Health cover at ‘tipping point’

Medibank boss Craig Drummond has warned that the health insurance sector is at a ‘critical juncture’.

Medibank Private chief executive Craig Drummond. Picture: Stuart McEvoy.

Medibank Private boss Craig Drummond has warned that the health insurance sector is at a “critical juncture”, saying the time for policy reform is now, but industry heads say that the volatile political environment dents any hope of change.

Mr Drummond, fresh from a tour of European and US health systems, said affordability concerns were accelerating, adding it was not just a private health insurance issue but one that spread across industries including banks, telecommunications and utilities.

“The issue is more about the ­financial shape of Australian consumers relative to their debt burden,” he said. “We are at a critical juncture and the time to act on reform and change is now, for many industries, before the challenge gets even bigger.

“You can push things under the carpet or take an approach that you need to make some changes now.”

The chief executive of Medibank said Australia had a high-quality healthcare system, but if there was a lack of action now to address the issues there was a real risk insurance would become less affordable for many people.

“The outcomes won’t just change in the private system, it will put significant pressure on the public system such that all Australians, compared to where we have been, will have inferior health outcomes,” he said.

Mr Drummond’s warning comes as a leading healthcare analyst, Morgan Stanley’s Sean Laaman, said that after a decade of continuous volume growth, the private health industry had hit an inflection point.

The absence of regulatory reform meant the declines were ­irreversible and likely to accelerate, he added.

Mr Laaman said in a 64-page report on the sector that government policy settings to encourage consumers to buy health insurance had lost their sting. He said the lack of political appetite to fix the problem would see current trends continue until the system was near breaking point.

“There seems to be political will, but we think it is overridden by the political sensitivity and it has been shown that politicians are too nervous to do anything,” Mr Laaman told The Weekend Australian.

“We would be surprised if there was any drastic measure that assisted the system.”

NIB chief executive Mark Fitzgibbon said he was not confident in meaningful reform because the politics were difficult.

“There are so many powerful vested interests, which we saw with the debate around the cost of medical devices,” he said.

Mr Fitzgibbon added that regulatory failure had fuelled many of the issues affecting the sector, such as the high cost of medical devices. Forcing insurers to contract with all hospitals, plus not allowing them to pay specialists outside the hospital, contributed to the issues.

Dwayne Crombie, the Australian managing director of Bupa’s health insurance arm, has con­fidence that Health Minister Greg Hunt will oversee some of the ­reform needed around affordability concerns.

“The minister has made it clear he wants to see what he can do to help us have a lower premium increase next year,” Mr Crombie said.

“With a late 2018 election looming, meaning one more budget, I’m optimistic something will happen.”

The Morgan Stanley report ­argues that the value proposition of private health insurance would continue to erode with wage growth tipped to remain muted.

That trend could lessen the appetite for consumers to continue paying annual insurance premium increases above wage growth.

“There is a limit to how far you can downgrade or tighten policy terms before eroding the value proposition and policyholders leave. We are now into this phase,” the report said.

“Combined impacts of a rising risk equalisation loading for younger cohorts and reduced value may accelerate the system drop-out rate.”

Mr Laaman said private health insurance policyholder growth had been negative for a while.

“It could be an anomaly but we think it’s the beginning of a trend,” Mr Laaman said.

“There is something that has changed in the industry over the last 12-18 months that has seen low policyholder growth and low volumes unfold.”

Mr Crombie said the industry had hit a “tipping point”, and said that people aged 31 and under were choosing not to take out insurance in greater numbers than previous years.

Under Australia’s risk equalisation and community rating system, young people need to pay for insurance to balance the claims payments of older people.

“Whatever participation growth you have, if you look under it, the only growth is in the over 65s,” Mr Crombie said.

“The challenge for the industry is to find extras that are more ­relevant to younger people and to sell that to them.” Mr Drummond, who took on the top job at ­Medibank a year ago, said the ­industry needed to do a better job at controlling the cost drivers.

Mr Drummond highlighted the need to look at alternative care pathways outside of the hospital setting.

“There is a big trend globally towards alternative care pathways outside the hospital because the hospital is seen to be an expensive, but high-quality, care pathway,” he said.

“The reality is that across the whole system there remains a number of parties that are happy with the status quo and that needs to change.

“Unless that changes, which will only be through transparency and reforms, our system, even though it is high quality, will be left behind compared to what is happening internationally.”