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Latest submission to Senate on private health insurance

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The following is an edited and condensed extract of the AMA’s submission to the ACCC report to the Senate on private health insurance.

In Australia, the public and private systems work together as a part of a health system that provides patients with universal access to affordable health care. The balance between the private and public system cannot be overlooked.

The private health sector is a large contributor to the system.  In 2014-15, 42 per cent of all hospital separations were funded by private health insurance; where 50 per cent were public patients and the remainder were self-funded. Not only is it a large contribution, but it is a cost effective one.  In 2014-15, there were 4.1 million privately insured hospital separations for approximately $12 billion in outlays, or around $3000 per separation, compared to 5.9 million separations in the public sector for a combined government outlay of $48.1 billion (or $8,100 per separation). While the service mix and complexity may differ between the sectors, the private sector very efficiently complements the public sector. If consumers withdraw from the private sector, these services will need to be provided by the public sector. Under current capacity, the public sector will either not meet the additional demand, or will only do so at a higher cost to governments.

We need to ensure that as private health insurers interact with patients and hospitals, the underpinning regulation promotes the efficient supply of health services. Private Health Insurance (PHI) has specific features that make the design of efficient regulation especially complex. This is further compounded by the specific historical development and place of PHI in the Australian context – as a form of supplementary insurance to Medicare, with the primary purpose of providing private hospital cover. Current regulation, as well as defining the scope of the cover PHI provides, includes restrictions on premiums through Community Rating and Lifetime Cover, means-tested subsidies for PHI take-up (the PHI rebate which is among the top 20 most expensive Federal Government programs), along with means tested tax penalties (the Medicare Levy Surcharge) for the failure to take out cover, and price controls over increases in PHI premiums.

Managed care

 Australians can choose to obtain their health care solely from Medicare or use a combination of Medicare and PHI to meet their medical needs.

PHI offers several advantages over the public system: a patient has the option of being treated by their own doctor, they have more control over when and where they receive medical care, and the waiting times for elective surgery tend to be considerably shorter.  In short, PHI provides choice for the patient and, without that choice, its value is diminished.

Yet there is a subtle, and defined, shift from a system of patient control to managed care occurring in Australia. Australians do not want US-style managed care imposed on a system that currently produces superior health outcomes at lower cost (USD$4420 here compared with $9451 in the United States). Managed care, in terms of health care, means a person agrees to only visit certain doctors and specialists within their health care plan – limiting their choice of practitioner.  Australia and Australians have not had a public conversation about whether they agree to relinquish control over their health and their health system to the private health insurers. (This change has occurred through the change to the contracting with hospitals with no-pay clauses; publication of practitioner details; establishing closed shop referral databases; and demanding pre-approvals prior to surgery.)

Competition in the sector

The level of competition along the supply side of private health services impacts upon the competition between private health insurers.  Both insurers and providers (hospitals and practitioners) have indicated that competition is not as effective as it might be. 

Some of the inputs to the provision of health can be influenced or controlled by the private health insurer. These are generally limited to hospital contracts, but do stretch to the pre-approving of surgery. As a result, contracting between the insurers and hospitals (large groups through to day surgeries) has become more vexed and publicly acrimonious at times.

Contracting is a voluntary, deliberate, and legally binding agreement between two or more competent parties.  However, it can be argued that firms are not operating in a competitive market and the factors at play are such that agreements are not voluntary. Hospitals need to have a contract with the major private health insurance funds (suppliers). Some insurers have such a strong market position that they would be considered price makers, where others are considered to be smaller, and thus price takers. Smaller insurers are beginning to contract as a collective to improve market power, and the Australian Health Service Alliance now represents 28 of the 36 registered health funds, creating what they claim is the third largest buying group. 

Furthermore, a small day surgery that may be practitioner-led may not have an equal power relationship when entering a contracting arrangement, nor the ability to undertake the detailed financial modelling that insurers can use to gain a more attractive contracting outcome – this can effectively provide the ability for insurers to determine what small day practices remain viable. This is problematic as small day surgeries can remove cases from the higher cost environment of overnight hospitals, as well as be areas where innovation can flourish.

As a result of this imbalance, the AMA is beginning to see variations in contracts that shift the nexus of control from the provider/patient to the private health insurance fund – managed care. 

Publication of a practitioner’s details

Private health insurers offer gap cover schemes to provide their members with certainty about out-of-pocket expenses for their privately insured medical care. Medical practitioners electing to participate in a gap cover scheme must agree to the terms and conditions that are set by the insurer.  One of the common terms and conditions is that the medical practitioner agrees to information about them being published including their name, practice address, contact details, gap agreement usage and participation rate, and average gap charges. 

