achr response to the phiac premiums and … phiac premiums and competition unit discussion paper ......

ACHR RESPONSE TO

THE PHIAC PREMIUMS AND COMPETITION UNIT

DISCUSSION PAPER

COMPETITION IN THE AUSTRALIAN

PRIVATE HEALTH INSURANCE MARKET

JANUARY 2013

ACHR Response to the PACU Discussion Paper on Competition Page i

CONTENTS

EXECUTIVE SUMMARY iii

INTRODUCTION AND OVERVIEW 1

About the Australian Centre for Health Research 1

ACHR’s mission 1

ACHR’s interest in the PHIAC Premiums and Competition Unit 1

Relevant ACHR-commissioned research 2

Competition in the PHI Industry – ACHR’s perspective 2

PHIAC’s role in PHI regulation and the Government’s policy agenda 3

Community rating and promoting practical innovations, not policy wish lists 3

Comments on the PACU Discussion Paper 4

Specific comments on the PACU Discussion Paper 4

A PRACTICAL FIVE-POINT PLAN TO IMPROVE PHI’S COMPETITIVE ENVIRONMENT 7

Advocating practical not radical reforms 7

Underlying assumptions of the Five Point Plan 8

Elements of the ACHR Five Point Plan 9

POINT 1: Sell Medibank Private from public ownership 9

Effects of a government-owned MPL on competition in the PHI industry 10

Has MPL’s conversion to for-profit status removed anti-competitive distortions? 11

ACHR Response to the PACU Discussion Paper on Competition Page ii

Competition benefits of removing MPL from public ownership 12

A compelling case? 13

POINT 2: Realistic capital adequacy and solvency standards 13

POINT 3: More effective and equitable risk equalisation 17

POINT 4: Untangle the regulatory regime 18

Competition effects of tangled regulation 21

Simplifying the regulatory tangle 19

POINT 5: Phase out Ministerial approval of premium increases from 2014 –

replaced by Independent PHI Pricing 20

Why does this anti-competitive process exist? 21

The anti-competitive effects of Ministerial price-setting 21

A simple and transparent means of removing Ministerial approval –

Independent PHI Pricing 23

The benefits of removing Ministerial approval 24

Why not start Independent PHI Pricing immediately? 25

CONCLUSION 26

ACHR Response to the PACU Discussion Paper on Competition Page iii

EXECUTIVE SUMMARY

The Australian Centre for Health Research (ACHR) promotes research and debate on health care

policy and practice, including in the private health sector. It draws on a diversity of health care

interests to support its work, and is well-placed to comment on the Private Health Insurance

Administration Council (PHIAC) Premiums and Competitions Unit (PACU) Discussion Paper,

Competition in the Private Health Insurance (PHI) Market.

While ACHR welcomes PHIAC’s interest in the dynamics of the PHI market, we believe that PHIAC’s

principal role in promoting an efficient and competitive industry is prudential and governance

supervision, not policy leadership. The PACU Discussion Paper signals PHIAC’s departure from that

conception of its role.

In general, the Discussion Paper is a helpful contribution to literature on the industry, including

bringing together some very useful data and other sources in the one document. ACHR is, however,

concerned that it:

Brings PHIAC into policy agendas that are more properly the role of the Department of

Health and Ageing.

Has an underlying presumption that more, not less regulation is necessary to improve

efficiency and competition in the PHI industry; and

Fails to question the efficacy of, or indeed the need for, the deep layers of existing

regulation in the industry, and whether greater deregulation is possible or desirable –

including whether PHIAC needs to exist separately to the general insurance and financial

services regulator, the Australian Prudential Regulation Authority.

ACHR’s view is that the PHI industry is highly over-regulated, and that some deregulation and market

liberalisation is justifiable in the public interest. To this end, this paper points out that the industry

and its products are subject to regulation almost as if they are toxic substances like nuclear waste.

This paper argues that PHIAC therefore should operate on the basis that:

Industry-specific regulation to protect consumers and taxpayers is necessary, but only to the

extent needed to ensure the minimum necessary to achieve this.

The preferred outcome is reducing not increasing regulation, reporting requirements and

related red tape; and

If existing general business regulation affecting the PHI industry already works effectively (eg

in the jurisdictions of the Australian Competition and Consumer Commission, the Australian

Prudential Regulation Authority, and the Australian Securities and Investments Commission)

there is no need for more onerous regulatory requirements specific to PHI.

ACHR Response to the PACU Discussion Paper on Competition Page iv

As a general principle, regulatory supervision and compliance standards in the PHI industry therefore

should not exceed those applying in the wider business world in general and in comparable

industries (such as general insurance and financial services) in particular.

This paper also highlights that two matters in particular constrain truer competition in the PHI

industry: the close regulation of PHI premiums, including personal approval of rate changes by the

Minister for Health; and keeping the market leader, Medibank Private in public ownership.

ACHR therefore advocates a Five Point Plan of “headline” measures to drive a more competitive

environment in the PHI industry. These Five Points are:

Selling Medibank Private as soon as possible to create a more level industry playing field.

Ensuring that PHI industry solvency and capital adequacy standards are adequate but

realistic, not gold-plated.

Promoting risk equalisation (RE) or reinsurance arrangements that protect insurers and

consumers against unexpected claims pressures while sharing the burden of high-cost claims

and high-risk insured persons fairly amongst all insurers. Current arrangements do not

spread risks fairly enough.

Untangling the regulatory red tape that strangles the PHI industry, recognising that PHIAC is

just one regulator of many. Considering the merger of PHIAC into the Australian Prudential

Regulation Agency is especially recommended; and

Ending Ministerial approval of PHI premium rates and increases, and let the market

determine its prices in a competitive environment though Independent PHI Pricing. The

Government’s proposed move to Consumer Price Index-linked annual indexation of the PHI

Rebates can drive this change by allowing Ministers to get out of premium setting without

Budget fears of Rebate-related cost blowouts.

Taken together these points, coupled with a general commitment to promoting competition through

greater deregulation wherever possible, and a regulatory attitude that trusts private health insurers

to do the right thing in their business activities, will go a long way towards fostering greater

competition and efficiency in the industry.

If these points are applied prudently, the Commonwealth’s very large direct investment in private

health through the Private Health Insurance Rebates (over $4 billion in 2012-13) will not be

compromised.

ACHR Response to the PACU Discussion Paper on Competition Page 1

INTRODUCTION AND OVERVIEW

About the Australian Centre for Health Research

The Australian Centre for Health Research (ACHR) is a company limited by guarantee and is

regulated by the Australian Securities and Investments Commission and Australian corporate law.

The Centre draws its funding from a range of sources, including health insurers and private hospital

operators, and it has received Commonwealth Government funding. It is run on a not-for-profit

public interest basis.

ACHR has a Research Project Committee, and intellectual and practical leadership is provided by an

Executive Director and a Board comprised of leading health sector representatives. A diversity of

health sector interests is represented, enabling ACHR to express an independent voice on policy and

regulatory matters affecting healthcare generally.

While it is passionately committed to the role of the private sector in the planning, funding and

delivery of health services, ACHR is not a spokesman for the private health insurance industry.

ACHR’s mission

Against this background, ACHR’s mission is to:

Commission research into health issues and topics that require further examination as part

of a move to create a better health system.

Promote wide public discussion of our commissioned research and related issues.

Influence policy formulation through the creation of an intellectually stimulating

environment where alternative ideas are discussed and considered continually; and

Identify and promote causes that have the potential to improve health delivery in

Australia.

