The take-up of hospital treatment and general treatment products also differs substantially by age group. Figure 3 shows the net annual change for in membership by age cohort for both hospital treatment and general treatment cover. The overall annual take-up of general treatment policies is higher than hospital treatment policies and the percentage increase across all age groups is quite similar between the two types of products. Figure 3 shows that the age group has the highest increase in members for both types of products. Statistics also show that these age groups are more likely to make claims. Comparing the number of people with hospital treatment cover to the total population of Australia also provides some further insight into participation. Figure 4 shows participation against total national population by age cohort and gender. 8 Operations of the Private Health Insurers ANNUAL REPORT

18 Figure 4. People with hospital treatment insurance against total population, by age cohort and gender 30 June Covered No cover Females Males , , , , , ,000 The figure shows that people in the oldest age groups, 90 and older, had the lowest participation rates closely followed by people aged between 20 and 29 years. The 20 to 29 age group historically has very low coverage and at 30 June 2010 only 31.9% of the population aged 20 to 29 had private health insurance for hospital cover. Private health insurance continues to be more popular with females than males in most age groups, with 45.8% of the total female population holding insurance for hospital cover at 30 June 2010, compared to males with 43.4%. Evolution of industry In 2000, there were 44 insurers operating in the private health insurance industry. Of these, 29 insurers were open access, of which four operated on a for-profit basis. The four for-profit insurers accounted for 12.5% of total market share. Contribution income was $5.46 billion against total benefits paid of $4.51 billion, and the industry had total assets of $3.26 billion. As at 30 June 2010, there were 37 private health insurers operating in the industry. Of these, 24 were open access, of which 10 operated on a for-profit basis, accounting for 70.4% of total market share. Contribution income was $14.17 billion against total benefits paid of $12.23 billion, and the industry had total assets of $9.06 billion. The growth between 2000 and 2010 shows that the industry has changed at a rapid pace. During this period, membership in terms of persons covered has grown by 21.1% and is the main reason for the substantial increases in contribution income and benefit outlays with growth in benefit outlays slightly outstripping growth in contribution income. Membership growth, however, is not uniform across the industry, and while low levels of growth can be usually sustained with little noticeable effect on an insurer, rapid growth in the membership of an insurer can have far reaching effects on its performance and capital position, and has often resulted in significant implications for policyholders in terms of higher premiums. Rapid growth has been associated with a number of failures of insurers within the last decade, emphasising the importance of planning for growth, carefully considering the implications of its achievement and closely monitoring performance during, and beyond, any growth phase. Review of the industry 9

19 Table 1. Industry structure Year No. of Open Restricted For-profit % of industry for- Total benefits paid insurers access access profit ($billion) % % % % 3.74 Figure 5. Market share as at 30 June % 25% 20% 15% 10% 5% 0% MPL BUPAAPL BUPAAH HCF HBF NIB AUHL AHM MBF Alli TFH GMHBA MU Defence CBHS Westfund H'Partners Latrobe H'guard HIF CUA St Luke's QTUH RT Lysaght Mildura GUC Navy QCH Police Phoenix DHF ACA HCI Transport CDH RBHS NHBA The change in the make-up of the industry can be seen in the Table 1 which shows the industry structure at different points over the last 15 years. In addition to the increase in for-profit insurers, Table 1 also shows the significant industry consolidation that has occurred since 1995 from 49 insurers to 37 insurers. Further to this, on 1 July 2010, the three insurers operating within the BUPA Australia group of companies BUPAAH, BUPAAPL and MBF Alliances merged to become one insurer bringing the number of insurers currently operating in the market to 35. PHIAC expects that this trend of consolidation within the industry will continue into the future. One important characteristic of the industry endures most people covered by private health insurance are covered by a small number of large insurers. The majority of market share is shared by the five largest insurers, or insurer groups, that together account for 84.1% of the market. In order of market share these are: MPL/AHM 31.3% BUPAAH/BUPAAPL/MBF Alliances 27.1% HCF/MU 10.3% HBF/H guard 8.1% NIB 7.3% 27 insurers shared the remaining 15.9% of the market. Figure 5 shows the market share of all insurers demonstrating the relatively small market share of a large number of insurers. 10 Operations of the Private Health Insurers ANNUAL REPORT

