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COMMUNITY AFFAIRS LEGISLATION COMMITTEE
09/07/2009
Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2009 Fairer Private Health Insurance Incentives Bill 2009 Health Insurance Amendment (Extended Medicare Safety Net) Bill 2009

CHAIR —Good afternoon. Have you done this before?

Mr Kerestes —No.

CHAIR —It is very straightforward. Information on parliamentary privilege and the protection of witnesses is available for you. If you would like to make an opening statement, please do so. Then, as you saw with the last witnesses, we will go into questions. Do you have an opening statement for us, Mr Kerestes?

Mr Kerestes —Yes, just a brief one. You are in receipt of our submission. I just want to highlight a couple of points. Our primary argument is about the enduring confusion amongst the private health insurance market, who have had, over a little more than the last two years, three premium increases and two Medicare levy surcharge amendments. The latest Medicare levy surcharge change was in October 2008. We have had less than a full year of that, and, as you have indicated in previous discussions, it is not until people sit down and do their tax return that they even realise there have been changes, no matter how widely publicised they have been. We do not expect to see the full impact of that until next year. It vitally important to realise that there is that lag in reaction in private health insurance. And we now have the change in the tax rebate as well. Our key argument is that these things should stop for the time being. There have just been so many changes. The product itself is confusing to begin with and then, if you add the nine choices for each product range, it becomes incredibly complicated.

The implementation and management of changes is unclear. I know that the department of health is seeking to redress that, and that may well solve those problems. The key problem, apart from minor details, is how you handle increases or decreases in people’s wages during the tax year, because many of them, until they sit down and do their tax return, will not realise that that has flowed through to their health insurance and that their health insurance rebate and adjustments will be quite substantial.

The other point is that we believe that the first category that people will drop as a result of increasing cost is the ancillary cover. It is not as vitally important to people as the hospital cover. Most people like to have both, but if they are economising they will drop the ancillary.

Fourthly, and finally, company-paid schemes, which are a market for some of our intermediaries, are a small part of the market but still significant to the individual intermediary. They will see a flow-through to their fringe benefits tax—that is payed for by the company—and that will further exacerbate the problem. It may even motivate some to drop the whole scheme.

CHAIR —Thank you.

Senator BOYCE —Mr Kerestes, you talked about the difficulties there are going to be in knowing where you sit, because of variations in income. Do you have any sense of the volatility of income?

Mr Kerestes —No, we do not. We have not seen or heard any comments about the volatility of the income. It is a real risk, but, as to how many people would end up in a given year in that category, we do not know.

Senator BOYCE —You talked also about the fact that, when we get to the end of tax year 2010-11, there will in some cases—and we do not know whether we are talking about a lot of cases or a small number of cases—be a need for substantial adjustments. Have you done any work at all on what sort of adjustments you might be talking about there?

Mr Kerestes —No, we have not.

Senator BOYCE —Do you have a sense of the size of corporate health insurance, which you mentioned as being a small part of the market?

Mr Kerestes —No; I would be guessing. In terms of membership, that could be around 100,000 or maybe 150,000—

Senator BOYCE —People.

Mr Kerestes —Members.

Senator BOYCE —Contributors?

Mr Kerestes —Yes. For people, you can roughly double that—

Senator BOYCE —And that is nationally?

Mr Kerestes —Yes.

Senator BOYCE —We had evidence this morning that some companies had chosen not to go ahead with tenders and others had said, ‘If this goes through, we’ll be dropping the scheme.’

Mr Kerestes —Yes, that is right.

Senator BOYCE —Have you heard that?

Mr Kerestes —We have, yes.

Senator BOYCE —Not necessarily naming names, unless it is reasonable to do so, can you just tell me what people have been saying?

Mr Kerestes —Our members are agents and intermediaries and they deal with the corporates all the time. They are hearing that people are suggesting that they may not go ahead with it next year when it comes up for renewal or that they will significantly have to review it. Those sorts of things they are hearing, without sourcing them to specific corporates.

Senator BOYCE —It is, intuitively, probably true. Who are the other customers of your members? Can you give me a quick customer profile, please?

Mr Kerestes —There are the corporate schemes which are paid for by the corporates and there are the corporate schemes which are not paid for by the corporates but voluntarily paid for by the employee.

Senator BOYCE —Is HIRMAA a—

Mr Kerestes —No, it is totally different from HIRMAA. For instance, bank XYZ might say, ‘Okay, for working for us we can give you a very attractive deal on health insurance.’ That would involve a broker setting up two or three private health insurance schemes for that particular bank of employees. It would also involve an intermediary, who would go around and present the schemes to various employee groups, and they might voluntarily say, ‘Yeah, I want them to deduct my wage; I’ll sign up with HBA,’ or whoever it is. The third category deals just with just the retail public. They are smaller agents who act for and on behalf of one health insurer, or three or four health insurers.

