COMPETITION IN THE AUSTRALIAN PRIVATE HEALTH INSURANCE MARKET

PHIAC Discussion Paper: COMPETITION IN THE AUSTRALIAN PRIVATE HEALTH INSURANCE MARKET Submission by TUH - January 2013 General comments TUH believes that competition is generally good for consumers and strengthens the industry. Diversity within the industry, represented by a mix of large and small insurers, for profit and not for profit organizations, and restricted access and open funds, enhances competition and innovation. Broadly, innovation is considered to improve outcomes for consumers and the industry. However our submission highlights some pressures and behaviours within the industry that do not enhance value for consumers or Australian taxpayers. Many of these behaviours are created by the very regulations and policies that are designed to protect consumers. For example, product regulation and political oversight arguably reduce scope for diversity in product design and increase pressure on premiums. In response, many health funds resort to low quality restricted and exclusionary products to provide consumers product choices at diverse price points. These restricted and exclusionary products tend to dilute the effectiveness of community rating, undermine the value proposition of private health insurance and increase the burden on consumers and taxpayers. The discussion paper makes the point that private health insurance (PHI) is available to consumers alongside the simultaneously available public health system. It also makes the point that the two broad elements to PHI competition include competition with Medicare (the public health system ) and competition as between insurers. The paper indicates that the institutional framework attempts to limit the scope and ability of private health insurers to compete against Medicare and therefore concludes competition between insurers, rather than with Medicare, is a key area of interest in understanding the competitiveness of the private health insurance sector (page 48). It should be noted that recent State government initiatives to enter arrangements with private hospitals to admit public patients in order to reduce waiting times in public hospitals, and the ongoing practice of public hospitals to pressure patients in public hospitals to be admitted as private patients, is increasing the competition between PHI and Medicare. These initiatives tend to blur the line between public and private hospitals and the value they provide, and increase the competition for patients between the public and private sector. This competition is heightened by Government policy changes that reduce the PHI rebate thereby increasing the cost of PHI to consumers. It is submitted that this aspect of competition should be considered by PHIAC and the Government in reviewing the competitiveness of the PHI industry. These initiatives have the potential to affect the competitiveness of the industry as a whole, and are just as important to consider as are aspects of competition between individual insurers. The following submission responds to a selection of the consultation questions raised in the Discussion Paper. 1

Consultation Questions 1. To what extent has the development of different markets in the various states had an impact on competition? The development of different markets has had a positive impact on competition in all states. State based pricing, driven by risk equalization jurisdictions and local hospital contracting, means that competition occurs at a state level rather than nationally. Historically funds, other than Medibank Private, competed predominantly in their states of origin (e.g. HBF in WA; NIB, HCF in NSW; MBF in NSW and QLD; Mutual Community in VIC and SA). Saturation within existing markets, the emergence of for profit funds and mergers/acquisitions have seen funds develop growth strategies in other states and in some cases develop a national focus. This change has altered the composition in state-based markets with the biggest impact being as a result of mergers (e.g. BUPA s market share in NSW and QLD is largely due to its merger with MBF). Smaller health funds with limited resources have tended to focus on restricted and/or regional markets, promoting alternatives to larger funds. Consumers typically consider a small number of funds when purchasing health insurance and unless they are linked to a particular fund (e.g. a restricted access fund, a local fund, or use a broker) they will gravitate to those funds with a large presence (branch networks, advertising, etc.) in their state. 4. To what extent does the regulatory system provide incentives to manage and contain margins and to what extent is this driven by competition for members and the need to provide member services? Margins are driven by both business objectives and by regulation. Mutual funds that are not for profit typically have a strong ethos of returning profits to members in the form of reduced premiums and improved benefits and services. The need to pay dividends to shareholders will lead to higher net margins amongst open for profit funds whereas the not for profit funds, particularly those with a restricted or regional focus, will seek to create as much value as possible for their members and keep margins to a minimum. The regulatory system does not have direct incentives for funds to contain margins. However, there are several aspects of the regulatory system that impact premium increases, benefits and margins: The Minister for Health s power to disallow a premium increase that is not in the public interest may cause insurers to moderate premium increases by reducing benefit levels and services to members. This occurred in 2010 with some insurers receiving adverse press coverage for significant changes they made to benefit levels as part of the premium review process. Industry average premium increases are typically lower than the growth rate of heath costs, which means insurers need to find ways to reduce the growth of outgoings. This reduction is increasingly being achieved by reducing the quality of the products. For hospital products, this can be achieved by applying restrictions and exclusions. The annual premium submission and approval process may cause some insurers to forecast higher margins to accommodate the long lead time to the next premium submission process. Prudential requirements and the uncertainty of investment income may also put upward pressure on forecasts and margins. 2

