1. 2014 Premium Round – PHIAC’s Role Shaun Gath CEO, Private Health Insurance Administration Council Presentation to Industry Sydney, 6 November 2013 Melbourne, 12 November 2013

2. Agenda Legislation What’s new (nothing much) PHIAC’s approach to the task Guiding principles

3. First question…If there’s not much new, why are we all here? Because you asked us to be here. Private Healthcare Australia polled its members and advised us that, notwithstanding not much change, these sessions would be appreciated. We are happy to oblige.

4. Plus, we can tell you what industry CEOs said about last year’s experience… “A big positive step forward” “#bloodyfantastic” “A better and more transparent process” “We thought the process was very good” “A vastly improved process resulting in many hours and $$ saved” “a material improvement over recent years” “Like it lots” See also 2013 Stakeholder Survey at www.phiac.gov.au, p16www.phiac.gov.au

5. LEGISLATION

6. Private Health Insurance Act 2007 Section 66(10) 66 ‑ 10 Minister’s approval of premiums (1) A private health insurer that proposes to change the premiums charged under a *complying health insurance product must apply to the Minister for approval of the change: (a) in the *approved form; and (b) at least 60 days before […] the change [takes] effect. (2) […] (3) The Minister must, by written instrument, approve the proposed changed amount or amounts, unless the Minister is satisfied that a change that would increase the amount or amounts would be contrary to the public interest. (4) […]

7. THE PROCESS … THEN AND NOW

8. What we used to do…. Industry DoHA PHIAC Minister for Health Applications Technical analysis and “minimum necessary” opinion (if sought) s.66(10) Advice Sent to PHIAC PHIAC – Insurer Discussions

9. Last year, it looked like this… Industry PHIAC Minister for Health DoHA DoHA liaison and observational role assisting Minister and PHIAC Applications Technical advice and s.66(10) Advice

10. Key differences…in 2012/13 (and this year) Applications went directly to PHIAC PHIAC was the primary source of advice to the Minister about premium increases –(Dept. retained visibility) PHIAC formulated its advice applying its own judgment as to the factors bearing upon public interest The Minister remained the decision-maker

11. 2013 indicative timetable EventDate Deadline for submission of applications15 Nov 2013 Assessment of applications by PHIAC16 Nov – 6 Dec 2013 Notification if resubmission required14 Dec 2013 Deadline for revised submissions17 Jan 2014 Assessment of resubmissions by PHIAC18 Jan – 24 Jan 2014 Insurers formally notified of approval6 Feb 2014 Public announcement of Minister’s decision7 Feb 2014 Insurers commence notification to members7 Feb 2014 Premium changes to take effect from 1 Apr 2014

12. How will PHIAC go about this? For us this is a relatively simple exercise: we do what we are already set up to do. Our statutory objectives are: To achieve an appropriate balance between: (a) fostering an efficient and competitive health insurance industry; (b) protecting the interests of consumers; (c) ensuring the prudential safety of individual private health insurers (PHI Act, section 264-5) This is the pricing task in a nutshell

13. Key themes to our approach We want: –a light touch –the process to be transparent –to remove scope for confusion and surprises –to encourage your regular communication We accept the principle that the market is the best place to set prices. –where there is evidence of clear and effective competition for products, PHIAC will be slow to disturb the pricing judgment of insurers –where the market is inefficient or failing, further inquiry may be required

14. What are the indicia of an efficient market for PHI services? Strong evidence of accurate and complete information about products and prices being provided to consumers Portability system working efficiently New entrants at times of high profitability Competition for new and current members Substitutable products readily available Suppliers don’t have disproportionate bargaining power

15. By these measures… In 2013, the Australian PHI market seems: not to be perfect or optimally efficient not to be dynamically competitive, despite high profitability, as evidenced by lack of substantive new entrants to be experiencing both growth but relatively low movement between insurers (“stickiness”) to be dealing with an information poor consumer sector Source: IPSOS, Health Care & Insurance 2011; ACCC, Report to the Australian Senate on anti- competitive and other practices by health funds and providers in relation to private health insurance; PHIAC, Competition in the Australian PHI Market, 2013.

16. “Competition in the Australian PHI Market” PHIAC published its paper on 3 June 2013 –Followed a discussion paper published in November 2012 which prompted 27 submissions –6 submissions confidential, one partially –The rest are available on the PHIAC website Discussion continues on the paper and issues raised on the PACU website

17. PHIAC’s Key Observations Competition in the PHI market is best described as a “mixed bag” The good news: –PHI has strong commercial visibility (advertising, sponsorship, longstanding brand awareness) –Vigorous retail presence (unlike many other countries) –Consumers have a strong awareness of the price of the product (cf. US experience – now changing) –Small funds do compete effectively with big ones –“general insurance only” is an emerging area for strong competitive behaviours

19. PHIAC’s Key Observations The not-so-good news: –Australian consumers are turned off by the complexity –Consumers exhibit strong degree of “stickiness” despite very real pricing opportunities –There is not much evidence that Australian PHI consumers are actually responding to price and product signals other than in some fairly narrow and highly contested areas (especially entry point, young adults caught by LHC policies for the first time). In short, a mixed story.

20. In summary We will give fair weight to the pricing judgments presented to us and generally be disinclined to second guess But… –We will want to examine your forecasts in the insurance business and your capital projections – as we have always done. We will, above all, be looking out for consumers

21. Thank you