Senator BOYCE —So I can pay there and claim there.

Mr Kerestes —Yes.

Senator BOYCE —So it might be someone who is running a retail business doing other things?

Mr Kerestes —No, they are dedicated private health insurance agents. They specialise in that area. They connect you up with the health insurer and, whilst they do not process the claims—the health insurer processes all the claims—they are your protection, I guess, to ensure that you are properly dealt with and attended to. Then there are people like iSelect—they are a member of ours—who deal over the web and over the phone with the public.

Senator BOYCE —In a broker sort of role, really.

Mr Kerestes —Yes—‘Ring us to get the best private health insurance.’ You either ring or go onto their website and give the profile that you want and—boom!—they give you a quote, sign you up and so on. So there are all those combinations, from large players, like iSelect, to small agents that have maybe two or three people working for them in their office.

Senator BOYCE —Would they also perform a type of brokerage role?

Mr Kerestes —The smaller ones perform more of an agent’s role than a brokerage role.

Senator BOYCE —I think we are told nine million people have coverage—how many contributors would be represented by your members? I am trying to get a sense of the percentage of the market.

Mr Kerestes —There is no definitive survey of these things, but our members estimate that they account for about 10 per cent of the market—all the combined types.

Senator BOYCE —You have spoken about what you think would happen with the actual premiums and the like, but what effect would it have on your members if this legislation were to be passed?

Mr Kerestes —The effect on them is more indirect, because they are the intermediary between the insurer and the insured. The major contribution would be a decline in business, really. You must understand they spend day in, day out talking to private health insurance consumers, so they are very close to them in that marketplace. The concern is that it would price the insurance out of the market in some cases, so they would lose members.

Senator BOYCE —Are you basing what you are saying about what will happen on the survey information that we have—for example, the Roy Morgan and Ipsos poll—or on what your members are telling you their customers are telling them?

Mr Kerestes —I am basing it more on what our members are saying their customers are saying to them. It not only intuitively does not make sense but has been reinforced by the murmurs and comments that people are making. Not all consumers are really across this issue, as you have heard. Many of them are indifferent to it, but the ones that are connected and switched on are making those sorts of negative comments. For someone who is successful as an intermediary in the corporate market, to lose one or two customers is quite a substantial proportion of their income.

Senator BOYCE —One of our witnesses yesterday suggested that there is a certain degree of stickiness about health insurance—that people will maintain it long after they give up other things. Is that what your members are being told? If not, why not?

Mr Kerestes —It is very hard to say whether there is that level of stickiness. There must come a point where they detach themselves, to continue the analogy. They have been ‘sticky’ through thick and thin, but you have constant premium increases, you have constant changes to the Medicare levy surcharge and now you are having changes to the rebate. There must come a time where people say enough is enough. I think that their first step will be to drop their ancillary cover, as I said in my introductory remarks. Bear in mind there are a large number of people in private health insurance who are not in the well-off category. Forty per cent are below $48,000 and there will come a time when they can no longer afford it. They will perhaps dispense with other forms of expenditure before private health insurance, but they have probably been doing that for the past couple of years anyway. So we need to be very cautious that we do not price it out of the market.

Senator BOYCE —You mentioned the fact that we have had change on top of change. What effect has that had on your members?

Mr Kerestes —It just adds to the confusion. People say, ‘This is such a complicated and confusing product,’ and our members are trying to simplify it.

Senator BOYCE —Your members are presumably quite expert in the area.

Mr Kerestes —Yes. Their marketing packages are quite good and impressive. This is just another layer of complexity on complexity on complexity. How simple is it going to be when you have to divide this product category into three because if your income is over this much then your rebate is this much, if your income is over that much then your rebate is that much and so on? It is adding enormous complexity to the product. We, in this room, may think that is quite easy to live with, once you come to terms with what lies behind it, but most people do not take the trouble to come to terms with it. When you try to explain it to them, their eyes glaze over. There is that fear picked up constantly, from my members, that it is a complicated product to begin with and this is just adding more complexity to it.

Senator BOYCE —Can you characterise your members’ customers for us? Would they be primarily people who would be in tier 2 and tier 3 levels?

Mr Kerestes —It is hard to say because of the mixed bag of customer bases. In some of these corporate schemes where they pay voluntarily for the insurance, there would be just a normal cross-section of the population. In some of the corporate paid schemes there would be a greater bias towards the tier 2 and tier 3. In the retail market, with the smaller agents, you would say that there was just a broad cross-section of the population. Quantifying that is extremely difficult.

