In Sickness And In Wealth

Sydney Morning Herald

Wednesday March 26, 2008

Kate Askew

Big business has its eye on non-profit-making health funds. Kate Askew examines what it means for consumers.

Helen had a brain tumour. Her private health insurance provider told her it was non-life threatening and she didn't have the operation she needed. She died.

Laurel is a university student. She also has cancer. She was scheduled for an operation but it was delayed while her insurer investigated whether it was a pre-existing condition. Meanwhile the disease spread throughout her body.

Helen and Laurel don't live in Australia. They are real-life horror stories in documentary maker Michael Moore's frightening examination of the US private health sector, Sicko.

But could Australia's health system be headed down this treacherous path?

Earlier this month private health insurance became even more expensive. The amount we now pay in premiums jumped 5 per cent on average. This hurt but potentially even more painful for consumers in the long run is the swing toward "for-profit" health insurer models and a looming sector consolidation.

Come May 12, MBF policyholders will vote on whether to demutualise and accept a $2.41 billion cash offer from the British mutual and giant of the global health insurance industry, BUPA.

Newcastle's NIB has set the stage for more public listings of health insurers after taking to the bourse last year.

And despite election promises to the contrary, noises within the new Federal Labor Government indicate Medibank Private will follow the same route to a stockmarket listing by 2010. For the first time the government-owned Medibank will have a competitor. Together BUPA and MBF will control 35 per cent of the market. These insurers plan to be ahead of the race: cashed-up and ready to force consolidation.

Is this big business taking over the industry - an industry that until now has been largely state-based, consisting of 37 players, only six of which are "for-profit"?

The heads of the dominant health insurers are singing from the same song sheet. Competition is only going to be good, good, good for consumers.

"Industry consolidation can only breed better price competition," says Mark Fitzgibbon, the chief executive of NIB. "The quality offering is much higher [after consolidation]," says MBF's Eric Dodd. He says it will strengthen the product consumers receive. "On the chiropractic side, we've just signed up 300 new providers."

Of course, most consumers don't sign up for health insurance for chiropractors and the like. The Australian Health Insurance Association says the reason most of us sign up for health insurance is to give us choice of treatment. We want to be able to choose which doctor we see, where we see them and when.

There is some evidence that consolidation is not necessarily going to give us what we want.

Choice declared in a September report that "health insurance premiums are increasing but consumers are getting less for their money".

"Any concentration of ownership and reduced competition - to the extent that there is competition - is obviously not in the interest of consumers," warns Michael O'Neill, the chief executive of the National Seniors Association.

The health insurers who have stuck to their mutual structure argue consumers are better-served as members come first.

"From our perspective it's really quite clear - to focus very, very much on the memberships. Your customer is your member," says Rob Bransby, HBF's chief executive. A non-profit model allows income to be directed to the benefit of policyholders, not shareholders.

NSW-based mutual HCF's policy is similar. "Health insurance, whether public or private, has a strong social element, which we believe makes not-for-profit funds a better vehicle for funding health care because they do not have to balance the conflicting interests of shareholders and policyholders."

This is in direct contrast to NIB's stance. Fitzgibbon sees a future for NIB in broadening its modus operandi. "We see ourselves as a finance company," he says.

For policyholders, this consolidation may see their once state-based insurers moving to a national presence.

"We see the market moving towards a more national network," says Richard Bowden, the head of BUPA Australia. "We need to be able to participate in this consolidation."

The downside of consolidation is that it could become difficult for those left on the outer. For consumers, this means their health insurer could find itself in tough financial straits.

"Shortly you'll have two big national players," says Jim Gillespie, a senior lecturer in health policy in the School of Public Health at the University of Sydney, as well as a co-author of a 2006 report into competition in private health insurance and the sale of Medibank Private. "The small- to medium-sized funds may be in a bit of trouble when consolidation starts."

Those driving the consolidation say the future is looking good. MBF's Dodd argues that consolidation increases its ability to cut better deals with providers. "It allows you to write national contracts with hospitals, not each state."

Fitzgibbon says NIB already has more pricing power because it has teamed up with 26 other health funds to negotiate with the group's providers.

Consolidation or no consolidation, it's still a difficult industry. The reality is the private health insurance sector is a study in imperfection. Margins are tight and government subsidies assisted it to the tune of more than $3 billion last year. In 2001-02, in the wake of the government's introduction of a 30 per cent rebate, Medibank Private actually lost $175 million and needed an urgent injection of more federal funds.

The amount the health insurance funds pay out in claims is rising. In 2006-07 it rose 7.7 per cent to $9.4 billion. Allowing for growth in memberships, claims payments rose 4 per cent.

Rohan Mead, Australian Unity's chief executive, says the bulk of premiums - 91 cents in every dollar - is returned to policyholders in claims payments.

"It's a very unusual industry because it's so dependent on government subsidy," Gillespie says.

"Are these commercial businesses?" Mead asks. He argues they are "creatures of public policy".

Grand plans by health funds to increase their membership and cut costs are not necessarily going to mean higher profits, according to analysis by Gillespie and his co-researchers.

It shows that as a fund attracts more members, it pays out more to members and, importantly, it paid out more than its income in increased care of the new members. Health insurers, as with all insurers, also experience the phenomenon of "adverse selection", that is, people take out insurance policies when they think that they may need it.

Competition among health insurers is also a furphy, Gillespie says.

"I don't think there is very much competition at the moment because of the heavy regulation," he says. "With subsidies comes all the regulation."

