Insurers reject cost-cutting to curb premiums

Health insurers have argued reductions in their overhead costs will not move the dial on lowering premium increases.

Health insurers have argued reductions in their overhead costs will not move the dial on lowering premium increases as they push for sector-wide reforms to address the rising cost of healthcare.

Private Healthcare Australia, which represents both for-profit and not-for-profit funds, has suggested that one way for health funds to bridge the gap between premium growth and healthcare inflation was to reduce their management, administration and marketing costs.

But it stressed that on average, about 90 per cent of a fund’s historical cost increases had been the result of benefit outlays.

“As a result, further reductions in overhead costs will have limited impact in reducing healthcare cost inflation,” Private Healthcare Australia says in its draft submission for Labor’s proposed Productivity Commission review of the sector.

“The industry median for those overhead costs in fiscal 2017 was around 9 per cent of revenues, after a steady decline over past decades.”

Opposition Leader Bill Shorten has committed to capping health insurance premium increases at 2 per cent for the first two years of a Labor government and flagged a Productivity Commission review of the sector.

Ahead of a potential Labor victory at the next election, the health insurance industry has mobilised and prepared a response to a future review.

The Private Healthcare Australia submission highlights that if health funds are unable to significantly reduce their overheads, any reduction in premiums or rises in healthcare costs will directly reduce the net margins of for-profit insurers, plus the contribution to capital reserves for the non-profit funds.

The sector argues that net margins in the private health insurance industry are not as big as perceived. It states that in 2017, the industry-wide margin was 5.1 per cent of revenues, which it says was below that of the general insurance industry and on par with major healthcare providers.

“Eight private health insurance funds currently have operating losses,” the report says. “Some of these funds have taken the voluntary decision to maintain premium affordability in the short-term. But it illustrates that premium restraint in the face of continuing healthcare inflation can quickly create a loss-making situation for funds.

“A continuation of below-inflation premium growth may bring five more funds into negative net margin territory by 2023.”

Private Healthcare Australia says that if premiums are constrained, even to the proposed 3.95 per cent annual growth, the industry will just be “buying time”.

“Health funds would be forced to find ways to close the inflation gap, all of which would either reduce the consumer value proposition of private health insurance or the capital adequacy of the funds,” the report says.

“The only sustainable solution to reducing costs to private health insurance consumers is to reduce costs of healthcare through system reforms.”