ACHR’s interest in the PHIAC Premiums and Competition Unit

ACHR takes a particularly strong interest in promoting the contribution of the private health care

sector, improving its efficiency and supporting policy and regulatory changes that improves the

quality and accessibility of health services to all Australians.

This aspiration always has influenced our programme of commissioned research.

In that respect, ACHR is well-placed to respond to the issues raised in the PHIAC Premiums and

Competition Unit’s (PACU) Discussion Paper no 1, Competition in the Private Health Market (the

PACU Discussion Paper). This response paper is intended to make some constructive suggestions for

improving industry competition, as well as some frank observations about the PACU Discussion

Paper and what it sets out.


Relevant ACHR-commissioned research

A number of ACHR-commissioned research reports have been released over recent years that are

relevant to PACU’s examination of competition in the private health insurance (PHI) industry and

market. These are:

Econtech Pty Ltd, An Economic Assessment of the Private Health Insurance System (2008).

Julie Novak, Chris Berg and Tim Wilson, The Impact and Cost of Health Sector Regulation

(2010).

Julie Novak and Asher Judah, Towards a Health Productivity Reform Agenda for Australia

(2011).

Dr David Charles, Private Health Insurance Premium Change Process: A Review (2011); and

Professor Just Stoelwinder and Dr Francesco Paolucci, Risk Equalisation: An International

Perspective (2011)

ACHR commends these reports to PACU for its consideration and reference1.

Competition in the PHI industry – ACHR’s perspective

ACHR takes the view that a strong, vibrant and innovative private health sector, funded in large part

by private health insurance, is one of the reasons that the Australian health system is one of the best

in the world.

To keep the PHI industry as strong and efficient as possible, public policy and regulation should

promote affordable access to private health insurance by consumers on the one hand, and a

commercially and economically efficient PHI industry on the other.

These primary aims recognise that access to PHI is heavily subsidised by the Commonwealth

Government to encourage those who can afford it to take greater responsibility for funding their

health care by taking PHI cover. The Commonwealth, on behalf of the taxpayer, has its own

responsibility to protect its investment in PHI through the Rebates that are available the over 12.5

million Australians covered currently by hospital and general tables. Periodic policy intervention to

do this is inevitable and justifiable.

A Commonwealth policy and regulatory challenge is, however, to safeguard its Rebate investment

while not undermining the PHI’s industry’s overall efficiency and productivity, nor act so as to make

the industry’s products less available, attractive and affordable for consumers.

1 These reports are public and can be downloaded from the ACHR website: www.achr.com.au

http://www.achr.com.au/


PHIAC’s role in industry regulation and the Government’s policy agenda

In establishing PACU, and commissioning the PACU Discussion Paper on competition in the private

health insurance market, PHIAC is relying on section 264-5 of the Private Health Insurance Act 2007,

the principal regulatory instrument of the PHI industry. The Discussion Paper stresses the Act’s

words that PHIAC “take all reasonable steps…to strike an appropriate balance between the following

objectives”:

Fostering an efficient and competitive health industry.

Protecting the interests of consumers; and

Ensuring the prudential safety of individual private health insurers.

PHIAC seems to be assuming that each are separate but related missions, and therefore that it has a

policy mandate to explore the competition “space”. ACHR believes, however, that this is too broad

an interpretation, especially vis a vis PHIAC’s long-established role as an industry prudential

regulator and observer. Instead, in our view the first and second objective of section 264-5 of the

Act should be read in the context of the third: guaranteeing prudential safety.

In establishing PACU, and commissioning the PACU Discussion Paper on competition in the PHI

industry, PHIAC is moving into territory that, in a regulatory sense, is already very well-covered by

the Australian Competition and Consumer Commission and the Productivity Commission. More will

be said later about such regulatory overlaps and confusion.

It also appears that PHIAC is positioning itself to be a primary policy adviser to Government, a

responsibility that, in relation to PHI, traditionally resides in the Department of Health and Ageing.

In ACHR’s view it is appropriate for PHIAC to take an interest in relevant policy, to alert Government

to the need for policy adjustment or change, and indeed to advocate internally for such change. But

it is inappropriate for PHIAC as a prudential regulator to usurp policy and oversight responsibilities

from the Department or, indeed, from external agencies like the ACCC and the Productivity

Commission.

A further real risk of exercises like this is that the PHI industry will continue to be treated as a special

case in its commercial operations when in reality it is no different generically to, say, the general

insurance and financial services industries. PHI as a sector is already supervised and regulated to its

hilt and, as discussion of the regulatory tangle in Part 2 of this paper will show, PHI insurers are

servants of many policy and regulatory masters beyond PHIAC. It is safe to assume that insurers will

resist any attempt to broaden regulatory and reporting intrusions that do not increase genuine

competitiveness and productivity within the industry.

Community rating and promoting practical innovations, not policy wish lists

ACHR supports community rating which ensures, with the exception of Lifetime Health Cover

penalties, that all PHI consumers pay the same premiums for the same cover regardless of their age

and health status.


Nothing in this paper should be taken to suppose that ACHR advocates risk rating. It is accepted that

there is no political will to abandon community rating, and any such change would be a radical

transformation of the private health sector well beyond PHIAC’s scope and competence to consider.

Defending community rating, however, is not an excuse for policy-makers and regulators to treat PHI

as an unusually dangerous beast demanding their close attention – almost, as commented

elsewhere in this paper, as if it were nuclear waste. Arguably, when all is said and done PHI is just

another form of general insurance, with consumers buying insurance cover for defined risks with

specific terms and conditions. Furthermore, PHI is no different to other forms of insurance in that it

has a claims “tail” that needs to be covered by premiums and reinsurance. It is just that in PHI’s case

that claims tail is very short – for hospital and general treatment there is usually little or no lag

between insured episodes of care and resulting provider costs being quantified and finalised.

Similarly, the focus of the Five Point Plan in Part 2 of this paper deliberately is on significant but not

radical reform. Even the sale of Medibank Private Limited (MPL) – the first point of our Plan – is

merely an incremental step in the context of the PHI industry and its operation.

In ACHR’s view this also is not the time and place to consider radical systemic reform proposals such

as, for example, the Medicare Select scheme advocated by the 2008 Health and Hospitals Reform

Commission. Large-scale policy ideas such as that are most appropriately taken up with Ministers

and their policy advisers.

Comments on the PACU Discussion Paper

ACHR has not answered the specific and individual “Consultation Questions” in the PACU Discussion

Paper, as we do not consider that the ACHR can add value at that detailed level as can insurers,

industry associations and other PHI industry experts.

Instead, Part 2 of this Paper sets out a Five Point Plan that identifies, in our view, the top priorities

for regulatory and policy reform to promote greater competition and consumer responsiveness.

While not exhaustive, the Plan’s Five Points should be seen as primary priorities, from which

secondary-level competition-enhancing outcomes and innovations can evolve and adapt more

effectively.

Such secondary-level items include the continuing evolution of Broader Health Cover; making PHI

more genuinely health and not just hospital insurance; offering greater scope for consumers to have

an interactive health management relationship with their insurers; promoting product features

including exclusions and incentives for good health management behaviour; and encouraging

greater cover portability and discriminating consumer purchasing behaviour.

Specific comments on the PACU Discussion Paper

As a document, the PACU Discussion Paper is an excellent descriptive summary of the evolution and

operation of the PHI industry, and as a narrative contribution to the industry’s literature it is

welcome.


