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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;

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risk equalisation in australia an overview

Risk Equalisation in Australia: An Overview

Francesco Paolucci

Research Fellow (ACERH, ANU)


Friday, March 7, 2008, 10am

9th RAN Meeting in Dublin / Ireland

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

Part 1.

Health Care Financing in Australia

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
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
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
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
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
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 cover12
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
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 subsidies14
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
Risk-equalization (RE)
  • Origins of RE;
  • RE policy objectives;
  • Modality of RE;
  • Benefits/costs equalised;
  • Risk-factors;
  • Components of RE model.
origins of re
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
  • 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 objectives19
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=Risk Equalisation Trust Fund

C=Contribution; S=Subsidy; P=Premium


RE per State


State A

State B

State C




benefits costs equalised
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
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.


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
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
        • ………………………

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);


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;


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

potential developments
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;


Product type;

Evaluation of the current RE system within the next 3 years.