Private Health Insurance (Complying Product) Amendment (Psychiatric Care) Rules 2018

EXPLANATORY STATEMENT

Issued by the Authority of the Minister for Health

Private Health Insurance Act 2007

Private Health Insurance (Complying Product) Amendment (Psychiatric Care) Rules 2018

Authority

Section 333-20 of the Private Health Insurance Act 2007 (the Act) authorises the Minister for Health, by legislative instrument, to make Private Health Insurance (Complying Product) Rules, providing for matters required or permitted by Chapter 3 and/or section 188-1 of the Act, or providing for matter necessary or convenient in order to carry out or give effect to Chapter 3 and section 188-1 of the Act (refer to Item 3 of the Table).

The purpose of the Private Health Insurance (Complying Product) Amendment (Psychiatric Care) Rules 2018 (the Amendment Rules) is to implement the mental health reform announced by the Government on 13 October 2017 as part of a package of reforms designed to make private health insurance simpler and more affordable for Australians.  The mental health reform introduces enhanced mental health support from 1 April 2018 to make it easier for policyholders to access mental health services when they need them.  These rules cover psychiatric treatment that is mental health treatment or addiction medicine.

The Amendment Rules establish revised “waiting period” requirements for benefits for hospital treatment or hospital-substitute treatment that is psychiatric care.  Psychiatric treatment covered by these Rules is treatment provided to a person who is admitted to hospital and under the care of an addiction medicine specialist or consultant psychiatrist.  Patients with limited cover for psychiatric care will be entitled to upgrade their cover without serving a waiting period to access higher benefits for specialist psychiatric treatment on a once-off basis[1] under the new policy.  This entitlement is described throughout this Explanatory Statement as the “waiting period exemption”.  The Amendment Rules also prevent an insurance policy from imposing conditions within a policy that limit the number of psychiatric treatments a patient can access, or limit the number of a particular kind of psychiatric treatment a patient can access, during a period of time.

The Amendment Rules commence on 1 April 2018.

The Amendment Rules are a legislative instrument for the purposes of the Legislation Act 2003.

Details

Details of the Amendment Rules are set out in Attachment A.

Consultation

On 7 February 2018, private health insurance funds and their peak associations were provided a ten day period to review and provide comment on an exposure draft of the Amendment Rules.  The Department of Health received comment from nine private insurance funds and the industry’s two peak associations.  The Department sought to incorporate the relevant drafting feedback that was received into the final version of the Amendment Rules.

Regulatory impact assessment

The Department of Health has prepared a Regulatory Impact Statement (RIS) on the Private Health Insurance Reform Package announced by the Government on 13 October 2017.  This is at Attachment B.

Statement of Compatibility with human rights

Subsection 9(1) of the Human Rights (Parliamentary Scrutiny) Act 2011 requires the rule‑maker in relation to a legislative instrument to which section 42 (disallowance) of the Legislative Instruments Act 2003 applies to cause a statement of compatibility to be prepared in respect of that legislative instrument.  The Statement of Compatibility has been prepared to meet that requirement. The Statement of Compatibility is included at Attachment C.

ATTACHMENT A

DETAILS OF THE PRIVATE HEALTH INSURANCE (COMPLYING PRODUCT) AMENDMENT (PSYCHIATRIC CARE) RULES 2018

Section 1 Name

Section 1 provides that this instrument is the Private Health Insurance (Complying Product) Amendment (Psychiatric Care) Rules 2018 (the Amendment Rules).

Section 2 Commencement

Section 2 provides that the Amendment Rules commence on 1 April 2018.  Subsection 2(2) provides that any information in column 3 of the table in this section is not part of this instrument.  However, information may be inserted in this column, or information in it may be edited, in any published version of this instrument.

Section 3 Authority

Section 3 provides that the Authority for this instrument is the Private Health Insurance Act 2007 (the Act).

Section 4 Schedules

Section 4 provides that an instrument that is specified in a Schedule to the instrument (the Amendment Rules) is amended or repealed as set out in the applicable items in the schedule concerned.  There is only one schedule contained within the Amendment Rules.

Schedule 1 – Amendments

Private Health Insurance (Complying Product) Rules 2015

Item 1 Rule 4

This item inserts definitions of the following terms: addiction medicine specialist, consultant psychiatrist, period of pre-upgrade hospital cover, psychiatric treatment, specialist psychiatric treatment, and upgrade to rule 4 of the Private Health Insurance (Complying Product) Rules 2015 (the Principal Rules).

Note:  ‘Psychiatric treatment’ is identified as meaning hospital treatment, or hospital substitute treatment, that is psychiatric care.  Psychiatric treatment encompasses services that are mental health treatment and addiction medicine (drug and alcohol treatment).  As such, the waiting period exemption applies to both mental health treatment and addiction medicine.

Item 2 Rule 4 (note)

This item inserts the word “transfer” into the Note under Rule 4 of the Principal Rules, which sets out a range of defined terms that have the meaning set out in the Act.