The overall tenor of the paper, however, and the Consultation Questions, reveal much more about

PHIAC than they cast light on the state of the industry.

Impressions left by the PACU Discussion Paper include:

PHIAC claims a mandate to inquire into day-to-day operations of PHI insurers that goes

beyond its traditional duties in prudential and governance supervision.

This includes the potential for PHIAC intruding into competition and consumer issues that

are either in the purview of another portfolio agency (especially the Department of Health

and the Private Health Insurance Ombudsman), or out of the portfolio altogether (such as

the ACCC).

In general, the PHIAC regulatory mindset clearly sees regulation in itself as a “Good Thing”.

Deregulation is not canvassed in the PACU Discussion Paper let alone considered, nor is it

highlighted as an option for the future. Consultation Question 22 is very revealing:

How could the regulatory system be strengthened or improved (ACHR’s emphasis) to

promote further competition as the industry faces future challenges associated with

population ageing, deteriorating population health, and rising health care costs?

If PHIAC’s starting position is that more, rather than less, regulation is necessary, that is

very worrying for not just the PHI industry but the wider private health sector. It also

seems to be an extension of the hackneyed presumption that healthcare is not “an

ordinary item of commerce”, and demonstrates that public policy-makers and regulators

do indeed have an ingrained suspicion of private sector funders and providers, and their

motives.

This also implies that existing regulation and supervisory arrangements are adequate and

effective and don’t themselves need review or reform – except to add to them. This

includes the failure of the PACU Discussion Paper to question PHIAC’s existence, role and

mode of operation, or their effects on the PHI industry and its performance; and

Information asymmetry is presumed to be a major problem throughout the PACU

Discussion Paper, as if consumers are incapable of making informed sophisticated choices

about their health needs and their health cover. Consumers are presumed to need

maximum regulatory protection, implying that PHIAC has a bounden duty to step in.

In summary, PHIAC should instead approach any examination of competition on the PHI industry

from the presumptions that:

Industry-specific regulation to protect consumers and taxpayers is necessary, but only to the

extent needed to ensure necessary protections.

The preferred outcome of any consideration of industry regulation is reducing not increasing

regulation, reporting requirements and related red tape; and


If existing general policy and regulation applying to the PHI industry works effectively (eg the

Trade Practices regime) there is no need for industry-specific duplication or extension.

In ACHR’s view the PACU Discussion Paper, and PHIAC’s underlying regulatory attitudes that

underpin it, fall considerably short of these goals.


A PRACTICAL FIVE-POINT PLAN TO IMPROVE

PHI’S COMPETITIVE ENVIRONMENT

Notwithstanding the claims made for its competition mandate through the PACU Discussion Paper,

PHIAC is a regulator first and foremost, not a policy agency. In ACHR’s view, PHIAC only has a direct

mandate to enhance the overall competitiveness of the PHI industry within its traditional and

appropriate areas of responsibility: prudential and governance supervision.

As part of the Government’s overall oversight of private health insurance, however, PHIAC also can

use its knowledge and industry insights to advise Government when there are policies in place that

are defective, or otherwise restrict or undermine effective competition between insurers to the

detriment of consumers.

Indeed, it is PHIAC’s duty to warn Government when policies are working against those objectives,

and to make recommendations about remedies while understanding that PHIAC can only advise, not

decide.

In an industry as broad and complex as PHI, there are many areas where there is room for

innovation. Indeed, each industry group – big insurers, smaller insurers, hospitals, doctors and allied

professionals – all have their own ideas of how the operating environment can be made more

competitive and efficient – usually from their individual perspectives and self-interest. ACHR,

drawing together as it does a broad range of private health sector interests, is well-placed to take a

genuinely wide view without having any particular axes to grind.

ACHR therefore prefers to focus on practical and realistic enhancements, including deregulation,

where innovation can mostly be made within current regulatory and legislative frameworks, and

introduced over the next three to five years.

In the ACHR Five Point Plan as presented in this paper, four of those points relate to regulatory

reform within PHIAC’s operation or advisory purview, including simplifying regulatory structure. The

first point of the Plan, moving Medibank Private Limited (MPL) out of public ownership, is, however,

a policy rather than a regulatory change. Nevertheless, if PHIAC takes its statutory competition role

seriously it should advocate to Government that it can make the industry more truly competitive by

ending the triply-invidious position of the Government being the overall regulator of the PHI

industry; MPL’s sole shareholder; and, since MPL’s conversion to for-profit status in 2009, the sole

dividend-taker from Australia’s leading insurer with almost 30 per cent of overall market share.

The ACHR Five Point Plan therefore is not intended to be an exhaustive manifesto for change but to

provide a set of “headline suggestions” as key steps necessary to promote greater price, product and

service competition in the PHI industry over the next five years.

Advocating practical not radical reforms

This is not the place to propose radical and root and branch reform of the private health sector, such

as the ambitious Medicare Select plan first developed by the 2008 Health and Hospitals Reform

Commission and developed in ACHR-commissioned work by Professor Just Stoelwinder and others.


Such proposals are major policy shifts, and they are more properly discussed with the policy

decision-makers: the Minister for Health and Ageing and her Department.

Therefore ACHR’s Five Point Plan, or any other innovations that are considered in the context of

PACU’s interest, therefore must be practical and realistically implementable innovations consistent

with PHIAC’s proper brief. In ACHR’s view, reflected in the Five Point Plan though not the PACU

Discussion Paper, PHIAC also needs to accept the hard truth that, when it comes to PHI competition,

it itself can be part of the problem and not just a solution.

Underlying assumptions of the Five Point Plan

There are several assumptions about industry, policy and regulatory environments that are assumed

in advocating ACHR’s Five Point Plan. These are:

The Three Pillars of private health insurance introduced following the 1997 Productivity

Commission inquiry into private health insurance in Australia – the current 30 per cent PHI

Rebate with loadings for those aged over 65; the Medicare Levy Surcharge; and Lifetime

Health Cover – are accepted by both sides of politics and will remain in place indefinitely.

With the exception of the period 2000-08, the PHI industry has been subject to extensive

and continuous policy, regulatory and market change since the introduction of Medicare in

1984. The pace has been especially rapid since 2008, with major adjustments to the

Medicare Levy Surcharge; means testing the PHI Rebates; constant changes to Ministerial

premium approval arrangements; and now the proposed indexation of the Rebates and

removing them from Lifetime Health Cover penalties.

In short, there is severe regulatory fatigue in the industry, and the rapid and politically-

charged changes of the last five years need to be stabilised and absorbed. There is no

industry appetite for avoidable new waves of regulatory or policy change in the short to

medium term.

Its multi-billion dollar investment in the PHI Rebates gives the Commonwealth Government

a legitimate direct interest in the financial health and competitiveness of the PHI industry,

and in the attractiveness of PHI products to consumers. Insurers and the PHI industry

accommodate this, not least because the Three Pillars positively influence the size and scope

of their consumer market; and

Community rating of private health insurance has broad acceptance and there is no appetite

to challenge it.


Elements of the ACHR Five Point Plan

The five points of the ACHR Five point Plan are:

Selling Medibank Private as soon as possible.

Ensuring that PHI industry solvency and capital adequacy standards are adequate but

realistic.

Promoting risk equalisation (RE) or reinsurance arrangements that protect insurers and

consumers against unexpected claims pressures but share the burden of high-cost claims

and high-risk insured persons fairly amongst all insurers.

