Summary of Meeting 3 of the Risk Equalisation Working Group 6 November 2017

This page contains the meeting summary for the third meeting of the Risk Equalisation Working Group 6 November 2017

Page last updated: 22 December 2017

Summary of Meeting 3 of the Risk Equalisation Working Group 6 November 2017 (PDF 145 KB)

Working Group Member


Greg Smith


Dr Gino Pecoraro

Australian Medical Association

Karl Niemann

Australian Prudential Regulation Authority

Tory Gervasi


David Torrance

dbn Actuaries

Mario Fortunato


Bruce Beatson

Latrobe Health Services

Bronwyn Hardy

Teachers Health


Kristy Domitrovic

Private Healthcare Australia


Charles Maskell-Knight

Stuart Rodger, Deloitte Actuaries and Consultants

Susan Azmi

Ignatius Li, Deloitte Actuaries and Consultants

Vanessa Sheehan



  • Ian Watts, Australian Physiotherapy Association
  • Jamie Reid, Finity Actuaries
  • Dr Rachel David, Private Healthcare Australia
  • Michael Bassingthwaighte AM, Peoplecare Health Insurance

Welcome, apologies, proxies and declarations of conflicts of interests

  • The Chair opened the meeting, and noted four apologies. The Chair welcomed
    Mr Ignatius Li to the meeting.
  • Members did not declare any new conflicts of interests.

Approach for meeting and report to the Committee

The Chair proposed that the Working Group aim to finalise its position on a range of issues. The Working Group also agreed to consider a draft Working Group report at its fourth and final meeting in December 2017.

Presentation of data and evidence to the Working Group

The Working Group considered a range of data analyses tabled by members and the Secretariat.

The Working Group considered modelling undertaken by Deloitte that demonstrated the long term impact on premiums of three scenarios: continuation of the current risk equalisation system; capping the risk equalisation pool at its current proportion of total benefits paid; and reducing the pool size as a proportion of benefits over time.

Deloitte modelled the landscape in ten years’ time to allow time for any policy changes to work through the system, and included analysis for both stable participation (based on participation rates in 2016-17) and falling participation.

The modelling showed that the more the risk equalisation pool is capped or reduced, the lower the subsidy provided by low priced products to comprehensive products becomes.  This means that capping the risk equalisation pool would effectively reduce the level of support provided to community rating by risk equalisation.  Related analysis was also tabled by one Working Group member.

The Working Group noted that there has been some criticism of the absolute size of the risk equalisation pool.  However members argued that reducing the size of the pool would not address the underlying issue of increasing health claim costs.

Members agreed that the growth in the risk equalisation pool would be less concerning if participation was also growing.  The Chair was mindful that any policy changes that impact differently on different age groups would have flow-on implications for the system as a whole. 

Members generally agreed that changes in the price differential between basic and comprehensive policies would lead to changes in the participation profile.  However, members argued that risk equalisation was not a major driver of participation compared with policies such as Lifetime Health Cover (LHC) and the Medicare Levy Surcharge. 

One member raised the possibility that if premiums for comprehensive products were pushed “too high”, consumers may downgrade to lower priced products.  It was put to the group that if basic products fell in price, this might allow insurers some flexibility to reduce the number of exclusions.

Members were concerned that capping the risk equalisation pool may provide incentives for undesirable behaviour, such as insurers attempting to reduce benefits inappropriately for older policyholders. The Working Group generally did not support capping the risk equalisation pool.

The Secretariat also tabled analysis that compared, at de-identified individual insurer level, the current system (based on actual claims costs) with a system based on average claim cost and/or average utilisation for each risk equalisation age cohort.  The analysis showed that in some cases, the impact on individual insurers of moving to a system based on averages was significant.

It was put to the group that, with the current data, it is not possible to know what is driving the differences in actual relative to average benefits across the industry.  For example, lower actual benefits could be driven by strong contracting and good chronic disease management programs, or by insurers charging high excesses and excluding services from their products.

The Working Group also considered tabled information about industry hospital claims relativity between males and females by age cohort, private health insurance participation by age group, high costs claims, and LHC loadings.

Finalisation of objectives of Risk Equalisation

The Working Group agreed the objectives of risk equalisation should be:

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

Members also agreed the following principles:

  • Minimise adverse incentives: risk equalisation should have minimal impact on the incentive for insurers to invest in the management of their membership’s claim costs;
  • Encourage participation: as far as possible, risk equalisation should have a positive impact on consumer participation in private health insurance, particularly of low risk individuals, including by not 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.

Positive and negative aspects of current arrangements

Members agreed that risk equalisation was necessary to support community rating, but that not all risk should be equalised, so that some incentive for insurers to manage claims costs is retained.

Members felt that the current arrangements distribute claims risk fairly well across age cohorts.  Some members put forward that the current arrangements do not adjust well for the risk to insurers of newly joining consumers claiming soon after purchasing a policy.

