The private health insurance industry expects new Health Minister Sussan Ley to approve increases in premiums as high as 7 per cent this year.
The 11 million Australians with private health cover will likely be hit by rises three times the inflation rate from April 1 because of increased use of services, rising care costs and more expensive medical technology.
The 11 million Australians with private health cover will likely be hit by rises three times the inflation rate from April 1 Photo: Virginia Star
“I expect premium increases will be consistent with the level of claims inflation the industry is experiencing which is between 6 to 7 per cent typically,” the chief executive of listed insurer nib , Mark Fitzgibbon , said.
Each year health funds ask the government to approve annual increases in the price of their policies on the basis of how much they expect the cost of paying private hospitals and medical providers for care to rise. This is known as claims inflation.
Insurers are in the final stages of negotiations with Ms Ley over premium increases. These will be revealed in early February ahead of their introduction in April. The government will outline an approved average increase for each fund, and an industry average.
Under former health minister Peter Dutton the industry average increase for 2014 was 6.2 per cent. Between 2010 and 2013 Labor health ministers approved average rises of between 5.1 and 5.8 per cent.
Investors who bought into the $5.9 billion float of Medibank Private await the rate news with interest. In its prospectus the insurer laid out earnings targets that were based on the 6.5 per cent average increase that Mr Dutton approved for the fund last year. However in the fine print Medibank said it had “not yet finalised its 2015 premium increase submission”.
Medibank has since applied for a different rate, a source said.
This could deliver either a pleasant or nasty surprise – depending on the approved rate – given many analysts are simply relying on a 6.5 per cent increase to inform their earnings estimates. Analysts from Bank of America Merrill Lynch said in a recent note they “see little surprise potential” on the basis that “Medibank has effectively pre-announced its 2015 price rises within the prospectus [6.5 per cent].”
Medibank declined to comment.
Some organisations, such as regional-focused insurer Westfund, have already received their approved increase. Chief executive Grahame Danaher would not disclose the fund’s rate but said the average rise across the 34 funds could reach as high as 7.5 per cent. Australia’s inflation rate is 2.3 per cent and is expected to drop further.
“I’d be thinking around 6.5 to 7.5 per cent,” he said.
Opting for cheaper cover
Mr Danaher said the rising cost of health insurance and weak economic conditions were pushing policyholders to opt for cheaper cover that excludes certain services such as orthopaedic or cardiac surgery. This leaves less revenue to pay for care of other members, which hits profitability.
“If someone downgrades from a $100 policy to a $90 policy, the overall effect is you have $10 less to meet that hospital claim that turns up somewhere else in the system,” he said.
Mr Danaher said in the past the value of ‘upgraders’ was greater than customer who downgraded, but in the past year the fund was “breaking even on upgrades”.
Although premiums could rise by up to 7 per cent, the private health insurance rebate will only rise at the rate of inflation. Labor policy that came into effect last year means the subsidy, which costs about $6 billion a year, will rise in line with the consumer price index. The effect of this is the level of the subsidy falls from 30 per cent of consumers’ policy cost but the government’s budget exposure is reduced.
Mr Fitzgibbon said although the rebate will gradually decrease “as a percentage of the premium” he did not expect it to lead to a drop in members.
The industry was worried that means-testing of the rebate that came into effect in June 2012 would discourage customers, but the proportion of Australians with hospital cover actually increased from 46.6 per cent at the time to 47.2 per cent in June 2014, according to the industry regulator.
“It [coverage] will continue to grow slowly,” Mr Fitzgibbon said.
The chief executive of the Consumers Health Forum Adam Stankevicius said customers were “suffering a contraction in coverage, an inexorable rise in premiums and a an explosion in out of pockets costs, from private health insurance companies who have to drive costs down in order to satisfy shareholders.”
He called on Ms Ley to order a Productivity Commission inquiry into private health insurance “so that we can have a reasoned, rational, evidence-based debate about its future role in our health system”.
A spokesman for Ms Ley declined to comment prior to the final decision being made.