Why is health insurance getting more expensive?

Positive reform of health insurance affordability in Australia is only possible if the root causes of premium inflation are understood. Here, Simon Lim of the Institute’s Health Practice Committee tackles this complex issue.

Health is important to Australians, and by extension healthcare and health insurance. It is therefore expected that the affordability of health insurance is also a topical issue that draws extensive public commentary and proposed solutions.

Constructive discussion of this issue and of possible reform for the benefit of all Australians is only possible if participants understand the root causes of premium inflation and their relative magnitude. Due to the nature of healthcare and health insurance, an industry involving a heterogeneous mix of services, funders and providers the quantification of root causes is complex. Nevertheless, this paper’s goal is to explain and quantify the drivers of premium rate rises.

The Actuaries Institute Health Practice Committee is calling for volunteers to participate in a working group that develops and evaluates PHI reforms. If this interests you, please contact actuaries@actuaries.asn.au.

A summary of the paper is presented below. The full paper can be accessed via this link:

  1. The paper investigates the drivers of health insurance premium rate rises over the 10 years to June 2017 by attributing the drivers of historical premium rate increases to a number of factors.
  2. The affordability of premiums has been decreasing, as evident by premium rates increasing at 2.0 times wages over the 10 years to June 2017. The indexation of the Australian Government Private Health Insurance Rebate over this period has further affected affordability.
  3. Over the 10 years to 1 April 2017, premium rates have increased by 5.6% p.a.[1] Claims inflation has contributed 4.9% p.a. of this inflation. Insurers’ operating costs and profit margins have contributed to the remaining 0.7% p.a. of the increase, a rate of growth less than the CPI.
  4. Three forces drive the growth in claim costs and therefore premium rates. In decreasing order of magnitude:
    1. Healthcare price inflation: Inflation in the price of healthcare services.
    2. Volume inflation: Growth in the utilisation of healthcare services in excess of that explained by aging, with new technologies and treatments, as well as changes in provider and consumer expectations being contributing factors.
    3. Ageing population – The population is getting older, resulting in higher per capita consumption of healthcare.
  5. The results of the analysis are generally consistent with AIHW and ABS studies on the drivers of healthcare cost inflation in the wider health system, as shown in Sections 5.1 and 7.
  6. Attributing premium rate rises provides a framework in which to evaluate reform or the value offered to consumers from the underlying drivers. Efforts to optimise future premium rate inflation should therefore focus on addressing these underlying drivers.

    [1] Department of Health industry average rate rises

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.