I'd like to highlight an area of regulation pertaining to the private health insurance sector that urgently requires reform.
The Risk Equalisation scheme must be amended, because at the moment, it totally lacks equity. Through my role as Chairman of HIRMAA (the peak body for restricted and regional funds I've been raising this contention with the Federal government (and the previous one) for quite a while. Unfortunately regulatory reform in this area is being stymied, due to no good reason I can see, other than the powerful opposition of the big insurers.
Risk Equalisation is essentially a new name for what we used to call reinsurance. It's a concept which has been a central aspect of private health insurance since October 1976 (having been preceded by a similar arrangement known as the Special Account that had been introduced in 1959).
I agree we need to retain the system of Risk Equalisation funds pooling. However, because of the differences between the big and small players, a far more equitable approach would be to have two separate pools.
I have long argued and will continue to argue that mutuality is a very appropriate setting for private health insurance. This position is even more applicable in today's economic climate, since last November the opportunity for higher returns on conservative investments is a virtual impossibility.
In our funds 85% of contributed income is returned to members, either in the form of pooling - but primarily as benefits, 10% is used to cover administrative expenses, leaving only 5% to increase reserves to meet the prudential requirements of the Federal Government. The question this equation leaves us with is: where, as a publicly listed company, do you find room for your shareholder?
Risk Equalistion has an important place in the industry, but it needs to implemented in a way that is not anti-competitive to the smaller, restricted and regional, not-for-profit mutual funds.
The role of Risk Equalisation has been to support community rating by distributing the costs of hospitalisation for the aged (now over 55 years) and other health fund members that are subject to high cost hospital claims (i.e. exceeding $50,000 in any one year).
Managed well, Risk Equalisation has an important social role to play in ensuring health insurance is available to all Australian citizens; alleviating considerable pressure from the public purse. Without it, we would be faced with a situation where "high risk" members of the community, such as the over 65's, or those with serious pre-existing conditions, were completely excluded from coverage (much as they already are in other sectors of the industry such as travel insurance).
Regulators also need to be aware that the Risk Equalisation scheme should not act as a major disincentive to the recruitment of younger members. In particular, the twenty year olds coming off their parents' membership when they cease to be students.
Initially introduced in an era where private health insurance was an entirely a not-for-profit mutual industry, the current arrangement also fulfilled a social policy objective and at one stage was supported by up to $100M per annum in Commonwealth subsidies.
In recent years the construct of the private health insurance industry has changed significantly with; conversion of for-profit health funds to for-profit entities, the emergence of off shore entrants to the industry (such as BUPA) and the de-mutualisation of some of the participating funds (e.g. MBF, NIB and soon to include AHM).
From 1 April 2007 the reinsurance scheme became known as the Risk Equalisation Scheme and the previous age 65 threshold and 35 day rule for the chronically ill for cost sharing between funds was eliminated and replaced by 2 separate pooling arrangements: an aged based pool, and a high cost claimant's pool.
Originally, the percentage distribution ranges (from 15% to 82% depending on age) was designed to ensure that the overall value of the distribution between health funds was similar to the sum of the distribution amount applicable from the previous reinsurance scheme.
Even back then many industry participants expressed concern that the growth in the overall pool size that had been experienced in recent years was unsustainable, and that with the somewhat arbitrary allocations determined for the new scheme (i.e. the scale of 15% to 82%) that periodically these percentage allocations should be reviewed to ensure that the Risk Equalisation pool size for distribution did not expand at too great a rate.
The development of the Private Health Insurance Act (2007) provided an underlying assurance that the annual size of the pool would not exceed 2 billion. Despite this it has grown steadily beyond its limits. In 2003/04 it was $159.9M. The overall pool size for 2006/07 (last official published data from PHIAC) was $2,519,093M with a total of $197.8M distributed between funds. It is estimated to be 2.7billion.