20 Despite their size, these smaller insurers play an important role in the private health insurance market in Australia. Although insurers can operate in the national market, not all insurers are active in all states. Smaller and restricted access 3 insurers often focus on a particular market niche. There are also a number of regional insurers that focus on specific areas and regions in Australia. Competition in the industry The market for private health insurance in Australia remains very competitive with insurers competing for new members and to attract members of other funds. The competition by insurers to attract younger members is intense, although the ability to target younger members through product design is limited as products offered are generally available to all current and prospective policy holders, reducing the specificity of product membership. While price is often a driver of competition, the industry also seeks to attract members through quality service, brand loyalty and broader value recognition of the private health insurance product. Insurers are limited in their ability to compete on price in the long term as large pricing differentials are usually unsustainable. The extent of competition is demonstrated by: the continued efforts through marketing and pricing strategies employed by individual insurers to attract new members to the industry as well as from other insurers the large number of private health insurance products on offer to consumers generally narrow underwriting margins of insurers. Although there is a significant degree of market concentration, smaller insurers can provide effective competition in regional and discrete, professional and trade based markets, competing for members through price, cover and service. As an industry, insurers also face significant competition from the public health system, Medicare. 3 Whereas open access insurers are available to anyone, restricted access insurers are only available through specific employment, professional or union groups. Have the products and services changed over the years? The range of services that must and may be covered by private health insurers is determined by legislation. Strict rules determine whether a product offered by an insurer is a complying health insurance product a prerequisite for the application of incentives such as private health insurance rebates. There are currently more than 30,000 complying health insurance products on offer. Private health insurance products can be generally classified into: full cover hospital treatment products that cover virtually all services permitted to be funded by health insurers medium cover hospital treatment products that identify certain cover exclusions usually related to cardiac treatment, hip and knee replacements and maternity services low cover hospital treatment products that typically feature exclusions, high excesses and/ or co-payments and limited access to private hospitals general treatment products that might cover dental, optical, physiotherapy and other allied services (but not hospital treatment). There are many private health insurance policies to choose from, depending on the budget and coverage requirements of the consumer. Each product offered by an insurer must be detailed in a Standard Information Statement. These statements are available on request by any member of the public to the relevant insurer and can also be viewed at < Most insurers product offerings are state-based. A distinction between states is made by insurers to reflect the different risk factors, cost structures, medical systems, hospitals, and demographic profiles present in each state. Consequently, most insurers set different premium rates for each state. Since 2007, insurers have been permitted to offer broader health cover (BHC) services as part of their suite of products. BHC refers to services that prevent, are part of, or substitute for traditional hospital-based services. These include hospital substitute treatment services and chronic disease management programs (CDMP). Review of the industry 11

21 Under BHC, insurers are able to offer consumers a broader range of treatment options involving clinical services delivered in safe, out of hospital settings. BHC is also used in partnership with doctors and other healthcare practitioners to provide preventative treatments that help policy holders to better manage their health and to receive treatment in a setting appropriate to their needs. Some out-ofhospital services such as general practice services and accommodation costs of residential aged care facilities are not covered by BHC. While the roll-out and take-up of these products has been slow in previous years, the number of CDMP s nearly tripled during , growing from 19,577 to 55,865. The number of insurers offering cover for CDMP s increased from 14 to 30 in and of the 30 insurers that offered CDMP s, 26 incurred claims (compared to nine the previous year). Those claims totalled $25 million compared to $9 million in It is expected that this number will continue to grow as more programs become available and the benefits of such programs become more widely accepted. Many insurers see these initiatives as important in assisting members to better manage their health issues, to reduce the frequency and severity of medical interventions associated with their condition, and minimise the costs associated with those interventions. CDMP s are available to members irrespective of age, but take-up of these programs most often occurs after age 50. In addition to the provision of funding support for services provided by third party hospital, medical and allied health service providers, some insurers also directly provide services to policy holders. In , five insurers operated dental and optical services and one insurer operated a private hospital and medical centre as a health-related business (HRB). HRB is the only other business allowed to be conducted as part of the health benefits fund of an insurer. Revenue across the industry from healthrelated business for was $343 million, an increase of approximately 10% from Other activities that are considered to be HRB include: insurance for people who are ineligible for Medicare to cover medical costs incurred in Australia such as: I. overseas students health cover provided by five insurers, and II. overseas visitors cover provided by nine insurers. acting as an agent for other service providers such as general insurers donations to medical research. A consumer perspective The biennial IPSOS 4 report Healthcare and Insurance Australia 2009 was released in November 2009 and reveals that consumers and potential consumers remain somewhat confused about aspects of private health insurance. Survey respondents supported simplification of private health insurance to make it easier to understand and make decisions. The research found consumers did not fully understand key issues such as how a product works, pricing arrangements, etc. Ensuring consumers have access to accurate, useful and targeted information in a timely manner remains a key priority for PHIAC. The IPSOS report shows that government incentives such as the MLS and the 30% rebate have helped to create and maintain demand for private health insurance. At the same time, consumers do not appear to be regularly checking to ensure their private health insurance coverage remains the most appropriate for their circumstances. There are relatively low rates of churn and few people are using web-based comparative tools to seek better coverage options. Greater promotion and use of the PHIO s recently revised consumer-oriented website < will assist in this regard. PHIAC works closely with its sister agency PHIO to ensure that consumers are informed about costs at the beginning of an episode of care through promotion of the principle of informed financial consent. While government incentives and a desire for security of access to healthcare play important roles in consumers decisions to purchase private health insurance, the IPSOS report suggests there is a 4 IPSOS is a survey-based marketing research firm which operates globally and produces reports that seek to interpret, simulate and anticipate the needs and reactions of consumers. 12 Operations of the Private Health Insurers ANNUAL REPORT

