Private Health Insurance

Transcription

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 [email protected] 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

21 The table following indicates the relative relationship between age and increased illness as reflected in the benefit levels paid out. Benefits Paid by Age Category in July September 1998 Population Persons Covered Benefits Paid Benefits Paid Per Capita Quarter Young (0 39 years) 2,733, , Middle (40 64 years) 2,121, ,108, Old ( years) 844, ,736, TOTAL 5,698, ,907, (Source: The Private Health Insurance Administration Council Report A) Means testing is a key element of the current Private Health Insurance Incentive Scheme (PHIIS) and as stated previously, while membership decline has slowed from its peak in , it is still falling at a rate between 1% and 2% per annum. This suggests means testing the rebate will do little more than replicate the problems that PHIIS was unable to fix. It will not address the very real need to attract and retain middle to higher income people into the system in order to spread risk and reduce overall premium costs. Given this, subsidies targeted only at lower income groups may not be as effective as a non means tested rebate in improving membership levels of health funds. Higher and middleincome groups also need assistance if there is to be a positive and lasting effect on health fund membership levels. Medicare is a universal health care system, so that means testing the rebate could suggest that taking out private health insurance would be the least attractive option for those that are relatively well off and healthy. This is hardly an equitable result. The following tables illustrate the points above, that more people in low-income deciles have private health insurance compared to those in higher income deciles. 19

22 Hospital and Ancillary Single Equivalent Units (SEU) by family type and income level Hospital and ancillary cover Single Couple Family Single Parent TOTAL Family 0-10, ,981 83,096 33,420 4, ,785 10,000 19, , ,359 28,483 24, ,292 20,000 29, , , ,447 29, ,485 30,000 39, , , ,245 23, ,206 40,000 49,999 99, , ,359 10, ,607 50,000 59,999 34, , ,084 1, ,025 60,000 69,999 17, , ,195 2, ,521 70,000 78,999 17,113 90,611 97, ,285 79,000 99,999 4, , ,199 1, , , , , ,848 1, ,746 TOTAL (includes unknown) 1,604,099 1,990,240 1,598, ,052 5,304,757 SEU = Single Equivalent Unit Single counted as one, Families and Couples counted as two (Source: ABS 1995 adjusted for SEUs as at June Includes both hospital and ancillary cover) Privately insured contributors by family type and income level hospital and ancillary cover Single Couple Family Single Parent TOTAL Family 0-10, ,981 41,548 16,710 2, ,831 10,000 19, , ,680 14,242 12, ,305 20,000 29, , ,272 51,723 14, ,920 30,000 39, ,483 98,634 84,122 11, ,990 40,000 49,999 99,179 77,860 94,679 5, ,526 50,000 59,999 34,975 94, , ,518 60,000 69,999 17,238 72,624 77,097 1, ,744 70,000 78,999 17,113 45,306 48, ,866 79,000 99,999 4,747 50,964 70, , , ,116 90, , ,544 TOTAL (includes unknown) 1,604, , ,183 56,026 3,454,428 (Source: ABS 1995 adjusted for Contributors as at June Includes both hospital and ancillary cover) 20

