Australia's private health insurance sector needs "shackles" removed to free it to play a bigger role in improving the efficiency and transparency of the country's high-cost healthcare system.
The call to remove restraints was made in a Productivity Commission report, released earlier this week, that highlights that like all other players in the healthcare system, health insurers face mixed incentives to encourage preventive care.
The report says that there are several options for addressing the current deficit in risk equalisation, including a prospective system (as used in the Netherlands) in which transfers between the funds reflect the differences in expected claim costs, rather than ex post claims. Another option might be the rigorous independent assessment of the net benefits of private insurers’ Chronic Disease Management Programmes with these benefits being largely quarantined from risk equalisation.
A further option, which would require a less significant (or no) overhaul of risk equalisation, is a cooperative approach by insurers to manage chronic illness. This would reduce free riding, says the report.
Under current policy settings, private health insurance premiums have been rising at rates well above the CPI, and for the first time in 15 years, the proportion of the population covered by private health insurance has fallen. It is in all insurers’ interests to reduce those pressures. It may be feasible to develop some common approaches to reduce claims through better management of chronic conditions, even if the strategies are executed differently from fund to fund. The high cost of prostheses and the strategic activities of public hospitals to switch patients admitted into emergency departments to privately-insured status have also been important drivers of premiums, although policies have changed recently to reduce those pressures.
The report also notes that private health insurance is highly regulated — with many of the most significant rules stemming from the overarching principle of community rating, which, unlike orthodox insurance products, sets premiums that are unrelated to the claim patterns of the class to which a person belongs. Accordingly, a person aged 70 years old (who has higher than average claims) will pay the same premium as a person aged 20 years (who has low average claims).
‘Risk equalisation’ underpins community rating by requiring that insurers with healthier members bear some of the costs of insurers with greater representation of less healthy people.
While this may be equitable, it has the serious disadvantage of lowering the incentive to invest in preventative care, because any gains made by one insurer are shared with the others. Where insurers are investing in prevention, they could readily lose 50 cents for every dollar of benefit they obtain from avoiding health care costs, which must weaken the commercial viability of such actions, says the report.