As an example MBF was a recipient from the pool of $83.4M ($120.14 per average hospital policy), NIB was a net payer of $46.7M ($164.64 per average hospital policy) and a HIRMAA member fund (Defence Health) was a net payer of the sum of $25.7M ($430.85 per average hospital policy).
In short, the biggest payers in to the scheme are the smaller, restricted, regional, not-for-profit mutual funds; whilst the biggest beneficiaries of the scheme are MBF, Bupa and Australian Unity.
Regulation has fostered our current situation in which the smaller, restricted, regional, not-for-profit mutual funds are subsidising the dividends for profit funds. The pools must be separated along for profit/not-for-profit lines. This would mean lower premiums for our members.
In light of the changing nature of private health insurance and its participants and the continual escalation in costs that are transferred between funds via this mechanism Risk Equalisation regulations urgently deserve further review.
John Rashleigh is Managing Director of Navy Health Limited and has held his current position since he joined the company in June 1999. John has over 30 years experience in the private health care sector embracing health insurance, private hospitals and aged care facilities. He is Deputy Chairman of the Australian Health Service Alliance, President of the Health Insurance Restricted Association of Australia (HIRMAA), and a director of the Australian Centre for Health Research. He is a former Vice-President of the Private Hospitals Association, Chairman of the Health Benefits Council and the Victorian Health Coalition. He is a fellow of the Australian Institute of Management and a fellow of the Australian Institute of Company Directors.
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Fair should be fair
John,
Not to get into an argument about what is written or to put another view, it nevertheless seems appropriate to clarify part of the discussion presented.
You followed your list of examples of recipients and payers of dollars from the risk equalisation pool with a reference to smaller and larger funds, as though the basis for paying or receiving payments for the pool is effectively whether you are a small or a large fund. That infers something which I don't think is correct.
In fact, the largest fund, Medibank Private, had always been a net payer, while some relatively smaller funds such as Australian Unity have been recipients, as you point out, quite probably relating to the average age of their membership. This is not an issue of size, but a policy aimed at maintaining the underpinning ideal of community rating, which respective governments have maintained as a core value of the health insurance legislation in Australia. That is, all Australians should have equitable access to their choice to be covered by health insurance independent of their underlying health status.
The risk equalisation pool is based on that philosophy and on the (correct) premise that older Australians have a greater requirement for health services and are, on average, likely to cost all of the contributors to the health fund they have chosen more than younger members. This, in turn, would logically result in higher outlays per member for funds with a greater proportion of older members, and hence result in higher premiums to cover the costs of those outlays.
The absence of a risk equalisation pool could establish a cycle of continuing health insurance with their fund becoming less and less affordable for older Australians, just at a time when they are most likely to need that cover. Simultaneously, younger people making a choice of one or other health fund would be dissuaded from choosing a fund that needed to charge higher premiums due to their disproportionate coverage of older people, causing further pressure on premiums for that fund, loss of even more young members, and eventually the fund might no longer be viable.
Risk equalisation offsets a large portion of the cost of the outlays for older members of each fund, as well as for expensive catastrophic cases, and spreads that across the different funds based on overall membership. That way, people aren't penalised for staying in a fund for a long time, and funds with an ageing membership can remain competitive and viable.
None of this argues against having separate pools for smaller and larger funds. It just points out that the argument is not whether big funds are all winners and small funds all losers as may have been perceived from the blog above. Fair should be fair - even the arguments to explain such - and there is still a lot to be said for having a system of risk equalisation that ensures that funds with greater proportions of older or more vulnerable members are protected to some extent from the likelihood otherwise of premium increases at a rate well above the rates of increase for funds with younger and/or less vulnerable members.
If an argument is to be made for separate pools based on market share of a health fund, then by all means make it based on the different overheads or fixed costs that might apply to large as opposed to small funds. Although size may count, it is still wrong to infer that there are "big, bad funds" that are continually extracting funds from "good, small funds". That is simply not the case, and certainly not the basis for the risk equalisation.
Stan Goldstein