Further Adventures in Health Riskan updated history of Australian Health Insurance

Andrew Gale

© Andrew P Gale

This presentation has been prepared for the Actuaries Institute 2017 Actuaries Summit.

The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the

Institute and the Council is not responsible for those opinions.

The adventure continues…

• Adventures in Health Risk (2007 Convention) – Gale & Watson

• Private Health Insurance Act 2007

• Risk Equalisation changes

10 years since:

20 years since:

• Industry Commission Report into Private Health Insurance

• Health Practice Committee PHI newsletter

• Industry Risk Equalisation quarterly survey

Adventure (n) an unusual and exciting or daring experience

Regulatory environment

• Private Health Insurance Prudential Supervision Act 2015

• Changes to Risk Equalisation arrangements

• Private Health Insurance Act 2007 and supporting rules

• Government Rebate & Medicare Levy Surcharge changes

• Transfer of regulatory supervision from PHIAC to APRA

Private Health Insurance Act

Generally separated and simplified previous arrangements

contained in National Health Act and regulations, with

some changes:

Discounts – move from provable expense savings for payment methods and commission (12% max) with annual reporting to Department of Health and strong regulatory intent

to12% maximum initial promotion plus 12% maximum ongoing discount, with commission excluded, no reporting or justification required and no linkage to substantially similar products

Discount changes created greater scope for aggregators

Private Health Insurance Act

Premium Approval

previous National Health Act: proposed premium change does not impose any unreasonable or inequitable condition on contributors or adversely affect the financial stability of the insurer

current Private Health Insurance Act:Proposed premium change is not contrary to the public interest. Minister for Health interprets this as the minimum necessary to:• ensure insurer solvency• support benefit outlays• meet prudential standards concerning capital adequacy• ensure affordability and value of PHI

Private Health Insurance Act

PHI coverage broadened to include hospital substitute/preventative care

Risk Equalisation 2007 changes

Age Previous Current

0–54 0.0% 0.0%

55–59 0.0% 15.0%

60–64 0.0% 42.5%

65–69 79.0% 60.0%

70–74 79.0% 70.0%

75–79 79.0% 76.0%

80–84 79.0% 78.0%

85–89 79.0% 82.0%

90–94 79.0% 82.0%

95+ 79.0% 82.0%

Proportion of benefits pooled tiered by age band:

Risk Equalisation 2007 changes

Intended to smooth retained costs across age bands

Government Rebate and Medicare Levy Surcharge

Medicare Levy Surcharge income threshold not indexed until 2008

Rebate income tested from 2012/13

Income thresholds frozen until 2020/21

Government Rebate

Since Apr 2014 Rebate

percentages progressively

reducing each year by the

difference between PHI

premium increase and CPI

Membership

After 10 years

of PHI

membership

growth above

population

growth, PHI

membership

growth has

now stalled

Membership

Highest growth amongst over 60 age group

Membership – impact of Veteran Gold Cards

Eligible war veterans (and dependants) have PHI equivalent cover,

which explains much of the recent growth in coverage for older persons

Membership – impact of Veteran Gold Cards

The impact of Veteran Gold Cards can be more starkly seen in the 80-89

and 90+ age groups. Come to my Insights session later this year for more

analysis of the impact of Veteran health care arrangements on PHI.

Financial performance

Financial performance has been relatively stable over the past 10 years

Premium increases and the CPI Index

CPI disaggregation

Sub-group Expenditure class

Items included CPI Index weighting

Medical, dental

and hospitalservices

Medical andhospital services

Consultations of physicians in general or

specialist practice and hospital charges,

medical insurance

3.42%

Group Expenditure class Year ended March 2017

%pa

10 years to March 2017

%pa

Weighting in total CPI

All groups

Health

Education

Alcohol & Tobacco

All

All

All

All

2.1%

3.8%

3.3%

6.1%

2.5%

4.6%

5.0%

5.5%

100.00%

5.29%

3.18%

7.06%

Health

Education

Alcohol & Tobacco

Housing

Household Equipment

Recreation & Culture

Medical & hospital services

Secondary education

Tobacco

Utilities (Electricity,Gas,Water)

