Explanatory Memorandum
(Circulated by authority of the Minister for Health, the Hon. Tanya Plibersek, MP)Outline and financial impact statement
Outline
The Bill amends the Private Health Insurance Act 2007 (the PHI Act) so that the Australian Government Private Health Insurance Rebate on private health insurance (the rebate) is no longer payable on the component of private health insurance premiums that have been increased because of Division 34 of the PHI Act (the Lifetime Health Cover loading). The Bill will also cease the Incentive Payments Scheme (IPS) to streamline the payment of the rebate with effect from 1 July 2013.
The intention of this Bill is to ensure that all recipients of the income tested rebate receive a comparable benefit relative to their premium cost, disregarding any Lifetime Health Cover (LHC) loading that applies. This Bill also improves the effectiveness as an incentive for a person to take out private health insurance earlier in their life and maintain cover to avoid the LHC loading. Improving the effectiveness of the LHC loading provides greater support to the principle of community rating in private health insurance, keeping health insurance policies affordable for all Australians.
The Bill will also make consequential amendments to the PHI Act, the Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 .
Lifetime Health Cover
LHC is designed to encourage people to purchase hospital cover earlier in life and to maintain their cover, thereby boosting and improving the risk profile of health insurance membership and supporting the principles of community rating.
LHC loadings apply only to private hospital cover. They do not apply to general treatment cover (also known as "ancillary" or "extras" cover).
To avoid incurring a LHC loading, residents of Australia must ensure they hold appropriate hospital cover before they reach their LHC base day.
For many people, their LHC base day is 1 July following their 31st birthday, but this can change depending on personal circumstances. For example, because LHC was introduced on 1 July 2000, anybody who was already over the age of 31 at the time was required to have commenced hospital cover by that date, in order to avoid incurring a LHC loading.
New migrants to Australia can avoid incurring LHC loadings by commencing appropriate private hospital cover within 12 months of being registered as eligible for full Medicare benefits.
Health insurers are legally required to charge LHC loadings to any new policy holders who were not privately insured under an appropriate hospital cover policy by their LHC base day.
The magnitude of a person's loading is determined by the number of years they are aged over 30 at the time they take out hospital cover. Each year will attract an extra 2% to their hospital cover premium. For instance, a person who waits until age 40 could pay an extra 20% on the cost of their hospital cover. If they wait until age 50, they could pay 40% more. The maximum LHC loading that can be applied is 70%.
Under existing arrangements, the Government pays an income tested rebate as a percentage of the premium paid, which includes any applicable LHC loading that increases the premium. This Bill will restrict the rebate to a percentage of the base premium excluding any LHC loading. The result of this is that the full amount of the LHC loading is passed on to the policyholder.
As announced in the Government's Mid-Year Economic Financial Outlook for 2012-13, the LHC measure implemented in this Bill takes effect, in respect of all hospital cover, from 1 July 2013. The rebate arrangements for 2012-13 will not change.
This measure improves the effectiveness of the LHC loading as an incentive to purchase private health insurance earlier and maintain private health insurance. This is important in providing greater support for the principle of community rating in private health insurance which is a key component in keeping private health insurance affordable for all Australians, regardless of age or illness. It also contributes to ensuring the sustainability of the rebate.
Incentive Payment Scheme (IPS)
Currently, the IPS allows an insured person to claim their rebate as a direct payment from a Department of Human Services Service Centre (DHS Service Centre). The IPS option is seldom used with little known benefit for the limited numbers of people who use it. Over 99.9% of rebate claims are made via the Premium Reduction Scheme (PRS) and tax offset claiming options. The PRS is the most popular method, providing the immediate benefit of an upfront premium discount to policyholders.
Ceasing the IPS claiming option is a simple and low cost option to reduce the administrative burden on insurers, DHS and the Australian Taxation Office.
Financial Impact Statement
The removal of the rebate on the LHC will result in savings to the Government of $386.3 million over four years.