A performance test for private health insurers
The super industry must prove itself, so why shouldn’t private health insurers?
Review the private health insurance system
National Seniors recently published a research report on older Australians views and experiences of private health insurance (PHI). It found strong support for PHI, but growing anger at rising costs and diminishing value.
With premiums rising and out-of-pocket costs spiralling, National Seniors has called for a full Productivity Commission review of the private health system, with a focus on identifying ways to improve the value proposition of private health and reduce out-of-pocket expenses for policy holders.
You can read more about this National Seniors initiative and other measures to bring down health costs for seniors here.
Don’t forget the best thing you can do is join National Seniors to support our advocacy in this space.
Given continued increases in private health insurance premiums, and cost-of-living pressures, is it time that the private health insurance industry follows the superannuation industry and has its financial performance put under the microscope?
For several years the superannuation industry has had its investment performance and fees closely investigated by the industry regulator, and underperformers named. This has led to some underperformers closing and members shifting to better funds.
While they are different industries, there are similarities between superannuation and private health insurance:
Both are subject to prudential regulation by the Australian Prudential Regulation Authority (APRA), which is focused on financial safety and stability of institutions.
Both are supported and their use encouraged by the Federal Government. Superannuation is intended to take pressure off the Age Pension and private health insurance is meant to reduce pressure on Medicare.
Both receive tax concessions. Earnings in superannuation are concessionally taxed. For private health insurance there is a rebate, with a loading to encourage insurance to be taken out at earlier ages, and a levy for higher income earners without private insurance.
Since 2021, APRA has published annual performance tests for some superannuation products, based on investment returns and fees.
Superannuation products are different to superannuation funds. The fund is the overarching structure and usually has multiple “products”, which is similar to how a bank has multiple different types of accounts. The regulator focuses on the performance of the products, but may then require the trustees, who run the fund, to take action.
So far, APRA has not made public the performance scores but has named the funds. In 2021, trustees of 13 superannuation products that failed the performance test had to write to their members about the results and carry information about the Australian Taxation Office’s superannuation comparison tool.
The regulator also “intensified” its supervision of those trustees and directed them to report on why the underperformance happened and what they planned to do to turn it around. The trustees had a choice – they could improve performance or plan to transfer members to a better performing fund.
This scrutiny produced results. In 2022, five products failed, four of which failed for the second time and were closed to new members.
Last year, one product failed. In fact, it had failed in each of the three years. It was closed to new members and plans were put in place to cease the product.
APRA said nine underperforming products had been stopped, with $38 billion in assets across 800,000 members shifted to other products.
This is a substantial amount of money and a lot of members, but it is important to remember that most of the industry is doing well: in 2021 84% of the tested products passed the performance tests. By 2023 this had risen to 98.44%.
Superannuation funds invest money on behalf of members and charge fees. Private health insurers do a different job: they take money, invest it, have administration and management costs, and assess and pay benefits.
So, the performance test for super funds can’t be directly applied to insurers. But there are a few performance measures which could better help consumers compare providers across the sector. These include:
- Benefits paid
- Management expenses
- Complaints.
Some of these measures are related: higher management fees leave less to pay out in benefits. The aim would not be to target particular levels, but rather to improve efficiency and outcomes for consumers.
There is already performance information available for some of these measures. For instance, for funds open to the general public in 2022/23, the lowest management expense per average policy was $263 and the highest $1,214. Benefits as a percentage of contributions – how much gets paid out – ranged from 70.0% to 87.9%.
The government already has some control over private health price increases, with the Health Minister approving premium increases. For 2024, the increases averaged 3.03% across the industry, but at the fund level the increases ranged from 0.27% to 5.82%.
Introducing a performance test for private health insurers would put a spotlight on disparate costs and benefits that flow on to people with insurance, but which are currently difficult to track and compare across the funds.
National Seniors believes there is sufficient scope and opportunity for the government, and regulator, to apply a performance test to the nation’s private health insurers. For this to happen, the regulator would need additional powers to put the same focus on the private health insurance industry as the super industry, which benefit PHI consumers.
