PRIVATE HEALTH INSURANCE

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1 PRIVATE HEALTH INSURANCE Presentation by Paul Collins to 26 March 2009 Disclaimer: The view expressed in this presentation are the views of the author and may not reflect the views of PHIAC

2 Outline of presentation Brief history of the private health insurance industry Role of PHIAC Current snapshot of the industry Cost drivers for the industry Broader Health Cover Growth trends and expectations.

Current snapshot of the industry Cost drivers for

3 Brief history of the private health insurance industry Commenced in the late 1800s as Friendly Societies National Health Act 1953 Health Insurance Act 1973 PHIAC established 1989 Private Health Insurance Act 2007

Societies National Health Act 1953 Health Insurance

4 Role of PHIAC Private Health Insurance Administration Council (PHIAC) is an independent Statutory Authority that regulates the private health insurance industry. Private health insurance policy is set down by the Australian Government Department of Health and Ageing Section of the Act requires PHIAC to achieve a balance between three broad objectives: fostering an efficient and competitive health insurance industry; protecting the interests of consumers; ensuring the prudential safety of individual registered organisations.

Private health insurance policy is set down by the Australian Government Department of Health and Ageing Section 264-5 of the Act

5 Role of PHIAC Supervise insurer operations Register/deregister private health insurers Monitor prudential capacity Monitor compliance with the Act Review corporate governance and risk mechanisms Intervene where necessary Administer Risk Equalisation Collect and disseminate financial and statistical data: To monitor health insurers; To enable consumers to make informed choices

mechanisms Intervene where necessary Administer Risk Equalisation Collect and disseminate

6 Current Snapshot of the Industry Distribution of insurers 37 Registered insurers (more trading names) 24 open 13 restricted access 9 for profit 28 not for profit 6 largest insurers have 78% of total policies

names) 24 open 13 restricted access 9 for profit 28

7 Current Snapshot of the Industry (continued) operating result compared to ,189m in premiums 9.5% 10,385m paid in benefits 10.1% PHI pays approximately 12% of total health expenditure in Australia 49m investment income ( from 672m)

8 Current Snapshot of the Industry (continued) Benefits paid by PHI by area of expenditure

9 Current snapshot (continued)

10 Current Snapshot of the Industry (continued)

11 Current Snapshot of the Industry (continued) Membership demographic profile Average age of insured persons 39.9 (increasing at the same rate as population age) Persons over 65 Hospital HST CDMP Ancillary % of total persons % of total benefits 13.4% 15.1% 21.8% 12.2% 45.4% 54.3% 50.6% 14.5%

9 (increasing at the same rate as population age) Persons over 65

12 Current Snapshot of the Industry (continued) Community Rating (legislated in 1953) Insurers cannot discriminate premiums based on risk factors such as age, gender. Cannot refuse cover to anyone Hospital products must cover psychiatric rehabilitation, and palliative care

13 Current Snapshot of the Industry (continued) Risk Equalisation Partly Compensates insurers for community rating that does not allow risk rated premiums Insurers with low risk demographic profile (lower than average benefits paid per member) pay into a pool administered by PHIAC and PHIAC pays from the pool to insurers with a high risk profile (higher than average benefits paid per member) => zero sum pool

(lower than average benefits paid per member) pay into a pool administered by PHIAC and PHIAC pays

14 Current Snapshot of the Industry (continued) Risk Equalisation Does not fully compensate insurers for community rating Has not stopped adverse selection (the older and sicker keep their insurance while the young and healthy drop out)

community rating Has not stopped adverse selection (the

15 Current Snapshot of the Industry (continued) Lifetime Health Cover Introduced on 1 July 2000 Policy holders pay an extra 2% on the base premium for each year after age 30 before taking private health insurance (eg. Pay 120% of base premium if join at age 40) Stopped the decline in the proportion of the population with private health insurance Lowered the average age of the insured

16 Current Snapshot of the Industry (continued) The proportion of insured persons responds to government policy

17 Cost Drivers Ageing population Utilisation of health services Benefits Hospital (Acute stay) Medical Prostheses

18 Cost drivers - Ageing

19 Cost Drivers - Benefits drawing rates by age

20 Cost Drivers - Benefits by age Total hospital benefits

21 Cost Drivers - Benefits increase due to ageing alone

22 Cost Drivers Utilisation of hospital services

23 Cost Drivers

24 Cost Drivers Utilisation and benefits per service drive cost per insured policy

25 Cost Drivers Utilisation and benefits per service drive cost even with no change in insured population

26 Cost Drivers Total hospital benefits paid by health insurers by major component

27 Broader Health Cover

28 Growth trends in insured persons

29 Mar-78 Mar-80 Mar-82 Mar-84 Mar-86 Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 % of labour force unemployed Is the number of persons with private health insurance affected by the state of the economy 12.0 Introduction of Medicare from 1 February 1984 PHI Coverage and UE Rate Introduction of Life Time Health Cover from 1 July 80.0% % 60.0% 50.0% % 30.0% 20.0% 10.0% 0.0% UERate Quarter PHIcoverage Medicare Levy Surcharge and 30% rebate from There does not appear to be a correlation but time series between government policy changes is too short to allow a statistically significant conclusion

30 Abbreviations BHC CDMP HST PHI SEU Broader Health Cover Chronic Disease Management Program Hospital Substitute Treatment Private Health Insurance Single Equivalent Unit a way of standardising the different health insurance policies of Single, Family, Single Parent, Extended family

The New Private Health Insurance Environment. Gayle Ginnane

The New Private Health Insurance Environment Gayle Ginnane Key Reforms Broader health cover Standards product information Changes to Lifetime Healthcover Risk equalisation Pricing Prudential standards