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.