23 1.3 Effect of the rebate on Australia s health system Insured people cost the Commonwealth less for health services than the uninsured. This is because insured people make a direct contribution to the cost of their own health services, which is not made by the uninsured. In combination with other health insurance reforms, the rebate has the potential over time to relieve pressure on the public system. Private hospitals comprise a substantial and increasing share of total hospital admissions/separations. If the present decline in private health insurance continues, the Government would need to provide for an extra 1.2 million public hospital bed days by , equating to 3300 new beds in that year. The Australian Hospital Statistics indicates that 30% of all hospital separations are by people who have hospital insurance. In only 26% of separations were by patients who had hospital insurance. This indicates the importance of the private sector s contribution to the overall health system. A recent Departmental report on the combined top 30 Australian National Diagnostic Related Groups (AN-DRGs) - clinical groupings that indicate the type of services offered in a hospital - in public and private hospitals also found that the private hospital sector accounted for 36% of total separations in these AN-DRGs (Attachment C). With 80% of private patient hospital care being funded through private health insurance, a declining health insurance membership runs the genuine risk of not properly utilising this major capital stock base. Private health insurance contributes around $3 billion in hospital benefits every year. Should the coverage of private health insurance fall, jobs in the private sector would also be threatened: around 100,000 jobs in the tertiary private sector are at risk, with 65,000 of them being direct jobs in 300 private hospitals and 140 in private day procedure facilities. As the numbers of self-insured increase, this has the potential to undermine the community rating system, which underpins the private health system in Australia. This is because the self-insured do not contribute to the support of the old and the sick through the reinsurance arrangements when they use the private system. Moreover, in the event of more serious medical needs, these people will most likely turn to the public system. They are often the hit and run users of the private system. Australia's health system is a very good one internationally. It provides universal access through Government funding and has a substantial private sector. A substantial private sector involvement in health offers the benefits of choice for consumers, a degree of competition, and with the potential for increased efficiency. Australia spent 7.7% of its GDP on health in 1988, rising to 8.5% in Australia recorded a nine-year average health spending to GDP ratio of 8.3%. The Australian situation lies somewhere between the US approach and the Canadian and UK approach, in many respect having the best of each. The US health system is predicated on employment related health cover (61% population) and does not guarantee universal access. Private insurance covers 58% of the population and accounts for 33% of the total health expenditure. The US system, as well as being 21

24 inequitable, is also very expensive. The US spent 11.5% of its GDP on health in 1988, rising to over 14% in In the UK and Canada, on other hand, there is universal access, but also limited choice, and greater reliance on public sector rationing than in Australia. However, it should be noted that Canada's legislated limit on private health insurance is in the context of the close proximity of the US and that Canadian private health insurance covers services delivered in the US. Canada spent 8.5% of its GDP on health in 1988, rising to 9.3% in The UK spent 5.8% of its GDP on health in 1988, rising to 6.7% in The Department s view is that the demand for choice will continue to increase, as our community becomes better informed, more discriminating and more affluent with a greater capacity to afford to pay for choice. Proposed reforms The rebate is part of a multi faceted approach, involving not only financial incentives to maintain private health cover, but also wide sweeping structural changes to make the industry stronger and more commercially focused. These proposed reforms also build on recently introduced reforms that responded to many of the issues raised by the Productivity Commission in its Report on Private Health Insurance in February The Government will be introducing legislation later in this Parliamentary session to continue the process of structural reform. These reforms will include: changes to the reinsurance system that underwrites the community rating principles in the private health insurance sector, to promote efficiency and competition by giving incentives for funds to control utilisation rates and unit costs; changes to allow coverage of total episodes of care including alternatives to hospital care, like hospital in the home services; reforms to solvency requirements, premium disallowance processes and protection from hostile takeovers with consequent changes to Private Health Insurance Administration Council (PHIAC) - the regulatory body which oversees the financial operations of funds; changes to allow health funds to offer discounted premiums to groups based on administrative savings in order to develop a wholesale market for private health insurance; changes to enable health funds to cover the cost of procedures undertaken in doctors rooms up to the MBS level, the gap for PBS medicines dispensed in hospital to private patients and changes to allow funds the option of offering tables covering non-hospital related specialist consultations; and encouragement of funds to offer loyalty bonuses. 22

