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.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Bill
The purpose of the Bill is to remove the Australian Government Private Health Insurance Incentive Benefit (the rebate) from the Lifetime Health Cover loading (the LHC loading) component of affected premiums. It will achieve this by amending the Private Health Insurance Act 2007 (the PHI Act). Consequential amendments will be made to the Income Tax Assessment Act 1936, and are minor. The Bill will also insert a provision in the Act to ensure the LHC loading on a premium for a complying health insurance policy for hospital treatment is no longer subsidised by a Government rebate.
The PHI Act, Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 will also be amended to cease the Incentive Payments Scheme (IPS).
Human rights implications
The right to health
The right to health - the right to the enjoyment of the highest attainable standard of physical and mental health - is contained in article 12(1) of the International Covenant on Economic, Social and Cultural Rights. The UN Committee on Economic, Social and Cultural Rights (the Committee) has stated that health is a 'fundamental human right indispensable for the exercise of other human rights', and that the right to health is not to be understood as a right to be healthy, but rather entails a right to a system of health protection which provides equality of opportunity for people to enjoy the highest attainable level of health.
Discussion of the Bill
The Committee states that the notion of 'the highest attainable standard of health takes into account both the condition of the individual and the country's available resources. The right may be understood as a right of access to a variety of public health and health care facilities, goods, services, programs and conditions necessary for the realization of the highest attainable standard of health.
The Bill will ensure that recipients of the Government's private health insurance rebate are treated consistently, regardless of whether they have a LHC loading or not. This measure will ensure the sustainability of the rebate. The Bill will also improve the effectiveness of the LHC loading as an incentive for a person to take out private health insurance early in their life and maintain it, providing greater support to the principle of community rating. Ceasing the IPS claiming option will reduce unnecessary administrative burden.
Schedule 1 of the Bill removes the rebate from the LHC loading part of affected private health insurance premiums and ensures that the LHC loading component does not attract the rebate. From 1 July 2013, everybody will receive a comparable rebate relative to their premium cost and income level, disregarding any LHC loading that applies.
Under existing LHC arrangements, the Government pays a rebate as a percentage of the premium paid, which includes any applicable LHC loading that increases a premium. If the Australian Government continued to subsidise a proportion of the LHC loading the incentive to take out hospital cover is diminished. The Government is currently imposing the LHC loading to encourage people to take out private health insurance at an earlier age, and then paying a portion of this loading. This is inequitable for taxpayers and those individuals who take out, and maintain, private health insurance earlier in life.
The principle of community rating, which underpins private health insurance in Australia, requires insurers not to differentiate the premiums they charge according to individual health risk characteristics. Under community rating, people with poor health, or higher health risks, pay premiums that are lower than they would be if adjustments were made because of their health status. Community rating is an equitable method of dealing with health costs and keeps private health insurance affordable for all Australians.
This Bill may increase the cost of obtaining private health insurance for people who have a LHC loading. However, it ensures that all rebate recipients are treated consistently, subject to age and income. It also ensures that the principle of community rating in private health insurance for all Australians despite their age, race, gender and health status remains embedded as part of the Australian health system. All Australians will remain eligible for public health insurance through Medicare, the Pharmaceutical Benefits Scheme and the public hospital system. It is for these reasons that there is no incompatibility with the right to health because the legislation is for a legitimate objective and reasonable, necessary and proportionate in the circumstances.
Schedule 2 of the Bill removes the IPS option for claiming the private health insurance rebate. The purpose of this amendment is to reduce the administrative burden on insurers, DHS and the Australian Taxation Office. The introduction of Schedule 2 of the Bill will not have a major impact on policyholders.
Currently, the IPS allows an insured person to claim their rebate as a direct payment from a DHS Service Centre. The IPS option is seldom used with little known benefit for the limited number 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 and is not affected by the introduction of this Bill.
Conclusion
This Bill is compatible with human rights as it does not raise any human rights issues.
The Hon Tanya Plibersek MP, the Minister for Health
Notes on clauses
Clause 1 - Short Title
This clause provides that the Bill, once enacted, may be cited as the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2012.
Clause 2 - Commencement
This clause provides that the Bill will commence on 1 July 2013.
Clause 3 - Schedule(s)
This clause provides that each Act that is specified in a Schedule to this Bill is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this bill has effect according to its terms. The Bill amends the Private Health Insurance Act 2007 (the PHI Act), the Income Tax Assessment Act 1936 (the ITA Act 1936), the Income Tax Assessment Act 1997 (the ITA Act 1997) and the Taxation Administration Act 1953 (the TA Act 1953).
Schedule 1 - Lifetime Health Cover Loading
Part 1 - Main amendments
Private Health Insurance Act 2007
Item 1- Before Subsection 22-15(2)
Item 1 inserts the subheading 'Private health insurance tiers' for readability to clarify that the calculation of the Share of the PHII benefit - single for someone who does not have their premium increased because of Division 34 is determined by subsections 22-15(2), (3), (4) and (5).