Of particular concern was the impact of the mandated portability requirement which allows consumers to transfer to a similar policy at a different insurer without re-serving waiting periods.  Portability requirements mean that consumers can transfer to a new insurer when planning to make a claim, in order to access higher benefits or to avoid product restrictions.  There was a view that in a system with mandated portability requirements the risk associated with such transfers should be shared by the industry, and that insurers should not be “penalised” for offering more attractive products.

Members considered whether one way to address the issue of portability was to allow all claims to be risk equalised for 12 months following a consumer transferring between insurers.  However, the alternative view was that the issue around portability may be better addressed through changes to the portability requirements.

Members also generally agreed that the current arrangements may not incentivise chronic disease management adequately, but were concerned about increasing the level of equalisation without solid evidence that more such programs would reduce or avoid future claims costs or that current equalisation arrangements are acting to substantively reduce the pursuit of opportunities for such programs.

Members also put forward that some services/and or treatment areas may not be equalised adequately.  Examples given included maternity services, psychiatric services and bariatric surgery.  Members did not reach agreement on the materiality of this issue.

Options for moving to prospective or proportional risk equalisation

Following discussions from the previous meetings, members confirmed that on the basis of current evidence, they did not advocate a move to:

  • prospective risk equalisation;
  • proportional risk equalisation; or
  • a system that would use ‘averages’ to calculate risk equalisation.

Links between risk equalisation and other private health insurance reforms

The Working Group considered risk equalisation implications related to the introduction of aged-based discounts for young consumers.  Members generally agreed that, although offering discounts will be voluntary, most insurers will choose to introduce the discounts.

Members considered whether the introduction of discounts might be more effective in attracting younger policyholders if insurers’ risk equalisation liability for each discounted policy was weighted to reflect the lost premium revenue resulting from the discount.  For the purpose of calculating the insurer’s risk equalisation liability, a discounted policy could be counted as less than one Single Equivalent Unit (SEU) in proportion to the discount being provided. This would effectively share the costs of discounts across the industry. 

It was put to the Working Group that the same logic could be applied to the additional premium revenue insurers receive through LHC loadings.  Relevant SEUs could be weighted to count for more than one SEU to reflect the premium windfall from the LHC loading.  One member put forward that if an insurer has many policy holders with LHC loadings this would be factored into their pricing and therefore an adjustment period would be necessary.

Members noted that the net premium income from LHC differed by the age of the policyholder and their claims. Members also noted that retaining LHC loadings creates an incentive for insurers to focus on retaining these members. One member proposed that because offering discounted products will be voluntary, any policy to weight the risk equalisation SEU should not lock in a reduced risk equalisation contribution for any individual.

Members generally agreed that weighting SEUs to reflect premium variations driven by aged-based discounts and LHC loadings has some merit and should be further considered. 

One member asked if weighting the risk equalisation contribution for Gold, Silver, Bronze and Basic should also be considered. Members agreed it was too early to consider the risk equalisation implications of the new product categorisations, but that a review in a few years may be warranted.

Current Risk Equalisation – Further consideration of parameters

Members considered whether a new risk equalisation sub-pool should be created to equalise claims for a class of services which may benefit the system by reducing future claims, such as chronic disease management program costs. 

Members further discussed the difficulty with demonstrating that costs now would reduce future costs. One member also put forward that the costs associated with future technological advances could be included in risk equalisation if the technology reduced future claims.

The group noted that any additional costs that were allowed to be risk equalised would further increase the per SEU risk equalisation liability, which would transfer more of the industry cost to young basic policyholders. 

Members did not advocate for the establishment of a new claims pool class.

The Working Group considered whether the parameters used to calculate the aged-based pool should be reviewed. The Secretariat advised that when the parameters were set in 2007 it was planned to review them every few years.  Members noted that the drawing rates at an industry level following risk equalisation adjustment are fairly flat across all age groups, but acknowledged that the experience of individual insurers differs.  

Members considered whether the current age cohorts should be amended.  Some members put forward that there may be an increased risk of higher drawing at age 35, although other members did not see this as an issue across industry.  One member suggested that arrangements needed to also account for the claims of dependents, which can be attributed to the risk equalisation pool without a corresponding SEU contribution.  Members also noted that demographic change will lead to increased numbers of policyholders 85 years or older, and this will increase the average risk equalisation liability per SEU. 

Members generally agreed that the drawing rate after risk equalisation would increase over time for all age groups as total claims costs increase, but that at any point in time the post-risk equalisation drawing rate should continue to be broadly similar across age groups.

Members agreed that the high cost claim pool should be reviewed. Members agreed to consider both the high cost threshold, which has been set at $50,000 since 2007, and whether particular clinical services, for example services for neonates, are driving high cost claims. 

It was put to the group that raising the high costs claims threshold may have implications for the amount of capital reserves each insurer needs to hold because less risk would be shared across the industry.  Alternatively, insurers may need to purchase commercial reinsurance.

The Chair asked that more data on high costs claims and capital implications be provided to the Working Group for consideration at the next meeting.

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