Untangling the regulatory red tape that has strangled the PHI industry for many years,

including merging PHIAC into the Australian Prudential Regulation Agency; and above all

Ending Ministerial approval of PHI premium rates and increases, and let the market

determine its prices in a competitive environment though Independent PHI Pricing.

In short, the ACHR Five Point Plan offers a genuine deregulation programme that PHIAC can

consider, aimed at putting the pro-competition rhetoric of successive Governments into genuine

action.

POINT 1: Sell Medibank Private from public ownership

IN ACHR’s considered view, the sale of MPL is crucial to breaking through barriers to improved

competitive performance in the PHI industry. If PHIAC is serious about the market supervision

responsibilities it claims through PACU, PHIAC should advocate within Government that MPL be sold

at soon as possible.

To that effect, ACHR notes that the enabling Howard Government legislation for a sale, the

Medibank Private Sale Act 2006, has not been repealed and is still on the Commonwealth statute

book. Indeed, the Sale Act’s administration was formally reconfirmed as the responsibility of the

Minister for Finance and Administration, Senator Wong, in the major changes to the Ministry

announced in December 20112.

ACHR acknowledges that the sale of MPL is a policy matter, and that since coming to office in 2007,

the Government consistently has ruled out a sale. The point, however, is that a sale is legislatively

possible and in practice can be implemented in the short to medium term, whether by float or trade

sale. In ACHR’s view, PHIAC nevertheless should advocate within Government for its consideration

in the best interests of the PHI industry and consumers.

2 Commonwealth Administrative Arrangements Order, 14 December 2011.


Effects of a government-owned MPL on competition in the PHI industry

The anti-competitive impact of MPL’s public ownership can be summarised as follows:

The regulator owns the biggest insurer in the market: With a market share of 28 per cent3,

MPL is the only insurer with a strong presence in all States and Territories. The two largest

insurers, MPL and Bupa, have nearly two-thirds of the consumer market between them.

While the Commonwealth maintains the fiction that there is a separation between the MPL

shareholder (The Minister for Finance and Administration) and the regulator agencies (the

Department of Health and Ageing, PHIAC and the PHI Ombudsman), the reality is that both

shareholder and regulator ministers are part of the Cabinet and are bound by the collective

decisions of Cabinet. Neither can ever be wholly independent of the other.

This huge conflict of interest creates industry instability, uncertainty and leaves a constant

doubt as to whether the regulatory and compliance framework operated by Government

will always be fully impartial. In normal circumstances, arguably it also would be an

unhealthy market distortion attracting the Australian Competition and Consumer

Commission’s attention.

The government has deep pockets, and can use them at any time: In the 2004 Budget, the

Howard Government outraged the PHI industry by granting an $85 million equity injection to

MPL (with no incursion of principal or subordinated debt to the Commonwealth) to help

cover the severe underperformance of MPL’s investment portfolio.

This totally unexpected decision (even to the then Health Minister, though it was

subsequently was ratified by Cabinet) relieved MPL’s then revenue crisis without it having to

economise its product offerings or administration, or compromise its growth plans – and

also easing upward pressure on MPL premiums. However, none of MPL’s competitors then

or now have privileged access to effectively free capital finance on such a scale, and the

2004 equity injection’s effect on MPL’s premiums at the time artificially kept them

competitive.

Nothing prevents the Government of the day destabilising the PHI industry by doing

something similar again.

Sovereign policy and regulatory risk: MPL’s public ownership status, coupled with its size,

affects industry and investor confidence, and arguably helps to deter new entrants.

3 PHIAC (2012), Operations of Private Health Insurers 2010-11, page 3.


As the 2004 equity injection episode indicates, MPL’s competitors have no guarantee that

Government will not intervene in the market to safeguard its interests in MPL ahead of the

wider PHI industry and consumers. Nor do they have solid assurance that Government will

forego using policy and regulatory mechanisms to MPL’s market advantage.

Again, whether or not this capacity to interfere is used, the opportunity for Government to

intervene in favour of MPL is always there, and MPL’s competitors always have this at the

back of their minds; and

MPL’s ownership status affects its own behaviour: Although both the Government and

MPL’s leadership consistent argue that Medibank is a free agent in terms of its commercial

judgment and decision-making, MPL is neither fish nor fowl. It is not a truly independent

business entity, nor entirely a Government Business Enterprise.

MPL’s anomalous situation is summed up by its ability to be summoned to, and appear at,

Senate Estimates hearings as a government agency, and be called to account of normal

commercial decisions4. Similarly, MPL’s board and management ultimately are accountable

to its single shareholder, the Minister for Finance and Administration. When MPL’s leaders

always have to look over their shoulder to make sure that Government is happy with them,

and are also subjected to Parliamentary scrutiny, MPL’s relationship with the PHI market

place, including promoting the best interests of its members and prospective members,

cannot come first.

In short, MPL’s privileged relationship with Government creates an uncomfortable conflict of

interest for MPL and MPL’s leadership.

Has MPL’s conversion to for-profit status removed anti-competitive distortions?

In 2009 the Government, supported by PHIAC, converted MPL to a for-profit status while remaining

its sole shareholder.

This has been a revenue bonanza for the Government. Since 2009, MPL has paid over $1 billion in

dividends to Government, with around $300 million likely to be paid in 2012-135. The terms of the

dividend calculation and arrangements are a closely-held secret between the Government and MPL.

While it gives the appearance of independence, and at least allows the MPL board and management

to act more like a private sector company than a government agency, for-profit status makes little or

4 MPL’s extensive marketing budget and event sponsorship activities have come in for regular Senate

Estimates scrutiny, as they do not sit comfortably with its status as a publicy-owned entity. In a privately-

owned company these are normal commercial decisions entirely with the province of the board and

management, and indeed are part and parcel of maintaining a normal commercial presence.

5 Senate additional estimates hearings, 15 October 2012; The Australian Financial Review, 16 October 2012.


no difference to the ongoing competitive distortions caused by MPL’s ownership. None of the real

and perceptional problems outlined herein have gone away.

The other key consequence is that a publicly-owned MPL’s dividends to Government still have to

come from the income streams of MPL’s health insurance and other businesses (including its

growing portfolio of health advice and maintenance services), plus its assets and investments. Put

another way, MPL’s annual rate calculations, reserve provisioning, product offerings and investment

strategies need to take the Government’s dividend requirements into account.

Consumer opportunity costs can be illustrated simply. An annual dividend of $300 million, divided

by MPL’s roughly 1.6 million hospital and general policies as at the end of 2010-116, gives an average

figure of just under $190 per policy7. Distributing the dividend to policy-holders rather than the

Government shareholder would realise MPL customers a saving on their PHI premiums – and,

indeed, the Commonwealth would receive a commensurate reduction in its exposure to PHI rebate

outlays for MPL customers which, dividing the estimated annual PHI Rebate outlays for 2012-13 by

the MPL’s approximately 29 per cent share of total persons insured, is about $1.2 billion8.

Effectively, MPL’s for-profit status churns its anti-competitive effects, not mitigates them.

Competition benefits of removing MPL from public ownership

The benefits of MPL-related policy change are simple but far-reaching:

Creating certainty in the PHI market place: All insurers would be independent of

Government in ownership terms, whether or not they are for-profit. Removing sovereign

regulatory risk arising from MPL’s ownership status would create management certainty and

confidence that all insurers are getting the even-handed treatment from policy-makers and

regulators.