25 These changes will mean that insurers can provide better quality health insurance products, which will be more attractive to consumers. Beyond those changes, the Government is continuing to investigate the possibility of other structural reforms that could, with the rebate, make the private system more sustainable in the long term. These reforms will also encourage the sector to work on its own behalf to improve its viability and the product it offers to the Australian people. Recent reforms reducing the gap and simplified billing Support of the private sector requires a strategic approach, involving not only financial incentives, through the 30% rebate but also structural changes to make the industry stronger and more structurally focussed. These changes include: simplified billing including measures to reduce the gap; and initiatives to improve the quality and attraction of private health insurance cover. The Health Legislation Amendment Act (No.2) 1998 received Royal Assent on 24 April This legislation responded to February 1997 Industry Commission Report on Private Health Insurance and the September 1996 report by the Senate Community Affairs Legislation Committee on its review of the Health Legislation (Private Health Insurance Reform) Amendment Act This legislation is addressing the problem of large and unexpected out-of-pocket costs and fostering new competition in the industry. The reforms are rewarding doctors who take up arrangements with private hospitals. Agreements between doctors and hospitals now allow health funds to cover charges above the Medicare Benefits Schedule fee, where the hospital also has a Hospital Purchaser Provider Agreement with a health fund. A number of hospitals and health funds have negotiated agreements. These agreements enable doctors to be paid above the schedule fee, potentially eliminating any out-of-pockets for patients. Some of these hospitals include Melbourne Private Hospital, Brisbane Waters Private Hospital and South Eastern Endoscopy. A number of organisations are making use of the new legislation enabling health funds to make arrangements directly with practitioners for payments above Medicare Benefits Schedule charges. The National Association of Obstetricians and Gynaecologists has supported a proposal by National Mutual Health Insurance (Mediplus Ezyclaim) to cover an agreed gap between the doctors charge and Medicare rebate for the delivery of a baby. Once again this means that there will be no, or known, out-of-pocket costs for patients. The legislation has also addressed doctor concerns about such agreements by enshrining in legislation the primacy of the doctor-patient relationship. It also provides protection against any moves by insurers to dictate to doctors who practise within accepted clinical parameters. The legislation has retained the requirement that funds provide mandatory cover in all hospital tables for rehabilitation and palliative care. The Government believes it is important to allow these areas more time to develop appropriate admission criteria and benefit levels. Progress will be reviewed in two years time. 23

26 This legislation also enables patients to assign their Medicare benefits to approved billing agents for in-hospital medical treatment. To date, interest from hospitals and doctor groups in accessing or utilising simplified billing arrangements has been overwhelming. The first hospital to be granted approved billing agency status was the Freemason s Hospital in Melbourne on 30 July 1998 and another 25 have since been approved. Recently completed national trials of simplified billing and informed financial consent enabled the testing of the billing agency model. The Government is encouraged by the results of the trials, which demonstrated: - a strong patient acceptance and satisfaction with simplified billing; - the new system is much simpler from the patient s perspective; - payment times for providers were reduced; - the potential for reduced bad debts and debt recovery costs; - improved access to information; - improved relationships within the health system; - the potential to increase occupancy in the private sector; and - the potential to increase private insurance usage in the public sector with consequent revenue potential. Following the widespread automation of processes between hospital, health fund and the Health Insurance Commission (HIC), the system will be sustainable on a large scale. Once widely introduced, simplified billing will increase the attractiveness of private health insurance as a product. HIC statistics show an increasing number of in-hospital medical claims (4.78% for October) are being processed through agreements with health funds and through simplified billing agents. The reforms provide greater certainty to consumers. They also provide clear incentives for hospitals and doctors to secure minimum arrangements for informed financial consent together with known, or no, out-of-pocket expenses. 24

27 Second Term of Reference: Balancing Priorities More effective support of private health insurance offers the opportunity to restore equilibrium in the Australian health care system. The rebate effectively restores previous levels of support and with other reform measures should contribute to more stability in the industry. It also helps relieve one of the greatest sources of pressure on the public sector in health. In recent years private hospitals have been shouldering more of the burden as public hospitals have treated fewer and fewer people who are privately insured. In , 44% of privately insurance hospital days were in public hospitals, 56% were in private hospitals. In these figures are now 22% and 78% respectively. In some specialities, for example complex knee surgery more than half of all operations conducted in any one year are provided in the private sector. These services are mostly financed by private health insurance funds. Each year the premiums paid to the health funds by people who continue to hold private health insurance, and paid by the funds to the hospitals and other providers make a larger contribution to the overall health system in Australia than the Medicare health levy funded by almost every Australian taxpayer. Health funds contribute $4.5 billion, while the Medicare levy is about $3.6 billion. Both the $400 million a year paid by funds into public hospital budgets and the much larger amount paid into private hospital budgets make an important contribution to relieve pressure on the public purse and public hospitals. Additional funding for public hospitals that the Government has committed under the 1998 Australian Health Care Agreements - $31.34 billion over the next five years will only be a stopgap if nothing further is done to support the viability of the private health sector and to address the key reason for drop-out from private health insurance in the first place the cost of premiums. If the rebate were not introduced, and current trends continue, the Commonwealth would need to find, by July 2001, about $500 million extra for the States each year to, in effect, maintain current levels of support. The 30% cut to the cost of private health insurance has the potential to preserve the integrity of the overall health care system. Private health insurance and the private hospital sector it supports should not be seen as competing with Medicare or with the public hospitals, but rather as necessary complements. Australians value a mixed system of public and private health care and this balance has contributed to the high overall quality system in place today. The Government remains committed to maintaining this balance. As noted above, the Government has made a commitment to substantially increase funding to the public hospital sector a 16.5% real increase in funding in the next five years over the next five years. 25

