Private health insurance premium cap ‘will cost taxpayer $600m’

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Labor’s plans to cap health insurance premiums for two years would be counter-productive, according to industry experts.

The opposition party has pledged to keep rises to two percent if elected in May, as part of reforms to make policies more affordable and halt a fall in consumer participation.

However, actuary Hayden Bernau said such a measure could actually cost the government $600 million, because its private health insurance (PHI) rebate is no longer linked to premium prices, but is means tested.

“Previously, if the government pushed premiums down by $1 they would save 30c in rebates,” Mr Bernau said during a PHI reform panel discussion at the Australian Private Hospitals’ Association’s 38th National Congress.

“Now the government doesn’t save anything in rebates if it squeezes PHI premiums. Now they lose money in their tax take,” he explained.

The cap could have the opposite effect to what Labor intended, according to Private Healthcare Australia CEO Dr Rachel David.

“We’ve made our position very clear to the ALP that this is not going after the big end of town, it will hurt systems in the private sector.

“It’s actually the for-profits who’ll sail through, making some tweaks along the way; the smaller funds will have a real challenge ahead of them,” she said.

Mr Bernau projected that consumers would save $3 billion due to cheaper premiums, though taxpayers who do not have cover would be subsidising those who do due to the rebate situation.

Mr Bernau said the bigger for-profits were better placed to ride out the cap, though their average margins would drop from seven percent to one percent by the end of the second year. Not-for-profits, which average around two percent, would fall into negative margins.

Medibank CEO Craig Drummond said during his own presentation at the congress that a low-capped premium environment would have a big impact on the whole private healthcare industry.

“While we want to reduce costs for our customers, the ALP’s policy does not address the rising costs of the system. There will need to be some tough calls on all sides,” he said.

Dr David said the PHA was also opposed to Labor’s plan to remove the rebate on so-called junk policies, which she said would disadvantage two groups: people on low incomes in regional areas who have little choice about the specialists they see, and young people who use it as an entry-level product.

“If they don’t have the opportunity to have an entry-level product at the time they’re choosing to upgrade – this stuff has a lifetime loading – they may choose to opt out,” she said.

Mr Bernau said removing the rebate on the lowest-value policies would make them 30-40 percent more expensive, and risk those consumers leaving the market. However, it could also encourage people to take up Bronze policies – the third of four tiers in the new categories under the government reforms starting in April – which would cost 10-15 percent more and provide greater cover.

“I imagine from a hospitals perspective, the net impact might be positive because you would have those people moving up with extra levels of cover and more likely to come through private hospitals for those procedures,” he said.

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