Risk Equalisation in Australia: An Overview. Francesco Paolucci Research Fellow (ACERH, ANU) [email protected] Friday, March 7, 2008, 10am 9th RAN Meeting in Dublin / Ireland . Agenda. Health care financing in Australia; Risk-equalisation in Australia;
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Health Care Financing in Australia
Mix of public-private financing of health services:
Private Health Insurance (PHI) (National Health Act, 1953);
Public Health Insurance (Medicare, 1984).
Universal compulsory coverage;
It provides coverage free of charge:
for (some of) the costs of private medical services (Medicare Benefits Schedule) and pharmaceuticals (Pharmaceutical Benefits Scheme);
for the full cost of being treated as a public patient in a public hospital.
46% of the population has PHI (PHIAC, 2007);
PHI share of total health expenditures 7% (PHIAC, 2007);
Fairly competitive market:
38 funds (32 not-for-profit);
75% market share for the 6 largest insurers.
Heavily regulated (e.g. mandatory subsidies).
Health funds must advise actuary of:
proposed changes to premiums or benefits;
development of new products or major changes to products;
any other event expected to have a significant financial impact.
Appointed Actuary must provide advice to the Ministry of Health and Ageing which is responsible for approving/disapproving the changes (previously disallowance).
Re-registration (by July 2008):
Restricted access or open;
Change of status: not-for-profit or for-profit;
Merger and acquisition of health funds allowed.
NIB (6th insurer with 6.4% of market share):
March 2007: announced plans to demutualise;
19 July 2007: members vote in favour of demutualisation;
December 2007: listed ASX.
MBF (2nd insurer with 18.3% of market share):
17 August 2007: Council endorse demutualisation proposal;
31 August 2007: BUPA announces interest in buying MBF;
22 October 2007: Government prohibits the takeover;
2008: MBF expects to demutualise and list on ASX.
Medibank Private (1st insurer with 27.7% of market share):
December 2006: Medibank Private Sale Act passed;
2008: ASX listing expected if coalition government re-elected uncertain after Labour’s election.
Primary coverage for (parts of) the costs of services uncovered by Medicare:
Hospital charges levied by private hospitals;
Duplicate coverage for the costs of services covered by Medicare (no opt-out):
Hospital services delivered in public hospitals to private patients (with more choice, shorter waiting times and better (perceived) quality of care).
Primary coverage also for:
Allied health services, and non-traditional therapies.
Duplicate coverage also for:
Home dialysis and chemotherapy;
Specificallyexcludes GP services.
Complex mix of explicit and implicit subsidies in PHI.
Lifetime community-rating per product per insurer (with open enrolment) (1953, 2000 “Lifetime Health Cover”).
Reinsurance scheme (1976);
A tax penalty of 1% of income (> $50,000 p.a. for singles and $100,000 p.a. for couples) if individuals do not hold PHI (the PHIIS-scheme “Medicare levy surcharge” (1997));
30% ad valorem premium-rebate for PHI-buyers (1999), 35% for those aged 65-69 and 40% for 70+ (2005).
Reduction of LHC community-rating age penalty from 35 to 10 years (2007).
Unchanged the Medicare levy surcharge and 30-40% ad valorem premium subsidy;
Risk-equalization scheme (Private Health Insurance Act, 2007).
Risk-equalisation in Australia
(PHIAC 2006-7; DoHA 2000; Industry Commission PHI, 1997).
Private Health Insurance Act 2007 Part 3‑2 Division 55
RETF=Risk Equalisation Trust Fund
C=Contribution; S=Subsidy; P=Premium
Hospital substitute benefits, i.e. treatment that:
Substitutes for an episode of hospital treatment;
Is any of, or any combination of, nursing, medical, surgical, diagnostic, therapeutic, pharmacological (…) or other services or goods intended to manage a disease, injury or condition;
Chronic Disease Management Program benefits, i.e. treatment that:
Reduces complications in a person with chronic disease(s);
Requires a written plan specifying the allied health service or other goods/services to be provided;
Is coordinated by a person responsible for ensuring the services are provided according to the plan and monitoring the patient's compliance;
High Cost Claimants benefits.
“A system for sharing the hospital costs of high risk groups between private health insurers (PHIAC 2006-7).”
System is ex-post (retrospective) and based on actual costs;
Age – seven age bands;
No health status.
Age Based Pool (ABP):
Benefits for persons aged 55 and over at an increasing rate, from 15% for 55 to 59 year old up to 82% for persons aged 85 +;
High Cost Claimants Pool (HCCP):
Benefits paid for high cost claims (> $ 50,000) after the age based benefits are taken into account.
The amount to be notionally allocated to the HCCP for a claim is calculated in accordance with the formula:
m ( R – T ) - H
m is 82%;
R is total gross benefit for the current and the preceding 3 quarters less the amount allocated to the ABP in the current and preceding 3 quarters;
T is the designated threshold ($50,000);
H is the sum of the amounts allocated to the HCCP in the preceding 3 quarters;
Subject to a maximum of 82% of gross benefits being included in Risk Equalisation when summing the ABP and HCCP components.
Limitations & potential developments
Policy objectives in the context of Community Rating:
To increase the industry stability?
To prevent improper discrimination and constrain product differentiation?
Adverse selection: a constant threat to the stability of the PHI market.
% of PHI-enrolees declined from 50% (1983) to 30% (1997);
PHI coverage increased from 31 to 37 per cent among the 70+ years old and decreased from 46 to 22 per cent among people between 25 and 34 years old (Butler, 2007; Connelly and Brown, 2006; Butler, 1998);
1997-2000, subsidies (PHIIS, 30% rebate, LHC etc.):
Re-commencement of adverse selection in the post-LHC period (Connelly and Brown, 2006);
Premium differentiation via product differentiation (“Swiss cheese policies”, premium of high-risk policies estimated 15 times higher than for low-risk policies);
Further changes (2005-2007):
Increased rebate for 65+;
PHI covers more long-term services;
Reduction of LHC age penalty from 35 to 10 years:
More incentives for worse risks to join → increased incentives for adverse & risk selection;
Australia’s risk-equalisation system is de facto a claims-equalisation scheme;
Claims-Equalisation refers to a system of ex-post (retrospective) claims-based subsidies that equalises the financial differences between insurers that arise from differences in actual claims.
Claims-equalisation schemes result in a reduction of the insurers’ financial risk that:
Reduces the premiums, in particular for the high risks (i.e. it increases affordability);
Limits price-competition (i.e. it decreases efficiency);
tradeoff affordability - efficiency
Allow insurers to risk rate & replace community rating by a premium rate band;
Remove the 30-40% subsidies;
From ex-post to ex-ante risk-equalisation:
Risk-Based Capitation proposal (2003):
Irish model’s age-bands;
Evaluation of the current RE system within the next 3 years.