28 2. 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 Competing priorities are essentially a matter for elected governments, and the platforms upon which they were elected, and not for Departments to comment upon directly. The Department understands, however, that it is not the Government s intention to reassign or reallocate funds that might otherwise be provided for the 30% rebate for any other purpose or priority. Other key funding priorities include rural health services, indigenous health services and public hospitals. The Government s commitment to these areas is outlined below. 2.1 Funding in of rural health programs in the Department of Health & Aged Care Improving the access of regional and rural families to health services has been a consistent priority of the Government since coming into office. The Government s approach recognises that the needs of rural communities, and hence the support needed for rural health services, are different from those in urban areas. The Government has provided significantly extra funding for the rural specific health programs than previous governments. Initiatives over the past three years have demonstrated that innovation, flexibility and collaboration are the keys to overcoming problems of access and the impact of isolation and distance in regional and rural areas. The Government has introduced a suite of services that recognises a one-size-fits-all approach to access and service delivery is not appropriate in rural communities: local communities need local solutions, with each community having a strong voice in developing flexible, integrated health services. In the Budget $24 million over four years was committed to increase to up to 90 the number of communities with access to multi-purpose, regional health service centres. Initiatives to improve the recruitment and retention rates of health care workers and to establish an infrastructure for the support of health care workers in country areas have included: the establishment of seven university departments of rural health ($30 million over four years); the John Flynn Scholarships ($3.8 million over four years); and $17.4 million over four years for innovative service delivery, establishing a rural health research agenda, and support for advanced nursing practice. Each of these initiatives not only contributes to better access to health services: it is an investment in building and maintaining social and intellectual capital in regional Australia. In , $100 million was spent on specific health and aged care services targeted at people living in regional and rural areas. In this has risen to $157.2 million, with continuing investment in support for a well-qualified and up-to-date workforce ($79.8 million), increased investment in rural multi-purpose health centres ($40.7 million) and access to mental health services and information ($8.4 million), and $2.06 million for 26

29 innovation and quality partnerships to tackle specific health problems in three communities (see Table A below). This expenditure is in addition to the significant health support that flows to rural families through the Medical Benefits and Pharmaceutical Benefits Schemes (MBS and PBS), and through Commonwealth funding provided to the States and Territories for the provision of hospitals and other health services such as immunisation and mobile breast screening services. The high priority the Government affords to the health and well-being of regional families and their communities is reaffirmed through the substantial new funding of a further $153 million over four years committed by Government in the election context (see Table B). This funding will build on existing initiatives to further improve access to health services, and see them delivered in ways that fit with community needs and preferences. It will, for example, enable rural women to access the services of visiting female General Practitioners, and allow rural families to make Medicare claims through a total of 1000 Medicare Ezyclaim facilities in local communities. 27

