Budget 1999-2000 - The government's private health insurance plan

With the Commonwealth's distinctive responsibilities for private health insurance, we have also developed a major reform agenda to improve private health insurance and make health care better value for money and more affordable for all Australians.

Page last updated: 1999

The government's private health insurance plan

When Medicare commenced in 1984, its long-term viability was predicted on a viable and healthy private insurance sector.

Tragically, the previous Labor Government let the private insurance sector wither, with the percentage of insured Australians more than halving, from about 65 per cent to 34 per cent.

Since the Howard Government was elected to office in 1996 measures have been taken to arrest this decline, with anecdotal evidence in the last month pointing to the fact that the decline in private health insurance numbers has slowed for the first time in 15 years.

Recent Government reforms include the introduction of a Medicare surcharge, a 30% rebate on private sector premiums, and the introduction of legislation requiring 'no gaps' or 'known gaps' policies to be offered by all health insurers.

But more needs to be done for the long-term viability of the private health insurance industry, which continues to take pressure off the public hospital sector.

Labor insists that assisting the private sector will only boost their profits, yet 41 out of the 44 insurers are not-for-profit organisations.

The health of private health insurance is vital to the future viability of Australia's health system. This was recognised by none other than former Labor Health Minister, Neil Blewett, who said when introducing legislation for Medicare in 1983,
"In every public statement we have made we have told people that Medicare provides only the basic cover and they should look, if they want to do so, to the need for private health insurance and its costs. It [ this bill] seeks to provide and underwrite the best elements private hospital system - and there is no doubt that this is a measure which serves to underwrite the private fee for service system in this country." [Hansard, 14 September 1983]

Over the next 13 years, the private sector was not underwritten but undermined through Government neglect and policy design, and the number of Australians with private health insurance declined from two-thirds coverage to around one-third.

This dramatic halving of rate of membership has significantly increased the demand on public hospitals.

As Labor Health Minister, Graham Richardson, said " I steered a package through the Cabinet but resigned before I could sell it to the Caucus. Practically the whole package died when I left, as the Labor Party had always been a bit biased against private health insurance, and without a sponsor any proposal to help the industry was doomed." (27 August 1996, The Bulletin)

With a two per cent fall in numbers each year from 1985-1996, by the time we came to Government, we were within twelve months of the type of disaster Graham Richardson had always described.

Labor continues to criticise the Government's efforts to fix the problem they largely created. Yet Opposition leader Kim Beazley has no plan of his own, other than further erosion of the private health insurance sector.
"Concentrating on public hospitals is a valid reason for not offering any funds to prop up private health insurance and the private sector," Mr Beazley told an ACTU meeting in late June 1998.

As NSW Labor Premier Bob Carr put it in 1993, "as fast as we hurled money at the hospitals, there was a further abandonment of private health cover and a further rise in demands on the public system".

To ensure the future financial viability of the Australian health system, a plan was needed to stabilise the levels of private health insurance and so preserve the public hospital system, Medicare and the private sector's future in health care.

In the Australian Health Care Agreements signed last year, we increased spending on public hospitals by 17.5% over the next five years.

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Over the last three years, the Government has fulfilled its promise to retain Medicare in its entirety.

We have also made significant reforms to ensure that private health insurance is sustainable and healthy in the long term.

These measures have already proven relatively successful with a slow down in the drop out rate from private health insurance from a two per cent annual fall to around one per cent.

By late 1998, there were more than 5.7 million Australians still in private health insurance who would have otherwise dropped out except for initiatives such as the Private Health Insurance Incentives Scheme, that was introduced in the 1996/97 Federal Health Budget and came into effect on 1 July 1997. This included some 700,000 Australians with annual incomes of less than $20,000.

Next to cost, the issue of gap payments and informed financial consent is the greatest reason why people drop their private health cover.

With legislation that passed in April 1998, the Government made possible a new system of contractual arrangements that permitted agreement between doctors, hospitals and private health insurers that could reduce or eliminate the 'gap payment'. Eight per cent of all bills in private hospitals are now single bills with no gaps and relatively soon simplified billing will become the norm in the private sector.