Item 2 - At the end of section 22-15
Item 2 amends the definition of Share of the PHII benefit - single by inserting a new subsection 22-15(6). This new provision determines the premium, or amount of premium, in respect of an individual who has their premium increased in accordance Division 34, for the purposes of calculating the private health insurance incentive beneficiaries (PHIIB's) share of the PHII benefit. When applying paragraphs 22-15(1)(a), (b) and (c) in respect of someone who incurs a LHC loading, the premium, or amount in respect of a premium, for the purposes of paragraphs 22-15(1)(a), (b) and (c) must not include the component of the premium, or amount in respect of a premium, that is attributable to an increase because of Division 34.
Part 2 - Consequential amendments
Income Tax Assessment Act 1936
Item 3 - After paragraph 264BB(2)(gb)
Item 3, Part 2 amends the Commissioner of Taxation's power to ensure that the Commissioner may require a private health insurer to provide the Commissioner with information about whether a premium has been increased in accordance with Division 34 (the LHC loading) in respect of any person who is covered at any time during a financial year under a complying health insurance policy issued by the insurer or who paid premiums under such a policy.
Part 3 - Application provision
Item 4 - Application provision
Item 4, Part 3, is an application provision applying to item 2 Part 1 of the Bill. The application of item 4 is dependent on whether a payment of a premium, or amount in respect of a premium, was made for cover provided under a complying health insurance policy for one or more days on or after 1 July 2013.
Item 2 applies in relation to a premium, or an amount in respect of a premium, paid on or after 1 July 2013 under a complying health insurance policy, relating to hospital cover, if the premium or amount relates to one or more days of cover that are on or after 1 July 2013.
For example, on 1 July 2013, Rebecca pays a premium for two months cover under a complying health insurance policy of $220. Rebecca incurs a 10 per cent increase in her premium because of Division 34 (the LHC loading). Rebecca is eligible for the 30 per cent rebate under section 22-15 of the PHI Act. Rebecca's base premium for the two months is $200 and her LHC increase is $20.
Item 2 applies in relation to Rebecca's premium paid for the two months cover which is $220 (base premium of $200 plus LHC loading of $20). In accordance with item 2, Rebecca receives a rebate of 30 per cent in respect of the $200 base premium equal to $60.
Schedule 2 - Incentive payments scheme
Part 1 - Main amendments
Private Health Insurance Act 2007
Item 1 - Paragraph 3-5(b)
Item 1, Part 1, Schedule 2 removes reference to payments by the Commonwealth in relation to premiums paid for complying health insurance policies in the overview of the PHI Act.
Item 2 - Section 15-1
Item 2, Part 1, Schedule 2 amends the introduction to Chapter 2 (Incentives) of the PHI Act to remove reference to the Incentives Payment Scheme (IPS) as a payment made in return for payments of premiums under complying health insurance policies as an incentive to encourage people to have private health insurance.
Item 3 - Part 2-2 (heading)
Item 3, Part 1, Schedule 2 of the Bill amends the heading of Part 2-2 of the PHI Act to remove reference to the IPS.
Item 4 - Section 20-1
Item 4, Part 1, Schedule 2 of the Bill amends the introduction to Part 2-2 of the PHI Act (Premiums reduction scheme) to remove the IPS as a mechanism to encourage people to take out, and continue to hold, private health insurance.
Item 5 - Section 20-5
Item 5, Part 1, Schedule 2 of the Bill removes the IPS as matter that is or might be dealt with in the Private Health Insurance (Incentives) Rules made under section 333-20 of the PHI Act.
Item 6 - Division 26
Item 6, Part 1, Schedule 2 of the Bill removes Division 26 of the PHI Act (the IPS) in its entirety. The deletion of Division 26 from the PHI Act removes the entitlement, receipt, withdrawal and reconsideration for a payment, paid in respect to a premium paid under a complying health insurance policy, when the claim is lodged at a DHS Service Centre.
Item 7 - Paragraph 206-1(1)(a)
Item 7, Part 1, Schedule 2 of the Bill amends the options available in order to revoke the status of an insurer participating in the premium reduction scheme to remove the repeated failure by the insurer to issue a receipt for a payment received which has been reduced under the IPS. This option will no longer be required due to the removal of the IPS in Item 6 in Schedule 2 of the Bill.
Item 8 - Section 230-1
Item 8, Part 1, Schedule 2 of the Bill amends the introduction to Chapter 6 of the PHI Act (Administration) to remove reference to general administrative matter relating to the IPS.
Item 9 - Part 6-4 (heading)
Item 9, Part 1, Schedule 2 of the Bill amends the heading of Part 6-4 of the PHI Act to remove reference to the IPS.
Item 10 - Section 276-1
Item 10, Part 1, Schedule 2 of the Bill amends the introduction to Part 6-4 of the PHI Act to remove reference to administration of the IPS.
Item 11 - Section 276-1
Item 11, Part 1, Schedule 2 of the Bill provides a typographical amendment to support the amendment in Item 10 in Schedule 2 of this Bill.