22 Figure 6. Percent of policies with excess and co-payment or exclusionary features 80% 70% 60% 50% Excess and Co-payment Exclusionary 40% 30% 20% 10% 0% Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 philosophy among many policy holders that value is associated with the capacity to claim amounts for treatments and services. This attitude sets private health insurance apart from other forms of insurance and is a challenge for insurers in product design, especially in general treatment services such as dental, optical, physiotherapy and chiropractic treatments. Details of the benefits paid by insurers are discussed in greater detail later in this report. Preference for excess and co-payments, or exclusionary products A co-payment is the agreed amount a policy holder pays when they receive hospital treatment, while an excess is the amount a policy holder must pay before health insurance benefits are payable. A policy holder may have a policy that requires an excess, or co-payment, or both being payable. Exclusionary policies offer members lower premiums as a trade-off for excluding cover for certain conditions or procedures such as maternity, cardiac surgery or hip replacements. At 30 June 2010, 76.6% of privately insured people were covered by a policy that required either an excess or co-payment be paid for hospital treatment. This has risen 0.5 percentage points since last year. The proportion of policies that have exclusions has also been rising in recent years. During , the proportion rose 11.2 percentage points to 24.0%. Figure 6 shows the percentage of policies with excess and co-payment or exclusionary features. The enhanced availability of information about private health insurance products has promoted increased policy holder understanding and sophistication in risk selection. This, together with increasing availability of co-payments and excesses, or exclusionary products, has resulted in a steady uptake of these products. Figure 6 demonstrates that the percentage of policies with co-payments and excesses options has increased at a significant rate since Further, there has been a recent increase in the percentage of policies with exclusionary features 5. During , the percentage of policy holders that had full hospital cover decreased 1.7 percentage points to 57.4%. Conversely, there was an increase of over 10 percentage points in 5 The sharp increase between and in products with exclusionary features is partly due to a reclassification of policies by some insurers. Review of the industry 13

23 policies with exclusionary features. The number of exclusionary policies is growing, indicating that consumers are increasingly seeking to reduce the cost of private health insurance cover by excluding certain treatments from their insurance coverage. Who pays for treatment? The cost of privately insured health treatment is shared between insurers, the Government and patients. During , there were 3.2 million hospital episodes and 65.9 million general treatment services that were wholly or partly funded through private health insurance. The total cost of these services was $18,190 million, which was met from: benefits provided by private health insurance $12,036 million benefits provided by Medicare $ 1,950 million out-of-pocket costs of patients $ 4,204 million The benefits paid in respect of health services received by policy holders in increased by 9.0% from much more than membership growth alone could account for. Patient contributions (out-of-pocket costs, or gaps) The gap is the amount paid by an insured person after any Medicare benefit and benefit paid by an insurer has been deducted from the amount charged. In , policy holders contributed $997 million in out-of-pocket payments towards the $11,920 million in fees charged for hospital treatment (including hospital substitute) and $3,208 million of the $6,271 million in fees charged for general treatment. The occurrence of out-of-pocket costs, or gaps, is a common concern for people holding private health insurance, and strong consumer sentiment in support of full coverage of service costs exists. Government contributions The Australian Government makes contributions to the cost of medical services provided to privately insured patients in the form of Medicare benefits for medical services related to a hospital or hospital substitute episode of care. For privately funded services, the Government provides a rebate of 75% of the Medical Benefits Schedule fee. Of the $3,938 million in privately insured, hospital related, medical costs incurred in , $1,950 million were funded by Medicare benefits. Figure 7 shows the break-up of total costs for privately insured services. Legislation and supervision of the industry Private Health Insurance Act 2007 The PHI Act is the principal legislative measure governing the private health insurance industry in Australia. It provides incentives to encourage consumers to take out private health insurance, sets rules governing private health insurance products and imposes requirements on private health insurers regarding how they conduct their health insurance business. The PHI Act also contains the administrative provisions relating to the operation of the PHI Act. This includes a range of enforcement mechanisms for monitoring and ensuring insurer compliance with the legislation, and protecting the interests of consumers. PHIAC s own administrative arrangements are also established by the PHI Act. Private Health Insurance Rules The PHI Act allows the Minister and PHIAC to make rules that detail how the PHI Act is applied, which provides greater flexibility in establishing legislative requirements to support the operation of the PHI Act. A summary of the Rules made by the Minister and the Council in relation to the PHI Act is set out in the legislation index. 14 Operations of the Private Health Insurers ANNUAL REPORT

