Lifetime health cover was introduced by the Federal Government in July 2000. People who take out private health insurance after age 30, pay 2 % per annum more for each year their age exceeds 30 years. Those who take out and continuously maintain cover can theoretically continue to pay the base rate for the rest of their lives.
Lifetime health cover was claimed to address two problems. These were:
• To avoid the problem of a predominance of older, higher service users in the insured pool, by increasing the proportion of young (and largely healthy) contributors to private health insurance.
This strategy was introduced to halt a decline in private health insurance.
Has it worked?
Following the introduction of Lifetime cover, the proportion of Australians with private hospital cover rose from 31% in September 1999 to 45.8% by September 2000. This provided a windfall to the health insurance industry.
The Australian Consumers Association has speculated that this may in part be because people were unclear about what they were entitled to under Medicare and were “not buying health insurance out of choice, but out of the fear of the possible ramifications of Lifetime cover.” This may have resulted from the "Run for Cover" advertising campaign. However, some adverse consequences have followed.
Little reduction in demand on public hospitals and health services
Lifetime cover may have encouraged some of the approximately 9% of Australians who self-insure (use and pay directly from their own pockets for private care when and if they need it) to join a fund. However, this may have only a marginal impact on demand for public health care services. Many people with private health insurance choose to be treated as public patients unless they require an elective procedure urgently, wish to choose their own doctor, or require a private room.
The increase in membership has included a high proportion of young people. The increase in private cover amongst young people has had minimal impact on demand for Medicare funded services because young people use health care services very little. There has been little impact on the proportion of membership among older Australians who make up most of the demand on the public sector(1).
Rhema Vaithianathan from the Australian National University compared claims and insurance coverage data before and after the introduction of Lifetime cover(2). More young people using the private health insurance rebate increases the cost of private health insurance to the government. Young people taking up private health insurance has no impact on the use of the public system by older people.
Private hospital activity may increase, especially after the 12 month waiting period for many services, but there will not necessarily be a parallel reduction in public hospital activity or costs. An additional concern is that increased private hospital activity may draw clinicians away from the public sector, further exacerbating waiting times for some high demand procedures.
A quick fix starts to unravel
The Private Health Industry Council insurance coverage figures show coverage peaking at 45.8% of the population for the September 2000 quarter, a dramatic rise from 32.2% in March of that year.
However since that peak, coverage has slipped by 0.7% over six months (or 1.4% pa). Before lifetime cover, the rate of decline was about 2% pa. As the Australian Consumers Association3 has noted, it seems likely that the levels of private health insurance may start to fall at around the same rate as in the late 1990s, albeit from a higher base. Furthermore, likely drop-outs are young members who joined in the rush up to July 2000.
For young people, premiums exceed average benefits until they reach old age. For those that delay cover until old age, even with the penalty of higher premiums because of late entry, average benefits will exceed premiums.
Ian McAuley(3) from the University of Canberra has calculated that a young person who invests the equivalent of their premium instead of buying cover, will have saved around $88,600 by the time they reach age 65. Given that the average benefit paid per episode is around $2000, self-insurance is an attractive option.
Meanwhile the level of complaints to the Private Health Insurance Ombudsman have risen dramatically since the introduction of Lifetime cover. The nine months to March 31, 2001 has produced 2557 complaints as against 1172 the previous corresponding period, an increase of 118.2%, or more than three times the rise in membership.(4)
Equity and access
Equity and access to health services are compromised by government’s support for private insurance. If a member aged over 30 falls on hard times and is forced to relinquish membership, they may be paying a higher premium, if and when they re-join, than their neighbour who had the good fortune to remain prosperous.
How the public purse pays more to get less
The Lifetime cover advertising campaign was more successful in getting new recruits than the Government expected. As the Prime Minister has noted, additional recruits mean an additional cost per annum of around $500M.
An optimistic estimate is that the Government is spending over $2 on the rebate for every dollar saved on public health care costs.
This view is supported by Federal Health Department documents which estimate that the 10.8% increase in private hospital activity in the six months following the introduction of lifetime health cover saved state governments more than $240 million in public hospital costs5. However, over the same period the cost to the federal government of providing the rebate was approximately $900 million.
Implications for Medicare
There is a widespread concern among health care workers, academics, and many in the community that the higher numbers with private cover will encourage the Government to wind back universal Medicare entitlements. The additional unanticipated costs of Lifetime cover mean even less money is available to fund the public hospitals and health services that provide care, research and teaching to benefit all Australians.
References
1 Private Health Insurance Industry Council website, 4.5.01, www.phiac.org.au
2 Vaithiananathan, R., An Economic Analysis of the Private Health Insurance Incentive Act 1998 at ANU website, 5.4.01, www.anu.edu.au/pad/media/releases2001/rsss_dp427.pdf
3 Australian Consumers Association , The Big Leak, ACA website, 4.5.01, www.choic.com.au/articles/a101543p1.htm
4 Private Health Insurance Ombudsman, Quarterly Bulleting No. 18 (January 1 to March 31, 2001) www.phio.org.au/pdf/quart18.pdf
5 Gray, Darren. Private Health Numbers Fall Again, The Age, 16.05.01
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