Item 12 - Division 279 (heading)
Item 12, Part 1, Schedule 2 of the Bill substitutes the heading of Division 279 of the PHI Act to remove reference to the IPS.
Item 13 - Division 282 (heading)
Item 13, Part 1, Schedule 2 of the Bill amends the heading of Division 282 of the PHI Act to remove reference to the IPS in relation to the recovery of payments.
Item 14 - Paragraph 282-1(1)(a), (b) and (c)
Item 14, Part 1, Schedule 2 of the Bill removes the criteria for a payment made under the IPS to be recovered as a debt from the Commonwealth to insurers participating in the Premium Reduction Scheme if the payment was made to a person who was not entitled to the payment, was afterwards refunded or was paid in respect to a claim that has been withdrawn.
Item 15 - Paragraph 282-1(2)(a)
Item 15, Part 1, Schedule 2 of the Bill removes the criteria for a payment made under the IPS to be recovered as a debt from the person referred to in respect of the payment that was made to the person who was not entitled to the payment, was afterwards refunded or was paid in respect to a claim that has been withdrawn.
Item 16 - Paragraph 282-15(1)(a)
Item 16, Part 1, Schedule 2 of the Bill amends the eligibility for a person to apply to the Chief Executive Medicare to reconsider whether an amount is recoverable as a debt due to the Commonwealth to refer only to the interest on payments made to an individual. The interest payable is determined by section 282-5(2) of the PHI Act.
Item 17 - Subsection 282-18(1)
Item 17, Part 1, Schedule 2 of the Bill removes the liability for excess private health insurance premium reduction or refunds to be made to the Commissioner of Taxation for payments made, in respect of the IPS, to a person in relation to a premium paid during a financial year.
Item 18 - Subsection 282-18(2)
Item 18, Part 1, Schedule 2 of the Bill removes reference to a payment (made under the IPS) in order to work out the liability for excess private health insurance premium reductions to be made to the Commissioner of Taxation by determining the reduction to the premium between the persons who are PHIIB's in respect to the premium.
Item 19 - Section 328-5 (table item 3)
Item 19, Part 1, Schedule 2 of the Bill removes the ability for the Administrative Appeals Tribunal to affirm an original decision by the Chief Executive Medicare to reject a claim to be paid under the IPS.
Item 20 - Section 328-5 (table item 40)
Item 20, Part 1, Schedule 2 of the Bill removes the ability for the Administrative Appeals Tribunal to affirm an original decision by the Chief Executive Medicare to recover a payment made under the IPS to a person who was not entitled to that payment or the premium was afterwards refunded.
Item 21 - Clause 1 of Schedule 1 (definition of incentive payments scheme )
Item 21, Part 1, Schedule 2 of the Bill amends Clause 1 of Schedule 1 of the PHI Act to remove the definition of incentive payments scheme in its entirety. This primarily supports the amendment made in item 6 in Schedule 2 of this Bill.
Part 2 - Consequential amendments
Income Tax Assessment Act 1997
Item 22 - Section 11-15 (table item headed "social security or like payments"
Item 22, Part 2, Schedule 2 of the Bill removes the exemption of private health insurance payments paid under the IPS for the purpose of income tax.
Item 23 - Subdivision 52-D
Item 23, Part 2, Schedule 2 of the Bill removes subdivision 52-D (Exempt payments made by the Commonwealth to reimburse certain expenditure) as a consequence of the amendment made in Item 22 in Schedule 2 of the Bill.
Item 24 - Section 61-200
Item 24, Part 2, Schedule 2 of the Bill amends the introduction to section 61-200 to remove a payment made under the IPS, or payment received under the IPS as an option of how to claim a private health insurance tax offset.
Item 25 - Subsection 61-210(2)
Item 25, Part 2, Schedule 2 of the Bill amends the amount of a private health insurance tax offset, because a PHII benefit was received in another form, to remove a payment which was made to a person under the IPS in relation to the premium.
Item 26 - Subsection 61-210(3)
Item 26, Part 2, Schedule 2 of the Bill amends the calculation of the amount of a private health insurance tax offset to remove a payment which was made to a person under the IPS in relation to the premium, as a consequence of the amendment made in Item 25 of the Bill.
Taxation Administration Act 1953
Item 27 - Subsection 355-65(2) in Schedule 1 (table item 8)
Item 27, Part 2, Schedule 2 of the Bill amends the exceptions, relating to the disclosure of information for other government purposes relating to tax, to remove the administration of the IPS from the exceptions regarding records or disclosures relating to social welfare, health or safety. This is a consequence of the amendments made in Item 22 in Schedule 2 to the Income Tax Assessment Act 1997.
Part 3 - Saving provisions
Item 28 - Saving provisions
Item 28, Part 3, Schedule 2 of the Bill continues the operation of administrative provisions for the IPS in relation to claims lodged under the IPS before commencement of the Bill and IPS payments made on or after commencement. This will allow all outstanding claims under the IPS made before commencement to be settled. All payments made under the IPS will continue to be subject to the same administrative provisions in effect before commencement of this Bill.