House of Representatives

Private Health Insurance Bill 2006

Private Health Insurance Act 2007

Private Health Insurance (Transitional Provisions and Consequential Amendments) Bill 2006

Private Health Insurance (Transitional Provisions and Consequential Amendments) Act 2007

Private Health Insurance (Prostheses Application and Listing Fees) Bill 2006

Private Health Insurance (Prostheses Application and Listing Fees) Act 2007

Private Health Insurance (Collapsed Organization Levy) Amendment Bill 2006

Private Health Insurance (Collapsed Organization Levy) Amendment Act 2007

Private Health Insurance Complaints Levy Amendment Bill 2006

Private Health Insurance Complaints Levy Amendment Act 2007

Private Health Insurance (Council Administration Levy) Amendment Bill 2006

Private Health Insurance (Council Administration Levy) Amendment Act 2007

Private Health Insurance (Reinsurance Trust Fund Levy) Amendment Bill 2006

Private Health Insurance (Reinsurance Trust Fund Levy) Amendment Act 2007

Explanatory Memorandum

(Circulated by authority of the Minister for Health and Ageing, the Honourable Tony Abbott MP)

COST-BENEFIT ANALYSIS OF OPTIONS TO REINFORCE THE LEGITIMACY OF PRIVATE HEALTH INSURANCE

Component 1: improving private health insurance products

Cost-benefit analysis of Option 1A - Status Quo (Existing arrangements remaining)

This table represents the reference model for comparison options 1B and 1C

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers would not be able to offer a comprehensive product The cost of regulation compliance is currently $81.28 million. This represents 1% of benefits paid No change to current arrangements
Service providers Providers are not able to develop efficient alternatives to hospital services as these services do not attract a PHI benefit Nil No change to current arrangements
Patients and consumers Consumers are limited by PHI for some out of hospital services, notably oncology services Gaps in cover for some services that are part of an episode of hospital care or which substitute for or prevent hospitalisation will remain No change to current arrangements
Govt / taxpayers Burden of regulation would continue unchanged Cost of 30% Rebate is approximately $2.8 billion, which is paid for hospital and ancillary cover No change to current arrangements
Option 1A net benefit No net benefit

Cost-benefit analysis of option 1B - Broadened hospital product

Options 1B and 1C are measured against the Reference model above . Modelling of the costs and benefits of the following options under Component 1 was undertaken by the Department of Health and Ageing . The following table represents the best available information along with qualitative information .

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers are able to offer a more comprehensive product
While the demand for services is expected to increase this would be offset by reduced costs due to the substitution to lower cost out of hospital services
The cost of regulation compliance is currently $81.28 million (1% of benefits paid) Insurers support this measure Insurers are able to provide products that cater to consumers' needs
Service providers Providers are able to develop efficient alternatives to hospital services as these services attract a PHI benefit Nil Service providers support this measure Service providers are better able to reflect current health practices and not be restricted by funding and regulatory restrictions
Patients and consumers Consumers can choose to be covered for services that are part of an episode of care or which substitute for or prevent hospitalisation Negligible impact on premiums Consumers have more choice Consumers are able to purchase products that cater to their needs
Govt taxpayers Legislation would need to be amended Would have negligible effect on the Rebates
Net benefit Improved PHI products that reflect the contemporary delivery of health services

Cost-benefit analysis of option 1C - Removing Lifetime Health Cover loadings

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers would need to administer the changes to premiums for which the loading could be removed The total cost of regulation compliance is currently $81.28 million (1% of benefits paid) Consumers have more reason to retain their insurance Insurers retain members who benefit from the 10 year loyalty arrangement
Service providers Negligible impact Nil Nil Nil
Patients and consumers Consumers with premium loadings will pay less for their premiums in the future relative to prices that they were charged in the past More than 300,000 people pay loadings. Up to 60,000 consumers each year (after year 10 -11 of membership) will benefit. Consumers perceive the current arrangements as an unfair penalty. They will now see a relief mechanism Consumers will benefit from the 10 year loyalty arrangement. Insurers will retain members
Govt / taxpayers Supports Govt's policy of supporting PHI and encourages participation.
Legislation will need to be amended
Cost of the 30% Rebate is approximately $2.8 billion
Net benefit Retention of consumers

Component 2: Enhanced private health insurance choices

Cost-benefit analysis of Option 2A - Status Quo (Existing information arrangements remaining)

