Summary of Meeting 1 of the Risk Equalisation Working Group 5 October 2017

This page contains the meeting summary for the first meeting of the Risk Equalisation Working Group 5 October 2017

Page last updated: 15 November 2017

PDF version: Summary of Meeting 1 of the Risk Equalisation Working Group 5 October 2017 (PDF 129 KB)

Attendees

Working Group Member

Organisation

Greg Smith

Chair

Dr Gino Pecoraro

Australian Medical Association

Ian Watts

Australian Physiotherapy Association

Karl Niemann

Australian Prudential Regulation Authority

Tory Gervasi

Bupa

Jamie Reid

Finity Actuaries

Mario Fortunato

HCF

Bruce Beatson

Latrobe Health Services

Michael Bassingthwaighte AM

Peoplecare Health Insurance

Proxies

Kristy Domitrovic

Private Healthcare Australia

Nicholas Stolk

dbn Actuaries and Teachers Health

Secretariat

Charles Maskell-Knight

Mitch Docking

Susan Azmi

Stuart Rodger, Deloitte Actuaries and Consultants

Apologies

  • Dr Rachel David, Private Healthcare Australia
  • Bronwyn Hardy, Teachers Health
  • David Torrance, dbn Actuaries

Introductions and opening statement

The Chair welcomed members and thanked them for their participation on the Working Group.  The Chair outlined the purpose of the Working Group, which is to provide advice to the Private Health Ministerial Advisory Committee (PHMAC) on possible reforms to the current risk equalisation arrangements in line with the Working Group’s Terms of Reference. The Chair noted that the Terms of Reference do not ask the Working Group to consider any changes to community rating, and therefore members should assume that private health insurance will continue to be community rated.

The Working Group was advised that a key focus for PHMAC is improving the value of private health insurance for consumers, and members were encouraged to continue with this focus in their consideration of possible reforms to risk equalisation. The Chair encouraged members take a ‘public interest’ view when contributing to this work.

The Chair advised that it will not be necessary for members to come to consensus on all issues; the Group’s role is to provide advice, which may include different perspectives.

The Working Group is expected to finalise its work by the end of December 2017 and provide advice to PHMAC in early 2018.

Confidentiality

Members were reminded of their confidentiality obligations as per the deed poll, which has been signed by all members.  The Chair noted that the sensitivities around the private health insurance reform process reinforce the need for confidentiality.

Conflicts of interest

The Chair thanked members for providing their declarations of conflicts of interest, and noted that some conflicts were inevitable due to the employment status of the members. As the Working Group has been established to provide advice, and is not a decision-making body, the Chair considered the declared conflicts were acceptable and did not prevent any member’s participation in the Working Group. The Chair asked members to advise the Secretariat as soon as possible in the event of additional conflicts arising.

Workplan

Members agreed to the indicative workplan for the first three Working Group meetings (at Attachment A).

Risk Equalisation Overview
The Working Group discussed the current risk equalisation arrangements, including:

  • That risks are currently equalised based on actual claims history within particular age cohort, rather than a calculated measure related to use/risk;
  • That age is currently used as a proxy for risk (i.e. older policy holders typically claim higher benefits than younger policy holders);
  • Whether the current arrangements create incentives for particular behaviour; and
  • The links between risk equalisation and other aspects of private health insurance, such as portability and exclusionary products.

Members noted that when the current risk equalisation arrangements were established in 2007, age was seen as a reasonable, and simple, proxy for health risk.

Risk Equalisation Objectives

The Chair asked members to consider possible objectives of the risk equalisation system – what is risk equalisation trying to achieve?  The Working Group thoroughly considered possible objectives.  Members were not able to agree on final objectives, but agreed the following possible objectives of risk equalisation for further discussion:

  • To maintain a competitive private health insurance model with incentives for insurers to compete; in a way that
  • Does not encourage insurers to discriminate against consumers based on risk; and
  • Does not put well managed insurers at prudential risk.

Members also settled on the following supporting principles:

  • Minimise adverse incentives: risk equalisation should not minimise the incentive for insurers to invest in the management of their membership’s claim costs;
  • Minimise impact on participation: risk equalisation should not adversely impact on consumer participation in private health insurance, particularly of low risk individuals, including by reducing consumer choice;
  • Low transaction costs: the system needs to be practical with low transaction costs, including implementation and ongoing management costs; and
  • Predictability: the financial outcome should be relatively predictable.

Why is Risk Equalisation necessary?

The Working Group noted that risk equalisation is often described as “supporting community rating”.  There was some discussion around other forms of community rated insurance that operate without an underlying risk equalisation mechanism, such as NSW Compulsory Third Party (Green Slip) insurance.  However, members generally agreed that some form of risk equalisation to support community rating in private health insurance is desirable.  Members broadly agreed that risk equalisation allows insurers to share across the industry those risks which are largely beyond the control of an individual insurer in a community rated system, such as higher claim costs.

The Working Group also identified four main risk types that private health insurers are exposed to with varying levels of control:

  • inherent to the consumer (e.g. age) - no control outside of product design;
  • nature of the service (e.g. cost) - some control over price but not services that must be funded;
  • insurer operations – full control; and
  • market (e.g. product changes) - some control.

The Working Group was of the view that removing risk equalisation would increase the incentive for insurers to seek to reduce the number of older, sicker policyholders and to increase the number of younger, healthier policyholders who are less likely to claim. Insurers who were successful in reducing their overall risk profile would be rewarded through lower claims, which could be passed to consumers as lower premiums, while claims/premiums for insurers with riskier profiles would increase. Insurers which did not “improve” their risk profile would be disadvantaged, even if they were otherwise well managed and efficient.