24 Figure 7. Funding for privately insured services, Total service charges $18,190 million Funding of general services $6,271 million Government contribution 0% General services 34.4% Patient expenses 51.2% Hospital services 43.9% Medical services 21.7% Private health insurer 48.8% Funding of hospital services $7,981 million Patient expenses 5.2% Funding of medical services $3,938 million Patient expenses 14.8% Private health insurer 94.8% Government contribution 0% Private health insurer 35.7% Government contribution 49.5% Community rating and risk equalisation Registration as a private health insurer imposes restrictions on insurers that are important features of the Australian private health insurance system. The most important of these is a prohibition on discrimination. Preventing discrimination is achieved through the mechanism of Community Rating 6, which prohibits insurers from discriminating against any person on the basis of: health status age (other than age at entry under LHC) race 6 Private Health Insurance Act 2007, division 318. gender sexuality use of hospital treatment, medical or general treatment services, or general claiming history. These anti-discrimination requirements are designed to ensure that private health insurance products are available to all residents of a state or territory at the same price irrespective of factors which might ordinarily impact upon their insurability. Limited exceptions to these requirements exist in LHC. Registration also requires that insurers participate in Risk Equalisation a key mechanism supporting the principle of community rating. The Risk Equalisation Review of the industry 15

25 Trust Fund (RETF) transfers and shares certain risks across all insurers, so that insurers with an older and less healthy membership are not disadvantaged. PHIAC is responsible for administering the RETF. Prudential standards PHIAC has in place four prudential standards applicable to the industry: the capital adequacy standard the solvency standard the appointed actuaries standard, and the governance standard (commenced 1 January 2010). Solvency and capital adequacy standards 7 The solvency and capital adequacy standards are key tools that assist PHIAC in achieving its objectives of ensuring the prudential safety of individual private health insurers and protecting the interests of consumers. The solvency standard prescribes the minimum capital requirement of a health benefits fund conducted by a private health insurer. This is to ensure that, under a wide range of potential circumstances, the private health insurer will be in a position to meet its existing obligations to policy holders and other creditors. The capital adequacy standard prescribes the level of capital necessary to ensure a private health insurer will continue to meet the liabilities of existing and new policy holders into the future. Appointed actuaries and governance standards 8 Appointed actuaries are an important part of the essential prudential structure which sustains the good financial and governance standing of the private health insurance industry. The proper exercise of this exacting role necessitates that the advice given by an appointed actuary is direct, unambiguous and fearless. The appointed actuaries standard supports the appointed actuaries in the performance of their role. The standard establishes eligibility and duty requirements of appointed actuaries, the reporting and notification requirements of both appointed actuaries and insurers, and confers powers upon appointed actuaries including broad powers to access information and to attend and speak at meetings and requires that appointed actuaries report to PHIAC any occurrence of a significant breach of the PHI Act or Rules. The reporting of instances of a breach or other concerns held by actuaries to PHIAC is a necessary and fundamental element in the fulfilment of the appointed actuaries obligations. In PHIAC continued to work closely with appointed actuaries and their professional body, the Institute of Actuaries of Australia, promoting through education and professional practice improvements, a strengthening in both the understanding and performance of the appointed actuary role. To strengthen and maintain the overall governance of insurers and minimise the risk of future regulatory and market failures, PHIAC made the Private Health Insurance (Insurer Obligations) Rules 2009 to include a governance standard. The objective of the standard is to strengthen the overall governance of private health insurers by ensuring that all insurers meet minimum standards with respect to governance arrangements. The governance standard was established by PHIAC in September 2009 with a commencement date of 1 January Contained in the Private Health Insurance (Health Benefits Fund Administration) Rules Contained in the Private Health Insurance (Insurer Obligations) Rules Operations of the Private Health Insurers ANNUAL REPORT