In the 1998 election campaign, we promised to introduce a 30 per cent rebate on health insurance premiums. This promise was honoured and introduced on 1 January this year. As a new measure whose full effect will not be able to be evaluated fully until next year.

However, if it had not been implemented, the numbers of people with private health insurance would drop to around 20 per cent by 2005.

Long term, genuine reforms take time to take effect, especially when you are starting from a point where previous Governments had neglected, been indifferent to and even ideologically hostile to private health insurance.

This narrow view has proven to be short sighted, not only forcing Australians who want private health cover to have to abandon it against their will, but also creating increasing pressure on the public hospital system and threatening the long term capacity of the Australian health system to provide high quality and timely hospital and medical care.

The next major step: Lifetime Health Cover

The next, great unfinished task in private health insurance is to provide a generational answer to the generational problem of an ageing population and a corresponding decline in the private health insurance membership numbers.

This dilemma is the current system of community rating that, as the Productivity Commission noted in 1997, perversely encourages 'hit and run' membership and offers no reward for people who join private health insurance at a younger age.

In fact, the current system of private health insurance effectively penalises those people who at 65 have had private health insurance for 40 years who find they pay the same premium as people who join for the first time at 65.

Indeed, the existing system of community rating fosters a short term, mercenary approach to private health cover and creates an unsustainable system.

The existing system encourages 'hit and run' memberships, that is, where someone takes out private health cover for a certain procedure, then drops their insurance after the procedure has been completed. This particularly occurs in procedures such as non urgent knee or hip surgery where people, rather than wait, jump over, have their procedure and then rejoin the public hospital system.

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In evidence before the Industry Commission the following are examples of procedures that are commonly subject to 'hit and run' behaviour: hip replacements, knee replacements, lens replacements, coronary artery bypass grafts and obstetrics.

The current system of community rating has also created a spiral of 'adverse selection', whereby more healthier and generally younger members drop their private health insurance, leaving generally older and "unhealthier" people in the pool of those with insurance.

This only creates further upward pressure on premiums, pushing healthier people out of private health insurance and leaving behind those most likely to use it.

The current system also encourages people to join private health insurance later in life when they most need it rather than seeing their health insurance as a longer term, lifetime concept.

This major structural flaw in private health insurance needs remedying. Every insurance system needs a critical mass of people prepared to insure themselves and their families and create a pool of money that can be drawn upon to pay for those who need hospital and medical care.

In the Private Health Insurance sector in Australia, around 41 out of 44 private health insurers are not-for-profit organisations and their capacity to underwrite their members depends on minimal level of reserves. With the factors contributing in drop in numbers, they are therefore forced to raise their premiums.

This Budget contains a major, new reform measure that rectifies this major structural flaw - Lifetime Health Cover.

This new 'lifetime' approach rewards early and long-term health fund membership by encouraging young people to join, and rewards them down the track with loyalty bonuses for making this choice.

Lifetime Health Cover will stop 'hit and run' membership, reduce costs over time, reward long term members and counter 'adverse selection'.

The new scheme is workable and fair and provides for the health needs of all Australians.

Lifetime Health Cover has been designed with a special 'grandfathering provision' to ensure that it is fair and of direct benefit to older Australians.

  • Special provisions apply to people who were born on or before 1 July 1934, that is, are aged 65 or more on 1 July 1999. People in this age group can take out hospital cover at any time in the future without paying a loading for joining later in life. If they choose to join a health fund at any time, they will pay the same premium as a 30-year-old new member. In other words, they are exempt for life from the provision.
In general terms, current members of health funds who have hospital cover, no matter what their age, will be treated as if they had joined a fund by the age of 30.

The premium paid by people entering private health insurance will be based on the age at which they first join and, once set, remains at that rate relative to premiums for people entering at different ages. For example, someone joining at the age of 30 will always pay a lower premium for the same product compared to someone who has delayed joining until age 55.

Lifetime Health Cover is a new system of private health insurance using an unfunded lifetime community rating system. It allows health funds to offer lower premium rates to people entering insurance early in their lives and higher premiums for people joining later. The new system therefore rewards membership loyalty and early joining.