30 Table A: Funding in of Rural Health Programs Expenditure $m Rural Multipurpose Health Services and Centres Workforce Initiatives University Departments of Rural Health Advanced Specialist Training Posts & related specialist programs The Rural Health Support, Education and Training (RHSET) Divisions of General Practice Program (Rural only) Practice Incentive Program (Rural loading only) Rural Workforce Agencies The John Flynn Scholarship Scheme Rural Undergraduate Steering Committee University Places for 100 Overseas Trained Doctors Clinical Assistantship Program Aboriginal and Rural Students in Medical Schools RCNA Nurse Credentialling for enhanced nursing roles in rural areas Establishing 20 new medical student places at James Cook University Royal Flying Doctor Service (RFDS) National Mental Health Strategy Mental Health Information for Rural and Remote Australia Rooming In Program Rural Schizophrenia Fellowship Clubhouses & National Training Centre Rural and Regional Youth Counselling Services Support to Rural Communities: ARHRI Charles Sturt University Quality and Innovation Partnerships The Partnership Project Integrated Electronic Systems in a Regional Hospital Burnie Take Heart Project National Illicit Drug Strategy (rural projects only) Other rural projects with one year funding TOTAL Table B: Government Election Commitments Commitment Rural GP retention grants Regional health service centres Female GPs visits to rural areas Rural transaction centres (health contribution) Remote area nurses measures Residential care needs planning Regional medical schools $m (over 4 years) TOTAL

31 2.2 Indigenous health Over the last two and a half years the Government has been putting in place a longer-term strategic approach together with unprecedented levels of financial support for indigenous health to ensure sustainable health gains in the years ahead. The strategic approach has four broad components: developing the primary health care infrastructure and resources; targeting specific causes of excess mortality and morbidity, risk factors and causes of high levels of disability through specific health strategies; building an evidence framework for health interventions; and developing a cooperative partnership approach between the Commonwealth and State / Territory government, ATSIC and the Indigenous health sector. Significant new funds have been allocated to indigenous health initiatives in the last three budgets, consistent with this strategic approach. Between and , the funds allocated to the program have grown by $42 million (which is 28% in real terms). Estimates of future expenditure growth between and are $56.4 million (or 29.6% in real terms over the whole period). Improving access to comprehensive primary health care services is regarded as fundamental to the overall strategic approach. Funding for the expansion of services in remote regions was announced in the Budget. In the Budget the Government announced funding of $72.6 million over four years. This funding builds on the strategic approach by strengthening the primary health care infrastructure and resources, with a focus on best practice and quality assurance, and by targeting specific health issues. Support in this Budget for remote communities involves: $7.9 million over four years to ensure that the physical infrastructure of services is properly maintained and replaced through a forward strategic replacement and upgrade program over the next three years. Some of this funding will also help to address the problem of lack of staff accommodation for trained health workers in remote communities; and $42 million over the next four years to provide additional resources to primary health care services which are moving towards best practice in areas such as the use of data and recall systems as well as well person checks, implementing clinical care protocols, participating in regional/local level health planning with other service providers and establishing local networks and consortiums. Work is also underway on improving the financing structures for primary health care services. Excess mortality is the major focus of health funding and services for Aboriginal and Torres Strait Islander peoples Budget initiatives in this area involve: 29

32 $12.1 million over four years to reduce the rates of preventable illness and death associated with pneumococcal and influenza disease by making the vaccine available, free of charge, through Aboriginal Medical Services, State clinics and GPs; $10.5 million over four years to reduce the prevalence of Sexually Transmitted Diseases (STDs) and HIV transmission. This initiative builds on the funding and work underway as part of the Government s National Indigenous Australians' Sexual Health Strategy; and $39 million over four years to the mental health aspects of the Government's response to the Bringing Them Home report, including the expansion of the specialist regional centres and the provision of 50 new counselling positions and an expansion of parenting support programs. This initiative builds on the Emotional Well Being (Mental Health) Action Plan announced in October 1996 and under which 11 specialist regional centres have been established to provide clinical support for counselling services, develop education packages and train Aboriginal mental health workers and to facilitate access to mainstream services. Action has also been taken to address specific health issues, which are the major causes of disability. For example, two reviews have been conducted on the prevention, management and treatment of Non-Insulin Dependent Diabetes Mellitus in Aboriginal and Torres Strait Islander populations. The reviews have provided a basis for regional development of clinical care guidelines for diabetes for use in primary health care services. In addition, the recommendations of Professor Taylor s review of eye health programs in Aboriginal and Torres Strait Islander communities are also being progressed. The recommendations are aimed at the development of appropriate screening, treatment and support services. The Australian National Audit Office Audit Report No indicates that the former Government during under the Aboriginal and Torres Islander Commission spent $85.4 million on Aboriginal and Torres Islander health programs. The current Government spent $119.9 million, in and a similar amount in In it spent $128 million and the estimate for is $156.1 million. A recent report on Expenditures on Health Services for Aboriginal and Torres Strait Islander People (known as the Deeble report) found that expenditure on health services for this group was on average only 8% higher than the rest of the population. This was considered to be lower than what was required to meet needs, given the health status of Aboriginal and Torres Strait Islander peoples was much worse than that of the rest of the population. In particular, the report demonstrated that access to mainstream funding mechanisms was low, with per capita expenditure on MBS and PBS in only one quarter and one fifth respectively of that expended on other Australians. The Department accepts the conclusion of the Deeble Report that, on the basis of need, expenditure on Indigenous health is still to low, not withstanding more recent increased in funding. The issues here are very complex, however, the Department s experience is that additional funding must be careful directed to ensure real improvement in health outcomes. 30