Creating a real and perceived level playing field with other PHI businesses: MPL, as a

government-owned entity, has a perceptional advantage in bidding for, particularly,

Commonwealth and State government contracts (for example, for telephone triage and

telephone and online health management and coaching services) by virtue of the fact that it

seen as a de facto fellow government agency by vendor agencies.

Whether it is real or imagined, removing such advantages would create a more equal playing

field for all insurers dealing with government instrumentalities.

6 Membership data compiled from authoritative PHI industry sources.

7 This figure excludes 262,000 General Only policies.

8 Based on 2012-13 Rebate special appropriation outlay estimate, Department of Health and Ageing, Portfolio

Budget Statements 2012-13, page 178.


It also ensures that there are no risks of any MPL acquisition of other public assets, such as

its 2009 purchase of Health Services Australia, being perceived or interpreted as being

discounted or “sweetheart” deals between one arm of Government and another.

The same applies to MPL’s consumer offerings. If MPL is seen to have the same constraints

upon it as other insurers in relation to product offerings, premium-setting and raising

capital, other existing players and potential new industry entrants can have greater

confidence that they can compete with the market leader on fair and equal terms; and

Encouraging new entrants to the industry: When the Howard Government was preparing

to sell MPL in 2006-07, the level of investor and operator interest in Medibank Private going

into private ownership was surprisingly strong. There was considerable serious interest not

only from within the existing PHI industry, but from private equity investors and established

health and general insurance business outside the industry, including leading players in

overseas health and general insurance.

The potential for significant fresh blood, not immersed in the deep established culture of PHI

in Australia, could give a huge boost to price, product and service competition in the

industry, and be innovative in ways that move PHI much further into becoming

comprehensive health service providers than they are now.

A compelling case?

In ACHR’s view, it is pointless to look at the competitive situation of the PHI industry without

acknowledging the MPL sale as the elephant in the room.

The PACU Discussion Paper’s complete silence on the implications of MPL’s status for competition

means, therefore, that its analysis of the sector is seriously flawed. If PHIAC is serious about its

competition mandate, it needs to acknowledge this shortcoming, undertake its own analysis of the

net industry effects of MPL’s ownership status, and give frank advice to Government about how best

to deal with them.

POINT 2: Realistic capital adequacy and solvency standards

PHIAC’s principal mission is to ensure that health insurers are capable of meeting their obligations to

people covered by their policies. That means that they meet capital adequacy and solvency

standards, sufficient to ensure that they can meet their claims, including at times when there is a

“run” on their reserves.

This is a vital regulatory and watchdog function. If it were not performed by PHIAC it would need to

be performed by another regulatory agency, such as the Australian Prudential Regulation Authority.

ACHR notes that PHIAC’s current review of Solvency and Capital Adequacy Standards currently is in

progress, and has been taking submissions from industry and other interested parties.


On its website, PHIAC writes that “PHIAC’s review of the capital standards aims to ensure that the

risks faced by insurers are consistently and accurately reflected, and to improve both insurers’

engagement with those risks and the quality of information available to PHIAC in support of its

regulation of the industry”9. While the message that the standards regime needs to reflect

contemporary PHI business is welcome, this website statement seems to reflect PHIAC’s self-

perception rather than industry and consumer needs.

The importance of capital adequacy and solvency standards is that the factors that they take into

consideration affect how insurers plan to meet them. Already operating on tight margins, insurers

need to set their prices, shape their revenue streams (including pricing their products) and tailor

their policies, while being sure in the knowledge that they can meet their reserve commitments

while remaining competitive in the PHI market place.

In other words, if capital adequacy and solvency standards are too conservative in setting reserve

levels, the level of revenue that a fund needs to satisfy them is commensurately higher. This affects

premium settings, which in turn affects the price settings of an insurer’s products. Furthermore, if

they are set too high or rigidly it may affect the ability of, particularly, smaller insurers to meet their

obligations, which may well make them easier targets for mergers and acquisition.

The PHI market is best-placed to determine the number of viable insurers it can accommodate

(subject to Trade Practices Act scrutiny), but it also sees that any shaking-out of insurer numbers is

best left to the operating of the market itself, and not be an unintended consequence of prudential

regulation.

What this basically means is that sensible prudential regulation should not apply nominal gold

standards, but adopt realistic benchmarks. These should relate to the basic expectation that

insurers meet their obligations under reasonably predictable stresses, but go no further than that. If

an insurer wants to provision beyond accepted standards, that is entirely a matter for its board and

executive, and their business judgment.

As indicated above, overprovisioning can affect premium bases and rate setting. Any compulsory

overprovisioning through unrealistic regulation has, therefore, serious implications not only for

individual insurers and their operations, but for the overall attractiveness and affordability of private

health insurance products. If it is serious about its pro-competition stance, PHIAC should ensure

that whatever emerges as from the Solvency and Capital Standards Review does not risk imposing

avoidable price and market pressures by regulating, in Othello’s words, “not wisely but too well”.

Regulations capping insurers’ capital and reserves also have their problems. ACHR notes that in

recent years PHIAC has endeavoured to impose caps on the level of capital and reserves held by

insurers. Such interventions are over-regulating in this context. Market forces are best-placed to

determine acceptable premium and benefit levels: if insurers’ pricing is subjected to upward

9 PHIAC Solvency and Capital Adequacy Review webpage: www.phiac.gov.au

http://www.phiac.gov.au/


pressure due to overprovisioning it will inevitably affect their market share. If an insurer chooses to

over-provide for their reserves, that should left as be a judgment for them, having reference to

Australian and international standards and externalities (eg Basel III accounting standards and

interest rates on borrowings). A realistic minimum standard of insurer capital and reserves

therefore should be more than sufficient to safeguard consumers’ interests.

Additionally, PHIAC’s website statement emphasises “the quality of information” and insurer

reporting obligations. As with the setting of standards, the provision of information – particularly

market-sensitive information – need only be the minimum needed to ensure that prudential safety

is being maintained. Over-reporting means additional cost to an insurer; costs contribute to

management expenses; and management expenses have to be met one way or the other. Keeping

prudential red tape and reporting requirements to a workable minimum exerts a downward

pressure on premiums.

Lastly, industry certainty always aids competition. Because of the fundamental importance of this

Review to the PHI industry’s operations, it is vitally important that it is completed, and its

recommendations considered and discussed by Government and industry, as early as possible in

2013. In ACHR’s view, it is important that any changed arrangements are in place to coincide with

the commencement of the next wave of policy change around the PHI Rebates, Lifetime Health

Cover, and any other reform measures that may commence in April 2014.

POINT 3: More effective and equitable risk equalisation

While community rating’s centrality to private health insurance in Australia is unquestioned, the

current risk equalisation (RE) system of spreading age and health status risks across the pool of

insured persons cannot similarly be assumed as untouchable.

As the PACU Discussion Paper notes, RE theoretically shares the economies of scale of larger with

smaller insurers. With reference only to members’ age (65 and older) and provision for high-cost

claims (ie claims costing more than $50,000), it is intended to provide a safety net against larger

claims and heavy claimers in any given year, reducing the pressure to recruit more “good” younger

and healthier risks to sustain the older and sicker in a community-rated framework10.

