Tech & Science Young are dropping out of private health insurance like flies
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Next year it will be 20 years since I packed up my Volkswagen Polo with everything I owned and headed to Canberra to start a career as an economist at the Department of the Prime Minister and Cabinet.
The memory of seeing Parliament House in the distance after the seven-hour solo drive from Melbourne remains vivid. As is the memory when a few weeks into my new job Australia was rocked by its biggest ever corporate collapse, that of insurer HIH.
The HIH collapse shook confidence in the entire insurance industry and its regulator, the Australian Prudential Regulation Authority (APRA). In response my-then boss, prime minister John Howard called a royal commission.
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While that royal commission did not find APRA responsible for HIH's collapse, it did find that the regulator had not recognised the trouble the large insurer was facing until too late. Recent comments from APRA's current head of private health insurance signal that the regulator does not intend to let lightning strike twice.
APRA has warned that the entire private health insurance industry is threatened unless major reforms are pursued.
Only three major insurers will remain viable in two years' time on current trends. It endorsed leading health economist Stephen Duckett's characterisation of the industry as being in a death spiral as accurate.
The death spiral occurring in private health insurance is one predicted by economic theory and the basic maths of an ageing population.
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Under Australia's private health insurance rules, everyone pays the same premium for the same product, regardless of age or health. This means that the young and healthy subsidise the old and sick through paying higher premiums. Unlike when you pay for car insurance, you do not get a no-claims bonus for health insurance.
What is going wrong and undermining the system is that the costs associated with the old and sick have been rising, driven by the large cohort of Baby Boomers entering the golden years of knee and hip replacements.
Because these and other age related "elective" surgeries are done mainly in the private system in Australia, these costs have fallen disproportionately on private health insurance. This has led to rising premiums for both the young and healthy and the old and sick.
While the old and sick still see value in private health insurance, and have been joining up in droves to avoid waiting for their elective surgeries in the public system, the young and healthy have been less keen on paying more for a product they often do not use.
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And then, when they do use their insurance, they find they face increasingly high and unpredictable out-of-pocket costs.
The young are dropping out of private health insurance like flies.
About 127,000 young people aged 20-34 have ditched their insurance in the past two years alone.
Unhelpfully, they have been replaced by 107,000 more people aged between 70 and 84.
So, with fewer young and healthy, and more old and sick, members, premiums get driven higher still.
And more young people leave private health insurance behind and enjoy the extra cash in their pockets; APRA last week estimated a further 345,000 will drop private health insurance by 2025. This is the death spiral facing the industry.
Without young and healthy people using health insurance and not paying premiums, the system does not work. It becomes unsustainable and its important role in our public-private healthcare system is thwarted.
Options for reform have included addressing high out-of-pockets costs, so that private health insurance is more attractive.
More radical ideas include allowing private health insurers to charge younger and healthier people less, and older and sicker people more.
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More than 9,000 Australians ditched their private health insurance in the last quarter of 2019, which consumer advocates say is young people "voting with their feet" and abandoning the system.The latest Australian Prudential Regulation Authority (APRA) figures show overall, about 9,400 people dropped their private health cover in the final three months of last year, meaning just 44 per cent of Australians now have basic hospital cover.
This would help keep the young and healthy in the system, paying premiums.
Figures produced by the Grattan Institute last year on this proposal showed the increase for those aged over 55 would not be substantial.
There is also a question about how much of the Baby Boomer-induced elective surgery surge the private health insurers can manage, and whether there is a greater role for public healthcare in meeting these costs.
Health economists love universal public insurance because the risks and costs are shared across the entire community, and you cannot drop out of taxation quite so easily.
Australia's health system relies on the public system dealing with the sickest, most complex and urgent patients.
The private system deals with healthier, less complex and less urgent patients. While most agree the system works well, it does mean that people who cannot afford to have private health insurance wait longer for less urgent care, often in pain and unable to fully participate in work and other more fun activities.
The crisis facing private health insurance calls into question the ongoing viability of this trade-off, and opens up the prospect of addressing this fundamental inequity by increasing funding in the public system for so-called elective surgery.
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It would require a substantial increase in capacity for public healthcare, that realistically only the federal government could underwrite.
APRA has called for a major independent review of private health insurance, with nothing left off the table to ensure that the entire industry and all stakeholders can work towards a solution; a solution that would secure the ongoing role of private health insurance in the Australian healthcare system.
This echoes calls from the ALP, consumer groups and think tanks.
Not everyone has welcomed APRA's intervention. Smaller insurers have called for the APRA private health insurance boss to be sacked. Major hospitals have expressed a lack of confidence in his direction. But the question remains. Is the government listening to its own regulator?
Let us hope so, because, while the future of private health insurance may be in doubt, the cost of an independent inquiry today will be far less than an otherwise inevitable royal commission in two years' time. For the government, for private health insurers and for taxpayers.
Angela Jackson is an economist at Equity Economics and a non-executive board member at Melbourne Health.
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