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Specifically, Lifetime Health Cover will operate with a threshold age of 30 years of age.

  • Anyone joining before or at the age of 30 will pay the base rate premium for the rest of their membership life.
  • People over the age of 30 will pay a two per cent loading on top of the base rate for every year they delay joining. For example, a person who delays joining until the age of 40 will pay 20% more than someone who joined at the age of 30. The maximum loading allowed will be 70% above the base rate paid by a 30 year old.
  • All existing health fund members will be credited with a joining age of 30 and will always pay the base rate premium. A 12 month grace period will allow non-members to join and be treated as existing members.
  • Everyone aged 65 or over at the beginning of the grace period will not be affected by this measure. They will be able to join a health fund and always pay the 30 year old rate.
  • A cumulative period of absence of up to 24 months will be allowed so that people who need to drop their health cover, for whatever reason, can rejoin without paying a higher premium.
Lifetime Health Cover will encourage people to join health insurance early in their lives and to maintain their membership. It discourages 'hit and run' membership, and therefore increases the stability of the industry and helps to contain the rising cost of health insurance premiums.

Legislation supporting the introduction of private health insurance will be introduced in Parliament shortly.

Lifetime Health Cover is part of the plan to improve private health insurance and forms a new part of the overall strategy the Government has to restore stability and balance to the health system.

The 30% rebate, eliminating the gap, informed financial consent and Lifetime Health Cover are the three most important reforms put in place.

Other steps

Other initiatives currently underway in the private sector include the following.

Reduction of in-hospital pharmaceutical gap fees

Health funds are now able to cover the gap for Pharmaceutical Benefits Scheme medicines dispensed in hospital where a health fund has a hospital/medical provider agreement in place to cover 100% of the patient's in-hospital costs.

Discounted premiums for group memberships

Recent legislation now allows health funds to provide discounts on premiums when the discount reflects administrative savings derived from payments made at least six months in advance, or as a direct debit from a bank account or payroll. This reform recognises that savings from advances in electronic commerce and business should be able to be passed on to members.

Loyalty bonus schemes

New legislation is now in place that will allow health funds to develop rewards for members based on length of membership. This initiative gives health funds greater flexibility to offer innovative reward schemes without contravening the principles of community rating. Health funds may offer rewards in the form of reduced premiums, access to more services or some other benefit.
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Private sector trials of coordinated care and early discharge programs

Private health insurers do not routinely offer rebates for services which would help people to stay out of hospital and continue living independently at home. As a result, the Government will set up a small number of private sector trials to coordinate the care of people with health insurance in the community setting. The trials will develop and test new, more flexible forms of health insurance. Better coordinated care means better access to community support services, reductions in avoidable hospitalisations, and better health outcomes for private patients. Trials of early discharge and hospital-in-the-home programs are already underway.

All three types of trials will explore the benefits of allowing out-of-hospital care to be substituted for more costly in-hospital care where this is clinically appropriate. If these trials are successful, health funds will have considerably greater scope to design integrated and cost effective products that better meet the needs of consumers.

Private health insurance consumer information service

The complexity of health insurance products can present a significant barrier to people wanting to take out health insurance. With so many products on the market, it is difficult to work out which product suits them best. To remedy this, the Government is developing a consumer information service to provide product advice and information on product performance against industry benchmarks.

Initially, a 'key features' statement will be developed to help define and describe industry products, so that people will be able to compare and contrast different health fund products within and between health funds.


The range and scope of these measures shows that we have a long term reform agenda for the private sector, that complements the long term plan we have for the public hospital system and for the health care to which all Australians are entitled.

We are funding the States with an extra $30 billion dollars for public hospitals over the next five years so that they can fulfil their responsibilities to the community.

With the Commonwealth's distinctive responsibilities for private health insurance, we have also developed a major reform agenda to improve private health insurance and make health care better value for money and more affordable for all Australians.

Our plan will improve the stability and efficiency of the private sector, ensure greater quality care and mean more Australians will be able to exercise their wish and their right to choose their doctor and the timing of their operation.
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