APRA: Time for action now before it is too late

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Hard decisions need to be made if private health insurance is to remain an essential part of the Australian health system, according to APRA Member Geoff Summerhayes.

Mr Summerhayes was speaking at a Members Health conference.

He said it was almost exactly two years since he first publicly expressed concern over the risks to the sector and its policyholders of declining affordability and adverse selection.

"I stated at the time that APRA had no prudential concerns about the state of the private health insurance industry, but noted I wasn’t sure how much longer that would be the case. My blunt message today is that it’s no longer the case," he said.

Mr Summerhayes said the risks had now become more acute with a further decline in hospital coverage and the fact the "younger, healthier cohort that financially underpins our community-rated system continues to abandon or shun private cover."

"Claims costs are rising faster than premium growth, cutting insurers’ profit margins," he said, adding the sector is only a few years away from forced mergers with smaller insurers the most vulnerable.

"The situation isn’t yet critical; for now, I would describe it as 'serious but stable', however that stability is under threat. We’ve reached the point where some hard decisions need to be made if private health insurance is to remain an essential part of the Australian health system."

Mr Summerhayes pointed to the fact claims costs are rising faster than premiums.

"In the past two premium rounds, premiums have risen by an average of 3.25 per cent and 2.92 per cent respectively, which is around 2 percentage points lower than the rise in the underlying costs.

"That money has to come from somewhere, and at the moment it’s effectively coming from policyholders as squeezed PHIs respond by increasing exclusions, increasing excesses, closing products and generally seeking to reduce claims costs."

He said the risk of this trend continuing is that only three private health insurers will still have a sustainable business model by 2022 and that APRA is "on the record expressing our disappointment about the industry’s progress responding to the sustainability challenge, with too many PHIs seemingly waiting for the Government to find a miracle cure."

"We have observed positive signs from some PHIs that are tackling the sustainability challenge head-on," said Mr Summerhayes.

"More successful strategies include enhancing value for younger and healthier members outside of typical hospital settings, lowering claims costs through alternative models of care and preventative health, and the use of partnerships and technologies to manage operational costs. Such progress should be recognised and encouraged.

"Regrettably for this audience, it is the larger PHIs that have been most active in these areas to date."

Mr Summerhayes said a "new approach is urgently needed" to address the "root causes of the sustainability problem".

"One option that APRA would support is an independent review of Australia’s private health insurance system led by appropriate qualified experts and involving all key stakeholders," he said.

"APRA believes that all key policy and regulatory settings should be up for discussion: these include the ongoing viability of the community rating model, what services can be covered, the way premiums are set, and the way prices are set between PHIs and medical providers. "

He also questioned the risk equalisation pool, "which transfers funds from PHIs with lower than average claims costs to those with higher than average claims costs."

"These are complex issues and there are no easy answers. What we do have a firm position on is that the industry’s current trajectory is unsustainable; and that while private health insurers may be the ultimate victims of the so-called death spiral, policyholders will be the first casualties through higher premiums and reduced benefits."

He added, "Reversing this direction will require difficult conversations and even tougher decisions involving all the industry‘s major stakeholders, including Government, insurers, regulators, medical practitioners, hospital groups, as well as device manufacturers, pharmaceutical companies and of course the views of health fund members. All have a role to play in keeping the system affordable, accessible and sustainable, and no single stakeholder can fix the issues in isolation."