COMPETITION IN THE AUSTRALIAN PRIVATE HEALTH INSURANCE MARKET Page 1 of 11
1. To what extent has the development of different markets in the various states had an impact on competition? The development of different markets in the various states has had a significant impact on competition. Funds who historically did not compete in certain markets now concentrate on infiltrating and gaining market share one state at a time. From a Western Australia perspective, advertising spend from competitors has increased significantly which has led to greater competition for new and existing members. The prevalence of brokers and the use of digital channels in the market has seen an increase in competition. Funds are now utilising a number of different avenues to gain a competitive advantage. 2. Are levels of profitability consistent with the existence of effective competition? There is a variation in profit when comparing not for profit vs. for profit insurers. This does not indicate effective competition or profit levels, rather a preference for shareholder or member satisfaction. In comparison with other industries, health insurance profit margins are much lower. There is a strong regulatory system which has significant influence over how profitable a fund is. Without the regulatory system, the market would be a key driver in keeping levels of profitability consistent. Research indicates that price and value for money are key drivers for members joining and cancelling. Consumers are becoming more rational thus to remain competitive funds need to keep their prices as low as possible, impacting profitability. 3. Does the variability in management expense ratios and net margins reflect competitive tensions in the market? The variability in expense ratios and net margins does reflect competitive tensions to some extent. Funds that implement acquisition strategies to combat the aggressive marketing campaigns of competitors may have to increase marketing expenditure to complete effectively. Page 2 of 11
There are a limited number of ways funds can differentiate themselves from the rest of the market. Management expense ratios can be one lever which funds can use to gain an advantage over the rest of the market. Funds can either position themselves as a premium brand, offering first class service with higher expenses, or as a budget fund, with minimal service but the ability to pay back higher benefits or pass on lower premiums. Funds that wish to expand their core business are also likely to incur higher expenses than funds that do not. The long term strategy of the health fund will be a significant driver in determining the Management Expense Ratio For profit funds will generally have higher net margins than not for profit funds due to the need to pay dividends to shareholders. This variability does not represent competitive tensions in the market. 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? The regulatory system does not so much provide incentives to manage and contain margins, rather it acts as a control mechanism. The regulations mean that funds do not have the ability to control how much they increase their rates. Instead they need to apply for rate increases and prove that the increase is necessary for the financial management of the fund. The regulatory system not only limits funds rate increases, it also specifies the benefits that must be paid. For example, the Second Tier Benefit arrangements specify the minimum benefit funds must provide. This means that even though a fund may choose not to enter an agreement with a hospital, the level of benefit payments that the fund must provide to that hospital is at a level not too dissimilar to that of contracted facilities, thus increasing costs and limiting the funds ability to negotiate. The regulatory system is potentially having a detrimental impact on competition as funds are limited in how much they can differentiate themselves. Without these regulator controls funds would have more flexibility to compete. The regulatory system also restricts the use of loyalty bonuses and limits the use of incentives to acquire members. These factors both limit competition and innovation. Page 3 of 11
5. What effect does the regulatory system have on either consolidating the national market or encouraging the development of states, territory and regional sub-markets? The introduction of state based pricing had a large effect on allowing development and growth in different states. Funds can now offer lower pricing in other states either by subsidisation or as claim patterns vary from state to state. 6. What is the impact of increased exclusionary and restricted products on competition? The impact of increased exclusionary and restricted products has been driven by a change in consumer behaviour. With health insurance products highly regulated, funds have little room for innovation. However as costumers are becoming more price conscious, funds have few options but to offer more price competitive products. With the majority of funds heavily promoting exclusionary and restricted products to attract business, a fund which does not offer exclusionary and/or restricted products may not be able to compete effectively in the market. Another point to consider is that many consumers are seeking low priced products and are prepared to accept high deductibles as they believe their utilisation will be low but take out cover in response to government incentives such as the Medicare Levy Surcharge, or Lifetime Health Cover Loading. This again reinforces the need for health funds to have a range of competitive policies on offer. 7. Is the growth in general treatment only products a signal that the market is increasingly competing in areas that are contributing the least to the objectives of private health insurance? General treatment is an important component of Private Health Insurance. Services such as Physiotherapy, Dental and preventative treatments all play key roles in maintaining member s health assisting to prevent or manage chronic diseases. Whilst general treatment does not directly contribute to hospital treatments, it has an important role as it attracts consumers into Private Health Insurance. General treatment is cheaper, thus easier to market Page 4 of 11