The problem for the existing RE arrangement is that is bears the hallmarks of its origins, an imposed

compromised between the then Government and PHI industry associations. In ACHR’s view, it

carries the following weaknesses:

Insurers can game RE to recruit a disproportionately high number of poor risks as part of

their business model (eg marketing themselves heavily to older consumers), calculating that

insurers with better member risk profiles will partially cross-subsidise them through RE.

10

PACU Discussion Paper, page 42.


As the PACU Discussion Paper states, the two largest funds by far, MPL and Bupa, are net

drawers from the RE pool11, reflecting their own attractiveness to an older membership

demographic.

Smaller insurers, particularly restricted funds with membership profiles dominated by

working-age contributors and their families (ie in age terms being predominantly “good”

risks) are more likely to be net contributors to the RE pool. Minnows are cross-subsidising

whales.

The current RE regime ran slightly ahead of the 2006-07 PHI policy reform package and the

resulting new PHI Act 2007. It does not make effective provision for Broader Health Cover,

or for incentivising insurers to make bigger investments in chronic disease management,

prevention and good health management services; and

If an insurer is a net drawer from the pool, meeting RE pool obligations affects their own

product design, pricing and marketing including, potentially, the need to recruit as more

“good” members as possible to sustain their own position, let alone that of their net drawing

competitors.

If progress is to be made towards a more competitive PHI industry, more effective ways of

preserving community rating by risks spreading need to be considered. A PHIAC Review of Risk

Equalisation, similar in intent to the current PHIAC Review of Solvency and Capital Adequacy

Standards, would be a welcome move by the regulator.

As a first step, PHIAC and PACU can consider the excellent international comparative study of PHI

risk equalisation commissioned by ACHR from leading health policy academics Francesco Paolucci

and Just Stoelwinder in 201112. Finding that Australian RE is “primitive” compared to some overseas

models, Paolucci and Stoelwinder concluded:

(We) conclude that a “perfect” RE scheme is the best regulatory strategy for maintaining

affordability while promoting competition and efficiency. Although “perfect” RE has not (yet) been

achieved, lessons from other countries point to the design features involving the expanded range

variables in the RE formula; the use of prospective, rather than retrospective calculation; the

frequency of funds transfers and the modality of financial flows13.

It would be beneficial for PHIAC to follow up on Paolucci and Stoelwinder’s work to reality-test

existing arrangements against overseas alternatives.

11

Ibid.

12 Paolucci and Stoelwinder, Risk-equalisation in health insurance markets: Models and International

Experience, Australian Centre for Health Research, 2011.

13 Ibid, page 2.


It may also be useful for PHIAC to think outside established conceptions of the industry-specific RE

pool itself. If, for example, it is accepted that PHI is akin to general insurance, if only with a short

tail, it may be feasible for insurers to maintain their commitment to community rating but buy

reinsurance directly from the genuine international Re: market, as do general and life insurers.

Whatever approaches are considered, the only thing that should matter is that community rating is

sustained in the most commercially fair and pro-competitive manner possible in the Australian

environment. The indications are that we can do much better in this department.

POINT 4: Untangle the regulatory regime

Radioactive waste is highly toxic, and the half-life of spent nuclear reactor fuel can range from tens

to millions of years. In Australia, as elsewhere, the handling and disposal of nuclear waste justifiably

is a highly regulated and supervised activity, especially given the great dangers that radioactive

materials pose to life and the environment14.

A sector of economic activity that, unaccountably, has a similarly high level of close and intensive

regulation to radioactive waste is the private health insurance industry.

The PACU Discussion Paper describes closely the regulation of PHI by PHIAC. It discusses the policy

role of the Department of Health and Ageing. But it doesn’t present the whole very broad

regulatory and compliance picture – a complicated and tangled mess of Commonwealth and State

legislation and agencies – in which a plethora of interested regulators have at least some role in

supervising and directing the business activities of private health insurers.

The reality is that the PHI industry, and insurers as individual businesses, are caught in a tangle of

regulatory and supervisory agencies. Beyond PHIAC, they include (not exhaustively):

Australian Security and Investments Commission: Close supervision of business

registrations; company and corporate structures; balance sheet, accounting and corporate

reporting standards; board, director and senior management conduct and decision-making;

shareholder relations; and corporate governance.

Australian Competition and Consumer Commission: The supreme regulatory arbiter of

trade practices and competitive behaviour in the Australian market place, including market

power and dominance (especially respecting mergers and acquisitions); pricing behaviour;

restrictive trade practices; trade descriptions; secondary boycotts; third-line forcing; and

misleading and deceptive advertising.

14

Williams and Woollett, Managing Radioactive Waste in Australia, Issues vol 92 (September 2010),

republished by the Australian Radiation Protection and Nuclear Safety Agency:

http://www.arpansa.gov.au/pubs/radwaste/Issues92_woollett.pdf


In ACHR’s view, PHIAC and the Private Health Insurance Act 2007 complement but do not

take precedence over the oversight of the PHI industry by the ACCC and the Trade Practices

Act 1974 when those two jurisdictions overlap or conflict, nor should PHIAC presume that its

narrow industry role takes precedence over the ACCC’s wide ambit.

Australian Prudential Regulation Authority: APRA directly supervises the activities of PHI

industry members, including Medibank Private, when they operate in allied areas including

general insurance; financial services; superannuation and retirement income products.

ACHR notes that there is a working and information-sharing relationship between PHIAC and

APRA, including a Memorandum of Understanding. But it also notes that there is no

obligation on PHIAC to mirror APRA standards and practices in common interests such as

capital adequacy, notwithstanding the similarities between private health insurance and

general insurance as forms of business15.

Australian Tax Office: The ATO has a direct interest in PHI insurers’ activities in relation to

company tax; personal tax (for employees and contractors); consumers’ personal income tax

– especially in relation to the PHI Rebates; the Goods and Services Tax, and other tax and

reporting obligations of their PHI and non-PHI businesses; and

State and Territory regulation: PHI insurers need to comply with State and Territory policies

and regulations when contracting for related State government business. Beyond that their

activities are affected by a range of State regulatory interests including consumer affairs;

sale of goods; occupational health and safety; public and private hospital registration and

regulation; and medical and health practitioner regulation (including national registration

arrangements covered by uniform State and Territory legislation).

In summary, while PHIAC is very important to the PHI industry, it is only one of health insurers’ many

masters. In considering competitiveness in the PHI industry, PACU and PHIAC generally need better

to understand this regulatory reality.

Competition effects of tangled regulation

Having so many masters, including in some cases (such as with PHIAC and APRA) different

procedures and standards for comparable business activities within their corporate portfolios,

affects industry efficiency and competition. Anti-competitive effects of tangled regulation include:

Cost impacts of compliance: Meeting all regulatory and prudential obligations takes

considerable management and staff time, involving significant corporate administrative

15

Even allowing for the difference between community rating for PHI and risk rating for general insurance,

effectively PHI can be characterised as a very short tail form of insurance.


costs. If compliance costs are too high, they flow through to management expense ratios,

and eventually to what consumers pay for PHI and related services.

Risk-averse behaviour in the market place: While no-one wants private health insurers

(and intermediaries for that matter) to be “cowboys”, excessive regulation, and the fear of

committing costly compliance breaches, discourages innovation and aggressive

entrepreneurialism within the PHI industry; and

Unrealistic regulatory expectations: Implementing any new regulation or regulator-

mandated procedure carries new or additional costs. The industry’s experience over many

years is that Government officials generally have little “real world” commercial experience,

and therefore have little or no understanding of the practical impacts or implementation of

their regulatory bright ideas.