33 2.3 Public hospitals The rebate will complement an additional $7.2 billion committed for public hospital funding. As mentioned, the assumption that spending on the rebate is at the expense of potential additional spending on public hospitals is highly questionable. The Commonwealth is already injecting substantial new funds into public hospital care, and the rebate will serve to reduce additional pressures on the hospitals. Over the five years of the Australian Health Care Agreements more than $30.6 billion in current prices will be paid to the States and Territories. In addition, $750 million will be paid by Department of Veteran s Affairs for the full cost of treating entitled veterans in public hospitals taking the total maximum five year allocation available for public hospitals to $31.4 billion. This is compared with $23.4 billion provided under the previous agreements. At the end of the Agreement in total funding in real terms for the States and Territories is 16.5%, (or 19.2% including veterans) greater than the base year funding. In about $5.7 billion in current prices will be paid under the Australian Health Care Agreements. The Agreements contain the following elements that promote reform in the funding and delivery of public hospital services: Quality Improvement and Patient Safety More than $660 million will be provided to fund and reward quality improvement and enhancement practices in public hospitals; National Health Development Fund More then $250 million will be provided over the five years of the Agreement to establish the Fund. The aim of the Fund is to provide additional money to States for larger scale reform projects such as for information technology development and improvement and capital development in public hospitals; Palliative Care Services The Commonwealth is providing around $160 million for the expansion of palliative care services across the States and Territories; Mental Health Services The Commonwealth will provide $315 million over the life of the Agreement to undertake national activities and to assist States in implementing the Second National Mental Health Plan; and Measure and Share Reform Proposals The Commonwealth and States have agreed to work on proposals for improving health service delivery and patient outcomes by removing Commonwealth/State financial barriers which currently create disincentives for best practice. This may involve shifting funding and program responsibility so there is better integration of acute and community health care. The tables at Attachment D illustrate the significant injection of funds the Government has made to public hospital care relative to previous funding levels. Under the Health Care Agreements, for every 1% point further fall in private health insurance membership, the Commonwealth is obliged to increase its funding by $82m a year. The impact will be felt by all Australian taxpayers, who will be required to fund these extra grants to the States. Waiting lists will increase denying timely access to more and more people and 31

34 denying many people choice about their health care. In addition, the States may need to find additional funds from their own resources. If the rebate is not introduced, and membership continues to fall at almost 2% per annum, the impact on Commonwealth funding would be approximately as shown below: $m $m $m Increased AHCA spending The cost to the States from their own revenue sources is unclear, but could be substantial. A 1995 study for the first 2% review concluded that the hospital utilisation rate of those dropping out of insurance was about 54% of the average. If this remains the case, the Commonwealth compensation would cover the most significant of the cost pressures on the States. If that percentage is increasing, as one might expect it is, the pressure on the States from their own revenues could be substantial. Alternatively, queues for hospitals could be expected to increase substantially, notwithstanding the Commonwealth compensation. During negotiation of the current Agreement, all States and Territories highlighted the pressures on public hospital budgets caused by falling private health insurance membership. The new Agreement ensures that the Commonwealth shares that risk into the future (unlike the last Agreement), but State concern will increase once again if membership continues to fall and their share of the risks places renewed pressure on their budgets. 32

