More changes to private health insurance Australia

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1 More changes to private health insurance Australia Country: Australia Partner Institute: Centre for Health, Economics Research and Evaluation (CHERE), University of Technology, Sydney Survey no: (12) 2008 Author(s): Marion Haas Health Policy Issues: Role Private Sector Current Process Stages Idea Pilot Policy Paper Legislation Implementation Evaluation Change 1. Abstract The Australian government has proposed changes to the Medicare levy surcharge. Since 1997 high-income Australians have faced a 1% tax penalty if they did not purchase private health insurance. The proposal has been the subject of much debate in the media and a parliamentary inquiry. It faces opposition in the Senate where the government does not have a majority. 2. Purpose of health policy or idea The objective of the goverment's proposal is to raise the income thresholds at which individuals and couples without private health insurance (PHI) face a surcharge equal to 1% of their income. The proposal is to increase the thresholds from $AUS50,000 to $AUS100,000 for singles and from $AUS100,000 to $AUS 150,000 for couples. The expected outcomes of the policy are that some individuals and families may choose to drop their PHI cover, thus effectively saving money and increasing their disposable income. If the pool of privately insured young and healthy people drops, PHI premiums are likely to rise. Any substantial drop in membership may place smaller PHI companies under financial pressure, increasing the likelihood that they will merge with or be taken over by larger companies. Some commentators have claimed that the policy will also place additional pressure on the public hospital system as those without PHI are more likely to use the public system. Main objectives The objective is to raise the income thresholds at which individuals and couples without private health insurance (PHI) face a surcharge equal to 1% of their income. The surcharge was initially introduced to encourage higher income earners to take out PHI. In the years since its introduction, incomes have risen but the thresholds have remained static. The new government claims that the income threshold now place an additional and unacceptable tax burden on middle income earners, not just those on high incomes. When the Medicare Levy Surcharge was introduced it affected the top 12% of income earners

2 Type of incentives The policy is likely to create incentives for some individuals and couples (most likely young, healthy people) to drop PHI cover. It may also create incentives for PHI premiums to rise and for some PHI companies to go out of business (ie to be taken over by or merge with another company). It may also create incentives for individuals to increase their utilisation of the public hospital system. Groups affected Individuals and couples with incomes affected by the proposed changes, PHI companies, Public and private hospitals 3. Characteristics of this policy Degree of Innovation traditional innovative Degree of Controversy consensual highly controversial Structural or Systemic Impact marginal fundamental Public Visibility very low very high Transferability strongly system-dependent system-neutral This is an amendment to an existing policy. Although it has created a great deal of debate, its actual effect is unlikely to be significant, in terms of government savings or expenditure. It is controversial because the government does not have a majority in the Senate and the political mileage and media coverage is thus magnified. It has high public visibility because of the media coverage but also because of its potential impacts on individual's incomes and PHI premiums. The public-private mixed system in Australia is unique and one of its most unique features is the extent of publicly funded support for the private sector, including the PHI industry. Therefore, this policy is unlikely to be replicated elsewhere. 4. Political and economic background This policy has been proposed by the Labor government which was elected to office in November As part of its election policy, the Labor party promised to increase funding for health, in particular for the public health system. The Medicare levy surcharge was initially introduced to encouraged higher income earners to take out PHI. In the years since its introduction, incomes have risen and the new government claims that the issue it is attempting to address is one of fairness - the income thresholds now place an additional burden on middle income earners, not just those on high incomes. The surcharge was introduced by the previous Liberal (conservative) government as part of a raft of policies designed to encourage Australians to take out PHI cover - as a result the government at that time was perceived as a strong supporter of the PHI industry. Any changes to such policies will be perceived as reduced government support for the industry. Change of government The new Labor goverment claims that the change is necessary because the current income thresholds no longer limits the surcharge to those on high incomes

