Understanding Private Health Insurance Premiums
The annual premium increase announced by the Government is necessary to ensure Funds remain financially viable, meet statutory prudential requirements and most importantly continue to provide members with access to quality medical treatment by covering the increasing costs of health care services.
This graph shows the increase in benefits paid out by Funds on behalf of members in different categories, compared with the average premium increase for 2011 of 5.56%.
Most Australians understand that an increase in the benefits paid out on their behalf requires an increase in premiums.
Reasons for premium increases
As part of the measure to enhance the transparency of the premium-setting process, the overarching reasons for the premium increases at industry level will be published.
At an industry level, the main reasons for the level of the premium increases are current and forecast increases in benefit outlays. This includes the increasing costs of treatments and services (in particular increased costs due to technology and higher provider and contracting costs) and higher utilisation of treatments and services.
Other reasons stated by insurers for premium increases were:
- Maintaining long term viability, including adequate underwriting (net) margins and sufficient capital to meet prudential standards and benefit outlays;
- Absorbing increased costs associated with an ageing membership profile; and
- The rising cost of payments to the risk equalisation pool.
Performance of private health insurers
While investment and other non-health related business returns have shown some signs of improvement over the past year, benefits growth and increases in utilisation of privately insured services are forecast to be well above this year’s average premium increase.
Private health insurers in Australia generally operate on narrow profit margins. Gross margin is the difference between total contribution income and total cost of benefits, which include state levies. Net margin is equal to the gross margin less management expenses.
The weighed industry average net margin is forecast at 3.92% for the 12 months to 31 March 2012. Within the industry, net margins are forecast to be on average higher for larger insurers and also for-profit insurers. Larger insurers are forecasting average net margins of 4.08% compared to the 3.38% forecast by smaller insurers. For-profit insurers are forecasting average net margins of 5.78%, while not-for-profit insurers are forecasting 2.01%.
In recent years, private health insurers have experienced significant growth in benefit outlays. In 2009-10, private health insurers paid more than $12.2 billion in benefits to members, an increase compared with the previous year ($11 billion). Benefits paid to members are around 86% of total premiums paid by members. A continued period of benefits growth is forecast. Benefit outlays are forecast to increase by a weighted industry average of 9.45% for the 12 months to 31 March 2012. Most insurers are forecasting an increase in total benefit outlays within the range of 8% to 14%.
Information submitted by private health insurers
Private health insurers must apply to the Minister for Health and Ageing for approval of premium changes (section 66-10 of the Private Health Insurance Act 2007). Premium changes include both increases and decreases in premiums.
Private health insurers must provide an extensive amount of information to support their premium application. This information must be provided using an ‘approved form’ (section 66-10 of the Private Health Insurance Act 2007).
Assessment of premium applications
All applications are assessed by the Minister for Health and Ageing, the Department of Health and Ageing, and the Private Health Insurance Administration Council (PHIAC). It is common practice for PHIAC to refer some applications to the Australian Government Actuary (AGA) for a further independent assessment (eg. five largest insurers).
Premium increases must be approved unless they are not in the public interest (section 66-10 of the Private Health Insurance Act 2007). The Minister considers premium increases to not be in the public interest unless they are 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 as a product.
Timeline for the premium round
An annual premium round, together with consistency in the date of effect for premium increases, provides consumers with the knowledge of when, and by how much, their premiums will increase. It also allows for the applications of all private health insurers to be assessed at the same time to ensure consistency and timeliness.