35 Third Term of Reference: Impact on Finances and Outcomes 3. 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. Health expenditure Health is a large component of the Australian economy currently involving well over $40 billion of public and private expenditure (or 8.5% of GDP), around 32% of which is privately funded. The cost to Government of the rebate must be seen in this context and reviewed against the contribution of the Commonwealth to the overall system together with other levels of Government and the private sector. Cost of the rebate Gross cost of the Rebate will be around $1.384 billion in its first full year of operation ( ), with a net cost to the Budget of $1.084 billion. If the participation rate were to increase to 35% the rebate will cost the Commonwealth a total of $1.486 billion or $1.168 billion net, and cover another 380,000 people. However, this must also be counterbalanced by the relatively cheaper cost to the Commonwealth of private care. Finally, there are savings arising from increased participation through the Australian Health Care Agreements. The Department has estimated that if the participation rate increased to 35% the Commonwealth would save around $155.2 million, partly offset by the impact on the MBS. Commonwealth Contribution The Commonwealth contribution to the national expenditure on health was approximately $21 billion in , mostly in 4 key areas: Medical services ($7.6 billion or 36.6%); Pharmaceuticals ($3 billion or 14.6%); Hospital services (grants to the States - $6.2 billion or 30%); and Nursing homes ($2.6 billion or 12.7%). 33

36 The forward estimates for these areas of expenditure are as follows: Estimate $m Budget $m Estimate $m Estimate $m Estimate $m Medical services and benefits Hospital services Pharmaceutical services Nursing homes ATSI health Other health services General administration TOTAL This means that the 30% rebate is approximately 6.6 % of Commonwealth health outlays. The important thing to remember about these figures is that they are only part of the picture the State and private sector contributions must also be taken into account. State contribution State Government spending is primarily on hospitals with outlays of $7.9 billion in States spend 69% of their health budget on hospitals, 28% on community and other noninstitutional services and 3% on nursing homes. As detailed above, under the Australian Health Care Agreements (AHCA) the Commonwealth will provide additional financial assistance to the States for the four years to for falls in the number of people covered by private health insurance after December A percentage point uniform national decline in the private health insurance participation rate at December 1999 relative to December 1998 would result in an $82 million increase in financial assistance to the States in This amount would be included in the base for indexation purposes for and later years. The negotiation of the next Australian Health Care Agreements in will necessarily be an even more expensive experience for the Commonwealth, and taxpayers, given the increase standing lease if the rebate is not introduced. Depending upon the average hospitalisation rate of those leaving health insurance, the States might expect some pressure on their own revenue sources beyond the compensation from the Commonwealth. The AHCA arrangements would provide the States with about $440 for every person leaving health insurance. However their ability to use this money depends on the capacity of existing public capital stock to meet increased demand. If the rebate is successful in increasing insurance coverage, the funding under the Agreements will only be reduced for increases in participation above a level consistent with a national rate of 33.6%. The impact on the States of this reduction will depend on the average hospital utilisation rates of those leaving insurance. 34