3 5. Purpose and process analysis Idea Pilot Policy Paper Legislation Implementation Evaluation Change Origins of health policy idea The proposed changes were introduced as part of the first budget of the Labor Government in May The main purpose of the policy is to raise the threshold at which a surcharge is applied to the income of singles and couples (equal to 1% of their income) if they do not have PHI cover. This is an amendment of previous policy. The effect of the surcharge has been to provide an incentive for individuals and couples with incomes above the threshold to purchase PHI cover. Legislation will be needed for the proposed changes to be implemented. Thus, the effect of the proposed changes will be to provide an incentive for some singles and couples to drop their PHI cover; it has been estimated that this may save singles up to $1000 and couples $1500 per year. The government is the main driver of the policy. Initiators of idea/main actors Government: The government has proposed the policy and has been involved in negotiations with the opposition parties in the Senate about the legislation needed for it to be implemented. Private Sector or Industry: Private health insurance companies are strongly opposed to the policy as it is likely to have a negative effect on their business Opinion Leaders: Australian Nurses Association is a supporter of the policy whilst the AMA is opposed - the doctors' association is traditionally a strong supporter of the private health sector Approach of idea The approach of the idea is described as: amended: Legislation covering the Medicare levy surcharge Stakeholder positions There has been widespread media debate about the policy since the budget was introduced in May In a parliamentary inquiry into the issue various estimates of the effects of the policy have been aired. For example, the PHI companies have claimed that, if the policy is implemented, appoximately 400,000 people will drop their PHI cover, the industry will suffer a fall of 20% in profits which in turn will result in a rise in premiums of 10-11%. The Treasury has estimated that more than 500,000 people may drop their PHI cover while the AMA says it may be 1 million. There is also disagreement about the extent to which PHI premiums will rise; the PHI companies claim the rise will be in the vicinity of 10%, the AMA is claiming they will rise by 5% and the Treasury, while accepting that premiums will rise, is not prepared to name a figure. There is no agreement about the effect the policy will have on utilisation of the public hospital system. PHI companies are using the issue to forecast mergers and company failures as well as steep increases in premiums. The State and Territory governments are using the issue to lobby for large increases in health funding from the Federal government, on the grounds that there will be a rise in the use of public hospitals, which are funded by the States and Territories on the basis of health care agreements negotiated between them and the Federal government. The opposition parties in the Senate are using the issue as an opportunity to flex their muscles and to lobby for either amendments to the proposed policy or support from the government for other issues in return for their support for this policy. Actors and positions Description of actors and their positions Government - 3 -

4 Government very supportive strongly opposed Opposition parties in the Senate very supportive strongly opposed Private Sector or Industry PHI companies very supportive strongly opposed Opinion Leaders Australian Nurses Association very supportive strongly opposed Australian Medical Association very supportive strongly opposed Influences in policy making and legislation To win support in the Senate for the policy, the government will need the support of either the Liberal/National party coalition or a number of senators outside the major parties such as independents or members of the Green or Family First parties. The opposition Liberal/National party coalition is unlikely to support any policy as it was in government when the policy was introduced. The Greens may support it if the government agrees to future indexation of increases in the income threshold, a review of the effect of the policy on PHI companies and the private health sector and if they will guarantee that any savings would be earmarked for the public health system. Some independent senators are lobbying for a decrease in the proposed new income thresholds on the grounds that the ones proposed will encourage too many people to drop their PHI cover, resulting in rises in premiums and increased pressure on the public hospital system. The government has estimated that it will lose approximately $600milion over 4 years due to cuts in taxation revenue as the number of people paying the surcharge declines. But government expenditure will also fall by about $1billion because of the decrease in PHI members receiving the 30% rebate on their premiums. The government has announced that it is prepared to increase the income threshold for singles to $75,000 rather than the $100,000 originally proposed and to keep the threshold for couples at $150,000. As yet, it is not clear if this compromise will be successful as far as having the legislation passed in the Senate. Legislative outcome pending Actors and influence Description of actors and their influence Government Government very strong none Opposition parties in the Senate very strong none Private Sector or Industry PHI companies very strong none Opinion Leaders Australian Nurses Association very strong none Australian Medical Association very strong none Positions and Influences at a glance - 4 -

5 Adoption and implementation If adopted, the proposed changes will be implemented through the taxation system. Monitoring and evaluation It is not clear if the results of the proposed changes will be formally monitored and reviewed, although this may occur if some proposed changes to the legislation are accepted by the government. However, it will be possible to monitor the major outcomes of the policy ie the changes in membership numbers of individual PHI companies, the changes in PHI premiums, any changes to the number of PHI companies in Australia (including mergers and take-overs) and the impact on utilisation of the public health system. PHI: More services to substitute fewer customers The Health Minister has offered to partially compensate PHI companies for the proposed changes by considering easing existing regulatory barriers that prevent the companies from broadening their product range eg being able to offer cover for lifestyle benefits such as gym fees, running shoes, therapeutic music CDs etc. 6. Expected outcome Increase in funding for public health sector The government has estimated that it will lose approximately $600milion in income over 4 years due to cuts in taxation - 5 -

