Health fund premiums could be slashed by $1 billion a year

As tens of thousands quit their health cover over soaring premium costs, it has been revealed some funds are charging their members 20 per cent too much.

Health fund members are paying 20 per cent more than they should, as they foot $400 million a year for marketing costs and exorbitant administrative charges, a damning report shows.

And insurer profits are set to get even larger unless radical changes are made, report author Dr Andrew Charlton, economic adviser to former prime minister Kevin Rudd, warns.

Dr Charlton reveals in the report, commissioned by medical device manufacturers, that soaring profits of health funds, up 50 per cent in the last five years have outpaced the 21 per cent increase in benefit payouts.

This comes as new data released this week shows health fund membership has plunged to its lowest level in more than a decade despite major reforms introduced in April.

In June, just 44.2 per cent of the population was covered by a health fund after more than 28,500 people dumped their cover as premiums continued to outstrip inflation and out-of- pocket bills grew.

However, health fund premiums could be slashed by $1 billion, saving members hundreds of dollars a year, if insurers cut administration costs, moderated their profit take, reduced preventable hospitalisations, tightened payouts for extras care and smaller funds merged, the new report says.

Health funds are overcharging customers. Picture: istock

Under a business as usual scenario, health fund profits are set to rise even further with the most profitable 10 funds enjoying average margins of 10.2 per cent (increasing from 8 per cent today), the report said.

The recipe is burning a hole in member’s pockets forcing them to pay 20 per cent too much for their cover.

In financial year 2018, insurers spent 86 per cent of premium revenue on benefits payments and 9.2 per cent on operational expenditure, while profits accounted for 5.0 per cent of revenue, or $1.2 billion.

This compares to financial year 2013 when 87 per cent of revenue went towards benefits, 8.9 per cent went towards operational expenditure and 4.2 per cent to profits.

The report by consultancy firm AlphaBeta, commissioned by the Medical Technology Association of Australia, outlines measures that would cut health fund premiums by hundreds of dollars a year.

Slashing health fund administrative costs by $210 million is the first suggestion.

“Operating costs have increased from 8.9 per cent to 9.2 per cent of revenue between 2013 and 2018, despite the industry growing by a third during that time, indicating that private health insurers have not been able to scale up efficiently,” the report says.

Some funds spend as little as 7 per cent of revenue on operational expenditure, while others spend more than 30 per cent.

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Health fund membership has plunged to its lowest level in more than a decade.

Marketing alone is estimated to cost health funds $400m, which is 18 per cent of operating expenses, the report said.

A further $290 million could be saved reducing the number of preventable hospitalisations; reducing overtreatment of low risk prostate cancer and knee arthroscopy patients; promoting care in the community; and reducing hospital readmissions.

Reforming extras cover could generate savings worth $250 million.

Private Healthcare Australia CEO Dr Rachel David said a key reason health fund costs were rising was that the medical device industry had not delivered on $250 million savings agreed with the government.

Instead of falling by $250 million, medical device costs had only fallen by $13 million, she said.

Health funds were prohibited by law from acting on most of the recommendations in the Charlton report because they could not interfere in clinical decision making by doctors and could not pre-approve claims, she said.

Originally published as Health fund premiums could be slashed by $1 billion a year