Item 3 Subrule 5A Psychiatric treatment – limitations

This item inserts a new Rule 5A to the Principal Rules which prevents an insurance policy from imposing as a condition of the policy, limitations on the number of psychiatric benefits a person can access during a period (for example over a 12 month period).  A policy must not impose limitations, in the form of a reduction in benefit for psychiatric care, because of the number of treatments a patient has accessed, or the number of a particular kind of treatment a patient has accessed, during a period of time.

Sub‑rule 5A does not extend to regulating the commercial terms of agreements or contracts between private health insurers and health care providers.  For example, it does not preclude a private health insurer and a hospital from negotiating step-down payment arrangements as part of an agreed psychiatric treatment program.

Item 4

This item inserts new Rules 9A and 9B to the Principal Rules outlining the conditions and requirements for the application and utilisation of the once-off waiting period exemption.

Subrule 9A Specialist psychiatric treatment – portability requirements

The waiting period exemption is portable.  That is, a person may choose to use the exemption when upgrading to new policy with their current insurer or a new policy with a different insurer.  Subrule 9A establishes four portability requirements that apply to the waiting period exemption.

Consumer choice to elect to utilise the waiting period exemption

Subrule 9A(1)(a)(ii) identifies there is a requirement for a consumer to choose to utilise the waiting period exemption.  This means that utilisation of the waiting period exemption is not compulsory.  A person has the ability to choose whether the waiting period exemption is activated for specialist psychiatric treatment occurring within two months of a transfer that is an upgrade.  That is, a person has the ability to choose to either:

• utilise the once-off exemption and receive higher benefits for the admission; or
• not use the exemption, receive the lower benefits they were entitled to under their old policy for that admission, and retain the ability to exercise the exemption at a later time.

Subrule 9B (discussed below) provides further detail on the evidence which is taken to show that a person has chosen to utilise the exemption.

Policy transfer that is an upgrade

Subrule 9A(2) specifies that a transfer between private health insurance policies is considered to be an upgrade for the purposes of the waiting period exemption if the benefit for psychiatric treatment under the new policy is higher than the benefit for psychiatric treatment under the old policy.

Subrule 9A(3) deals with instances where a person upgrades to a new policy with a different co-payment and/or excess than their old policy.  For clarity, this subrule indicates that, for the purposes of determining whether a transfer is an upgrade, any excess or co‑payment under the old or new policy is to be disregarded.

Period of pre-upgrade hospital cover

Subrules 9A(4) and 9A(5) establish a definition of a “period of pre-upgrade hospital cover”.  This term refers to the length of prior hospital coverage that must exist for a person to become entitled to higher benefits for specialised psychiatric treatment following an upgrade to a new policy.

Under these sub-rules the new policy must not apply any waiting period for the higher benefit if the person had hospital cover immediately before the upgrade for two months or more, that is, where the length of the person’s period of pre-upgrade hospital cover is two months or more.

In instances where a person’s period of pre-upgrade hospital cover is less than two months, an insurer is permitted to require that the person serve the remaining balance of the two month psychiatric care waiting period permitted under the section 75-1(b) of the Act before that person is eligible for higher benefits for specialist psychiatric treatment.

Retrospective cover provisions

Subrules 9A(6) to (8) establish retrospective cover provisions for the waiting period exemption.  If a person upgrades their policy within five business days of their admission for specialist psychiatric treatment, then their increased cover and payment of higher benefits will apply retrospectively to the day of the admission.  The person must pay the appropriate premium to cover the retrospective period.

The retrospective period will only apply for policy upgrades that occur within five business days starting on the day the person was admitted to hospital for psychiatric treatment.  If the day of admission is not a business day, then the day of the admission is not included in the count of five days for the purpose of retrospective cover.  The intent of including a five day retrospective period as part of the waiting period exemption is to allow people who have been newly admitted to hospital time to:

• decide whether to upgrade their policy;
• decide whether to utilise the once-off exemption; and
• facilitate transferring from their old policy to a new policy.

The five day retrospective period is intended to help balance flexibility for consumers, who may not be able to make a decision about upgrading their policy before or at the point of their admission, against financial risk and uncertainty for hospitals and insurers.

After the first five business days of an admission have passed, consumers would still be able to choose to upgrade their policy and to utilise their waiting period exemption, but they would only be eligible for higher benefits paid under the new policy from the date they purchase the upgraded cover, (that is, there would be no retrospective cover).

Subrule 9B Specialist psychiatric treatment – choice to have upgraded in accordance with rule 9A

Subrule 9B specifies the once-off nature of the waiting period exemption and the evidence taken to show the waiting period exemption has been utilised.

Once off utilisation of the waiting period exemption

Subrule 9B(1) specifies that a person may choose to have an upgrade treated in accordance with subrules 9A(4) to (8) if they have not previously made such a choice in relation to any upgrade.  This subrule means that a person can only utilise the waiting period exemption once in their lifetime.  However, it should be noted that Section 75‑1 of the Act specifies the maximum waiting periods that an insurance policy may apply for particular types of treatments or conditions.  The identified waiting periods are not mandatory and an insurer may choose to waive these waiting periods at any time.  Subrules 9A and 9B do not prevent an insurer from choosing to waive waiting periods for a benefit for hospital treatment or hospital-substitute treatment that is psychiatric care.   Insurers have discretion to waive psychiatric care waiting periods, including for persons who have already utilised the waiting period exemption established by subrules 9A and 9B.  However, where this occurs, it would not be considered as a waiting period exemption under subrule 9B(3).