and more appealing to the price conscious market. Packaged with hospital treatment it can appeal to those wanting to see immediate benefits from their health insurance. Whilst General Treatment is easier to market, it is not the intention to gain general treatment only members. The intent is to attract these members to the fund, where then a fund can then explain the benefits of hospital cover. If the member cannot be converted to hospital cover straight away, the fund can at least retain them until they are more likely to increase their cover at a later stage when they feel they could benefit from hospital cover. In general, we find that although there is a growth in general treatment products, the majority of consumers who purchase a general treatment product will also purchase a hospital product. 8. Does community rating create a barrier to pricing innovation and reduce incentives to keep the sick well? If so, in what way? Community rating is a key factor in why Australia has one of the strongest health care systems in the world. The nature of community rating means that there will always be some barriers to pricing innovation, however many of these barriers actually have a positive impact as they discourage discrimination against members, in particular those who need complex or long term treatment. One difficulty we have found is that there is no way to reward those who look after their health and make no or low claims. Consumers have an expectation based on experience with other insurance channels (car or home insurance for example) that insurers should be able to give them some form of reward if they don t claim. Being able to reward in a minor way those who have not made a claim in an extended period of time would increase consumer satisfaction and allow non claiming members to potentially see the benefit of having Private Health Insurance. 9. Are the prescribed requirements on product content and pricing oversight a material barrier to competition? Yes. The regulatory system has greater influence in dictating price and product content rather than market forces effectively working. This limits the amount that funds can differentiate from the rest of the market, thus reducing competition. Page 5 of 11
If funds were to have some greater degree of control over content and price, competition would likely increase. 10. Does risk equalisation penalise insurers in ways that adversely affects competition between insurers? If so, then in what way? Risk equalisation is a necessary part of community rating. It is beneficial as it attempts to adjust for the risk of adverse selection and a fund experiencing a sicker or higher utilisation policy holder demographic. This encourages funds to compete for both younger and older members, rather than target certain age segments. Without risk equalisation there would likely be significant competition for younger members, but funds may be hesitant to promote to older members. This could create gaps in the market where older people are not attracted to Private Health Insurance and may be left feeling unwelcomed by insurers. Risk equalisation is unlikely to be having an adverse affect on competition. The proportion of eligible benefits which are paid into the risk equalisation pool for each age group are the same across all funds. This creates a level playing field when trying to attract new business. 11. Can the current model of risk equalisation be changed to improve efficiency and competition? Risk equalisation is a key factor in ensuring that community rating is successful. There are always going to be funds that must pay into the risk equalisation pool, thus it is unlikely a risk equalisation model exists that all funds will completely agree with. Currently, funds that have high claims (especially to members over 55) will receive a portion of the claims back in risk equalisation either through the age based or high cost claims pool. This is a strength of Private Health Insurance in Australia. Premiums for members on high claiming products can be kept at a reasonable level. Without Risk Equalisation, Private Health Insurance for many members would be prohibitive. Page 6 of 11
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? Less influence from the government in setting premiums would improve competition. Funds are limited in what they can do to improve benefits payable to their members as rate increases must be the minimum necessary. There is minimal flexibility to improve member pain points. With the high level of competition in the market and consumers being price conscious, it is very unlikely funds will apply rate increases higher than necessary, even if the rate increase is justified by increasing benefits or improving value to members. Further support for chronic disease and wellness programs will have advantages for all parties. Members will be healthier, funds will have incentive to provide programs as claims will be reduced in the future and private health will be more competitive, easing the pressure on the public system. Some form of reward system for funds who are active in this area would encourage all funds to focus on keeping their members well. Brokers are now key players in the battle to acquire new members. Funds using brokers have an additional option in the quest to gain new members. The down side is that funds will be paying large commissions to these brokers. This money could be used to keep premiums low or improve benefits for the member. If broker fees could be capped, more money would be available to face challenges associated with population ageing, deteriorating population health and rising health care costs. 13. Is the number of new entrants into the private health insurance market a signal that market entry barriers are prohibitive? Like all insurance markets there are barriers to entry and relatively low levels of new entrants. Given the high level of sovereign risk, including the restrictions on setting prices, the regulatory and product complexity, capital requirements, tight margins, the high number of insurers compared to other insurance sectors plus the outlook for rising health costs across the world it is not surprising that the number of new entrants is not high. Page 7 of 11
