Sustaining Affordability AHIA National Conference 2005 Sustaining Affordable Private Health Insurance in Australia Professor Ian Harper — Melbourne Business School Modelling by Econtech Pty Ltd 9 November 2005

The 30% Rebate: Earlier Work l Reports for Medibank Private: “Preserving Choice”, Ian Harper, March 2003 “Easing the Pressure”, Econtech and Ian Harper, January 2004 l Current Policy (Rebate + Lifetime Health Cover) supports PHI hospital coverage to 2041/42: 37% under Current Policy 18% without Current Policy l “For every $1 government spends on the PHI rebate, it saves $2 in reduced public hospital outlays”

The 30% Rebate: New Work l Effects of the rebate on public hospital waiting lists - commissioned by Medibank Private and Affinity Health (now part of Ramsay Health Care) l How to reduce projected future growth in premiums using a “PHI savings plan” approach - commissioned by Medibank Private

The Rebate & Waiting Lists: Introduction l Professor Stephen Duckett’s recent report claims that, “the Government’s private health insurance policies may actually be contributing to long waiting times for public hospital treatment” 1 l Our first study estimates the impact of the PHI rebate on public hospital waiting times for elective surgery 1. Duckett, S.J., “Private Care and Public Waiting”, Australian Health Review, vol. 29(1), pp

The Rebate & Waiting Lists: Impact of PHI Coverage l Higher PHI hospital coverage reduces demand for public hospital services l Governments can respond by: reducing public hospital funding; or allowing public hospital waiting lists to fall; or a combination of the two l Public hospital funding depends on state populations and is unaffected by PHI coverage this suggests that, until current HealthCare Agreements expire, the impact of lower public hospital demand falls on waiting lists

The Rebate & Waiting Lists: Waiting Times (days)

The Rebate & Waiting Lists: Conclusions l Without the PHI rebate, waiting times would be longer, contradicting Professor Duckett’s claim l Alternatively, cost savings would be made in the public hospital system

Sustaining Affordability: Purpose of Study l Investigate a “PHI savings plan” designed to reduce rapid growth in PHI premiums as Australia’s population ages l Like superannuation accounts, contributions are made into personal PHI offset accounts during working years to help pay PHI hospital premiums in retirement l Contributions could come from members or government l Our study assumes they come from government in the form of an extra PHI hospital rebate between 30 and 65

Sustaining Affordability: PHI Offset Account Features l The funds held in accounts would not be cashable and would be foregone if insured person leaves PHI l Members would be notified of their accumulated extra rebate funds in their annual statements l Offset accounts could be taxed the same way as superannuation accounts l Accounts would be portable to avoid members being locked into one PHI fund

Sustaining Affordability: Affordability in Retirement l Current policy of higher rebates assists affordability of PHI in retirement: those aged receive a 35% rebate and those aged 70 and over receive a 40% rebate l PHI offset accounts would also improve PHI affordability in retirement and have two other advantages: young people have an incentive to join and stay in PHI to accumulate government funds in their PHI offset accounts PHI accounts avoid a rapid escalation in the cost of the PHI rebate as the population ages (This is consistent with the idea behind the new Future Fund.)

Sustaining Affordability: Modelling l Draw-downs from PHI offset accounts are used to reduce growth in net PHI hospital premiums in retirement l The policy reduces the average annual rate of growth in net premiums in retirement from 5.2% to 3.75% l If funds earn 6% p.a., this requires the extra rebate be set at 4.7% until preservation age of 65 l This replaces the existing higher rebates of 35% and 40% after age 65 l The cost to government is roughly the same

Sustaining Affordability: Extra Rebate (% of gross premium)

Sustaining Affordability: Various Scenarios PreservationAnnual NominalExtra Scenario name AgeRate of ReturnRebate* Preserved 65; 6%656%4.7% Preserved 65; 9%659%1.8% Preserved 55; 6%556%12.5% Preserved 55; 9%559%4.8% * Extra rebate rate paid to members PHI offset accounts until preservation age

Sustaining Affordability: Hospital Coverage (% of pop)

Sustaining Affordability: Conclusion l By reducing the average annual rate of growth in net premiums in retirement from 5.2% to 3.75%, PHI becomes more affordable to retirees l By accumulating an additional rebate before retirement, younger people have more incentive to join and remain in PHI, boosting hospital coverage by 1 percentage point l Compared with paying higher rebates to people over 65, this policy costs about the same l Appropriate transitional arrangements could be devised