37 Private contribution Private spending amounts to $12.1 billion in with 35% spent on a mix of private health insurance, 17% on out of pocket expenses on pharmaceuticals, and 37% on out of pocket expenses on various health services. The rebate would reduce the private health insurance cost of Australians by 30%. Health outcomes, and access and equity to quality health care for people on low incomes The Department does not expect any adverse impact on health outcomes, access to health services by low income groups or any diminution of service quality as a result of the rebate. Lower income holders of private health insurance are often the older and sicker members of the community and their need for integrated care packages across the service delivery modes is high. In recognition of this fact the Government intends to broaden the scope of private health insurance to cover out of hospital care including day procedures in doctors rooms, extending hospital in the home for advanced day surgery patients and examining the feasibility of using motel type services for step-down recovery from the acute sector. The Department is also undertaking a range of pilot projects to evaluate alternative care delivery systems to hospital treatment in the private sector. The range of projects, some of which are in the developmental stage, include: an early discharge program for private psychiatric patients which involves continuum of care for patients in a community setting; an early discharge program for private palliative care patients at St Francis Cabrini Hospital in Victoria; an early discharge rehabilitation program for private patients in a Victorian rehabilitation hospital who will attend on a non-admitted basis and a hospital in the home project for acute patients of selected Victorian hospitals. The aim of these pilots is to test a range of alternative delivery modes with a view to enabling patients to access the most appropriate care for their needs in the most appropriate setting. The Government announced during the recent election a commitment to allocate $20 million over four years to establish a National Institute of Clinical Studies (NICS). This will be a council of leaders in the health industry who will work Australia-wide to look at best practice in treating illnesses that most commonly cause admission to hospital. There is a distinct private sector component to the proposed work of NICS. There will be advantages for hospital clients through a number of key areas: Quality and safety in acute care settings; Support for the use of evidence based clinical practice; Clinicians taking the leading role in clinical practice improvement; and Improving the efficiency of hospital service delivery. NICS will bring a new focus on the central role of clinical best practice in quality and safety as well as address health management issues that effect both the public and private sectors. However, given the differing management and financing reforms underway in the respective 35

38 sectors, mechanisms to achieve quality and safety will be adapted to suit the requirements of each sector. To ensure value added service for its members, the private sector must develop simplified health management guidelines to link quality with purchasing. Guidelines will need to be tailored to patient, fund, hospital and clinical practice requirements. Best practice initiatives such as the NICS have greatest potential for the sickest members of the community for those holding health insurance these are often the people also on the lowest incomes. 36

39 Conclusion The principal reason people are dropping private health insurance is the increasing cost of premiums. The rebate will make private health insurance more affordable for both new and existing members and kerb the decline in the participation rate. And it will give the industry the breathing space to allow them to make the most of recent and proposed structural reforms. The Government agenda for private health insurance not only involves the rebate, but broad ranging structural changes to allow the industry to offer more attractive products and to become more competitive. The size of the rebate approximately equals the financial support removed from the private sector over earlier years and the contribution made by private health insurance to public hospitals. With a substantial increase in funding for public hospitals through the Australian Health Care Agreements, the issue is not one of competing priorities, but complementary initiatives. Health insurance complements our system of universal access with around 80% of private patient hospital care funded through private insurance. It is entirely reasonable for those exercising that choice to retain a substantial part of the funding from the public system. This is especially the case given that the cost to the Commonwealth of health services for the insured is less, on average, than for the uninsured. There are strong arguments not to means test the rebate. Evidence suggests that it is those in the middle to higher income bracket that are leaving private health insurance and that these are precisely the people who should be encouraged to retain their insurance to protect the risk pool and hence community rating. 37

40 ATTACHMENTS Attachment A - Average Cost of and Participation in Health Insurance Attachment B - Trends in Registered Private Health Insurance Organisations to , Real Prices Attachment C - Attachment D - The 30 AN-DRGs (V 3.1) that account for the highest number of separations from combined Public and Private hospitals. Commonwealth Contributions to Public Hospitals 38

41 Department of Health and Aged Care Occasional Papers Series Health Financing Series No 1 Health Financing in Australia: The Objectives and Players No 2 International Approaches to Funding Health Care No 3 Health Expenditure: Its Management and Sources No 4 Public and Private In Partnership for Australia s Health No 5 Technology, Health and Health Care No 6 The Quality of Australian Health Care: Current Issues and Future Directions 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 No 5 Health Policy and Inequality No 6 Measuring Remoteness: Accessibility/Remoteness Index of Australia (ARIA) No 7 The Ageing Australian Population and Future Health Costs: No 8 Some Characteristics of Hospital Admissions and Discharges: Older Australians No 9 Insights into the Utilisation of Health Services in Australia based on Linking Administrative Data No 10 Ageing Gracefully: An overview of the economic implications of Australia's ageing population profile No.11 The use of hospitals by older people: a casemix analysis First 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 Accessibility/Remoteness Index of Australia (ARIA)