This table represents the reference model for comparison for options 2B and 2C

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers do not need to change their existing information arrangements Insurers also view the Key features Guide and other information requirements as not helpful for consumers and costly to produce No change to current arrangements
Service providers Service providers do not need to change their current information arrangements Nil No change to current arrangements
Patients and consumers Consumers will not be able to compare products easily. The Key Features Guide is too complex Difficult for consumers to see the value of the product they purchase No change to current arrangements
Govt taxpayers Govt agencies will continue to receive correspondence from aggrieved members of the public who have become aware of deficiencies in their PHI product Nil No change to current arrangements
Net benefit No net benefit

Cost-benefit analysis of Option 2B - Providing Standard Product Information

The following options under Component 2 are measured against the Reference model above

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers will have to adapt their marketing information Negligible as insurers change products in the normal course of business and would have to change promotional material
Service providers Service providers will have to be clear about service pricing with insurers so that gap information can be published Nil
Patients and consumers Consumers will be able to compare numerous products across funds more easily Nil Consumers will be able to understand which product offers the best choice for them.
Consumer representatives support this option
Govt taxpayers Govt would specify in legislation the information that insurers must provide to consumers Nil
Net benefit Improved information for consumers

Cost-benefit analysis of Option 2C - Private Health Insurance Consumers Website

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers will be required to provide up to date information and data to the PHIO Minimal impact as there would be a small increase in the PHIO levy to be shared proportionally across 40 funds More information on products will lead to increased competition between insurers
Service providers Service providers may provide information to the PHIO Nil
Patients and consumers Consumers will be able to compare numerous products across funds more easily Negligible impact on premiums Consumers will be able to make better purchasing decisions.
Consumer representatives support this option.
Govt taxpayers Govt would specify in legislation the information that insurers must provide to the PHIO Estimated at $1.4 million in development and start up costs in the first year
Net benefit Consumers will be better informed

Component 3: appropriate regulation

Cost-benefit analysis of Option 3A - Status Quo (Existing reinsurance arrangements remaining in place)

This table represents the reference model for comparison for options 3B and 3C

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Limitations of the model continue to affect products offered by insurers. This model is administratively complex $164 million moves between funds from the reinsurance pool. There is an average effect of zero but it can affect funds' cash flows No change to current arrangements
Service providers This arrangement continues to affect products offered by service providers Nil No change to current arrangements
Patients and consumers The community rating principle continues to apply Nil No change to current arrangements
Govt / taxpayers No change to current arrangements Nil No change to current arrangements
Net benefit No net benefit

Cost-benefit analysis of Option 3B - PHI industry risk equalisation model

Options 3B and 3Care measured against the Reference model (3A) above . Modelling of the costs and benefits of the following options under Component 1 was undertaken by the Department of Health and Ageing . The following table represents the best available information along with qualitative information .

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers This model has improved pooling of risks and includes a new arrangement for high cost claims $154 million would move from funds to risk equalisation pools. Average effect would be zero, but effects on cash flow may be slightly less Insurers support this model, which includes a new arrangement for high cost claims Industry supports moving to this model
Service providers Should not have a direct impact on service providers Nil
Patients and consumers Will accommodate broadened hospital products No significant increase in premiums as reinsurance is a zero sum operation This model supports the community rating principle
Govt / taxpayers Administratively simpler Negligible effect on the 30% Rebate
Net benefit Industry supports this model

Cost-benefit analysis of Option 3C - Demographic risk equalisation model

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers This model has improved pooling of risks of funds
Industry does not support this model
$189 million would move from funds to risk equalisation pools. The average effect would be zero. There will be a marginal negative effect on cash flows.
Some of the larger funds would be contributing to the risk equalisation pools whereas before they were drawing from them
This option encourages funds to find efficiencies in product development, claims managements and contractual arrangements
Service providers Should not have a direct impact on service providers Nil
Patients and consumers
Will accommodate broadened hospital products
There would be no direct impact on patients No significant increase in premiums as reinsurance is a zero sum operation Consumers may benefit from a reduction in premiums
Govt / taxpayers Administratively simpler Negligible effect on the 30% Rebate
Net benefit Best option for the long term

Cost-benefit analysis of Option 3D - Status Quo (Existing regulatory arrangements remaining in place)

This table represents the reference model for comparison for options 3E and 3F

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers The burden of regulation would continue unchanged. New entrants to the market may be deterred 1 per cent of benefits paid across the industry No change to current arrangements
Service providers No impact Nil No change to current arrangements
Patients and consumers Compliance costs would continue to be factored into premiums Nil No change to current arrangements
Govt / taxpayers The existing regulatory arrangements are complex to administer Departmental resources would continue to be diverted to discuss legislative interpretation No change to current arrangements
Net benefit No net benefit

