Private health insurers call for reform of second-tier default benefits

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Private Healthcare Australia says the current second-tier default policy needs to be reformed because it is not meeting its intended purpose of supporting smaller hospitals and hospitals in under-serviced areas.

The association has used its submission to the Department of Health and Aged Care's current consultation on the policy to recommend its modernisation to ensure it meets the original intent of reducing out-of-pocket costs.

Second-tier default benefits provide patients with access to higher claims when they are treated in a hospital that does not have a negotiated agreement with their insurer.

The policy was introduced in 1998 to assist with direct negotiations between private health insurers and hospital providers. It was thought that by placing an effective floor under provider payments, the benefit would even up negotiations for ‘second-tier’ smaller hospitals.

Second-tier default benefits are predominantly used by day hospitals in urban areas. According to PHA's submission, there were 249,607 insured patients treated in hospitals without an agreement, with 72 per cent in day hospitals. Very few day hospitals are located in rural and remote areas.

There has been a decline in patients with private health insurance treated in hospitals without an agreement over recent years.

Generally, hospitals have entered agreements with insurers to reduce out-of-pocket costs for their customers. However, day hospitals are not on average moving with this trend.

In 2018-19, the average hospital gap payment across all separations per day in day hospitals was $134, compared to $63 per day for other private hospitals.

PHA says the policy should be reformed to require hospitals using default benefits to sign a common form of undertaking to prohibit charging more than 100 per cent of the defined benefits, where a hospital falls out of contract.

It says the government could also consider abolishing second-tier default benefits, abolishing second-tier default benefits in urban areas, or decreasing second-tier default benefits in urban areas while increasing them in rural areas.

"Removing or reforming second-tier default benefits will increase access to care by removing incentives to provide care in already overserviced areas with old-fashioned inpatient models. Without the regulatory crutches, hospitals and other health providers are more likely to promote modern community-based models of care, in areas where services are most needed," said PHA in its submission.