6. What is the impact of increased exclusionary and restricted products on competition? Exclusionary and restricted products enable health funds to compete on product and price, yet may have adverse impacts on other elements of the private health insurance system. Health insurance premiums are largely a function of the cost of benefits. With the cost of health benefits increasing at a higher rate than general CPI and a small percentage of policy holders claiming the major proportion of benefits, the value proposition of health insurance is under constant scrutiny by low claiming, price sensitive consumers. Community rating and other regulatory factors limit the ways that health funds can contain the price of health insurance to largely product exclusions/restrictions and excesses/copayments. Taxation rules related to the Medicare Levy Surcharge effectively restrict the size of excesses that health funds can offer healthy members therefore leading to an increased emphasis on exclusions and restrictions in response to consumers demands for affordable products when there is a free alternative in the form of Medicare. Exclusions and restrictions result in consumers who might otherwise drop out of PHI continuing to purchase health insurance. Exclusions and restrictions have enabled health funds to create hospital products that cater for consumers different health needs and budgets. This increases competition for price conscious and low claiming consumers in particular. However, as the Discussion Paper acknowledges, exclusionary and restricted products may have adverse impacts on other elements of the PHI system, particularly community rating. In targeting low claiming, healthy members, exclusionary products limit the pool of contributors paying into comprehensive PHI products that are required by older and less healthy Australians, thereby diluting the effectiveness of community rating. Exclusionary and restricted products are also being used by some health funds to limit premium increases to what they believe will be approved by the Minister for Health. Exclusionary and restricted products also provide a vehicle for insurers to offer and market products that avoid the Medicare Levy Surcharge but have little impact on reducing the burden on the public hospital sector. 1 In this respect, exclusionary products provide both an opportunity for health funds to meet consumer demand for low-cost products, and a risk to the value proposition of private health insurance. All hospital products make a contribution to the risk equalization pool that supports older and higher claiming members, but comprehensive products without exclusions and co-payments make a larger contribution to revenue available for the risk equalization fund. Exclusionary products can be designed to provide a quality product to price conscious consumers and therefore can enhance competition in the PHI market. However, some exclusionary products can provide such little value to the consumer that they erode the value of private health insurance in the eyes of consumers. Consumer information and awareness is required to ensure exclusionary products are fully understood before they are purchased by an unwary consumer. 1 Thomas, Peter. Reflections on the role of less than comprehensive (exclusionary) private health insurance products in the Australian healthcare system. Australian Health Review, 2012, 36, 273 276. 3

9. Are the prescribed requirements on product content and pricing oversight a material barrier to competition? Pricing oversight by the Minister for Health and requirements on product content both represent a barrier to competition. Pricing oversight is contributing to a race to the bottom as insurers attempt to meet political expectations of low price increases by reducing benefits and services to members. Many insurers are increasing their offering of exclusionary and restricted products to the detriment of community rating and those consumers seeking value from their PHI membership. The prescribed requirements on product content, particularly with respect to what health insurers cannot sell, limits health funds ability to differentiate themselves from competitors and is a disincentive for innovation and competition. Without such restrictions health funds could design products that better address the health needs of low claiming members including paying benefits for emergency admissions, GP visits, pharmaceuticals, etc., instead of relying on exclusions and restrictions to differentiate their products. 12. How could the regulatory system be strengthened or improved to promote further competition as the industry faces future challenges associated with population ageing, deteriorating population health, and rising health care costs? Risk equalization could be improved and regulatory restrictions could be removed to promote further competition in the industry. A growing portion of member premiums are paid into the risk equalization pool. While risk equalization is designed to support community rating it has adverse impacts on the affordability of PHI for low claiming and healthy members. As these members gravitate to exclusionary and restricted products, community rating is undermined. A risk equalization model that allows insurers to benefit from investment into health management programs for their members would provide incentives for insurers to develop innovative mechanisms to allow members to monitor and manage their health status. Other suggestions for improving the regulatory system involve removing regulated requirements on health funds that reduce competition and the value proposition of private health insurance, including: Removing prohibition on offering no claim bonuses Removing prohibition on rolling over of benefits Removing restrictions on product design Lessen the restrictions on the businesses that health funds engage in Remove once per year price increases Remove the requirement for health funds to pay for medical errors and adverse events. 4

