Health insurance models vary from country to country. As highlighted in our first series of articles on international health markets, governments often dictate the role of private and public health insurance within any country. Milliman has produced a new series of blogs focused on the medical underwriting and risk adjustment practices of eight countries: Australia, Ghana, Ireland, New Zealand, Saudi Arabia, South Africa, Spain, and United Arab Emirates. This is the first article in our series.The national public health system in Australia--"Medicare"--provides universal health coverage for all Australian citizens and most permanent residents. It provides free or subsidized access to most medical services and prescription pharmaceuticals. It is largely funded from general taxation, including a statutory insurance levy, which is 1.5% of taxable income (some low-income people are exempt or pay a reduced levy). Individuals and families on higher incomes who do not take out private hospital insurance pay an additional means- tested Medicare levy surcharge of 1%-1.5% of taxable income. The remaining funding comes from private out-of-pocket payments.
The benefits received from Medicare are based on medical and pharmaceutical fee schedules set by the government. Medicare usually pays the full schedule fee for general practitioner (GP) services, 85% of the schedule fee for other outpatient services, and 75% of the schedule fee for inpatient services when treated as a private patient in either a public or private hospital. Services provided to public patients in public hospitals are free of charge. GPs and specialists charge on a fee-for-service basis and can choose to charge more than the fees in the schedule.
Private health insurance is optional but encouraged through the use of taxes and subsidies. Private treatment often complements Medicare, by offering more choice of private hospitals and inpatient specialists, as well as access to services that are not readily available in the public system or that are not covered under Medicare.
There are two main types of health insurance available: hospital coverage and "extras" (dental/ancillary) coverage. There are various levels of hospital coverage, some offering full coverage for the cost of hospital and medical charges as a private patient, others requiring the insured to meet part of those costs themselves in return for lower premiums. This may be through excesses, copayments, or exclusions for some conditions such as hip and knee replacements or maternity. "Extras" coverage provides a range of nonhospital services that are not covered under Medicare (e.g., dental, optical, physiotherapy, podiatry, and complementary medicine). It is often combined with hospital coverage.
Private health insurance does not include outpatient medical services, which are covered by Medicare, including GP visits, outpatient specialist consultations, and diagnostic tests (including imaging). It may also not cover the full cost of physician services provided in an inpatient setting, leaving the "gap" as an out-of-pocket expense.
Private health insurance is community-rated and is provided by both for-profit and nonprofit organizations. The government (through the Minister for Health and Ageing) sets the private health insurance policy agenda to ensure that the principle of community rating is maintained and to ensure affordability and long-term stability. Increases in premiums must be approved by the government minister. An independent statutory body--the Private Health Insurance Administration Council (PHIAC)--regulates the private health insurance industry.
The government's private health insurance policy encourages people to take out private hospital coverage early in life. This is through the lifetime health coverage (LHC) and a federal government rebate, as well as the Medicare levy surcharge mentioned above. The LHC offers people who join a health fund before age 31 a relatively lower premium through their lives, regardless of their health status. People over 30 incur a 2% increase in premiums over the base rate for every year they delay joining. After 10 continuous years of paying an LHC load, the load is removed so long as hospital coverage is maintained. The government also pays means-tested rebates to people on their premiums, the maximum rebates for those on the lowest incomes being 30% for ages up to 65, 35% for ages 65-69, and 40% for those over 70.
There is significant transparency in the premium-setting process because insurers must apply to the Minister for Health and Ageing for approval of premium changes (both increases and decreases). The application must be supported by an extensive amount of information. The PHIAC also assesses the application and it is common for some applications to be referred to the Australian Government Actuary. Premium increases are approved unless they are not in the public interest, meaning the minimum necessary to ensure insurer solvency, support benefits outlays, and meet prudential standards concerning capital adequacy, while also ensuring the affordability and value of private health insurance.
Underwriting: Risk selection and risk adjustment
Private health insurers cannot refuse to insure even people who are old or chronically ill. They must accept any applicant no matter the person's age, health status, or claim history. They must also charge the same premium for the same insurance policy. They may, however, impose waiting periods for first-time policyholders and/or when increasing coverage levels. Preexisting conditions are also subject to a waiting period before coverage for those conditions commences; 12 months is common.
The PHIAC administers the Risk Equalisation Trust Fund, which is deemed necessary by the government to support the community-rating principle. Private health insurers pay money into this fund when they have paid eligible benefits that are less than the average paid across the risk equalization jurisdiction (state). Conversely, insurers who have paid eligible benefits that are above the average receive money from the fund. It is therefore intended to partially compensate insurers that have a riskier demographic profile by redistributing funds from those with less risky demographic profiles. It is calculated on a quarterly basis. Eligible benefits are hospital benefits, hospital substitute benefits, and chronic disease management program benefits comprising benefits for planning, coordination, and allied health services.
The risk equalization calculation is purely retrospective and allows for:
- Age: A greater proportion of eligible benefits are included at higher ages, with none included below age 55.
- High cost claimants: A percentage of the eligible benefits that exceeds a set threshold, measured over the four consecutive quarters including the calculation quarter, excluding benefits in the age-based calculation and any benefits in the previous quarter's high-cost claimant calculation.
Comment
Risk equalization systems, which are purely retrospective and based on actual costs, can sometimes reduce incentives for insurers to provide efficient care or invest heavily in any medical management. This is because the financial benefits of any efficiency improvements will be mostly shared with other insurers through the retrospective payments. And any acute conditions that result from loose medical management are compensated for in the retrospective formula. Without any efficiency incentive, overall health expenditures tend to be driven upwards.
An alternative to reimbursement based on actual cost is to tie the retrospective reimbursement to diagnosis codes, compensating insurers based on the average cost of treatment. But that would leave insurers without a financial incentive to provide care beyond the amount for which they will be reimbursed. In other words, the sickest patients will be at the highest risk of receiving less care than they need. Using average cost in the reimbursement model also increases the incentive for selection, to try and beat the risk equalization system and gain from the differential between retrospective payments (based on average cost) and the actual cost of treatment. This could be quite marked for chronic conditions in particular, because of the presence of significant comorbidities and widely differing severity levels under the same broad diagnosis.
Therefore, a combination of both prospective and retrospective equalization payments is sometimes used, whereby equalization payments are first calculated prospectively and then adjusted retrospectively.