Only three private health funds will be financially viable within two years if the industry does not take urgent action to break out of its “death spiral”, the prudential regulator says.
In what he described as a “blunt message” to the troubled industry, Australian Prudential Regulation Authority member Geoff Summerhayes warned the regulator might force underperforming funds to merge if they did not control their costs or arrange their own merger.
Summerhayes said payouts from funds were continuing to soar as the price of medical treatments rose and younger people fled private health insurance, leaving the system stuffed with older members who tended to make bigger claims.
He said the industry responded by reducing benefits to policyholders, “which may explain why efforts to suppress premium growth haven’t stemmed declining levels of coverage”.
In a speech to a meeting of not-for-profit funds in Sydney on Tuesday morning, Summerhayes again warned the industry against “complacently waiting for the government to rescue them”.
However, he said Apra would support an independent review of private health insurance that would re-examine whether one of its core principles, community rating, was still viable.
Under community rating, health insurers are required to offer their products at the same price to everybody, regardless of their age or existing illness and injury.
Summerhayes said Apra recognised that ending community rating had “potential downsides”.
“For example, scrapping or recalibrating the community rating model to lower premiums for younger, healthier policyholders would inevitably push up premiums for older, sicker members,” he said.
Summerhayes’ intervention is likely to reignite a political battle over the future of private health insurance, which is heavily subsidised by taxpayers due to a 30% tax rebate on premiums that costs the government more than $6bn a year.
The rebate cost the budget about $6.4bn in 2018-19 and is predicted to top $7.1bn by 2022-23, budget papers show.
Despite the hefty rebate, membership of funds continues to fall, with the proportion of Australians with hospital cover dropping from 47.4% in 2015 to 44.1% in September.
Summerhayes said there were “no easy answers” to the industry’s woes.
“What we do have a firm position on is that the industry’s current trajectory is unsustainable; and that while private health insurers may be the ultimate victims of the so-called death spiral, policyholders will be the first casualties through higher premiums and reduced benefits.”
Apra forecasts that private health cover will continue to shrink, with most of the losses coming from people between 20 and 34.
There are currently 37 health insurers but Apra forecasts that, if benefit costs continue to increase by 5% a year and premiums by 3% a year, by March 2022 only three big for-profit funds will have businesses that are sustainable and well-capitalised.
The remainder of the industry might not be sustainable, and four funds were in more immediate danger because they were both unsustainable and lacked adequate capital.
“When not even substantial taxpayer subsidies and the Medicare levy surcharge can convince a growing number of policyholders that private health insurance represents value for money, it’s time for a rethink,” Summerhayes said.
“For now, PHIs [private health insurers] are profitable, well capitalised and comfortably able to meet their obligations to policyholders, but that will not remain the case much longer without major structural and policy reforms,” he said.
“We should not wait for the industry’s stable but serious condition to become critical before operating to save it.”
Summerhayes also said that Apra would soon have more to say on the impact of global heating on the banks, insurers and super funds it regulated.
He has previously warned that directors may be in breach of their legal duties if they fail to consider climate risk.
