Health in­sur­ance is unique, backed by mem­bers for mem­bers

The Weekend Australian - Travel - - Health - BAR­BARA CAR­NEY

MU­TUAL health in­surer NIB re­cently posted out the prospec­tus for its pro­posed float to po­ten­tial in­vestors. A cou­ple of weeks ago I, along with other pol­icy hold­ers, re­ceived NIB’s of­fer of an es­ti­mated 70 to 90 cents per share if we sell be­fore the planned list­ing in Novem­ber. As a long-time NIB pol­i­cy­holder op­posed to de­mu­tu­al­i­sa­tion, I still can’t see any­thing to change my mind about Aus­tralia’s private health funds go­ing pub­lic. MBF is also keen to fol­low NIB into pub­lic own­er­ship.

As a con­sumer, there are sev­eral fac­tors that make me wary.

The high level of gov­ern­ment reg­u­la­tion of private health in­sur­ance, in­clud­ing the fact that the fed­eral Gov­ern­ment di­rectly sets pre­mium lev­els, is an ob­vi­ous one. Any in­vestor should be wary when a com­pany is sub­ject to con­trols that are po­lit­i­cal in na­ture.

A big­ger rea­son is that private heath in­sur­ance is not gen­eral in­sur­ance with a few spe­cial wrin­kles. It is a fun­da­men­tally dif­fer­ent prod­uct.

It’s nec­es­sary to look be­hind the rhetoric about the need for the health funds to be able to raise cap­i­tal, ex­pand their of­fer­ings, be more ag­gres­sively com­pet­i­tive and all the other ben­e­fits that are sup­posed to flow from re­struc­tur­ing the private funds into pub­lic com­pa­nies. Such ben­e­fits would be real, not il­lu­sory, but an­other ques­tion would be — is flota­tion the only way to achieve them?

Health funds can’t di­rectly con­trol their most sig­nif­i­cant costs in the way other busi­nesses can. There’s no sim­ple lever to pull to limit provider costs. Doc­tors, den­tists and other providers in the private sec­tor are free to charge what they can. The great ma­jor­ity of pro­ce­dures per­formed by doc­tors that funds cover are done in hos­pi­tals. Th­ese cost the most. It’s ob­vi­ously in the best in­ter­ests of the private hos­pi­tals, be­cause of their need to en­ter into agree­ments with the funds, to reach agree­ment with the spe­cial­ist doc­tors who prac­tise in the hospi­tal about fees. But at the end of the day, a doc­tor in private prac­tice sets his or her own fees.

The same goes for den­tists, phys­io­ther­a­pists etc, and al­ter­na­tive prac­ti­tion­ers such as natur­opaths. Funds cope with this by lim­it­ing the re­bates for ser­vices, giv­ing rise to out of pocket ex­penses — the ma­ligned ‘‘ gap’’. In or­der to in­tro­duce greater com­pe­ti­tion, the Gov­ern­ment ac­tively en­cour­ages peo­ple to find out what the gap is, with the im­plied en­cour­age­ment to shop around for an­other provider if the gap is too wide. This has been pretty suc­cess­ful. About 80 per cent of in­hos­pi­tal ser­vices now have no gap. Again, good news for con­sumers, but not such good news for a mar­ket ea­ger to see prof­its rise quickly.

A Stan­dard and Poor’s re­port in 2006 showed that ben­e­fits paid out by funds had con­tin­ued to grow at twice the rate of in­fla­tion (mea­sured by the CPI) in 2005. This trend means that con­trol­ling costs is vi­tal for funds, es­sen­tial in the un­for­giv­ing pub­lic mar­ket.

But funds can’t en­ter into a pre­ferred sup­plier scheme with in­di­vid­ual health providers to keep pre­mi­ums down, the way gen­eral in­sur­ers do with smash re­pair­ers or sup­pli­ers of white goods. The only sure way to con­trol provider costs and of­fer big­ger, more at­trac­tive, re­bates to mem­bers would be for a health fund to own its own hos­pi­tals and med­i­cal cen­tres and em­ploy its own doc­tors, nurses, health pro­fes­sion­als and al­ter­na­tive prac­ti­tion­ers. It’s very hard to see this hap­pen­ing in Aus­tralia with our long and strong his­tory of private medicine.

As a pol­i­cy­holder, you have to ask your­self: if gov­ern­ment is con­trol­ling the pric­ing, and 60 per cent of a listed fund’s rev­enue has to go to share­hold­ers in the form of div­i­dends, what pres­sure does that put on the fund to cut ser­vices to mem­bers? Not to men­tion that for the first time, th­ese listed funds will be pay­ing tax — 30 per cent — whereas a mu­tual pays none.

The log­i­cal place to look for ef­fi­cien­cies is in prod­uct of­fer­ings such as the an­cil­lary ta­bles: fit­ness costs, weight-loss pro­grams, mas­sages and al­ter­na­tive ther­a­pies, or fur­ther lim­it­ing other ser­vices such as au­di­ol­ogy or op­ti­cal — an even harder task. The risk here is that mem­bers will vote with their feet and the fund will lose mar­ket share — not a good thing to have to ex­plain at an AGM. Funds need to at­tract young healthy mem­bers whose pre­mi­ums will pay for the older sick ones, and brand loy­alty is in­creas­ingly a for­eign con­cept to younger de­mo­graph­ics. Fit­ness perks and mas­sages are ex­actly the kinds of ben­e­fits that ap­peal to the young and fit.

Like thou­sands of oth­ers, I main­tained my private health in­sur­ance through the years of ever-ris­ing pre­mi­ums and no gov­ern­ment sub­sidy. It’s been good to see the funds be­come more com­pet­i­tive, bet­ter run, and more flexible in prod­uct of­fer­ings. What I won­der is, how will a list­ing on the ASX en­able a fund to be­come even leaner and meaner with­out cut­ting into ben­e­fits to mem­bers?

Some of­ten-ne­glected facts have to be stated. Private health in­sur­ance in Aus­tralia is not sim­ply gen­eral in­sur­ance with a bit more gov­ern­ment scru­tiny. As an in­dus­try sec­tor, it is unique in sev­eral par­tic­u­lars. Fund mem­bers re­ceive com­pen­sa­tion for out­lays on pre­mi­ums; those pre­mi­ums are di­rectly set by the fed­eral Gov­ern­ment; funds don’t con­trol sig­nif­i­cant costs; de­mand is elas­tic to say the least as con­sumers do not make ra­tio­nal choices. Dr Bar­bara Car­ney is a for­mer chief of staff to fed­eral health min­is­ters Michael Wooldridge and Kay Pat­ter­son, and a for­mer head of gov­ern­ment af­fairs for In­sur­ance Aus­tralia Group.

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