One member suggested the Working Group should consider the possible administration of the risk equalisation pool on a ‘rolling’ 12 months to help smooth the experience for insurers.  The current risk equalisation arrangements are administered on a quarterly basis, i.e. insurers either pay into or receive from the risk equalisation pool based on the actual claims/benefits in each quarter.  Due to the quarterly administration, the larger funds in particular could influence the distribution of the pool if there is a delay in claims processing and allocation of benefits through risk equalisation.

Overall, the Working Group agreed that some form of risk equalisation/sharing should be retained.

Should Risk Equalisation be a risk sharing tool, or should it encourage particular behaviours?

The Working Group generally agreed that risk equalisation should be considered, first and foremost, a risk sharing tool. Members were concerned that changes which might be designed to encourage certain consumer or insurer behaviours could instead undermine risk equalisation’s support of community rating by providing more, or less, support for different types of consumers.

Some members of the Working Group suggested that the design of the current risk sharing model reduces the incentive for insurers to control costs or invest in cost reducing initiatives, such as those that could improve the health of their policy holders. This is because the efficiency resulting from any improvement in the overall health (risk) of an individual insurer’s policyholders would not be solely returned to that insurer, but would be shared across the industry through risk equalisation. 

The Working Group noted that under the current arrangements risks are not equalised completely for any age group, so individual insurers still bear some of the risk. Insurers retain all of the efficiency from keeping under 55 year olds out of hospital, and for claimants 55 or over they retain both the unpooled element and a proportion of the pooled element equal to their jurisdictional market share. This creates some incentive for individual insurers to manage their own claims risk and supports competition.

The Working Group also noted that individual insurers may not realise the efficiency of their investment in prevention programs because the pay-offs are longer term and consumers are free to transfer to another insurer. It was put forward that given any efficiencies are shared across the industry, the costs should also be shared.

Some members put forward that current arrangements do not effectively promote hospital substitute treatment or chronic disease management programs (CDMPs) because the percentage of cost allowed to be pooled is highest for the oldest cohort, where these programs are likely to deliver lower benefits.  An option may be to allow higher rates of claims pooling for younger people on CDMPs where there is potential for greatest gain.  One member raised that future health costs are only delayed, not avoided, and still worn by the industry. The counter view was that because most people remain in the system, and continue to pay premiums, there is still value for the industry overall in delaying/avoiding costs.

The Working Group generally agreed that changes to the risk equalisation arrangements were not critical for the industry, but that the Working Group should look for opportunities for improvement.

The Chair questioned why risk equalisation in private health insurance is paid on actual benefits paid, rather than another measure such as an average or efficient benefit. The Chair briefly outlined the Commonwealth Grants Commission approach to risk sharing across the states and territories (fiscal equalisation). When determining payments to states and territories, only uncontrollable factors that affect costs are taken into account. Only in the case of natural disasters, where all expenditure arises from circumstances outside the states’ control, is funding based on actual cost. The Chair suggested that the Working Group could consider the application of risk equalisation based on a measure such as average benefits. Well managed, efficient insurers operating below the average would be rewarded, and other insurers would have an incentive to improve. This approach could place downward pressure on contracted prices/benefit paid, and provide an incentive for insurers to invest in improving the health of their policyholders.

Does the size of the Risk Equalisation pool matter?

The Working Group extensively discussed the size of the risk equalisation pool.  Benefits paid through the pool have grown from 36% to 44% over the last 10 years. Members’ views were varied on whether the absolute size of the risk equalisation pool is a problem.

Members noted that under the current risk equalisation arrangements, risks inherent to the consumer are equalised based on the view that the insurer is unable to protect itself from these risks. The Age Based Pool equalises claims costs and shares the increased risk of older people across the industry, with age used as a proxy for complexity and cost.

However, the composition of the insured population is changing, with more older policyholders and fewer young policyholders, resulting in more claims being eligible for pooling through risk equalisation.  97% of risk equalised benefits now flow through the Age Based Pool.

Members noted that this issue has a flow-on impact for the mandatory contribution to the risk equalisation pool, which transfers some of the cost of high claimants onto low claim policies, and effectively creates a “floor price” for all products. Members were most concerned that the growing size of the risk equalisation pool has increased the floor price, making premiums for basic hospital insurance more expensive. Community rating, which is underpinned by risk equalisation, relies on a broad insured population including younger, healthier consumers who are less likely to claim. Some members were concerned the private health insurance sector is at a tipping point and the floor price is further reducing affordability for younger people who typically purchase entry-level products.

Members agreed that community rating is based upon younger, healthier policyholders cross-subsidising older, less healthy policyholders. However, there was considerable discussion about the “right” level of subsidy which delivers an appropriate balance between supporting older, less healthy policyholders, and ensuring affordability for younger, healthier policyholders. Reducing the risk equalisation contribution may increase affordability and could improve the composition of the insured population.

Members noted that any changes to the risk equalisation contribution which would reduce premiums for basic products (typically purchased by younger people) would result in higher premiums for comprehensive cover (typically purchased by older people). The proportion of total benefits that are risk equalised would reduce, and each insurer would be required to manage an increased proportion of their costs at the individual product level. Some members argued that individual insurers should be exposed to a greater level of risk attributable to community rating through changes to risk equalisation that would increase premiums for comprehensive products in exchange for lower premiums for basic products.

One member indicated that it was his understanding that the original intention for the current risk equalisation arrangements was for the proportion of benefits paid through the pool to not increase disproportionate to the overall growth in fund benefits over time. This intention was not able to be verified by other members.

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