Private Health Insurance: metallic paint, game theory and product standardisation

The interaction of reforms to categorise all hospital insurance products into Basic, Bronze, Silver and Gold with the commercial and political environment will require careful planning and detailed risk assessment, writes Barry Leung.

On 16 July 2018, Minister for Health, the Hon Greg Hunt MP, invited comments on the exposure draft of the Private Health Insurance (Reforms) Amendment Rules 2018. The measures contained in the rules provide the detailed framework for several reforms announced by the Minister in October 2017.

One of the key reform measures is the mandated categorisation of all hospital insurance products into four different categories – Basic, Bronze, Silver and Gold. The intent of this measure is to address concerns that many consumers do not fully understand the benefit coverage of their hospital insurance policy. All health insurers must comply with a raft of requirements under the proposed rules, including:

  • Product coverage requirement – All products must meet minimum coverage levels for products under defined categories[1]. The rules do allow insurers to cover more than the minimum requirement if they choose to do so. The minimum coverage requirements go hand in hand with the new standardised clinical categories detailed below.
  • Product naming convention – all insurers must include the appropriate product category as part of a hospital policy name and may not include any other metal or gemstone. If the product covers more than minimum requirement for the Basic, Bronze and Silver product tiers, the products may be named [Basic] Plus or [Basic]+, as an example.
  • Changes to “Restricted” benefit coverage – So called ‘restricted’ benefits are a feature of some hospital insurance products in the current market. Where treatment is covered on a “restricted” basis, a policyholder will be fully covered if admitted to a shared room in a public hospital. If the treatment is provided in a private hospital, the patient will not be fully covered, with the insurer’s hospital benefit liability capped at the shared room public hospital accommodation rate and the patient likely to incur significant out of pocket expenses.

    As restricted benefit coverage can be confusing for consumers, the Government has proposed that it be removed for most clinical categories from the Gold, Silver and Bronze product categories.

“Restrictions” would still be allowed on Basic products, as well as for psychiatric, rehabilitation and palliative care under Bronze and Silver products. The Government’s position on “Restrictions” will be reviewed in 2020-21.

  • Standardised Clinical Categories – A persistent problem in PHI is the varied interpretation and language used by different insurers to describe the benefit coverage of their products, and the adverse impact on consumers when comparing products in the market. For example, the Commonwealth Ombudsman has received complaints concerning definitions of “minor gynaecological procedures”, “minor eye surgery”, and “minor joint investigations”. These policies can present difficulties if an individual’s procedure is considered minor by their surgeon, but is not considered minor by the insurer. When this occurs, the consumer may be aggrieved that the insurer’s definition of a “minor” procedure differs from their doctor’s view, and as a result the treatment is not covered. To enable consistent interpretation of what is covered under each clinical category, the Government has proposed to mandate standard clinical categories across all hospital insurance products. Each clinical category sets out the conditions that are within scope and the treatments for which benefits must be paid.

The proposed product categorisation has been subject to independent review, consumer testing and extensive consultation with stakeholders. Independent actuarial modelling has also been conducted to evaluate its impact on industry participation and premium rates. Mandated product categorisation is expected to become effective on 1 April 2019.

The introduction of product categorisation raises some interesting challenges for insurers’ product portfolio management. Health insurers must assess the implications for the product coverage of existing products, competitive dynamics, marketing, administration system, operations, customer communication and retention and the upcoming premium increase application.

Some key questions insurers should ask themselves include:

  • Would the coverage of existing products need to change to meet the standardised clinical categories, and/or removal of “Restrictions” on the Bronze and Silver product tiers? What are the implications for sales, retention and pricing/profitability?
  • Which product category will each existing product fall under?
  • Would the competitive positioning of existing products shift under the new system?
  • Does the insurer need an offering in all product tiers? How would that link to its marketing and product strategy?
  • Are current product names compliant with the mandated product naming convention? If not, what decisions need to be made?
  • What will be the impact of any upcoming new products?
  • What is the best way to engage and communicate these reforms and changes with staff, as well as new and existing customers?

Product categorisation is only one of the many new measures which will become effective in 2019.

Other important reform measures include:

  • Voluntary implementation of age-based discounts for people aged 18 to 29 under a hospital insurance policy;
  • Increased the maximum voluntary excess levels for hospital products providing individuals an exemption from the Medicare Levy Surcharge;
  • Allowance to provide travel and accommodation benefits under a hospital insurance policy.
  • Increased flexibility with how standardised information on health insurance policies can be presented to consumers;
  • Removal of coverage for some natural therapies from extras cover;

The interaction of these reform measures with the commercial and political environment will require careful planning, detailed risk assessment, and appropriate actions. Actuaries are well positioned to assist health insurers to assess the uncertainties and devise strategies to minimise adverse impact on the business.

And to everyone working in the health insurance industry, it will be an exciting (and challenging) year ahead!

[1] The minimum requirements for each product tier can be found here.

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