16. What does the expansion of insurers outside of their core business, and/or more deeply and more broadly into improving member health, mean for market competition? The expansion into health-related services provides a point of differentiation among insurers and enhances innovation and competition. Some insurers will decide to offer health-related services directly, some will offer access to provider networks or contracted services, while others will do both. Initiatives such as optical and dental centres and health management programs can reduce demand for high cost health services in the future, reducing inflationary pressures on health insurance products. Diversification into healthrelated services also makes health insurance products potentially more attractive to consumers and a factor in their purchasing decision. 17. With most insurers able to effectively access economies of scale, either as a single large fund or through cooperative arrangements, do scale economies have a material impact on market structure and competition? If so, in what way? Economies of scale continue to have a material impact on market structure and competition despite cooperative arrangements that assist smaller funds to compete. As noted in the discussion paper the two largest funds have a 57% market share, while the 24 smallest funds share 8% of the market. So even with cooperative arrangements economies of scale favor larger funds. Brand awareness through advertising, promotions, sponsorships, branch networks, etc. is a key factor in attracting new members. These services are not shared by smaller funds thereby providing a distinct advantage to the larger funds. Similarly larger funds have an advantage when it comes to investment in innovation and expanding services (e.g. Medibank s health centres, HCF s large investment in health management, BUPA s acquisition of a large dental network, etc.). Smaller funds compete by offering quality products and personal service leading to higher rates of member satisfaction and retention. Smaller and mid-sized funds also typically have a lower ratio of management expenses to contribution revenue. So although larger funds have the advantage of economies of scale, many smaller funds experience high rates of membership growth and member satisfaction. 19. What is the role, importance and extent of use of member retention bonuses? How is this seen to affect consumer satisfaction and affect competition or the ability of consumers to switch? A distinction should be drawn between increased benefits associated with length of membership which are available to all members (loyalty schemes) and one-off discounts to retain a terminating member (retention bonus). Loyalty schemes are a commonly used practice in many industries to reward long-standing members and enhance product innovation and competition. Retention bonuses may be selectively offered and can harm competition. Member retention bonuses may take the form of bonuses paid to health fund staff to save a terminating member (typically for staff employed in retention teams) or to members who attempt to join another fund (typically offered as discounted premiums). Both forms of retention bonus are harmful to the industry and restrict the ability of consumers to switch health funds. The use of retention teams by large funds to selectively save members who would otherwise switch funds diminishes consumer choice and delays efficient transfers between funds often in contravention of the Private Health Insurance Act 2007 (the Rules require transfer certificates to be 5

provided within 14 days, although this standard is often not met when retention teams are used). Member retention bonuses have the potential to undermine the principle of community rating by targeting low-claiming members, and by providing terminating members with a premium discount that is not available to other members of the fund. 20-22 What role have intermediaries had on the level of competition between insurers for both new members and switching members? What role do intermediaries have in increasing the contestability of the market for new entrants? How well are intermediaries able to overcome the underlying stickiness and complexity of the private health insurance to promote efficient consumer switching? Intermediaries have increased access to information for consumers of private health insurance and have simplified the process of choosing between health funds. However the proliferation of intermediaries has come at a cost to the industry and had some adverse impacts on consumers. Health funds have used agents and brokers to assist in their sales processes for many years. However, the internet has provided a vehicle to approximately 15 online intermediaries to enter the market within the last few years, sometimes referred to as comparators. Consumers believe that intermediaries are independent and can take the confusion out of health insurance making it easier for them to purchase the appropriate cover. However intermediaries are usually agents for selected insurers, selling particular products. Consumers do not necessarily have a better understanding of health insurance as a result of intermediaries and intermediaries do not reduce the underlying stickiness of the majority of health fund members who are satisfied with their health fund. Intermediaries do fulfill a role for consumers who are shopping for a health fund for the first time or wishing to move to another fund. Intermediaries have given funds that do not have large advertising budgets the opportunity to gain exposure in the market and grow rapidly. On the downside, intermediaries have increased churn within the industry and have added to the administrative cost of member acquisition. 6