Bupa has a ‘Find a Healthcare Provider’ section of its website. It provides information on the gap payment that may apply with providers it is contracted with, as well as information on the percentage of services, roughly, under which providers participate in its gap scheme.

Nib, Bupa and HBF are major shareholders of a system called Whitecoat, which owns a database that provides information on practitioner charging patterns using data gleamed from the HICAPS system.  Under the Whitecoat system, a provider’s agreement with the payment processing system (HICAPS) will lead to publication in the directory.  The directory is segmented by insurer, and only a customer of Nib can find Nib data about a practitioner’s billing practices or percentage of services provided under a no-gap or known gap scheme. 

Not unlike Trip Advisor, the Whitecoat site also allows consumers to search, find and book a clinical provider as well as review and share their experience.  Whitecoat has stated that the customer reviews are vetted to ensure they do not contain clinical details, however, members have raised concerns that the vetting process is not foolproof.

Already it hosts over 40,000 providers (thus far, mainly allied providers such as dentists) and shares 250,000 patient reviews. Around six million private health insurance members will have access to this information.

However, these types of websites have the potential for significant unintended consequences. Far from helping health consumers, posting outcomes of treatment online could lead to reduced access to care, particularly for patients with chronic and complex health problems.

Referrals databases for consumers and general practitioners 

Medibank has announced it is providing information to the referrals database Healthshare that will allow general practitioners to identify specialists who charge gap fees.

This initiative will provide information to approximately 85 per cent of general practitioners as to which doctors are part of Medibank’s ‘no-gap’ or ‘known gap’ schemes. The converse of this is that general practitioners will therefore know which doctors are not part of Medibank’s ‘no-gap’ or ‘known gap’ schemes as they will not be on the Medibank list. 

Effectively this action by Medibank (which will undoubtedly be followed by the other large funds) could have a detrimental impact upon the referrals received by practitioners who are not part of Medibank’s ‘no-gap’ or ‘known gap’ schemes, as patients are increasingly weighing gap charges into their decision on which specialist they choose. It is a closed shop, and it means that who is the most appropriate clinician for the referral, based on medical advice, may not be the consumer’s driving motivation.

Again, this is a private health insurer influencing the provision of services and determining who may provide a service and, since they set the ‘no-gap’ or ‘known gap’ amounts, at what price.

Setting of premiums

The regulation of PHI premiums sits on top of this complex regulatory environment. It has a dual goal of protecting consumers from excessive pricing and the Commonwealth from fiscal risk. However, it has been argued by the PHI sector that this regulation provides an inefficient outcome.

Many stakeholders are of the view that the compliance costs of the premium setting process are out of proportion to the benefits that are obtained. These concerns tended to focus on the process being too long, the amount of information required, and claims that outcomes would be the same even if the requests for increases in insurance were not reviewed.

A relevant consideration to the process and its ongoing appropriateness is whether market failures exist in the PHI market that justify the current suite of regulations. There are 36 PHI entities competing in the market. However, the Australian industry is highly concentrated. The two largest insurers, Medibank and Bupa, have 55.4 per cent of the market.  The Private Health Insurance Administrative Council in 2013 indicated that there does not appear to be ‘unbridled competition’.

Premiums are a key driver in the choice of insurance for consumers. The increase in exclusionary products has not been at the expense of growth in excesses and co-payments that are also used to mitigate premium costs.This indicates that consumers are purchasing products with excesses, co-payments and exclusions to minimise their premiums. Therefore any methodology to set premiums must ensure that this product remains viable and attractive to consumers. 

PHI used to be run mainly by not-for-profit funds. However, around 70 per cent of the insured population are now covered by ‘for-profit’ funds. The shift to a for-profit industry has created a greater need to ensure that there are sufficient profits to allow a respectable return to shareholders. It would appear that the private health insurers are not averse to increasing premiums in order to ensure a sufficient return for their shareholders. APRA data show an industry surplus (before tax) of $1.56 billion for the 2015-16 financial year (up from $1.45 billion for the previous year).  Nib’s 2017 half-year results showed a sizable return on equity of 31.7 per cent.  

The Federal Government has a decided stake in ensuring participation in PHI. The Government’s regulatory environment of incentives and penalties all but guarantees customers to private health insurers and has ensured that the PHI industry is one of the Australian economy’s more protected industries. However, it also has the effect of undermining consumer confidence in the product.  Allowing an industry with limited competition to set its own premiums may contribute to a further decline in confidence.

The full submission can be found at:  submission/ama-submission-accc-report-senate-private-health-insurance

 Jodette Kotz 

AMA Senior Policy Advisor