Subrule 9B(2) sets out the conditions for establishing whether a person has chosen to utilise the exemption and the evidence which is taken to show that the exemption has been utilised.  There are three conditions identified within this subrule:

• a person transfers to an insurance policy (the new policy), and the transfer is an upgrade in relation to psychiatric treatment; and
• a claim is made under the new policy for a benefit for specialist psychiatric treatment provided to the person; and
• a benefit of the amount claimed would only have been payable under the new policy for the treatment if the person had chosen to have the upgrade treated in accordance with subrules 9A(4) to (8).

The making of a claim for higher specialist psychiatric benefits under the new policy is taken as sufficient evidence that a person has chosen to utilise the exemption.

Part 5 – Transitional provisions

Rule 19 Transitional provisions relating to the Private Health Insurance (Complying Product) Amendment (Psychiatric Care) Rules 2018

Rule 19 is a new Rule within the Principal Rules which establishes transitional provisions regarding policy upgrades and/or admissions for specialised psychiatric treatment which occur prior to the commencement of the Amendment Rules on 1 April 2018. 

Policy upgrades prior to 1 April 2018

Subrule 19(2) clarifies that the waiting period exemption established by subrule 9A(4) applies whether an upgrade occurs before, on, or after 1 April 2018.  The primary purpose of this subrule is to make clear if a person upgraded their policy prior to 1 April 2018, and their length of pre‑upgrade hospital cover at that time was longer than 2 months, the person is eligible to utilise the waiting period exemption and to access higher benefits for specialist psychiatric treatment from 1 April 2018.

Where a person upgraded their policy prior to 1 April 2018, and their length of pre‑upgrade hospital cover at that time was less than 2 months, an insurer is permitted to require that the person serve the remaining balance of the two month psychiatric care waiting period permitted under the section 75-1(b) of the Act before that person is eligible for higher benefits for specialist psychiatric treatment.

Retrospective cover for upgrades occurring before 1 April 2018

Subrule 19(3) clarifies that the retrospective cover provisions established in subrules 9A(6) to (8) only apply to an upgrade that occurs on or after 1 April 2018.  This means that the retrospective cover arrangements do not apply to upgrades that occurred prior to 1 April 2018.

Persons already admitted and receiving specialist psychiatric treatment on 1 April 2018

Subrule 19(4) requires that in instances where an upgrade has occurred and a person was admitted to hospital for specialist psychiatric treatment before 1 April 2018, and is still an admitted patient in relation to the treatment on 1 April 2018, higher benefits for the treatment are only payable from 1 April 2018.  Higher benefits for the period of the admission before 1 April 2018 will not be paid.

Subrule 19(5) specifies that if the application of the retrospective cover provisions were to result in the starting date of a new policy’s cover being prior to 1 April 2018, the starting date of the cover is taken to require the coverage to start no later than 1 April 2018.  This has the effect that higher benefits are not paid for any part of an admission prior to 1 April 2018.

Below are some example scenarios of how the retrospective cover provisions would be applied in the following scenarios where a person upgrades their policy and is admitted for specialist psychiatric treatment prior to 1 April 2018.

• If a person was in hospital receiving specialised psychiatric treatment on 30 March 2018 and upgraded their policy on 31 March 2018, they would only be eligible for higher benefits under the new policy from 1 April 2018.
• If a person upgraded their policy on 10 March 2018, and was admitted to hospital for specialised psychiatric treatment on 28 March 2018, they would only be eligible for higher benefits under the new policy from 1 April 2018.

• If a person was in hospital receiving specialised psychiatric treatment on 30 March 2018, and upgraded their policy on 3 April 2018, their retrospective cover under the new policy (that is eligibility for higher psychiatric benefits) would only go back to 1 April 2018.
  

ATTACHMENT B

Regulation Impact Statement (RIS)

Name of Proposal: Private Health Insurance Reforms

Office of Best Practice Regulation (OBPR) ID number: 22741

Note: The announcement of the reform package (described in detail in Section 3) limits the scope of this RIS.  This RIS considers two options: the implementation of the reform package as a whole, and the status quo.

1                    What is the policy problem you are trying to solve?

Decline in private health insurance participation

Private Health Insurance is a key part of Australia’s health system providing choice for 13.5 million Australians.  As at 31 December 2017, 11.3 million Australians were covered by hospital treatment cover (45.6 per cent of the population) and 13.54 million Australians had some form of general treatment cover (54.6 per cent of the population). General treatment is also known as extras or ancillary cover which includes services such as optometry and dental.

While in 2018, there was the lowest average weighted premium increase in almost 17 years, at 3.95 percent, in the past nine consecutive quarters coverage has declined in proportion terms and in the December 2017 quarter has declined by about 20,000 people compared with the same quarter in 2016. If this trend continues it may signal the start of a decline in coverage similar to that seen in the 1990s when hospital insurance dropped from 45 percent to 30 percent of the population over the decade. That decline was only arrested by the introduction of the premium rebate (which lowered the cost), the Medicare Levy Surcharge (MLS) and Lifetime Health Cover (LHC) (which created incentives for higher income earners and younger people to purchase insurance). 

