Is the Gold Hospital Private Health Insurance Category Ill?

There has been a lot of talk in the insurance industry and media around the impacts of pooling, asymmetric information and pricing in various insurance industries.

These are not always the terms used, especially in the media. Late last year, Actuaries Digital published three articles on genetic testing. Those articles discussed the issues, societal benefits and costs of insurers being allowed to use genetic testing information for pricing versus rights to privacy and public access to insurance.

Many Australians have now heard about the issues with climate change and its impacts on the affordability of home insurance in areas of Australia that are prone to floods and cyclones. These risks are central questions of access to insurance, the degree of pooling, and of different groups having different information at different times (asymmetric information).

The private health insurance industry is not immune to these issues. Notably, Gold hospital products have received substantial media coverage, following increases in health insurance premiums greater than inflation and other hospital insurance products. This may restrict access to coverage for some clinical categories that are predominantly available on Gold hospital policies.

The Health Practice Committee and the Gold Products Working Group want to understand if there is an issue and, if so, why this is happening.

Without detailed data, the reasons for problems with the Gold hospital category are uncertain and the Working Group has started the process to investigate. But taking a principle perspective, it makes absolute sense that there would be a problem.

All insurance is about pooling

Customers all pay a bit in and, if a claim is made, the policyholder gets compensated for their loss. How we decide who pays which portion of the final cost is complex, and different for consumers, categories and products.

Australia’s Medicare system is at one end of the payment system spectrum where a heart attack victim gets the same care regardless of their lifestyle choices, genetic predisposition, or health prevention measures the customer has (or has not) undertaken. At the other extreme, some international health systems are entirely funded by the user. Most health insurance systems are somewhere on this spectrum, balancing pooling of risks against customers with greater risk paying a bigger share (via higher premiums).

It is hard to quantify what is “fair” when determining how much pooling should occur. Most countries rule out some risk factors but not others. The European Union (EU) does not allow gender to be used to price insurance, but Australia does. Australian regulation allows life insurers to charge a smoker more for life insurance than a fitness guru, but restricts other information being used in underwriting. Some Australian states charge motor injury insurance at a flat rate while others allow risk rating.

Australia’s private health insurance system has some interesting characteristics. Insurers cannot underwrite for any factor except state, type of product, excess chosen and family grouping. The price is the same regardless of their risk characteristics or what the customer knows about their future health plans. There are waiting periods, but no other restriction. Insurers also cannot refuse coverage to anyone meeting their general fund criteria (e.g., some funds are restricted to particular professionals).

Hospital product structures explained

Australia has a tiered hospital product structure from Basic to Gold and the Government has mandated minimum coverage where Basic products have the least minimum coverage while Gold products must cover all hospital services insurers may cover. Australia’s private health insurance system also includes risk equalisation where claims costs of those over 65 are partially shared across all policies.

Community rating means funds must offer the same price (insurance premium) regardless of risk levels of the customer, however the system does allow the fund to share some of the costs for the cohort of older policyholders across all policyholders. This does not apply for other risk characteristics or services generally supplied to younger members.

Australia’s Gold products have some of the higher cost clinical categories for members under 65. Pregnancy, mental health and weight loss surgery are all expensive and impact individuals under 65. Funds must carry the full cost of these claims.

These three clinical categories also have the additional features that all of these health services may be planned to some degree, some of the time. Pregnancies and weight loss surgery can be planned, although it can also strike unexpectedly. Often the delay to access a psychiatric ward in a hospital is long enough to partly or entirely offset the waiting period on a Gold policy. Customers who know they will utilise these services can purchase private health insurance in advance knowing it will save money.

This is asymmetric information. One party knows more about the likely costs than the other party and can act in a way that benefits them. This is exacerbated when the party with the lesser knowledge (in this case, the private health insurance fund) can’t price for risk as they do not have access to the same information. This can be different for other types of insurance where the consumer is required to disclose relevant information.

How do private health insurance funds react to this imbalance?

We know that in the long term, the private health insurance sector will target a financial surplus. Private health insurers can estimate the total cost of all customers and will charge accordingly, depending on their financial targets and corporate strategy (for profit or not for profit). But for Gold products, private health insurers have few clear choices to manage their costs against what they can charge customers.

Alternatively, an insurer could choose to subsidise the cost of these clinical categories across other products. This effectively means everyone is helping pay for these costs. However, this means for an individual insurer that their other products are less competitive, while their Gold product will be cheaper and therefore attract more users. This is likely to result in a poorer financial outcome for the fund and is easier to do for closed funds and harder for open funds.

Some insurers may even choose not to offer Gold products.

The consequences for customers are uncertain. We can theorise that over time the premiums for Gold products may keep rising. This is partly for insurers to cover their costs but also to disincentivise customers buying Gold hospital cover. We would expect that fewer health insurance members would purchase Gold cover for peace of mind and exit from the category altogether as costs rise.

There are other possible outcomes, with and without government intervention. Different parties may or may not see these trends as an issue. There is the fundamental reality that if this is a problem to fix, then any “solution” almost certainly means that someone must pay a cost for these products; consumers, health insurance funds, hospitals or government. Insurance is fundamentally about sharing the costs across a pool of people; any expansion of coverage or reduction of prices in one place must be covered by the rest of the pool paying more. With the government providing carrots and to encourage PHI take-up, even opting out doesn’t truly mean an Australian won’t be paying.

Actuaries are well equipped to examine these issues and to contribute to policy discussions about the sustainability of insurance. If you are interested in contributing to the conversation on if there is an issue and who should share the costs of health care, come along to the Insights Session on Monday 30 September 2024.

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