By Andrew Main
Health Minister Greg Hunt’s recent moves to make Australia’s private health cover slightly more affordable have had the effect of lifting the bonnet on the system, and what they show is that there’s a mutual reliance between the health insurers and the government that’s something of a tightrope act.
In simple terms, the health insurers will be allowed to discount premiums by 2% for each year by which a person is younger than 30 years old, to a maximum of 10%.
The insurers have all stated that they will pass the savings directly on to clients, which they will have to do anyway to lift membership numbers at the lower end of the age spectrum.
The bonds that bind
This is all about pooling risk of course. But what a lot of people don’t realise is quite how tight the bonds are between the insurers and the government.
Just compare, for a moment, how the general insurers operate in high risk areas like north Queensland. They know very well that coastal communities are at risk of blowing away so they set their premiums accordingly. There are screams and yells from affected communities but effectively the market is working.
Now look at the private health equivalent. Someone in their 50s with a dodgy hip limps in to the insurer and the insurer can’t decline cover. This is clearly a pre-existing condition and the insurer’s only defence is to impose the 12-month waiting period.
The top cover premium might be $5000 a year but at the end of the year the member will be able to go into a private hospital for a hip operation, at a time relatively convenient to them, and have an operation worth somewhere between $20,000 and $40,000 paid for almost totally by the insurer.
That’s an extreme example but that’s what’s happening. The health insurers also have to get their annual premium increases agreed by the government, so it’s not a free for all by any means. As you saw, they even need permission to cut their rates.
The obverse of this situation is that the government has given health insurers a stick to encourage people to take out private health cover, in the shape of the tax surcharge on higher income earners who choose not to take out private health insurance. Singles earning over $90,000 a year or couples earning over $180,000 pay the Medicare Levy Surcharge of between 1 and 1.5% of income if they don’t have private health insurance.
Why? Because the government needs the private health insurers as much as they need the government. Any public hospital doctor or administrator will tell you that without the private hospital industry, the public system would be horribly overloaded and waiting times for elective surgery would be even longer.
The other inescapable reality is that as we all live longer, health spending in Australia and other developed countries is a black hole which no measurable amount of money will ever fill.
That sounds a bit scary but at least the relevant regulators and bureaucrats in Australia understand that, and continue to make sure our private health insurers can survive and hopefully prosper.
Hunt also made it clear that overcharging by the makers of prostheses is going to have to stop, in response to some serious lobbying by a very annoyed private health insurance industry.
Worst case scenario
If you really want to see what can go wrong, look at what’s happening as President Trump fiddles around the edges of Obamacare with the clear intention of having it collapse.
One of his moves last week was to announce that the US government would stop paying subsidies to health insurance companies that help pay out-of-pocket costs of low-income people, a key component of Obamacare.
Most analysts say the move will backfire, increasing health insurance premiums and forcing more people to remain on the lowest safety net system, Medicaid.
Conclusion? Health insurance is one of those systems that’s held together by mutual need between governments and companies and any moves to change it tend to be a bit like pulling out Jenga blocks from a wooden tower.
Trump, meanwhile, is starting to kick the tower on the deluded basis that his new plan will be better than Obamacare. Congress thinks otherwise.
Back in Australia, Greg Hunt’s move has been well received but analysts don’t expect any dramatic lift in takeup of private health insurance by the under-30s.
The general view is that it won’t cut their premiums by even a dollar a week and Morgan Stanley analyst Daniel Toohey calculated that even if the 20 to 30 years old age bracket lifted their participation to the 30-to-40 year old level, it would boost the customer base by a relatively modest 4%.
That said, it’s an incremental business. Net growth in membership among the industry last year was a mere 0.9% and a tightly run health insurer such as Newcastle-based nib makes a pre-tax profit of only 5 or 6% of premium income.
The news did help the share price of nib and the other listed health insurer Medibank.
Medibank shares enjoyed a 5 cent rise on Thursday, the day of the announcement, to $3.04 and a further lift to the $3.10 level on Friday, where it also closed at on Monday.
Nib did a little better, climbing 11 cents on the announcement to $6.01 and then lifting again on Friday to $6.07, and lifting further on Monday to $6.17.
Call it a good reception and a small rise, followed by a minor rethink on how hard it will be to make a big difference.
That share price reaction does show the market is working. The health insurers are this week in a slightly stronger position than they were before, but the hard work of increasing membership is still ahead of them.
Greg Hunt’s changes aren’t a miracle cure for the insurers but they are a useful tweak and they show the government is listening.
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