Table 1 below includes a comparison of the number of people and the percentage of the population with hospital and general treatment policies over the past four years. Table 1 shows that the percentage of the population with hospital treatment and general treatment has declined over the past three years.

Table 1: Hospital treatment and general treatment health insurance policies

The current decline in participation is attributed to the cost to consumers growing on average by 68 per cent in 10 years and the confusing product offerings.  In addition, the two thirds of the population that are aged under 50 have been born or reached adulthood under Medicare.  Many people in this age group regard health insurance as a supplement rather than a necessity, and they are therefore more likely to respond negatively to increasing premiums.

Figure 1 below shows the change in the number of people with hospital treatment policies by age category over the past four years. This graph shows the decline in participation rates, particularly for the 20-24 and 25-29 age groups.

Figure 1: Private health insurance participation (hospital cover) by age category[2]

If no changes are made to the current arrangements, it is expected that private health insurance premiums will continue to increase and people may choose to downgrade or cancel their health insurance or not take out private health insurance at all.

Falling membership, particularly among younger Australians (who cross subsidise the premiums of older people), risks the overall stability of Australia’s health system as people dropping out or not taking out insurance must use the public hospital system which significantly increases cost to governments.

In the 12 months to 31 December 2017 health insurers paid $14,812 million in hospital treatment benefits. This included more than 4.6 million episodes and 11.9 million hospital treatment days.[3]

Industry data shows that private health insurance pays for almost two-thirds of non-emergency surgery, 90% of day admissions for mental health care and 50% of all mental health admissions, 70% of joint replacements, 60% of chemotherapy and 88% of retinal procedures.

Background

Australia’s health system is funded by a mixture of public and private funding and service delivery. The role of private health insurance in Australia is unique among OECD countries, in that it operates as a Commonwealth supported and regulated industry, but is complementary to a universal public insurance system – Medicare. Most medical practitioner services are funded or subsidised through Medicare and state public hospital services are generally provided free to public patients. Private health insurance covers some or all of the costs of healthcare for private patients and provides consumers with greater choice in the provision of treatment, access to shorter waiting times, and coverage for some services not funded by Medicare.

A key feature of Australia’s private health insurance industry that makes it different from many other forms of insurance is that it is community rated. This means insurers are prohibited from discriminating between people who wish to be insured on the basis of their health or likelihood to claim. Under community rating, everyone is entitled to buy the same product, at the same price (except for Lifetime Health Cover) and an insurer cannot refuse to insure an individual.

By requiring that the premium paid for a person’s chosen health insurance product, and the cover available under that product, are the same regardless of the health or demographic characteristics of the individual seeking coverage community rating imposes a cross-subsidy from low risk to high risk policy holders. Community rating prohibits insurers from discriminating on the basis of past or likely future health or risk factors such as age, pre-existing condition, gender, race or lifestyle in the premiums that they charge. Although community rating means that people who are older or sicker do not have to pay higher premiums commensurate with their risk, it also means that younger and healthier people pay more than they otherwise would.

Community rating is underpinned by a system of risk equalisation. Risk equalisation attempts to adjust for the risk of adverse selection. It is designed to spread the burden of high cost claims across all insurers, helping to keep them all financially viable. Under risk equalisation,
a proportion of claims for older and high claiming members are ‘pooled’ and are redistributed between insurers retrospectively through the risk equalisation arrangements. In 2015-16, annual net transfers were around $439 million.[4] These arrangements are designed to ensure that insurers (and policy holders with those insurers) with higher numbers of older members or high users are not financially disadvantaged compared with those insurers with a younger or healthier membership.

The ongoing viability of the community rating requires the retention of a broad membership base. Rather than target certain age segments (e.g. younger members), the current system encourages insurers to compete for both younger and older members. Without a broad membership base, premiums would need to increase to cover the cost of insuring higher risk consumers who maintain their health insurance.

If private health insurance participation rates continue to decline, private health insurance will no longer cover the cost and number of hospital treatment days mentioned earlier.  This will therefore impact on tax payers and public hospital waiting times.

Current government initiatives

The Australian Government has three major initiatives in place to encourage take-up of private health insurance, the Medicare levy surcharge, Private Health Insurance Rebate and Lifetime Health Cover.

Following the introduction of private health insurance incentives between 1997 and 2000, there was large growth in the proportion of Australians holding private health insurance (Figure 2). The Medicare Levy Surcharge, the 30 per cent premium rebate, and Lifetime Health Cover saw the percentage of the population with hospital coverage increase from 30.5 per cent to over 45 per cent in 2001. Participation peaked at 47.3 per cent in June 2015.

Figure 2: Private health insurance participation in Australia since 1971[5]

Medicare levy surcharge

The Medicare levy surcharge (MLS) is a tax on higher income earners who do not hold appropriate hospital insurance. It is designed to encourage individuals to take out private hospital cover.

The MLS is payable in addition to the Medicare levy.

The base income threshold (under which the MLS is not liable to be paid) is $90,000 for singles and $180,000 for families. Table 2 provides details of the MLS tiers.

Table 2: MLS income thresholds from 2014-15 to 2017-18

Table 3 shows the number of people and amount of MLS paid in 2015-16.

