Risk Equalisation in Australia: An Overview

Risk Equalisation in Australia: An Overview Francesco Paolucci Research Fellow (ACERH, ANU) Francesco.Paolucci@anu.edu.au Friday, March 7, 2008, 10am 9th RAN Meeting in Dublin / Ireland

Agenda • Health care financing in Australia; • Risk-equalisation in Australia; • Limitations & potential developments .

Part 1. Health Care Financing in Australia

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).

Public Health Insurance: Medicare (1984) Universal compulsory coverage; Tax-financed single-insurer; 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.

Private Health Insurance (PHI) Voluntary coverage; 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).

PHI Act 2007 • Separated from National Health Act 1953; • Appointed Actuary; • Re-registration of health funds; • Broader Health Cover; • Changes in Subsidies (e.g. Risk-Equalisation).

Appointed Actuary 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 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.

De-mutualisation? 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.

Broad Health Cover Before (2007): Primary coverage for (parts of) the costs of services uncovered by Medicare: Hospital charges levied by private hospitals; Home nursing; Ancillary services. 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).

Broad Health Cover After (2007): Primary coverage also for: Allied health services, and non-traditional therapies. Duplicate coverage also for: Out-patient care; Home dialysis and chemotherapy; Specificallyexcludes GP services.

Changes in Subsidies Complex mix of explicit and implicit subsidies in PHI. Before (2007): Implicit subsidies: Lifetime community-rating per product per insurer (with open enrolment) (1953, 2000 “Lifetime Health Cover”). Explicit subsidies: 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).

Changes in Subsidies After (2007): Implicit subsidies: Reduction of LHC community-rating age penalty from 35 to 10 years (2007). Explicit subsidies: Unchanged the Medicare levy surcharge and 30-40% ad valorem premium subsidy; Risk-equalization scheme (Private Health Insurance Act, 2007).

Part 2. Risk-equalisation in Australia

Risk-equalization (RE) • Origins of RE; • RE policy objectives; • Modality of RE; • Benefits/costs equalised; • Risk-factors; • Components of RE model.

Origins of RE • “Special Accounts” – January 1959: • > 35 days in hospital in a year: claims paid by Govt; • Initially included over 65s. • “Reinsurance” – October 1976: • Two age-bands (+/- 65 years old): • 100% of claims for in-hospital care for 65+; • 100% of claims for 65 - if > 35 days in hospital in a year; • Claims only shared by health funds; • Reduced to 79% pooling in 1995; • Initially national, changed to state based in January 1984. • “Risk-equalisation” – April 2007: • Change of name but no change in basic principles; • Increasing pooling by age category; • High cost claims pool (replaces +/- 35 days).

RE policy objectives • RE policy objectives: • “… allows a more equitable treatment of health funds with different coverage of high risk groups to support Community Rating”; • To increase “the industry stability in the context of Community Rating”; • To constrain product differentiation; (PHIAC 2006-7; DoHA 2000; Industry Commission PHI, 1997).

RE policy objectives • Principle of Community Rating: • no improper discrimination against: • Health status; • Gender, race, sexual orientation or religious; • Age of a person, except for LHC; • Where a person lives, except to the extent where people live in different risk equalisation jurisdictions; • no risk rating of different groups for the same product. Private Health Insurance Act 2007 Part 3‑2 Division 55

RE modality Modality C: RETF S-C Consumer Insurer P-S+C RETF=Risk Equalisation Trust Fund C=Contribution; S=Subsidy; P=Premium

RE per State Australia State A State B State C RETF RETF RETF

Benefits/costs equalised Hospital benefits; 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.

Risk-factors RE definition: “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; Current risk-factors: Age – seven age bands; No gender; No health status.

Components of RE model 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.

ABP

HCCP 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.

Part 3. Limitations & potential developments

Highly imperfect mechanism • Policy objective of equitable treatment of funds with different coverage of risk groups? • Age only risk-adjuster; • 7 age-bands: • 2 between 55 and 64; • 4 between 65 and 85+; • Funds will be disadvantage if they have more: • Females vs. males; • Females of child bearing age vs. other females; • People aged in the early 50s compared to younger aged people; • High-risk groups than funds in other states • ………………………

Selection 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. Medicare (1984): % 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);

Selection 1997-2000, subsidies (PHIIS, 30% rebate, LHC etc.): 43% PHI-enrolees; 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;

Efficiency 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.

Efficiency 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

Potential developments 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; Gender; Product type; Evaluation of the current RE system within the next 3 years.

Risk Equalisation in Australia: An Overview