Crunch time for health funds

HEALTH funds believe this month will provide a crucial test of federal reforms to the insurance rebate.

HEALTH funds believe this month will provide a crucial test of federal reforms to the insurance rebate and whether members believe their policies still provide value for money.

The introduction of a means test for the insurance rebate last year prompted many members to pay their premiums in advance, to maintain the savings for as long as possible, while health funds fear others would have overlooked the requirement to nominate their income level if receiving the rebate as a premium deduction.

The Australian Taxation Office has yet to analyse how many members have been hit with a higher tax bill due to their failure to nominate an income level. With an estimated 98 per cent of members receiving the rebate as a premium deduction, much depends on the diligence of those 2.5 million tax returns already lodged with insurance details.

The government has also stripped the rebate from the Lifetime Health Cover surcharge paid by members who took out insurance when they were older, thereby adding to their costs.

Several health funds say they expect a surge of membership inquiries from mid to late August, when they believe most tax returns will be done, perhaps continuing the trend of members looking to downgrade or alter their cover to save costs.

It comes as the private health insurance regulator examines why so few health fund members are prepared to switch funds for a better policy or premium, and whether new measures are required to increase competition.

In a new discussion paper, the Private Health Insurance Administration Council questions whether the lack of movement between funds is because members are satisfied with their insurer, have adopted a "set and forget" approach, see added benefits to staying, or simply

find the market complex and difficult to compare, with limited knowledge about portability arrangements.

The paper suggests the intransigence may be the result of the wide variation and inconsistencies in prices, coverage, benefit arrangements, waiting periods and co-payments offered by different health funds.

"The result is that consumers' ability to identify what is the best value offering for them, and to exercise their right to switch health insurance providers, is challenging to say the least," the paper states.

Industry sources told the regulator that in 2011, between a quarter and a third of funds' new members had transferred from other funds, but two-year retention rates across insurers are declining, which may be a result of switching or policies lapsing.

If members are opting to reduce their level of cover to cut costs, the regulator points out that there are often cheaper policies at other funds, but a lack of members willing to switch.

"Given this price dispersion of hospital products, and given that price has been identified as the primary reason for consumers switching insurers, it is perhaps surprising that there is not more evidence of consumers willing to move from one insurer to another in search of what they consider to be better value for their 'PHI dollar'," the paper states.

Membership rates remain high, however.