Table 3: Payments under the Medicare Levy Surcharge during 2015-16[7]

Note: The ‘Others’ category is for taxpayers who were liable for MLS for part of the year only.

As part of the 2014-15 Budget, the Australian Government announced that from 1 July 2015 the income thresholds used to determine the MLS and the private health insurance rebate (discussed below) would be kept at the 2014-15 rates for three years.

As part of the 2016-17 Budget, the Australian Government announced the continuation of the pause on indexation of income tiers for the MLS and the private health insurance rebate for a further three years until 30 June 2021.

Private Health Insurance Rebate

The Australian Government provides an income tested and age related rebate to encourage people to take out and maintain private health insurance. The Government’s estimated expenditure on the Private Health Insurance Rebate will amount to more than $6.4 billion in 2017‑18.[8]

Most people who hold private health insurance are eligible for a rebate on their insurance costs. A person may claim the private health insurance rebate if they:

• are eligible for Medicare;
• have a complying health insurance product that provides hospital treatment or general treatment, or combined cover; and
• have an income for MLS purposes below Tier 3 (see Table 4 below).The Private Health Insurance Rebate Percentages are as follows:

Table 4: Private Health Insurance Rebate effective from 1 April 2017 to 31 March 2018

The rebate percentage is adjusted on 1 April each year based on the Rebate Adjustment Factor, which has the effect of increasing the rebate in line with the Consumer Price Index rather than the growth in premiums. The Rebate Adjustment Factor is set out in the Private Health Insurance (Incentives) Rules 2012 (No.2). 

Lifetime health cover

Lifetime Health Cover (LHC) is an Australian Government initiative that started on 1 July 2000. It was designed to encourage people to take out hospital insurance earlier in life, and to maintain their cover throughout their life. LHC is a financial loading that can be payable in addition to the premium for private health insurance hospital cover.

LHC loadings apply only to hospital cover. They do not apply to private health insurance general treatment cover. To avoid incurring the LHC loading, residents of Australia must ensure they hold appropriate hospital cover before they reach their LHC deadline (also known as the LHC base day which is 1 July following a person’s 31st birthday).

A person’s loading is determined by the number of years they are aged over 30 at the time they commenced hospital cover. Each year will attract an extra two per cent to their hospital cover premium, up to a maximum of 70 per cent loading. Once a LHC loading on private hospital insurance has been paid for 10 continuous years, the loading is removed.

New migrants to Australia who have already reached the 1 July following their 31st birthday do not incur a LHC loading if they purchase hospital cover with an Australian registered insurer before the first anniversary of (or within 12 months after) being registered as eligible for Medicare.

The Department conducts an annual mail-out specifically targeting people who are approaching their LHC deadline. The mail-out is intended to serve as a reminder for the recipients that they have an opportunity to avoid extra costs on private health insurance should they wish to purchase it before their approaching deadline.

2                    Why is government action needed?

In 2015-16 the Government consulted on private health insurance to identify key issues of consumers and stakeholders across the sector. The consultations raised common themes around people’s concerns:

• poor value for money;
• high out-of-pocket costs for consumers;
• lack of transparency;
• lack of sustainability; and
• complex regulation.

In response to these findings, the Government established the Private Health Ministerial Advisory Committee (PHMAC), consisting of key representatives of interest groups in the private health sector to consider and develop possible reforms to private health insurance with the aim of improving the value of private health insurance to consumers, as well as protecting the long-term efficiency and sustainability of the sector. Additional information about the PHMAC is available at http://www.health.gov.au/internet/main/publishing.nsf/Content/phmac.

Government action is needed to help strengthen the viability of the private health system by addressing concerns about affordability, complexity, and lack of transparency of private health insurance. 

Without Government action, there is a risk that participation in private health insurance will continue to decline.  As mentioned above, continued falling participation will have an impact on access to services. An increased impact on the demand for services in the public hospital system will result in greater pressure on Commonwealth and state funding for public hospitals. It will also have an impact on funding levels under the National Health Reform Agreement and implications for the contributions to public hospitals required from tax payers.

The Australian Government considers that a healthy and stable private health insurance system is essential for the stability of Australia’s overall health care system. Encouraging private health insurance cover provides consumers with a greater choice of care options and relieves pressure on the state public hospital system.

3                    Government Announcement

On 13 October 2017, the Government announced a wide ranging package of reforms to make private health insurance simpler and more affordable for Australians. The key aim of these reforms is to make private health insurance better value for consumers and make policies easier to understand.  The Government is helping to reduce the rising costs for health insurers – which would otherwise be passed on through higher premiums. These reforms include:

• Younger Australians will be encouraged to take up private health insurance by allowing insurers to offer products which discount hospital insurance premiums for 18 to 29 year olds by up to 10 per cent.  This discount will phase out after people turn 41.
• People with hospital insurance that does not offer full cover for mental health treatment will be able to upgrade their cover and access mental health services without a waiting period on a once-off basis.  This will significantly enhance the value of private health insurance for young people.
• To support Australians in regional and rural areas, insurers will be able to offer travel and accommodation benefits for people in regional and rural areas that need to travel for medical treatment.
• An agreement has been entered into with the Medical Technology Association of Australia to lower the price of implanted medical devices from 1 February 2018.  This has had immediate benefits for consumers in contributing to the lowest premium rise in seventeen years.
• Consumers will be able to select a higher excess in exchange for a lower premium. This will be the first increase in the maximum excess since 2001.
• Private health insurance will be simplified as insurers will be required to categorise products as gold/silver/bronze/basic, and use standardised definitions for treatments to make it clear what is and isn’t covered in their policies.
• The privatehealth.gov.au website will be upgraded to make it easier to compare insurance products, and insurers will be able to provide personalised information to consumers on their product every year.
• The powers of the Private Health Insurance Ombudsman will be boosted and its resources increased to ensure consumer complaints are resolved clearly and quickly.
• Following consultation with the private health insurance and medical sector, the Government has agreed to stop insurers from offering benefits for a range of natural therapies.
• The Improved Models of Care Working Group will consider how to better support privately insured people’s access to efficient and clinically appropriate mental health and rehabilitation services.
• The Ministerial Advisory Committee on Out-of-pocket costs will provide options to improve the transparency of medical out-of-pocket costs.
• The second tier default benefit, providing a safety net for consumers attending non-contracted hospitals, will continue, but the administration of eligibility will be transferred to the Department of Health.

4                    Policy options

In light of the Government’s announcement of the private health insurance reform package (outlined in Section 3 above), two options have been considered:

1. Implement private health reform package; and
2. Maintain current arrangements (status quo).

1. Implement private health reform package

This consists of a suite of reform options, which must be implemented as a whole, to achieve the above objectives include:

2. Maintain current arrangements (status quo)

Maintaining the status quo would not impose additional regulatory burden on insurers or consumers as the existing arrangements would continue.  While maintaining the current arrangements was considered, this option was not preferred as it would not meet the objective to improve the affordability of private health insurance and increase the information available to consumers.  The continued decline in private health insurance participation would also be likely to continue.  This would place pressure on the public health system, and increase costs to governments.

5                    What is the likely net benefit of each option?

1. Implement private health reform package

Implementing a suite of reforms would improve private health insurance and participation, and the information available to consumers in the short to medium term.

Benefit

Implemented in full, these reforms aim to:

• increase affordability of private health insurance;
• improve information available to consumers to allow them to more easily compare products and choose the most appropriate product for their needs/circumstances; and
• maintain the sustainability of the private health system to ease the burden on the public health system.

The impacts of each reform are outlined in the table below:

Regulatory Costs

There are regulatory costs associated with some of the options (Reforms 1, 2, 4, 6 and 11).  Regulatory costs for these options are one-off costs, which primarily involve system changes and changes to information provided to consumers (both verbal and written) (e.g. labelling of products as “Gold, Silver, Bronze or Basic” and updating information to use standard clinical definitions).

There are regulatory savings associated with Reform 6 as there will be savings from making the provision of information to consumers technology neutral and allowing insurers to transmit information via email.

Other options do not have regulatory impacts as:

• they are voluntary for insurers to participate in:
  • introducing travel and accommodation benefits into hospital treatment policies (Reform 5); and
  • discounts for 18-29 year olds (Reform 8);
• are changes to currently existing arrangements with no additional regulatory burden:
  • changing maximum excess level amounts (Reform 10); and
  • moving second tier assessment to the Department from industry (Reform 12); or
• are wholly government funded with no regulatory impact
  • options which establish committees (Reform 3 and 7).

In relation to Prostheses List benefit reductions (Reform 9), the department has a RIS exemption for making and amending the Prostheses Rules (OBPR RIS reference number 12116).

Detailed information about estimated regulatory costs is at Attachment A.

In summary:

• Consumers will experience no regulatory cost.
• Doctors will experience no regulatory cost.
• Brokers will have a regulatory cost of $1.88 million annually over 10 years.
• Insurers will have a regulatory cost of $3.27 million annually over 10 years.

The regulatory burden to business, community organisations and individuals has been quantified using the Regulatory Burden Measurement framework. Offsets will be found through identified regulatory savings and the portfolio’s net regulatory objective will be met at the end of year reporting period.

2. Maintain current arrangements (status quo)

While under this option arrangements would be the same and there would be no additional regulatory burden on industry, it is also likely that there will be a continued decline in participation and continued consumer complaints about information provision arrangements.

Assessment

If the current arrangements are maintained there is a risk that private health insurance participation will decrease, putting pressure on premiums for remaining private health insurance customers and increasing pressure on the public health system.

In order to be successful at achieving the objectives to ensure affordable and simpler private health insurance, the reforms need to be implemented as a complete package. Taken as a complete package, these reforms will have the greatest impact as they are complementary, with some reforms focused on increasing affordability and product value, while other reforms are focused on making information simpler and more transparent for consumers. Through implementing Reforms 1-12, there would be changes to the current private health insurance arrangements to contribute to the ongoing viability of the system. If successful, it will help to mitigate the recent trend of a decline in private health insurance participation, assist in reducing private health insurance premium rises, compared with what they would have been without the reforms, and also result in improved access to information by consumers.