14. Is there any market based factor, including the behaviour of incumbent insurers, that acts as a barrier to entry? Soveriegn risk, market saturation and the current high levels of competition would present significant market challenges to potential new entrants. 15. What are the main advantages from long term tenure in the market? The advantages of long term tenure in the market include: Brand Awareness This will also lead to lower cost per acquisition for new members Experience Knowledge of the industry and the various inputs into private health (negotiations, agreements etc.) 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 of insurers outside of their core business has the potential to both increase and decrease the level of market competition. Funds are continually looking to improve their offering, which increasingly means expanding outside their core business. This in theory should increase competitiveness amongst funds, and improve choice and variety for the consumer. On the other hand, there is the risk that one fund will monopolise the market by expanding outside of their core business. For example, if a single fund was to implement extensive chronic disease management plans, and provide multiple optical, dental and medical clinics, whilst competitors were inactive in this market, or perhaps did not have the means to do so, there is the risk of competition being reduced. Page 8 of 11
17. With more 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? There is a perception that the two most significant players have a scale advantage however there is limited evidence to suggest that they have been able to achieve significant market advantage. 18. In what way does the price responsiveness of consumers in the private health insurance market affect competition? Do different insurer types (such as open vs. restricted) have differing levels of price responsiveness? In the current economy, consumers are becoming more and more price conscious. The greater use of intermediaries and easier access to information means that consumers are often looking for the best deal and have the access to find it. This will encourage funds to continually improve their product offerings, thus increasing competition. 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? Retention bonuses are seen by members as very important. Retention bonuses are prevalent in other insurance markets and therefore members often expect to be rewarded for loyalty and do not necessarily see it as a bonus. The ability of funds to recognise and reward retention will likely increase consumer satisfaction and competition. 20. What role have intermediaries had on the level of competition between insurers for both new members and switching members? Intermediaries have created greater competition for both new and switching members. Funds which have struggled to gain brand recognition can now use intermediaries to sell their product and promote their brand. Consumers are now able to use a third party to assist them compare health insurance products. Page 9 of 11
21. What role do intermediaries have in increasing the contestability of the market for new entrants? Intermediaries have a huge role in increasing contestability for new entrants. The bigger intermediaries have brand awareness and are a popular choice amongst consumers. In all states, there are a number of major health funds that saturate the market. As with any industry new entrants face difficulties in establishing a reputation and to penetrate the market, intermediaries can help in this regard. 22. How well are intermediaries able to overcome the underlying stickiness and complexity of the private health insurance to promote efficient consumer switching? Intermediaries are very efficient in the promotion of consumer switching. Most intermediaries have sound knowledge of the workings on Private Health Insurance and are capable of simplifying the options to the consumer. One thing that is lacking is the transparency of who the intermediary represents. Many of the larger funds do not participate in arrangements with intermediaries, and therefore their products are not included in comparisons. This is not always clear to the consumer. 23. To what extent does market size matter to pricing outcomes achieved along the supply chain? Market size has a big impact to pricing outcomes achieved along the supply chain. Size can be both positive and negative. One positive is that it is not in a hospitals best interest to go out of contract with a larger health fund as they provide a large portion of their revenue. In a similar vein, hospitals are aware that health funds will want the best for their members and will want to have arrangements with all major hospitals in their market. As the hospitals are so reliant on the income they receive from the larger health funds, they will always fight harder to get fee increases from the bigger health funds than the smaller health funds. Page 10 of 11
The issue of smaller funds having minimal leverage in pricing outcomes is alleviated through the working with the Australian Health Service Alliance. 24. Is market power spread efficiently across the supply chain in the private health insurance industry? In Private Health Insurance a significant amount of the power is with doctors. The hospitals where procedures are performed are often governed by doctor s choice. Hospitals have a disproportional amount of power. When a hospital and insurer go out of contract, the negativity and blame from the media and public is generally focused on the insurer. This indicates there will be greater power with the hospital within the supply chain. The large hospital groups will generally have greater market power than smaller hospital groups or individual hospitals. Page 11 of 11