Printable version of 03/11 (PDF 22 KB) and Private health insurance – transparent premium setting (PDF 30 KB)
5 January 2011
2011 Private Health Insurance Premium Round - Outline of Premium Approval Process
The 2009-10 Federal Budget measure ‘Private health insurance – transparent premium setting
’ aims to enhance the transparency of the premium-setting process by providing consumers with a better understanding of the Government’s role in assessing and approving proposed premium increases.
A document outlining the process of the 2011 private health insurance premium round has been published on the Department of Health and Ageing website
The document, titled 2011 Private Health Insurance Premium Round - Outline of premium approval process
, forms part of the implementation of the budget measure along with publishing the industry average premium increases and the reasons for premium increases at the conclusion of the process. This includes the release of average premium increases for individual private health insurers and providing reasons for the premium increases at an industry level.
2011 Private Health Insurance Premium Round Outline of premium approval process
Transparent premium setting
The 2009-10 Federal Budget measure ‘Private health insurance – transparent premium setting’ aims to enhance the transparency of the premium-setting process by providing consumers with a better understanding of the Government’s role in assessing and approving proposed premium increases (Budget Paper No.2, p.312) . This includes the release of average premium increases for individual private health insurers and providing reasons for the premium increases at an industry level. This document forms part of the implementation of the budget measure along with publishing the industry average premium increases and the reasons for premium increases.
Average premium increase
The average premium increase for each insurer is calculated according to the following formula:
Percentage increase in forecast contribution income (FCI) resulting from the premium change(s) expressed to two decimal places, for the 12 month period following the implementation of the changes, calculated as follows:
(FCI with premium changes – FCI without premium changes) x 100
FCI without premium changes
(where FCI is the forecast contribution income for the insurer for the 12 month period
following the implementation of the changes, excluding forecast changes in membership, and
including rate protection)
The percentage increase in forecast contribution income is considered a fairer way of reflecting average premium increases as the calculation takes more fully into account the revenue impact of the increases to an insurer. Also, a calculation focused on the increases for individual products may be biased towards insurers with a lower premium increase for an individual product that affects a larger number of people.
The weighted industry average premium increase is calculated by weighting each insurer’s average increase by its market share.Market share is determined by calculating the total number of people covered by an insurer for both hospital treatment and general treatment (ancillary) policies.
Under rate protection, if a consumer has paid for their policy in advance they will not have to pay extra if the premium is increased during the period for which they have paid. For example, on 1 March 2011 a member may have paid their premiums for 12 months in advance. If premiums increase on 1 April 2011, and their insurer offers rate protection, the member will not have to pay the increased premium amount until 1 March 2012. The maximum period for which a member may pay in advance is up to the discretion of each insurer.
There are over 20,000 products in the market. It is not practical for the Government to release the premium increases for every product available. The Private Health Insurance Ombudsman website
lists every health insurance product available from every health insurer, and allows consumers to search for, and compare, products. Consumers can find out the new prices of the products on this website from 1 April 2011. Insurers will also notify policyholders affected by the changes of the premium increases for their particular product.
When comparing the average premium increase for individual insurers, it is important that consumers consider the type of benefits offered and the level of benefits paid. These factors also determine the value of the products offered and provide a context for the size of the premium increase. For example, the average increase for one insurer may be higher than another insurer, however the first insurer may offer more generous benefits or have a cheaper actual product price.
Premium approval process
The objectives for regulating private health insurance premiums include:
- Ensuring an attractive private health insurance product for consumers;
- Keeping downward pressure on private health insurance premiums;
- Protecting the Government’s interest in private health insurance;
- Transparency in the approval of private health insurance premiums;
- Timeliness in the approval of private health insurance premiums; and
- Consistency in the approval of private health insurance premiums.
Information submitted by private health insurers
Private health insurers must apply to the Minister for Health and Ageing for approval of premium changes (section 66-10(1) of the Private Health Insurance Act 2007). Premium changes include both increases and decreases in premiums.