In this regard PHIAC is something of an honourable exception, as PHIAC staff members have

worked capably and effectively with insurers for many years, and have taken the trouble to

understand the industry. Nevertheless, understanding an industry from outside is not the

same experience gained from working extensively in it.

Simplifying the regulatory tangle

In ACHR’s view there are several practical and/or policy measures to relieve the anti-competitive

pressure of overregulation and compliance, ranging from a fresh wholesale look at the competition

and regulatory environment to some concrete legislative reform. These include:

A fresh Productivity Commission (PC) inquiry into private health insurance in Australia:

The 1996-97 PC inquiry let a breath of fresh air into what was, at the time, a semi-moribund

industry undercut by Medicare and a decade of Government policy neglect. That inquiry

recommended the Three Pillars that eventually turned the industry, and the wider private

health sector, completely around: the 30 per cent PHI Rebate; the Medicare Levy Surcharge;

and Lifetime Health Cover.

A fresh inquiry by such a respected (and disinterested) agency could look at the current state

of the industry; the operation of the Three Pillars as affected by policy and market

conditions as they have evolved since 1997; and, most importantly in this context, the

overall effects of a complex regulatory and compliance regime that extends way beyond

PHIAC’s narrow jurisdiction.

Harmonising PHIAC practices with wider regulatory practices: In ACHR’s view, no regulation

specific to the PHI industry should be more onerous than regulations applying to any

comparable industry or business in the wider economy.


It follows that if PHIAC is serious about its pro-competition mandate, it should commit itself

to this principle as a basic standard for its own operations, and advocate within Government

to ensure that it is applied in the best interest of, ultimately, PHI consumers.

Similarly, any PHI industry governance and accountability requirements determined by

PHIAC ideally should harmonise with, and not exceed, comparable standards administered

by ASIC and APRA for the wider corporate sector.

Indeed, as an alternative to a PC inquiry PHIAC could recommend to Government a

“Harmonisation Review”, to be conducted by a qualified independent and expert reviewer.

Such a Harmonisation Review would identify and assess any regulatory compliance

anomalies between PHI business and comparable businesses in the wider economy, and

recommend solutions for them. This could include redressing dangerous under-regulation if

justified.

Pursuing greater harmony with general business regulation would help ensure that the PHI

industry operates responsibly and protects consumers’ interests without regulatory burdens

relatively more onerous than those of businesses in the wider private sector; and

Considering a sensible and practical harmonisation reform: merging PHIAC into APRA: One

simple way of kicking harmonisation along is to stop treating PHI as a special industry case.

In ACHR’s view, the best practical way to do that is to merge PHIAC into APRA.

Such a move would not only save significant administrative costs for Government. It also

would move PHI and general insurance under the same regulatory umbrella. Then only one

agency, under a single Board and CEO, would be responsible for overseeing all forms of

insurance business; promoting consistent prudential standards across like industries; and

allowing cross-fertilised industry expertise within the supervising agency.

POINT 5: Phase out Ministerial approval of premium increases from 2014 – replaced by

Independent PHI Pricing

The most artificial constraint of all on open competition in the PHI industry is the complicated,

convoluted and politicised Government regulation of premiums, to the unusual point of requiring

personal approval of rate changes by Minister for Health and Ageing. Even the PACU Discussion

Paper tacitly acknowledges (but does not condemn) this.

The Discussion Paper also claims that following recent changes to the premium round process,

PHIAC is now the primary source of advice to the Minister about premium increases. It says that

“PHIAC’s objectives of fostering a more efficient and competitive industry will more directly

influence the premium approval process”16. ACHR is very disappointed because this statement

16

PACU Discussion Paper, page 45.


accepts the need for the process in the first place, and indeed it takes for granted that highly-

regulated price setting is desirable.

Why does this anti-competitive process exist?

The current Ministerial premium approval process is an accident of history.

It arose from a political crisis experienced by the then new Howard government in 1996 when it

introduced the original Private Health Insurance Incentives Scheme in that year’s Budget, only to

find that many insurers already had posted premium increase letters to members. While reflecting

normal industry practice at the time, this had the very unfortunate appearance of insurers gouging

the new incentives, and the media and public outcry severely embarrassed the Government.

As a result of that bad political experience, the Howard government insisted on Ministerial approval

of premiums, including final Prime Ministerial sign-off. As part of the policy settlement around the

Three Pillars, Government and industry also agreed to end insurers’ discretion over the timing of

rate changes, with 1 April as the annual rate change day.

From the late 1990s onwards, the rate change process involved analysis and advice to the Minister

from the Department of Health, with input from PHIAC. Ministers and advisers regularly have

queried individual premium bids, generally to ensure increases were the lowest possible consistent

with maintaining insurer solvency and claims reserves. While Ministers Abbott and Roxon

introduced higher degrees of routine rigour into the assessment process (including bringing in the

Australian Government Actuary for second opinions), reliable anecdotal evidence from industry

sources indicates that other factors, including political considerations, still have influenced some

Ministerial decisions, making outcomes more opaque and unscientific.

The anti-competitive effects of Ministerial price-setting

Briefly, the key competition consequences of the current unsatisfactory arrangements include:

Transferring direct responsibility for pricing decisions from insurers to Ministers: Rigid

regulation of prices by Government means that (whether they like it or not) Ministers are

personally responsible for the basic competitive mechanism of the industry – setting the

prices of PHI policies and products to consumers.

Unpopular rate rises then can be blamed by insurers on the Government, and in providing

the bad news to members their indirect message often is: “Don’t blame us, the Minister and

the Government’s regulator (ie PHIAC) approved this increase”.

Besides the obvious political risks of this (which is not an appropriate matter for PHIAC’s

concern), it also means that insurers are less market-focused and more second-guessers of

what rate changes the Minister and her advisers will tolerate. In that sense, the Minister


becomes the customer who matters most to insurers, not the nearly 13 million17 consumers

of hospital and general PHI policies; and

The process is opaque and unscientific: ACHR notes that, in the PACU Discussion Paper,

PHIAC takes credit for making the Ministerial price approval process more streamlined and

more responsive to PHIAC’s advice18.

ACHR acknowledges that the approvals process is much more consistent and systematic

than it was in earlier years. But nevertheless, anecdotal evidence suggests that it is still not

applied in a way in which all applicants are treated identically. For example:

- Not all applications are given to the Australian Government Actuary for a second

opinion.

- Not all applications involve comebacks to insurers from PHIAC, the Department of

Health and Ageing or the Minister, nor are the grounds for making such comebacks

codified or consistent.

- There is still scope for unscientific and unofficial “haggling” to ensure that approved rate

changes are politically acceptable to the Minister. This can include “offline” discussions

between officials, advisers and insurers to shave or add percentage points off the

applied-for figures here and there (5.9 per cent always looks better than six per cent), or

for insurers to be given subtle hints during the process as to what rate changes may or

not be seen as acceptable.

- If insurers make overly conservative price applications – to ensure that, in their best

judgment they make making sufficient provision for claims or unexpected events – it is

not unknown that Government officials quietly talk them down to a lower figure; and

- Political pressure can be applied to keep rate changes as minimal as possible: indeed in

2000, when the introduction of Lifetime Health Cover caused a huge surge of new

joiners, the then Government actively (and successfully) discouraged any premium

increases at all that year.

Such subjective, secretive and opaque interactions between Government and insurers

undermine public and consumer confidence in the fairness and impartiality not only of the

approval process, but the PHI marketplace as a whole.