Cost-benefit analysis of Option 3E - Clarifying and simplifying the existing legislative framework

Stakeholders Impact Costs Benefits Net Benefit
Compliance costs would be expected to reduce due to legislation being easier to understand and interpret Nil It is expected that compliance costs could be reduced to under 1% of benefits paid
Service providers Providers are not able to develop efficient alternatives to hospital services as these services do not attract a PHI benefit Nil No change to current arrangements
Patients and consumers Potential downward pressure on premium prices if compliance costs reduce Nil Potential for premium prices to be moderated
Govt / taxpayers Govt policy will be more transparent Departmental costs to rework the legislation Simplified legislation. Policy objectives would be more apparent
Net benefit Potentially reduced costs . More efficient regulatory framework

Cost-benefit analysis of Option 3F - Clarifying and simplifying the existing legislative framework and adding measures from option 1B

Stakeholders Impact Costs Benefits Net Benefit
Private health insurers Insurers would be able to develop more innovative products in a more efficient regulatory framework The cost of regulation compliance is currently $81.28 million (1% of benefits paid)
Service providers Service providers would be able to develop more innovative products in a more efficient regulatory framework Nil
Patients and consumers Consumers would have access to more innovative products and be able to get information more easily about the range and benefits of individual products Nil More flexible products and better, mandated forms of information
Govt / taxpayers Government policy would be more transparent Departmental costs to rework the legislation Simplified legislation. Policy objectives would be more apparent
Net benefit Improved business opportunities .
More efficient regulatory framework

Options - consultations with stakeholders

The Department of Health and Ageing conducted confidential consultations on private health insurance issues. Feedback from stakeholders has informed the development of the Regulation Impact Statement.

Formal consultations have taken place in relation to all of the options canvassed below with:

·
Insurance industry
Individual private health insurers and their industry representatives (Australian Health Insurance Association and the Health Insurance Restricted Membership Association of Australia);
·
Service providers
Private hospitals and their industry representatives (Australian Private Hospitals Association, Catholic Health Australia and the Australian Health Services Alliance), and the Australian Medical Association;
·
Statutory bodies
The Private Health Insurance Advisory Council and the Private Health Insurance Ombudsman;
·
Consumers
Consumers Health Forum.

Components - Stakeholder comments

NB: (1) If stakeholders did not comment expressly on an option the relevant box will be left blank. Stakeholders are not identified individually on the basis that comments were provided in a confidential setting. An aggregated position for groups of stakeholders will be presented below.
(2) Comments from other government agencies are not included, as individual portfolios provided co-ordination comments on the Cabinet Submission.

Components Insurance industry Service providers Consumers Statutory bodies
Options recommended for action in the RIS - in the context of a package of measures Broadly supported those proposals in Components 1, 2 & 3 which are recommended Broadly supported those proposals in Components 1, 2 & 3 which are recommended Broadly supported those proposals in Components 1, 2 & 3 which are recommended Broadly supported those proposals in Components 1, 2 & 3 which are recommended
Component 1 - improved private health insurance products
Option 1A - status quo
Option 1B - broadened hospital product Supported this option which would increase the flexibility of product design and better meet consumer needs and expectations Cautious about the boundary between broadened hospital tables products and ancillaries
Option 1C - removing lifetime heath cover loadings Expressed some support for Considered favourably
Option 1D - introducing safety and quality standards for all service providers Interested in how these standards would be identified or determined Ranging levels of support across the industry Supported this option
Component 2 - enhanced private health insurance choices
Option 2A - maintain status quo
Option 2B - providing standard product information Considered how some standard information might be gathered and the need for efficacy in the information Some support for this option. Interested in considering the practicalities for collecting information Supported the option. Agencies consider that such information should assist consumers in identifying products that best meet their individual needs
Option 2C - private health insurance consumer website
Component 3 - appropriate regulation
Risk equalisation
Option 3A - status quo
Option 3B - industry model for risk equalisation Support for industry model Noted that industry favoured its own model
Option 3C - demographic risk equalisation Less support for this model
Appropriate regulation
Option 3D - status quo
Option 3E - simplifying regulation Supported this approach Supported this approach
Option 3F - simplifying regulation and new measures added Supported this approach Supported this approach


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