Only three private health insurers will be left standing in 2022, APRA warns
Australia’s private health insurance system is seriously ill and only three insurers are likely to survive, according to the country’s prudential regulator.
Soaring rates of chronic disease and an ageing population have forced firms to hike premiums to cover costs.
And young customers have consequently left in their droves.
The challenges facing the industry are so severe that Geoff Summerhayes of the Australian Prudential Regulation Authority (APRA) predicted on Tuesday that only three private insurers would survive the next two years.
In a speech to a meeting of not-for-profit funds in Sydney, Mr Summerhayes backed calls for a government inquiry into the private health insurance system and supported earlier claims the industry had fallen into a “death spiral”.
Mr Summerhayes told the Members Health event that insurers’ profit margins were eroding because claims were rising faster than premiums.
And he said “hard decisions need to be made” if the private health insurance is to survive in any meaningful way.
“The Grattan Institute’s description of a “death spiral” may be dramatic, but it’s also pretty accurate: on current trends, APRA predicts we’re only a few years away from seeing private health insurers forced to merge or fold, with the smaller insurers, represented in this room, likely to be the most vulnerable,” Mr Summerhayes said.
“That would not only be bad for those insurers, but it risks poor outcomes for their policyholders.”
The current situation is “serious but stable” rather than “critical,” Mr Summerhayes said.
Profitability remains strong, despite a slight fall last year, and policyholders can be confident their insurers will pay legitimate claims, as most are well-capitalised.
But Mr Summerhayes said we’ve reached a point where only “a whole-of-industry response” can reverse the death spiral.
Hospital coverage has fallen to its lowest level (44.1 per cent) since June 2007, after 127,000 policyholders aged 20-34 abandoned the sector over the past two years.
And the younger customers have been replaced with older policyholders who are more likely to make expensive claims.
The underlying cost of claims is consequently growing at 5 per cent a year – almost double the average growth in annual premiums scheduled for April 1 (2.92 per cent).
“That money has to come from somewhere, and at the moment it’s effectively coming from policyholders as squeezed [insurers] respond by increasing exclusions, increasing excesses, closing products and generally seeking to reduce claims costs,” Mr Summerhayes said.
“Annual premium growth might be falling, but so is policyholder value, which may explain why efforts to suppress premium growth haven’t stemmed declining levels of coverage.”
APRA predicts that only three of Australia’s 37 private health insurers will survive the next two years if the gap between premiums and claim costs stays at 2 percentage points.
Mr Summerhayes didn’t name the three companies to which he referred.
But given he said smaller firms should merge to boost their chance of survival, publicly-listed firms such as Medibank, Bupa and NIB have better odds of success.
Stemming the tide
In the eyes of health economist Angela Jackson, though, the future of the entire system is in doubt.
Ms Jackson, an economist at Equity Economics, told The New Daily reforms could lower medical costs and help insurers over the short-term, but ultimately wouldn’t be enough to save the industry.
“We’re getting to a point with demographic change and chronic diseases where you just can’t stop the tide,” she said.
“You could spend a lot more money, but it wouldn’t be money well spent. So we need to look at other ways of supporting private sector in Australia.
“Directly subsidising the use of private healthcare is one option – but there are other options out there.”
Meanwhile, Dr Stephen Duckett, the Grattan Institute’s health program director, described Mr Summerhayes’ speech as “bold but accurate”.
He told The New Daily young people no longer saw private health insurance as “good value for money”.
And he said a government inquiry was required to untangle the competing interests of private health insurers and private hospitals, doctors, and device manufacturers.
Insurers want to drive costs down but the rest want to drive costs up, he said.
“We have to help this industry put in place the right strategies to reduce claims costs – the right strategies for them to become attractive and so on, without the need for more government intervention and more government subsidies,” Dr Duckett said.
Not another inquiry
Not everyone supports the idea of another inquiry, though.
Dr Rachel David, chief executive of peak health insurance body Private Health Australia, said Mr Summerhayes’ speech “should provide a wake-up call to all stakeholders in the health sector”.
But she rejected calls for another inquiry and instead called on the government to “adjust policy levers” and drive down the price of medical devices.
“The only solution is to forensically address waste in the system and provide subsidies for care where it is economically efficient to do so,” Dr David said.
“We also need to adjust policy levers to incentivise younger people to take out PHI (private health insurance) and we have given the government a number of options to consider including restoring the 30 per cent PHI rebate for those under 40 years of age.”
Budget papers show the controversial rebate scheme cost taxpayers $6.4bn in 2018-19 – a figure that’s expected to surpass $7.1bn by 2022-23.