6 revenue as the number of people paying the surcharge declines. But government expenditure will also fall by about $1billion because of the decrease in PHI members receiving the 30% rebate on their premiums. If the policy is introduced, there is no doubt that some people will drop their PHI cover. However, it is not clear how many will do this and what the overall effect will be, although some commentators are predicting not just an exodus of young people immediately but a slowdown in the rate at which young people take up PHI; if these people have been the drivers of the recent increase in PHI membership then this may have a long lasting effect on the PHI industry. However, research has shown that the extent to which people take up and drop PHI depends on their motivation for purchasing PHI and the value of the product to them. Those who do drop their cover will have lower costs but those remaining in the PHI system will face premium rises, as the overall pool of insured will be smaller. However, such premium rises are an annual occurence in Australia - premiums have risen by around 5% per year for the last 3 years, driven by higher claims, in particular higher benefits per day. The reasons that benefits have been increased is a combination of technological advances (more complex and more expensive procedures), higher rates of procedures and higher fees paid to providers. Once again, the extent to which premiums will rise is an empirical question; young healthy people tend to purchase relatively cheap policies with high deductibles and there may be little impact on the premiums of policies which offer higher levels of cover unless these policies are cross-subsidised by revenue from young healthy policy holders. Accelerating mergers on the PHI market While there may be a reduction in the number of PHI companies due to mergers and takeovers, the large number of companies is an unusual feature of the Australian PHI context and may be the result of long-term government financial support as well as the existence of regional companies with relatively small market shares. There is evidence that changes are already taking place in the PHI market, prior to the proposed changes to the surcharge. Thus a shake-up may have occured without any changes to the Medicare levy surcharge. There is no evidence that the change in policy will have an adverse impact on the viability of either the PHI or the private hospital sector overall. Another area of contention is the extent to which the changes will impact on the public health system ie by forcing some people who would have been treated in a private hospital to be treated in a public hospital. For example, Catholic Health Australia has estimated that 247,444 people in NSW and the ACT would drop their PHI cover resulting in an additional 73,400 requiring public hospital procedures in the foreseeable future. The same organisation has forecast that this will translate into an Australia-wide increase of 200,000 procedures in a 12 month period, costing public hospitals an additonal $400m. Extra burden for public hospitals? However, the relationship between PHI cover and utilisation of private and public hospitals is not straightforward. Analysis of utilisation data before and after the last round of PHI reforms (in the late 1990s) indicates that admissions to acute public hospitals rose at the same rate before and after the reforms, while length of stay declined before the reforms and rose after they were introduced. Government spending on public hospitals increased 8% during and 8.9% during after a 42 % increase in PHI coverage. Over 50% of elective surgery is performed in private hospitals; those who are most likely to require this are also those least likely to drop their PHI cover. The young and healthy who are most likely to drop their cover (because they took it out in response to the financial incentives) are also least likely to require a procedure. Therefore, it is not clear that a drop in PHI coverage will have a catastrophic effect on public hospitals, as forecast by some private sector commentators. Slowing the brain-drain from public to private? There is some evidence that the increased government funding provided by the previous Federal government may have resulted in health care professionals moving into the private sector. Thus, there is a possibility that this policy, particularly if it is accompanied by an increase in funding to the public sector, may encourage more professionals to work in the public sector, thus increasing its capacity to provide high quality services. Quality of Health Care Services marginal fundamental - 6 -

7 Level of Equity system less equitable system more equitable Cost Efficiency very low very high As the impact of the proposed change to policy on the utilisaton of health care services, whether in the private or public sectors, is likely to be very small, the proposed change in policy is not likely to have any significant effect on the quality of care, equity or efficiency. However, if the policy is accompanied by an increase in funding for the public health sector, the quality of services provided may rise and equity of access may increase. As there is also evidence that the proportion of costs used for adminstration are higher in PHI companies than in the public insurer Medicare (10% for PHI versus 3% for Medicare), a significant decrease in the use of PHI may also increase efficiency. 7. References Sources of Information Private health insurance- Medicare levy surcharge Franklin M, Ryan S. Rudd forced to tone down Medicare surcharge reform. The Australian 16th September 2008 Shanahan L. Greens stymie Medicare levy bill. The Age, 28th August 2008 Ryan S. Labor bid to offset health fund exodus. The Australian 14th August 2008 Shanahan L. Medicare change to raise private health fees - premiums predicted to surge 10%. The Age, August 13th, 2008 Metherall M. Insurance decline to hit public hospitals. The Sydney Morning Herals, August 4th, 2008 Ryan S. Levey change "will cost health funds a million members". The Australian, July 29th, Yong J, Time to review health insurance policy. The Australian 21st July, Shanhan L. Treasury in dark on effects of levy change. The Age, July 15th, Franklin M. Nurses back PM on health insurance. The Australian, 14th July, 2008 Franklin M. Levy plan to "hurt poorest". The Australian July 14th Franklin M. States to rebel on health changes. The Australian, July 14th, 2008 Davidson K. Private cover means public gain. THe Age, June 12th, 2008 Steketee M. Subsidy-addicted, semi-public system in all but name. The Australian, May 22nd, 2008 Ryan S. States want cash for Medicare change. The Australian May 13th, 2008 Metherall M, Pollard R. Health fund fees to soar "young to lead insurance exodus". The Sydney Morning Herald, May 12th, Savage E. Submission to the Senate Inquiry into Tax Laws Amendment (Medicare Levy Surcharge Thresholds) Bill Buchmeuller T, Fiebig D, Jones G, Savage E. Advantageous selection in private health insurance: the case of Australia. CHERE Working Paper 2008/2, CHERE, Sydney, Ellis R, Savage E. Run for cover now or later? The impact of premiums, threats and deadlines on supplementary - 7 -

8 private health insurance in Australia. International Journal of Health Care Finance and Economics (accepted February 2008). Fiebig D, Savage E. Viney R. Does the reason for buying health insurance influence behaviour? CHERE Working Paper 2007/1. CHERE, Sydney, Author/s and/or contributors to this survey Marion Haas Suggested citation for this online article Marion Haas. "More changes to private health insurance Australia". Health Policy Monitor, September Available at -

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