Optimising private health insurance: findings and possibilities

In an era marked by rapidly evolving healthcare landscapes, it's imperative to examine existing policies and explore avenues for improvement.

This article explores the review of incentives for participation in Private Health Insurance (PHI) and encourages input to the consultation. The policies, known as PHI incentives, include the Medicare Levy Surcharge (MLS), Lifetime Health Cover (LHC) and private health insurance rebate (Rebate), which have remained unchanged for over a decade.

Summary of key findings

The aim of incentive policies is to contribute to the sustainability of the mixed delivery model of private and public healthcare in Australia. The effectiveness of these levers against their policy objectives has recently been independently examined.

Here are some key takeaways from independent studies:

This article will discuss the outcomes of the study on PHI incentives, where they fit into Australia's health system - including the challenges in the current health system, the approach of the study and future avenues - and the current consultation process.

Overview of health system - where do the incentives fit?

The objective of the Australian health system can be summarised as universal access to high-quality care that results in the best outcomes at an efficient, and affordable, cost to individuals and the community.

The core values of the system include:

• Community rating: Promoting affordable access to health care for all with no premium differentiation by risk.
• Clinical autonomy: Enables choice to ensure high-quality care.
• The mixed public and private provision of health services: Bringing universal access through leveraging aspects of government oversight and market dynamics.

PHI is an important part of Australia's overall healthcare system, forming a central part of its provision and funding. Currently, over 45% of the Australian population holds private hospital coverage ^[1] . The Federal Government provides support for the private health industry through the three policy levers.   

The challenges

Irrespective risk is a challenge when ensuring premiums are affordable, particularly when offering optional insurance coverage. Since PHI premiums reflect the average claim cost of people insured and remain community-rated, policies would not be affordable if only people with high expected treatment costs were insured.

By offering policies that incentivise broader participation in PHI, lower premium rates can be achieved, making private healthcare more affordable for all Australians.

A continuing effort to optimise the policy settings is necessary when ensuring best value to consumers and the community. In this light, the studies investigate the effectiveness of these policies and possible avenues for improvement.

The approach of the study

As the objective of PHI incentives is to encourage an increase in contribution while supporting others to access private healthcare, each PHI policy has its own particular objectives. For example, the Medicare Levy Surcharge (MLS) seeks to ensure high participation (or contributions) among high earners, reducing average premiums for PHI and private healthcare.

On the other hand, the rebate attempts to make premiums more affordable for older people and those on lower incomes, while the Lifetime Health Cover (LHC) incentivises obtaining and maintaining hospital coverage and supporting the breadth of population necessary for sustainable community rating.

Throughout the project, stakeholder consultation took place through workshops, interviews, written consultations, and regular updates through the Department's communication channels. This allowed for a comprehensive review of the cost, effectiveness, and impact of PHI incentives on the healthcare system, as well as the preferences of consumers.

The study focused on two key areas:

1. The financial return for the rebate: The analysis of the effectiveness of these tools was made possible by insurers who provided comprehensive claims data that formed a solid foundation for analysis.
2. A consumer survey: This involved a survey of over 1500 consumers to assess their preferences and experience of different scenarios related to PHI policy settings. This allowed for the identification of changes that would have a significant impact on expected consumer behaviour.

Avenues for Change

Regarding the MLS, it is effective to maintain its application for individuals with the highest capacity to pay for PHI while excluding those earning less than $93k. The challenges with the value proposition of PHI for the latter group are evident with their lower participation rate. To optimise the MLS, annual indexing of thresholds based on earnings changes was recommended.

For individuals in the highest income brackets (Tier 2 - $108k and Tier 3 - $144k), the requirement for adequate products should be to purchase Silver Tier or higher hospital cover. Increasing the MLS for these high earners to 2% of their income would not only simplify the system but provide a strong incentive for insurance uptake. The settings can include an increased contribution to the health system from those who have the capacity to pay.

Another avenue to consider is the rebate increase for those with high utilisation of services. This is the segment where the rebate provides the greatest value for money for the government, as the public hospital cost savings are the highest. Additionally, removing the rebate for Tier 2 earners, who are strongly motivated by the MLS, would be beneficial as it offers the least value for money to the government. This recommendation assumes rebate spend is fixed and the policy objective is to get a greater offset.

• A good financial deal for the government?Findings indicate that PHI subsidy policies are financially advantageous for the government. There are net savings resulting from the rebate meaning the offsets to public hospital costs are larger than the subsidy costs, considering the MLS recoveries. Net savings increase with age, as the average hospital claims funded exceed the average rebate. For instance, individuals over 75 years of age receive an average PHI rebate of $965 per person, while the average claims funded are over $7,000 per person. While this is based on assumptions, sensitivity analysis shows the robustness of the findings.The recommended actions depend on policy balance or trade-off between higher claim participation (with a high return for the rebate) and more low claimers lowering the premiums and improving affordability.
• Should the reduction of the percentage rebate by annual indexation be stopped?The studies found that the rebate is effective though, with low elasticity, there is little persuasive empirical evidence to increase the total amount spent on rebate. On the other hand, the research indicates that reducing the rebate further may increase the government spending in relation to public hospital costs. The short-to-medium term approach is to keep the budgeted spending and attempt to make the outcomes more optimal.
• What changes are effective, given studies of consumer behaviour?The study explored consumer behaviour and tested changes to LHC start date, loadings and other elements. While none of the proposed adjustments represented a significant improvement on the current system, findings revealed that increasing starting age (from 30 to 35 or 40) would benefit people who take out PHI later in life but do not result in a materially better outcome overall. Comparatively, the MLS policy has a more pronounced impact on the individuals it targets compared to other PHI incentive policies. A key decision revolved around determining when it is fair to apply such a strong incentive to individuals. Even when the MLS appropriately targets specific individuals, it may not be incentivising the most desirable actions because only the purchase of Basic tier hospital policy is necessary to avoid the MLS.

Consultation

The study into PHI Incentives is published along with a consultation paper on the website of the Department of Health and Aging. Feedback on the findings and recommendations of the studies is open now until Tuesday, 15 August 2023, 3:00pm (AEST). Find out more.

^[1] Consultation on the Private Health Insurance (PHI) Incentives and Hospital Default Benefits Studies - Australian Government Department of Health - Citizen Space. (n.d.). Consultations.health.gov.au. Retrieved August 1, 2023, from https://consultations.health.gov.au/medical-benefits-division/consultation-on-phi-studies/