Senator FURNER —In terms of dropping ancillary cover, what range of ancillaries would your members’ clients have?

Mr Kerestes —They would work on the package that health insurance products offer. Most insurers have at least two different ancillary tables, some have three or four. It would really depend on the package that the broker or the agent had packaged up to sell to the consumer. They would cover the standard range of things, dental, optical, physio and a whole raft of things. Some have token natural therapies; some have many more natural therapies and so on. It is again difficult to be very definitive about what our members have. They will have the choice of a lot.

Senator FURNER —So it were a plausible argument to suggest that people are going to drop their ancillaries or some of their ancillaries, do you think they would examine what their past usage of those particular ancillaries had been and then say, ‘I haven’t been using optical, I haven’t been using physio, so I’m going to drop them and maintain dental and other types of ancillaries.’

Mr Kerestes —No, I do not think they would have the option. It is all packaged up as one product. You have your hospital coverage and you have your ancillary coverage. Your optical, dental and so on are all part of that ancillary product that you buy; it is one product. If you think that you are only using optical once a year, so you do not need the rest, you will just take out optical coverage—it does not work that way. The concept of insurance is spreading the risk across the pool, so you need a big enough pool and that is why ancillary products are designed that way.

Senator FURNER —Why do you draw the conclusion that they will drop ancillary? Is that through some sort of examination of the other submissions or is it the feedback that you are getting?

Mr Kerestes —It is feedback plus instinct. The hospital cover is the basic desire for having private health insurance. The ancillary is—

Senator BOYCE —An option.

Mr Kerestes —Yes, it is an option, and many people avail themselves of that option, particularly with growing families and so on, orthodontic treatments and you name it. It is quite a handy and useful piece of insurance. If you are confronted with rising costs, you have to start compromising somewhere, and you can drop your ancillary without having any effect on your Medicare levy surcharge. Secondly, it would drop a considerable sum from your total premium. It is not the largest component, the hospital is, but it is still a considerable sum. It varies depending on what it is and who the insurer is; it varies from about $600 a year right up to $1,200 a year depending on what it is, family cover versus single cover and all those sorts of things.

Senator FURNER —One of the submitters yesterday, Dr Deeble, used the example of a family earning $165,000 a year on the private hospital insurance equating to a rise of four dollars a week, and he went further, saying it is a cup of coffee a week. Based on what you have just indicated about dropping the ancillary charges and maintaining the hospital insurance, do you think that is a reasonable suggestion to put, that people would maintain their hospital insurance based on those sorts of results?

Mr Kerestes —They may well at that sort of level because, as you rightly point out, it is an inconsequential rise when you are earning $165,000 per year or something like that.

Senator BOYCE —I do not know that all couples with three children earning $165,000 would share that view, Mr Kerestes.

Senator FURNER —That is difficult and we do not know the answer.

Mr Kerestes —Yes. But when you go to lower levels of salary it does become quite critical and quite sensitive. Most of our families with three kids I would put to you are below the $165,000 level.

CHAIR —So they will be untouched by this legislation in the first action.

Senator BOYCE —No, $165,000.

CHAIR —You said that most of the people with three children are on a lower salary. It cuts in with families at $150,000. Family coverage cuts in at 150 grand. I am struggling to hear the statements about complexity, because the industry in which you are working is one of the most complex industries. Working through private health insurance for anyone is extraordinarily difficult, and the marketing campaigns and the processes around the different optional packages are one of the reasons people use your business, because they are so confused. What is being proposed in the process is a means test. It seems to me that people will have the salary situation worked out. It is certainly another issue to take into account; I do not doubt that at all. But I am interested in the statements about increasing complexity. It is a means test which people cope with in their Centrelink arrangements, with their family tax arrangements—all those things already people are working with. I am interested in why your members are saying that. In answer to Mark’s question about the different ways people cut and what they choose to do, can you tell me why a means test in the choice is seen as such a complexity? I do not wish to be difficult but I am struggling a bit.

Mr Kerestes —Because it is not just a simple means test. Sure, it determines what level of rebate you get but there are effectively four levels. There is the 30 per cent, the 20 per cent, the 10 per cent and nothing. And at those various levels when they cut in it adds a layer of complexity. You have to know what your income is, what it is going to be—

CHAIR —Or what you say your income is going to be, the same as in the Centrelink claim.

Mr Kerestes —Yes, but then what happens if you get a wage increase or you lose your job and you fall to the next level? That is a layer of complexity. How do you explain that or answer that?

CHAIR —Certainly that is a level of detail in working with the department about how that is going to work. I totally accept that.