Herein lies the protection for us, the policyholders. Australian consumers with private health insurance will always be able to choose which doctor they wish to see, when they want to see them and where - it's legislated.

A policyholder will always be entitled for the percentage of the bill covered by the Government - regardless of whether your fund has done a deal with the hospital. Likewise, those insured will always be able to get private health insurance - because community ratings are, again, legislated.

Under community ratings, everyone pays the same premium - the elderly and sick don't get hit with higher premiums just when they need the insurance most. The health funds' insurance pools rely on younger and healthier members to subsidise the old and sick. But as this group ages, it too will benefit, in the same way, down the track.

The Australian Health Insurance Association, which represents most health insurers, supports these ratings. The downside to regulation is that the products health insurers sell are relatively rigid.

"I don't think we are going to see incentives for consumers to improve their health to lower their premiums, as I do not see the Government allowing private insurance to do much other than community-rate its offerings, as it does now," says Steve Leeder, the University of Sydney's professor of public health and community medicine and a proponent of the public healthcare system.

Gillespie says this is because "it's a very heavily regulated industry in terms of the products it can offer. It's constrained [insurers] against going into innovative areas."

When a health insurance company decided to do special deals to those who had given up smoking, the idea was hit on the head by a government department.

The upside to this regulation is that it protects consumers from being denied coverage by insurers if they are deemed to be a risk. "They're not allowed to discriminate," Gillespie says. "It has the effect of preventing what the American funds do, which is block people from it."

In its present form, the health insurance industry is still far from the dire US model. But certainly there's little being done to slow changes to the industry that could see the private health sector move in that direction.

Policyholders themselves appear to show little more than ambivalence toward this sector transformation. At NIB's vote last year, only one-third of its membership voted. Of those, 95 per cent supported the proposal. And few, whether for-profit or mutual health insurers, dispute consolidation is here to stay.

"With [health fund] activity over the past decade predominantly concerned with regulatory changes and government initiatives, the theme of the next 10 years appears to be consolidation, involving sharemarket listings, capital efficiency and economies of scale," a Deutsche Bank report on the sector says.

"With six of Australia's private health insurance funds commanding close to an 80 per cent share, there is clearly potential for acquisitions of smaller players and merger activity within the six majors. The pace at which this occurs will be gradual, in our view, given the number of restricted, regional and very small funds that exist."

MBF, for example, was in talks on-and-off for five years with the likely acquirer, BUPA.

Market sources say that Victorian-based Australian Unity, Perth's HBF and HCF in NSW are among attractive takeover targets.

NIB has confirmed it is in talks with two separate parties with an eye to acquisition. Fitzgibbon predicts there will be four or five big players in the Australian health insurance sector in the wake of the consolidation phase.

Gillespie says there are "a lot of dangers in going public" when these insurers are dependent on government subsidies.

As for investors: "You're investing in a business where the chief executive has no control over his margin," one insurance player says.

Fitzgibbon acknowledges government subsidies are a topic of interest among the institutional shareholders he briefs but says the new Federal Government has committed to retaining its existing support to the sector.

Government subsidies are an obvious risk to the industry. But there are more.

Australian Unity's Mead believes the landscape is changing - not only because of consolidation.

Health funds' returns on investment have benefited from a bull market for equities. No longer.

And increasing prevalence of chronic disease is also transforming the sector.

"Someone comes in presenting with an acute condition, which is a cardiac condition," Mead explains.

"But underlying is a diabetic condition, which is headed towards a renal condition.

"This is a really significant set of challenges. It's all hands to the pump. How do we work together to address these challenges?"

TIPS FOR TAKING OUT INSURANCE

* Who counts as a member? Family cover generally includes your partner and children under a certain age. The age varies from fund to fund - it could be 16, 21 or even up to 23. Some policies may include full-time students under 25. If extended cover for family members is offered, does it cost extra?

* Are there any advantages to longer membership? These may include higher benefits or benefit limits, or lower excesses the longer you're a member.

* What waiting periods will apply?

* If you want to go to a specific private hospital or be covered for treatment by a specific health practitioner, will there be out-of-pocket expenses?

What excess or co-payment applies? How does it work? Is there an annual maximum per membership?

* Are there any limits to treatment, even with so-called 100 per cent cover? For example, you may only be entitled to a certain number of overnight stays overall or there may be day limits for specific treatments.

* Is the hospital you want to go to an agreement hospital with the fund?

* Are any treatments initially limited to care as a private patient in a public hospital?

* Are any treatments excluded or restricted to public hospitals?

* Does the fund have an agreement with your doctor to cover the "gap" between the actual charge and the Medicare schedule fee?

Source: Choice

Quality treatment when you need it

Don Reid, 67, took out an insurance policy at the age of 17 or 18 because it seemed the "prudent" thing to do.

Reid, a self-funded retiree, moved north from Sydney to Buttaba on Lake Macquarie five years ago.

He is in good health, apart from an operation he needs for his eyes, which will cost him $500 in a hospital excess payment, under his MBF policy.

He is confident that his premiums are going one way - up.

"It's an almost automatic increase," he says.

But the reason he has kept his health insurance for 50-odd years is because he wants to choose the doctors and specialists who treat him and have access to a hospital without having to wait.

He doesn't want to rely on the public hospital system where he may have to join a queue for treatment and accept whichever doctor is available.

"You don't have to wait around for something to be available," he says, adding that he has had elective procedures before.

Reid also has ancillary cover. "You don't get a whole lot back for some of these ancillary things."

The ancillary benefits he claims include podiatry, physiotherapy and dentistry.