Nick Maconachie and Anna Dimeas have very different views on private health cover.
On one side, Sydney financial technology worker Mr Maconachie, 37, has recently cancelled his private health insurance, saying it was a waste of money he would rather spend on fitness.
He takes boxing classes three times a week, as well as paying for a gym membership.
On the other side, Melbourne mum Ms Dimeas, 51, says she would never be without her two policies, having recently paid no gap for two knee reconstructions and with a hip replacement on the cards in coming months.
Together, the pair illustrates the “death spiral” of Australia’s insurance sector: Young people want out, while older people often desperately need to stay in.
Experts have warned the health sector is at a crossroads, and if radical changes are not made, the consequences will affect the private and public systems.
George Savvides, Medibank’s chief executive for 14 years until 2016, has warned an exodus of young people from the private system could skew more people towards the public system and make it more expensive for those that stay behind.
“Even those Australians who are not privately insured – more than half of the population – they benefited by having a private system that takes the pressure off the public system,” he told 7.30.
Mr Savvides said the systems were created to complement one another, with private health designed to be a life-long health system for those within it.
“People join on the basis that their premiums over life will be neutralised with young and old in the pool. So if we don’t motivate or incentivise young people to be a part of that system and go on that journey, then it will heat up and become expensive,” Mr Savvides said.
“If you heat up the system, it will skew to all the members who are higher claimers, and there’s no natural equalisation of risk in the pool. And that’s not a healthy paradigm.”
‘I’ve decided the value is not there’
With private health premiums outpacing inflation and wages, young people feel they have more pressing financial priorities.
“The younger generation coming through, perhaps my age and younger, are experiencing the toughest environment,” Mr Maconachie told 7.30.
“They’ve had more insecurity when it comes to their employment, their incomes haven’t increased.
“I still have a very sizeable HECS debt that actually removes quite a fair amount of my income each year, in terms of repayment for an education that no doubt has benefited me. But it’s something that a lot of our parents have had for free.”
Mr Maconachie cancelled his private health insurance policy in December, after realising he was only keeping it for extras.
“It was a question of value for me and I’ve decided the value is not there,” he said.
Meanwhile, Ms Dimeas said she sees more than enough value in her two health policies, one with Medibank and one with the Commonwealth Bank. She paid nothing for her two $15,000 knee replacements.
“Having private health cover is the best thing we’ve ever done,” she said.
“I’ve encouraged my daughter to get it too because when something happens, think about whether you would have $15,000 or $20,000, or if you’re in pain, would you be able to wait?”
In a survey last year, financial comparison site Canstar found that just 58 per cent of private health fund members aged 18 to 29 made a claim, compared to more than 90 per cent of people aged over 70.
The Grattan Institute’s health program director Stephen Duckett said that as young people drop out of private health insurance, older people are using health services more.
“So the premiums go up to pay for them, then more young people drop out, then premiums go up again. And so the cycle continues,” he said.
“The private health insurance system in Australia is in a sorry state. In fact, you could say it’s in a death spiral.
“The industry solution to every problem is to put their hand up for more money. They do not want to have to fix their problems themselves.”
‘We need to get that balance back’
Private hospital cover has been mostly declining since the introduction of Medicare in the 1980s.
The Howard government tried to turn that around by introducing a Medicare Levy Surcharge in 1997, penalising those without private coverage.
In 2000, the introduction of Lifetime Health Cover resulted in a spike in membership.
In 2012, the Gillard government began means testing the rebate, which saw another small spike in the number of insured Australians, but the decline resumed again.
“Members are upset. They’re not seeing value in the premiums, they feel the premiums are getting too high [and] also they’ve heard some bad stories about out of pocket (expenses), and some people are even frightened to use their health insurance because they don’t have the cash to pay for the out of pockets,” Mr Savvides said.
“It’s the very opposite reason why we have the system.
“It’s designed for people to use to take pressure off the public system. And that’s the role it’s played for many, many years. And we need to get that balance back.”
Mr Savvides says the current generation of young people will live longer than those in the system now, and therefore they will be heavy users of future health systems.
“It’s hard [for young people] to see the value up front – unless you and your family already have some other medical requirements – and I think we’ve missed some of that messaging,” he said.
Even Rachel David, chief executive of Private Healthcare Australia, the health insurance industry’s peak body, admits the sector could “do better” to sell insurance to younger people.
“That younger generation is feeling squeezed, as they are needing to find the money in an environment of flat wages growth to support this and we think there are some ways it can be better supported,” she said.
“We need to better articulate what’s value for money in that generation.”
Too many people in public health system could ‘create havoc’
Public policy think tank Grattan Institute put forward a radical proposal last month aimed at stemming the youth exodus.
The suggestion involved doing away with the “community rating” system for young people – a system that allows everyone to pay similar premiums despite their age or medical risk, which would make it cheaper for young people to buy insurance.
“What we’re suggesting is that the subsidy that currently is spread across everybody be concentrated on older people that use health services more,” Mr Duckett told 7.30.
“The community rating has some strengths, but it’s just not working. It’s inherently unstable. We’ve got to do something about it. But we say keep it for older people, but have age-based risk rating the younger people.”
But Mr Savvides said any plan to scrap the community rating system would swamp the public system.
“If we were to apply a risk rating for all the privately-insured individuals today, we will put them in an unaffordable situation,” he said.
“And the transition would be far too shocking for them in terms of financial access. So we would lose them and we would lose them to the public system and you would create havoc there.
“The only solution that will work is when all of [the interest] groups get round the table … and they need to come to the table being willing to give up some of their position, to come out with a much more collaborative approach for a sustainable system going forward.”