Mr Kerestes —And whatever solution they come up with, it is still adding to the complexity and the confusion around the product. If it is a simple ‘You will catch it up—

CHAIR —At the end of the taxation year.

Mr Kerestes —Then, ‘Hang on a minute, in good faith I’ve declared at the start of the year and I’m in this category and then you are telling me that at the end of the taxation year if I’ve got a wage increase and been successful I’m going to be penalised because my rebate has come down.’ The question is, how do you apply that rebate? Is it for the half-year that you had the lower income?

CHAIR —They are the kinds of questions I need to know rather than just, ‘It’s complex.’ The point you are raising now is absolutely critical in terms of working with the department about where it goes. I have to put on record that already the private health insurance area, with the various optional packages that are out there for people, with the marketing campaigns that are going on which are quite direct to encourage people to take up different things, already I think a lot of people are confused. That point has been made by many submitters.

Mr Kerestes —And generally we are saying that this is going to add to the confusion.

CHAIR —It is specifically about how it is going to work.

Mr Kerestes —Yes.

Senator BOYCE —And it comes on top of change that has not yet been bedded down.

Mr Kerestes —That is right.

CHAIR —There was also an income test, straightforward. It applied or it did not. What you are really concerned about is how it is going to work.

Mr Kerestes —Yes. But going back to the earlier point that Senator Boyce made, the Medicare levy surcharge change in October 2008, no-one knows what that effect is.

CHAIR —Until the end of the taxation year.

Mr Kerestes —And that is happening now. Then people are not going to react until the new year, the 2010 year. We are not going to know the full impact of that Medicare levy rate change until 2010.

CHAIR —Can you explain to me why, when they find out now, they will not make changes until 2010?

Mr Kerestes —They will make them when they find out, but that will not flow through until they make their decision, which might be in August or September of this year. Then they will say, ‘Okay, I’m going to drop my health insurance’ or whatever.

CHAIR —Or orthodontic or whatever.

Mr Kerestes —Yes. So we are not going to see what happens in the whole industry until that year.

CHAIR —Okay, I see the point.

Senator FURNER —Looking at this concept of people being caught up in terms of means-testing, surely it would be the same as people on Centrelink or something like that where they are means-tested based on their earning capacity and therefore their returns are reduced or ceased as a result of their ability to earn an income. It is not directed at you, it is something we need to clarify with the department. Using your examples of wage increase, surely there would be a trigger there to inform the relevant department that that has occurred, so therefore the rebate and those necessities would be changed. As you said, you would not go through a six-month period and then at the end of the taxation year end up with a huge bill to actually pay. It would be the same as other types of insurance. You would not insure a Mini Minor and then six months down the track decide to upgrade to a Calais or something like that and expect the same level of insurance, would you?

Mr Kerestes —No, but it is slightly different insuring yourself from insuring a motor car. You have a wage increase, so your instinct is not to go off and tell the health insurer.

Senator BOYCE —What will I do? I’ll ring my health insurer.

Mr Kerestes —And say, ‘I’ve got a wage increase.’

CHAIR —It could be in future, and that was part of the marketing campaign.

Mr Kerestes —It may well be, but how effectively that works remains to be seen. And the longevity of that remains to be seen. If it works, that is fine. Twelve months down the track—

Senator BOYCE —But haven’t we just finished simplifying family tax benefit to save families from these sorts of glitches in income as well?

CHAIR —That is possibly not a question for Mr Kerestes. Do you have further questions, Senator Furner?

Senator FURNER —No.

Senator BOYCE —I would like to follow up on that. As Senator Furner points out, people who have regular contact with Centrelink are used to having to notify changes in income and so forth. But, within this area, until recently the only principle that surrounded the private health insurance market has been the community rating concept. How do you see this idea of means-testing working with an industry that is based on everyone paying the same?

Mr Kerestes —Conceptually everyone is supposed to pay the same, but we know in fact they do not. That is why these different products are designed—the exclusionary products and whatnot. So we need to just acknowledge—

Senator BOYCE —Everyone pays the same for the same coverage, whether they are 16 or 75.

Mr Kerestes —Yes. I think that is divorced from whether you can means-test the application of a tax rebate, which is what we are talking about. They are two separate issues. In the consumer’s mind, of course, they are part of the one product. So, I think, conceptually they could live with the means-testing, but as a practical measure the consequences of it are such that it will price the product out of the market for a number of people.

Senator BOYCE —Thank you.

CHAIR —If there is anything that you want to add to your evidence—when you go away and think about the questions we have asked you may come across something that would make it clearer—please get in contact with the committee.

Mr Kerestes —Sure.

CHAIR —Thank you very much for your time.

Mr Kerestes —Thank you.

Proceedings suspended from 2.38 pm to 3.00 pm