Private health insurance in death spiral

Australia’s private health Insurance (PHI) industry urgently needs a rescue plan to stop its death spiral, a Grattan Institute report released today, warns.

“(I)t’s now clear that regulatory tinkering, government handouts and blame shifting are not going to solve the industry’s fundamental problems,” the report said.

It urged the Federal government and industry leaders to get together to forge a plan to rein in “greedy surgeons” who charged exorbitant fees; stop private hospitals keeping patients in hospital too long, giving them care they did not need; end the rorts in the prosthesis and device supply chain so private patients and their insurers paid no more than public patients; and ensure private health insurers who failed to give members value for money were prevented from charging ever-increasing premiums.

The report found the COVID crisis had not saved private health – the industry was in a death spiral before the pandemic and was “still in a death spiral today”.

The causes of the death spiral were well known. An ageing population, increased use of healthcare services and rising healthcare costs were driving insurers’ benefit payouts higher each year.

As benefits increased, so did premiums. Rising premiums made health insurance less affordable and less attractive – particularly to younger and healthier people. As they dropped their insurance, the insurance risk pool shrank, premiums went up, more young people dropped out and so the cycle continued.

The latest APRA statistics show despite a 0.7% increase in policy revenue to $25.2bn for the year to March, PHI profits in the period were down 2.2%, to $951.5m, while the profit margin was squeezed 1.6 percentage points to 2.3%.

But PHI plays a big role in Australia – most procedures are done in private hospitals and although people with PHI have dwindled over the years (see: PHI too expensive, too confusing, too little value: Choice), more than 40 % of the population were still covered by PHI. But for the past 20 years, PHI premiums had been rising faster than wages and inflation. Australians were paying more but getting less.

The report focuses on four specific problems – private hospital costs, which would be lower if private hospitals were as efficient as public hospitals; patients’ out-of-pocket expenses, which were a major source of people’s dissatisfaction with PHI; a minority of GPs whose “egregious” billing was a major cause of increased costs; private insurers paying too much for prostheses, because the way they were priced was opaque and not subject to competitive forces; and premium increases which were too great and too frequent.

The report said insurers that would not – or could not – offer customers value for money should not be allowed to raise their premiums. “Change is inevitable. But at the moment each industry player is looking out for themselves and policy settings inhibit many sensible reforms,” the report said.