6                    Consultation and implementation

Establishment of the Private Health Ministerial Advisory Committee

Extensive consultation has been undertaken in the development of the reforms outlined in this RIS. 

One of the key mechanisms for consultation with the sector has been through the PHMAC.  PHMAC was established to bring together key groups in the private health sector to work in partnership on the development and implementation of possible reforms to private health insurance. 

PHMAC agreed to the establishment of working groups on a number of topics including standard clinical definitions, information provision and second-tier and default benefits.  Additionally, PHMAC agreed to hold a rural private health insurance workshop that was attended by some 32 participants from a range of stakeholder groups, including consumers, doctors, hospitals and insurers, to discuss improving the value of private health for regional and rural consumers.

Sector views

In general, the main concern of service providers is that people are covered for (i.e. receive a benefit for) more services.  Insurers are concerned with product price and consumers are concerned with product affordability and transparency of information.  The reform package strikes a balance between these objectives.

While there are diverse sector views, the package is broadly supported by stakeholders, who have been, and continue to be, consulted throughout the process. The table below lists the consultation undertaken to date.

Consultation to date

Implementation

During the implementation phase, there will be continued consultation with affected parties through the PHMAC, other committees (e.g. the Ministerial Advisory Committee on Out-of-pocket Costs and Improved Models of Care Working Group and its sub-groups) and focus groups/consumer testing.

The table[9] below provides a guide to when the reforms will be implemented.

Implementation timetable

Evaluation

These reforms aim to:

• mitigate the recent trend of a decline in private health insurance participation. This will be measured from quarterly reports by the Australian Prudential Regulation Authority;
• reduce private health premium rises, compared with what they would have been without the reforms. The reforms aim to keep average premium increases below 4.0 per cent in each year between 2018 and 2020, maintain membership levels at 55 per cent and above. Data from the yearly premium rounds will demonstrate the success of this. For example, in the recent 2018 premium round, there was the lowest average weighted premium increase in almost 17 years, at 3.95 percent; and
• improve access to information by consumers. This will be measured by a reduction in complaints to the Private Health Insurance Ombudsman about complexity and costs of insurance.

Attachment A - Estimated Regulatory Cost

Private Health Insurers

IT system update costs (Reforms 1, 2, 4, 6, 11)

Private health insurers will require updates to their IT systems to be able to support the changes to product categories and information provision.

The Department of Health understands that the majority of the 37 insurers are supported by 3 system developers, and that 4 insurers have their own in-house system developers.

The estimated cost for IT system updates is $46.25 million.

This figure was based on each of the 37 insurers incurring a cost of $1.25 million for these IT changes based on similar updates made by the industry for other required changes.

Staff training costs (Reforms 1, 2, 4, 6, 11)

The estimated cost for staff training is $1.92 million. This figure is based on:

• there being 2 large, 3 medium and 32 small insurers;
• staff receiving an estimated 6 hours of training each;
• each large insurer would train 1,200 staff;
• each medium insurer would train 400 staff;
• each small insurer would train 5 staff;
• staff wage cost is $68.79/hour[10]; and
• develop training materials: 2 weeks per insurer for 1 person (8 hours/day at $126/hour – based on $150,000 annual salary plus on-costs). Total cost per insurer is $10,080.

Table 1: Cost of training by insurer size

Re-design of private health insurance products (Reforms 1, 2, 4, 6, 11)

The estimated cost to re-design private health insurance products is $5.8 million. This figure was based on:

• there being 2 large, 3 medium and 32 small insurers;
• a large insurer would require a team of 3 actuaries and 10 marketing specialists;
• a medium insurer would require a team of 2 actuaries and 8 marketing specialists;
• a small insurer would require a team of 1 actuary and 4 marketing specialists;
• the cost of each actuary and marketing specialist at $168/hour ($96/hour plus $72/hour for on-costs – based on $200,000 annual salary); and
• each actuarial team and marketing team would be required for 4 weeks.

Table 2: Cost of product design by insurer size

Standard Information Statement updates (Reforms 1, 2, 4, 6, 11)

The estimated cost to update the Standard Information Statement is $137,580. This figure is based on:

• updating 2000 products; and
• 1 hour per product at a rate of $68.79/hour.

Website updates (Reforms 1, 2, 4, 6, 11)

The estimated cost for insurers to update their websites is $2.5 million. This figure is based on:

• large and medium size insurers updating their websites in-house using existing web teams. Team of 4 people for 4 weeks ($126/hour – based on $150,000 annual salary plus on-costs) = $80,640 per insurer; and
• small size insurer will need to outsource the work to update their websites. This is a higher cost but generally lower complexity product offering and therefore the estimate is 80% of the cost of large and medium insurers. 80% of $80,640 = $64,512 per insurer (the cost for small insurers is based on data from the 2017 premium round).

Table 3: Cost of website updates by insurer size

Updating promotional/marketing material (Reforms 1, 2, 4, 6, 11)

The estimated cost for updating and re-printing brochures is $420,000. This figure is based on:

• large insurers updating and re-printing 10,000,000 brochures at $0.01/brochure[11];
• medium insurers updating and re-printing 1,000,000 brochures at $0.02/brochure; and
• small insurers updating and re-printing 100,000 brochures at $0.05/brochure.