26 Levies Private health insurers directly support the operational costs of PHIAC and PHIO. Insurers may also bear the cost of supporting other insurers in the industry that have experienced greater than average claims in older age groups or that have collapsed. These costs can be levied through specific purpose legislation. There are four private health insurance levies: the Council Administration Levy which finances the administrative costs of PHIAC the Complaints Levy which finances the administrative costs of PHIO the Risk Equalisation Levy which transfers and shares risk across the industry so that insurers with a membership demographic that is older or less healthy are not disadvantaged. This levy enables insurers to charge the same premium to everyone for the same product, regardless of their individual risk profile (risk equalisation is discussed in more detail earlier in this report) the Collapsed Insurer Levy which empowers the Council to raise a levy from the industry to help meet a collapsed insurer s liabilities to the people insured under its policies that the insurer is unable to meet itself. To date, this levy has not been imposed on the industry. A private health insurer must pay any levy imposed by the Council and any late payment penalty in respect of any unpaid amount of each levy. The PHI Act and the Private Health Insurance (Levy Administration) Rules 2007 detail when to pay, how the levy and late payment penalties are recovered, when a levy may be waived and the records required to be maintained by each private health insurer. Monies collected under each levy are placed into the Consolidated Revenue Fund and appropriated by PHIAC as required. Review of the industry 17

27 18 Operations of the Private Health Insurers ANNUAL REPORT

28 Performance review Performance review

29 outcomes The financial year saw a strengthening of the industry margins were slightly improved and recovery in financial markets and investment returns helped bolster balance sheets and restore the strength lost during the period of the global financial crisis. In addition, the industry experienced slightly higher growth than the previous year, reducing the burden from an ageing population and broadening the insurance pool. Privately insured people continued the upward trend in service usage, which grew throughout the year for both hospital and general treatment. The higher membership numbers and usage levels, together with a growth in costs, led to a significant increase in the quantum of benefits paid by private health insurers on behalf of policyholders. Financial outcomes for Due to growth in membership during and the 6.02% weighted average premium increase that took effect from 1 April 2009, premium revenue increased by $1,092 million or 8.4% from , totalling $14,170 million. The increase in premium revenue was slightly more than the increase in benefits paid, with benefits payments, including changes in provisions, totalling $12,227 million, an increase of $878 million or 7.7% from These benefits included: $8,994 million in hospital benefits $3,081 million in general treatment benefits $160 million in levies applied by the NSW and ACT Governments (an increase of $14 million) which entitle privately insured patients to emergency ambulance transport within Australia. Benefit payments continue to grow at rates significantly in excess of inflation. One driver of this growth is the ageing of the insured population, estimated to add between one and two percent per annum to benefits payments. Other significant factors contributing to the increase in benefits payments between and included: 4.1% increase in hospital days 6.6% increase in hospital admissions 5.4% increase in number of medical services provided 2.0% increase in acute bed days per person 5.4% increase in acute accommodation benefits paid per bed day 8.4% increase in medical benefits 2.8% increase in medical benefits paid per medical service 8.7% increase in benefits paid for prostheses 1.1% increase in prostheses benefits per service. In total, drawing rates, or benefits paid per person, increased by 7.1% for hospital treatment and 9.7% for general treatment (ancillary) key indicators of the industry s need for ongoing premium increases. The industry s gross margin result of 13.7% is considered sound, and after allowing for management costs of 9.2% of premium revenue ($1,300 million), the industry recorded a net margin result of 4.5%, up from 3.2% in This represents a strengthening of core business performance. In addition to the improved margin performance, the industry earned investment revenue of $443.7 million for , a significant turnaround from the losses of $83.7 million and $11.5 million in and respectively. This marked increase in investment earnings was largely due to the recovery experienced in investment markets and was a key factor behind the strong overall performance of the industry. Insurers who held investment portfolios with more growth assets, or higher risk investments, generally gained more in investment revenue recovering much of what was lost in previous years whilst revenue for insurers with more defensive portfolios remained fairly stable. Net revenue from health-related insurance businesses conducted by insurers in , which relates to overseas visitor cover and overseas student health cover, totalled $38 million. Revenue generated by non-insurance activities conducted as part of the business of a fund totalled $37 million, a 20.3% increase from Overall, the industry recorded a profit after tax of $953 million for compared with 20 Operations of the Private Health Insurers ANNUAL REPORT

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