Household appliances & tools

Audio,visual,computing equip

5.4%

4.1%

13.3%

4.3%

-2.3%

-7.2%

6.3%

5.9%

10.4%

7.4%

-0.6%

-12.2%

3.42%

1.26%

2.32%

3.61%

1.43%

1.56%

PHI premiums comprise 57.7% of the Medical & Hospital Services class

or 37% of the Health CPI or 1.98% of the overall CPI

Insurers

Insurers

New Entrants since 1989• Transition Benefits Health Fund: operated from 1996-2002 to manage

BHP’s employer funded health insurance

• National Health Benefits Australia: trading as onemedifund,

commenced in 2007, has less than 6,000 contributors

• health.com.au: commenced April 2012, purchased by GMHBA

in July 2015

• CBHS Corporate Health: registered 1 July 2016, focusing on PHI

through employers, part of CBHS Health group

• Emergency Services Health: registered 4 November 2016, focusing on emergency response and recovery sector, backed by Police Health

• Nurses and Midwives Health: registered 2 December 2016, focusing on nursing & midwifery union members, assoc with Teachers Health Fund

health.com.au

Health.com.au primarily sourced contributors through iSelect.Purchased by GMHBA for $46.2m in July 2015 as part of a recapitalization and repayment of $42.1m of loans from iSelect.

Financial

Year

Premiums

$m

Gross Margin

% of premium

Contributors

2011/12

2012/13

2013/14

2014/15

2015/16

0.7

25.3

59.4

108.7

117.3

-13.7%

14.7%

9.4%

7.4%

3.7%

3,456

15,863

31,656

39,489

40,350

Most significant new startup health insurer since Health Australia in more than 30 years

Status changes since 2012

Not For Profit to For Profit Restricted to Open Access

Doctors Health

Transport Health

CUA Health

Queensland Country Health

Health Care Insurance

Transport Health

Phoenix Health Fund

2 of the 4 For Profit conversions were associated with acquisitions

Restricted to Open access conversions are part of a long term trend

Mergers & Acquisitions

Year Target Acquirer Net Contributors Contribution Data

Assets

$m

000's Income

$m

per

Contributor

% of

Contributions

date

2016 Transport Health rt health 25.3 10.5 9.5 24.8 $1,562 60% Jun-16

2015 Health.com.au GMHBA 46.2 14.7 38.9 108.7 $808 29% Jun 15

2014 Medibank Private ASX listing 5,673.2 1 1,155.1 1,830.0 5,499.9 $2,469 82% Jun 14

2014 Transport Health Primary Health Care 18.0 10.3 4.6 15.6 $1,662 49% Jun 13

2012 Doctors Health Avant Mutual 30.0 19.9 7.5 25.0 $1,350 40% Jun 11

2009 AHM Medibank Private 367.0 215.0 155.4 377.1 $979 40% Jun 08

2008 Manchester Unity HCF 188.0 2 85.2 79.1 225.1 $1,299 46% Jun 08

2008 MBF BUPA 2,410.0 1,182.1 819.2 1,988.4 $1,499 62% Jun 08

2007 NIB ASX listing 611.1 3 336.3 328.8 666.0 $836 41% Jun 07

2004 IOOF NIB 15.0 6.4 10.6 17.2 $812 50% Jun 03

2003 NRMA Health MBF 100.0 46.3 95.7 170.6 $561 31% Jun 03

2002 AXA Health BUPA 595.0 117.6 453.4 821.0 $1,053 58% Jun 02

Purchase Goodwill Paid

Price

$m

Mergers & Acquisitions

Discussion areas

CPI – measurement of PHI premiums in Medical & Hosp Serv group

Premium Approval – clarity of public interest test

Discounting rules - consistent with community rating?

Membership Trends – impact of rebate means testing/reduction

Mergers & Acquisitions – around one per year – who is next?

New Entrants – pros/cons of a separate insurer

Restricted to Open Access – moving beyond the traditional base

Not For Profit to For Profit – realizing value outside of health fund

Ghosts of Private Health Insurers past

Melbourne

Sydney

Hawthorn