A new survey, which is part of a widespread government consultation on private health insurance, has caused a stir by suggesting health insurers might be able to set premiums based on health risk factors.
The survey asks a number of questions about what consumers seek when they consider buying private insurance. It includes a question:
If insurers were permitted to vary their premiums for different customers, which factors should be considered?
Choices include smoking behaviour, age, gender, “health risk factors” and an open-ended field.
If health insurers were able to charge people different amounts based on certain health factors or lifestyle, their commercial incentives would override the government’s public policy objectives.
One forgotten point in all of this is that our public system, Medicare, exists to ensure all people have equal access to health care regardless of risk factors. There’s little point trying to force private insurers to do what Medicare already does.
Rather than questioning whether private health insurers should be allowed to discriminate, we should instead be asking whether governments should withdraw their support for private insurers that will never have the same public objectives as the government’s own health care system.
Private insurers’ commercial concerns
The government is always concerned with big-ticket items in the health budget, and budget papers estimate private health insurance subsidies are now costing A$8 billion a year.
There are also concerns about rising premiums (which rose by 6.2% this year) and consumer dissatisfaction with private insurance as revealed in this year’s regular survey of the industry by the Australian Competition and Consumer Commission (ACCC).
The industry also has concerns. While coverage continues to grow (from 11.1 million to 11.3 million people over the last year), many are downgrading their cover, typically to products with restrictions, high co-payments and only “private patient in public hospital” cover.
The ACCC survey suggests that consumers tend to take little notice of the fine print in policies (many people simply take out insurance to avoid the Medicare Levy Surcharge). As a result, they are shocked and annoyed when they come to make a claim and find the limits of their policies.
The industry is also concerned with what is known as “adverse selection”. That refers to people with known high needs being more likely to take insurance than those who assess their needs as low.
The insurers’ particular dislike is what they call the “hit and run” customer who, aware of a coming need (hip replacement, pregnancy), takes a policy for the minimum period (usually a year under the pre-existing condition rule), then drops the cover after making a large claim.
In most insurance markets insurers try to overcome these problems through what is known as “risk rating”. This means they charge different premiums depending on known risk factors. Motor vehicle insurers, for example, set higher premiums for young drivers, and reward responsibility and loyalty with no-claim bonuses.
When the Howard government re-introduced subsidies for private insurance, it did not allow insurers to discriminate on the basis of risk factors. This is known as “community rating”.
The only exception is the government’s mandated “lifetime health cover”, under which there is a 2% loading on premiums for each year people defer taking out insurance once they reach age 30.
Thus, lifetime health cover already discriminates based on age. But this discrimination is almost certainly not as strong as would occur in a less regulated market. This is because, on average, lifetime cover means that people aged between 30 and 55 subsidise older members.
An unregulated age-rated system would result in much higher premiums for older people. Discrimination based on other factors, such as smoking, obesity, chronic conditions and genetic predispositions, would lead to even higher premiums for people with known risk factors, rendering insurance unaffordable for these groups of people.
Why bother with private health insurance?
The fundamental problem facing this and previous governments is that they are trying to reconcile the irreconcilable – the clash between a public policy of community rating and commercial incentives for risk-rating. They are trying to cajole and regulate private firms into doing what the public sector can do much better.
Medicare, and similar public insurers in other countries, achieve community rating through the tax system, and do so at a much lower cost than can be achieved through private insurance.
OECD data shows that among prosperous developed countries, which all have much the same health outcomes, the more they rely on private insurance to fund health care the more they have to pay for health care.
The standout example of a country that has relied on private insurance is the US, where health care absorbs 18% of GDP, compared with 9% in countries with single national insurers.
Rather than trying to fiddle with private insurance the government should be asking whether the industry can serve any useful purpose that Medicare cannot serve.
There is often reference to “taking pressure off the public system”, but private hospitals, funded by private insurance, draw specialists and other staff away from public hospitals. The patient who, funded by private insurance, gets to the front of the queue for elective surgery lengthens the queue for public patients.
Should governments support these private companies?
It’s now 46 years since the Commonwealth last subjected health insurance to economic analyses. Subsequent studies such as those commissioned by the Howard and Rudd governments have been about how to support private insurance, rather than whether it should be supported.
Unlike the motor vehicle and other manufacturing industries, private health insurance has enjoyed the privilege of successive governments simply assuming it should be generously supported.
The questions raised in the survey are important ones, because they go to the heart of our public values about sharing and personal responsibility. It will be very interesting to see the results. But they need to be part of a much wider public discussion about whether governments’ support of private health insurers adds value to health care.
The real question here is not whether health insurers should be able to behave like other insurers, but rather whether the government should be supporting private insurers at all. Would the funds used to subsidise private health insurance companies be better used to strengthen the government’s own health care system, which is guaranteed to abide by its public objectives?