New start is needed for health insurance

Federal government tax penalties and prohibitively expensive health insurance premiums are to blame for a majority of families choosing the lowest-value products that amount to junk policies.

Grattan Institute’s health program director Stephen Duckett.

Federal government tax penalties and prohibitively expensive health insurance premiums are to blame for a trend that has seen the majority of families with insurance choosing the lowest-value products that amount to junk policies.

The Grattan Institute’s health program director Stephen Duckett has called for a “new industry plan” for private health insurance in a new paper that proposes a winding back of excessive regulation of the industry.

“The private health insurance industry is over-regulated and cosseted,” the report said. “It needs to embrace efficiency-driven reform to create a better product which people want to buy.”

Professor Duckett criticised high administration costs of some funds which pay out only 80 cents for each dollar collected in premiums – a figure he says should be significantly higher.

“Some funds are keeping more than 20 per cent what they get in premiums as their overheads or profits or management fees,” Professor Duckett said. “Those funds which are not giving back 85 or 90 per cent, when it comes to the premiums rises every year, the Commonwealth minister should be saying ‘go out and sharpen your pencils’.”

“Australia’s private health insurance industry is in a death spiral,” Professor Duckett’s report said. “Government and the industry must come together to agree on a new industry plan to ensure the private health system is sustainable. It’s now clear that regulatory tinkering, government handouts, and blame shifting are not going to solve the industry’s fundamental problems.”

Despite increases in the numbers of young people taking out hospital cover in the past two quarters, there has been an even greater rise in the number of older people taking out policies, leaving the industry facing ever-rising claim costs.

The Grattan report proposes four reforms to rein in premiums rises and provide better value for consumers.

Firstly, the private hospital system should be more efficient and its costs should be lower.

Secondly, out-of-pocket costs must be reduced, and there must be renewed efforts to address overcharging by a minority of doctors.

Thirdly, prostheses must become cheaper in Australia, with consumers paying as much as four times for the same device compared with other countries.

And fourthly, insurers that fail to provide value for money for their customers should be barred from raising their premiums.

Professor Duckett said high government subsidies for the private health insurance industry combined with tax penalties for people who fail to take out hospital cover facilitates a sheltered industry.

“This is an industry which is not functioning as a normal market,” Professor Duckett said. “

“It’s both subsidised, which is unusual, and also you’ve got tax penalties if you don’t take out health insurance. What’s happening is that people are responding to that by choosing products which are the cheapest products and they end up with junk policies.”

Private Healthcare Australia chief executive Rachel David said she disagreed that the industry was cosseted, but agreed it was over regulated, with multiple regulators and layers of government bureaucracy dealing with health funds.