Private health insurers must provide an extensive amount of information to support their premium application. This information must be provided using an ‘approved form’(section 66-10(1) of the Private Health Insurance Act 2007). The Department of Health and Ageing provides insurers with the ‘approved form’ (also known as the ‘Schedule’) that outlines the information that must be included in premium applications.
The key information required in an application includes:
- The date the premium increases are to take effect;
- The average premium increase (this is referred to as the increase in forecast contribution income including rate protection);
- Reasons for the proposed premium increases including:
- Benefit outlays
- Management expenses
- Gross and net margins
- Capital management
- Dividend payments, distributions or capital returns
- Current and/or proposed chronic disease management programs and hospitalsubstitute treatment
- Any proposed rule changes
- A list of each product for which a premium increase/decrease will be sought;
- Financial results and forecasts; and
- An opinion from the insurer’s Appointed Actuary on the financial information.
The information contained in premium applications is considered commercial-in-confidence and is not available for public release.
Assessment of premium applications
All applications are assessed by the Minister for Health and Ageing, the Department of Health and Ageing, and the Private Health Insurance Administration Council (PHIAC). It is common practice for PHIAC to refer some applications to the Australian Government Actuary (AGA) for a further independent assessment (eg. five largest insurers).
Premium increases must be approved unless they are not in the public interest (section 66-10(3) of the Private Health Insurance Act 2007). The Minister assesses premium applications made by private health insurers to ensure that increases are kept to the minimum necessary. This takes into consideration insurer solvency requirements, forecast benefit payments and prudential requirements, while also ensuring the affordability and value of private health insurance as a product.
Each insurer’s application is assessed on its own merits.
Key documents/information considered as part of the premium approval process include:
- Private health insurer application;
- Appointed actuary report;
- PHIAC Operations Reports;
- PHIAC quarterly data; and
- Standard Information Statements.
In the event that the Minister is not satisfied that the premium increase requested by an insurer is the minimum necessary, the insurer is asked to consider resubmitting their application by seeking a lower premium increase. Alternatively, the insurer can choose to provide further justification as to why the increase requested is the minimum necessary. This may occur a number of times.
For example, in the 2010 premium round, all 37 private health insurers submitted applications for premium increases. The Minister wrote to 19 insurers and requested they consider resubmitting with a lower premium increase or provide further justification for the increase sought. New applications for lower premium increases were submitted by 8 insurers and further justification was provided by 11 insurers. The Minister wrote again to 6 insurers and requested that they consider resubmitting with a lower premium increase or provide further justification for the increase sought. New applications for lower premium increases were submitted by 4 insurers and further justification was provided by 2 insurers.
If in the end the Minister is still not satisfied with any lower premium increase sought or the further justification provided by the insurer, the insurer’s request for a premium increase may be refused. A refusal by the Minister must be tabled in Parliament along with the reasons for refusal (section 66-10(6) of the Private Health Insurance Act 2007).
Advising consumers of premium increase
Insurers must provide consumers with a reasonable period of notice prior to a premium increase taking effect (section 93-20 of the Private Health Insurance Act 2007). This reasonable period is generally interpreted to be 30 days. This provides consumers with an opportunity to shop around for a different product or a different insurer if they are unhappy with the premium increase for their particular product.
The Private Health Insurance Ombudsman website
lists every health insurance product available from every health insurer, and allows consumers to search for, and compare, products.
Timeline for the premium round
An annual premium round, together with consistency in the date of effect for premium increases, provides consumers with the knowledge of when, and by how much, their premiums will increase. It also allows for the applications of all private health insurers to be assessed at the same time to ensure consistency and timeliness. A timetable of key events in the premium approval process is provided using the 2010 premium round as an example.
Timetable of key events for 2010 premium round
|20 November 2009 ||Deadline for submissions of applications from insurers|
|21 December 2009 –|
19 February 2010
|Resubmission discussions with insurers and assessment of insurer resubmissions|
|25 February 2010||Insurers notified of Minister’s decision|
|26 February 2010||Premium changes publicly announced|
|1 April 2010||Premium changes took effect|
If you require further information please telephone: (02) 6289 9853/24 hr answering machine or email the enquiry to Private Health Insurance Branch
For more information visit 2011 Private Health Insurance (PHI) Circulars
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