17

PHIAC quarterly membership statistics for the September 2012 quarter.

18 PACU Discussion Paper, page 45.


A simple and transparent means of removing Ministerial approval – Independent PHI Pricing

In the policy changes announced in its October 2012 Mid-Year Economic and Financial Review

(MYEFO), the Government inadvertently identified a way simply and transparently to introduce

Independent PHI Pricing that does not involve officials and Ministers.

In MYEFO, The Government announced that it would, from 1 April 2014:

Introduce annual indexation of the PHI Rebates.

Link Rebate increases to the Consumer Price Index rather than the actual premium rate

change; and

The Rebates for any particular insurer’s product would increase by CPI or the actual rate of

increase, whichever is the smaller19.

In other words, the full effect of a premium increase will only be incorporated if it is lower than the

CPI. Any component of a premium increase above the determined CPI measure would be passed on

to the consumer, the unrebated component effectively becoming an unsubsidised cost increase for

the consumer.

Given this, Ministerial approval of rate changes actually will be redundant from April 2014. The

Government’s exposure to the Rebates having been circumscribed by indexation against CPI, there

will be no need for PHIAC, the Department or the Minister to scrutinise premiums and their

justification beyond that. A premium rate increase either will be at CPI or lower, or above it.

Therefore, ACHR urges that the MYEFO-related proposals to be considered by Parliament in 2013

also provide that the Private Health Insurance Act 2007 is amended to remove the requirement for

Ministerial price approval from the 2013-premium round onwards.

ACHR also urges that PHIAC uses its advisory role within Government to advocate strenuously for

such pro-competition change.

If the Government agrees, there is also scope to remove the single annual 1 April commencement

date for rate changes, leaving insurers to make their own judgments not only about the quantum of

their premiums, but also the timing of rate changes vis a vis their own prudential state and the

prices of their competitors’ products.

This would take some further negotiation and design sufficiently flexible rebate indexation

mechanisms, but it could be done – say by determining that multiple rate changes may happen at

any time over a year, but the indexation ceiling remains constant for the year as a whole.

19

The Treasurer’s (The Hon Wayne Swan MP) MYEFO press release, 22 October 2012.


The benefits of removing Ministerial approval

The importance of removing this anachronism of political history cannot be understated. It truly

would let a thousand flowers bloom, and make the PHI industry more price, product and service

competitive than it has ever been. Benefits of Independent PHI Pricing include:

Insurers will have to take responsibility for their product, pricing and management

expense decisions: Without the comfort of the Ministerial approval safety net, and not

having to worry about haggling rate changes with PHIAC, ministerial advisers and other

officials, insurers’ boards and executives could set rates according to what they judge the

market will bear.

Provided that insurers maintain sufficient reserves to meet their claims and other expense

obligations under whatever prudential standards are in place, they could set prices as they

wish. They will be accountable directly to their members and shareholders for their

commercial judgments.

Indeed, the indexation ceiling on the PHI Rebates itself will focus their minds. No insurer will

want to set prices exceeding the indexation ceiling significantly, as that would make increase

the real cost of their products to consumers and weaken their positions vis a vis their

competition – and indeed with the public system if a member decides to drop his or her

cover altogether in protest at a price hike.

In a traditionally conservative industry where “groupthink” is encouraged by a long history

of constrictive over-regulation and government interference, handing back the key pricing

responsibility to insurers will encourage them to rely more on their commercial initiative and

judgment. They also will have to work harder to widen the scope of their products and

improve the quality of their customer service (especially in the Broader Health Cover

direction), while doing everything possible to keep their claims costs and management

expenses under control.

Indeed, such hopes underpinned the Howard Government’s introducing Broader Health

Cover in 2007. It was disappointing, however, that the then Government baulked at taking

the related step of abolishing Ministerial pricing approvals. With PHIAC’s support,

Government can now rectify this shortcoming in a positive and consumer-friendly way.

The market will set prices, not the Minister: There will be far greater opportunity for

consumer-friendly pricing and product duels between insurers.

Consumers also will want more and better information, and especially new joiners will want

to shop around to ensure that they buy the best product deal for their needs. Clearly, that

would also bring into play such other product factors as excesses, exclusions and inclusions

and discounts; and


Consumer purchasing power will increase: There will be far greater scope for consumers to

shop around for PHI deals most appropriate for their needs and affordable to their wallets.

As the PACU Discussion Paper emphasises, PHI is a very sticky market – once customers are

recruited that are very hard to shake20. This stickiness has been a source of comfort in some

quarters, particularly when it comes to getting away with indifferent customer service and

product offerings.

If significant price differentials become more of a market factor, however, the potential of

unhappy customers taking their business elsewhere will also increase. Less well-performing

insurers will not be able to afford complacency based on stickiness, and will have to work

harder to attract and retain new members.

This includes working with providers to reach purchaser-provider outcomes that give fair

prices for purchased medical, hospital and other services. It also encourages insurers and

providers to work together to ensure that their mutual customers have no nasty cost or

service shocks when they actually use their PHI cover: for example, by ensuring that

Informed Financial Consent is standard practice.

Why not start Independent PHI Pricing immediately?

Clearly, a new Independent PHI Pricing regime cannot start sooner than 2014, given that the 2013

premium round process is all but complete ay the time of writing (January 2013).

Beyond that, there are also implementation issues to be worked out, including necessary legislation

and regulation changes; the precise details of rebate indexation and how it applies to both insurers

and products to be determined; and making sure that insurers have adequate lead time to gear up

to implement Independent PHI Pricing.

ACHR believes that Independent PHI Pricing should become effective from 1 April 2014: that is,

coming into effect on the same date as the Government’s proposed new PHI indexation regime. This

would mean that Ministerial approval would apply for the 2014 premium round. It would also

mean, however, that that premium round would provide the baseline for the new independent

pricing regime.

20

PACU Discussion Paper, pages 55-56.


CONCLUSION

Less and more flexible regulation is the best aid to more efficient competition in the PHI industry.

Far from being moribund, hidebound and closed to competition, the industry is vigorous, vibrant,

and keen to promote the good health of Australians by broadening its role as a healthcare funder

and, increasingly, provider. This includes increasing services to members directly assisting them with

good health maintenance, disease and injury prevention and chronic disease management.

PHI is a mature industry, run by responsible and highly-experienced men and women. It can be

treated as responsible as its leaders are responsible. They are not cowboys.

While the ACHR Five Point Plan as a whole offers major pro-competition reform, the standout

change that could be made is ending Ministerial premium approval and introducing Independent PHI

Pricing. More than anything else, this would bring a hot wind of competition into the industry,

removing the safety net that for too long has meant good performers aren’t rewarded, mediocre

performers can keep going, and bad performers can simply hang on.

The sale of Medibank Private also would be a big step to finally introducing a competitive and level

playing field to the PHI industry, and the other measures that we suggest as part of the Five Point

Plan also would play their parts in balancing industry stability with appropriate commercial risk-

taking.

But if PHIAC does not take this and every opportunity to question the effectiveness of the existing

regulatory regime, and look to reducing regulation or deregulating wherever possible to improve

industry efficiency and competitiveness without compromising consumers, then the opportunity for

fresh and truly innovative thinking afforded by this exercise will be wasted.

Australian Centre for Health Research

Melbourne, 18 January 2013

achr response to the phiac premiums and … phiac premiums and competition unit discussion paper ......

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