Information provision (Reforms 1, 2, 4, 6, 11)

The estimated savings for the standard information statement, lifetime health cover and tax statement mail outs is $29.3 million. This figure is based on:

• a cost of $2 per letter, $0 per email (based on advice that the cost of sending an email is negligible);
• an administration cost (fixed) for each insurer per mail out to set up email distribution ($2752 per insurer per mail out - 1 person for 40 hours at $68.79/hour);
• an estimate of 75% of private health insurance policy holders (75% of 9.75 million[12] individuals) receive information via mail ($14.6 million per mail out);
• an estimate of 25% of private health insurance policy holders already receiving this information via email ($101,824 administration cost);
• an estimate of an additional 50% of policy holders will choose to receive this information via email (cost per mail out will be reduced to $4.9 million);
• an estimate of 25% of policy holders will continue to receive this information via mail ($101,824 administration cost); and
• information is required to be sent to 9.75 million individuals for each mail out (standard information statement, lifetime health cover and tax statement).

In relation to changes to coverage of natural therapies, a mail out will be required for general treatment policy holders to inform them of a change that is or might be detrimental.[13] The estimated cost for this mail out is $4.98 million. This figure is based on:

• an estimated 25% of policy holders will receive this information via mail and 75% of policy holders will receive this information via email;
• 2.44 million people will receive this information via mail (25% of 9.75 million individuals);
• a cost of $2 per letter, $0 per email (based on advice that the cost of sending an email is negligible); and
• an administration cost (fixed) for each insurer to set up email distribution ($2752 per insurer - 1 person for 40 hours at $68.79/hour).

Ongoing costs

No ongoing costs are required.

Estimated annual regulatory costs over 10 years

Table 4: Summary of regulatory costs for insurers

Brokers

IT system update costs (Reforms 1, 2, 4, 6, 11)

Brokers will require updates to their IT systems to be able to support the changes to product categories and information provision required to be implemented by insurers.

The estimated cost for IT system updates is $17.5 million.

This figure was based on each of the 14 brokers incurring a similar cost of $1.25 million for IT changes based on similar updates made by the industry for other changes.

Staff training costs (Reforms 1, 2, 4, 6, 11)

The estimated cost for staff training is $310,343. This figure is based on:

• there being 3 large and 11 small brokers;
• staff receiving an estimated 6 hours of training each;
• each large broker will train 100 staff;
• each small broker will train 10 staff;
• staff wage cost is $68.79/hour;
• develop training materials: 2 weeks per broker for 1 person (8 hours/day at $126/hour – based on $150,000 annual salary plus on-costs). Total cost per broker is $10,080.

Table 5: Cost of training by broker size

Website updates (Reforms 1, 2, 4, 6, 11)

The estimated cost for brokers to update their websites is $0.95 million. This figure is based on:

• large size brokers updating their websites in-house using existing web teams. Team of 4 people for 4 weeks ($126 per hour – based on $150,000 annual salary plus on-costs) = $80,640 per broker; and
• small size brokers will need to outsource the work to update their websites. This is a higher cost but generally lower complexity product offering and therefore the estimate is 80% of the cost of large brokers. 80% of $80,640 = $64,512 per broker.

Table 6: Cost of website updates by broker size

Ongoing costs

No ongoing costs are required.

Estimated annual regulatory costs over 10 years

Table 7: Summary of regulatory costs for brokers

Summary of Estimated Regulatory Cost

Table 8: Summary of regulatory costs for insurers and brokers

ATTACHMENT C

[1] “Once-off basis” means a person is only entitled to access a waiting period exemption once in their lifetime.

[2] Australian Prudential Regulation Authority, Private Health Insurance Membership Trends, June 2017.

[3] Australian Prudential Regulation Authority, Private Health Insurance Statistical Trends – Benefit Trends, December 2017.

[4] Australian Prudential Regulation Authority, Private health insurance – Risk equalisation financial year results 2015-16, February 2017.

[5] Australian Prudential Regulation Authority, Private Health Insurance Membership Trends, June 2017.

[6] Single parents and couples (including de facto couples) are subject to family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first. 

[7] Data from the Australian Taxation Office, September 2016.

[8] Australian Government, Budget Paper No. 1, Budget strategy and outlook 2017-18, Statement 6, Table 8.1.

[9] Available on the Department’s website at http://www.health.gov.au/internet/main/publishing.nsf/Content/private-health-insurance-reform-timeline.

[10] Regulatory Burden Measurement Framework Guidance Note: Appendix 2 Default work-related and non-work-related labour rates.

[11] Based on information from the Department of Health’s Communication Branch.

[12] Australian Prudential Regulation Authority, quarterly statistics, June 2017. This figure only includes adults that have a private health insurance policy for the purpose of a mail out.

[13] A private health insurer must ensure that, if a proposed change to the insurer’s rules:

a)       is or might be detrimental to the interests of an insured person; and

b)       will require an update to the standard information statements for a complying health insurance product of the insurer;

an adult insured under each complying health insurance policy in the product:

c)       is informed about the proposed change a reasonable time before the change takes effect; and

d)       is given the updated standard information statement for the product subgroup that the policy belongs to as soon as practicable after the statement is updated.