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COMMUNITY AFFAIRS LEGISLATION COMMITTEE
10/07/2009
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 —Welcome. You have information on the protection of witnesses and privilege. Would you like to make an opening statement.

Mr Jennings —I would like to deal with the safety net legislation first and then lead on to the various interconnections between the two. Obviously, the legislation is seeking to empower the minister to determine the maximum benefit payable under the extended Medicare safety net for specified Medicare benefits items. The legislation has its genesis in the issue of gaps fees versus rebates and I think it is important to reflect on why gaps have arisen.

The CMBS itself has a particular history and I would like to quote Dr Blewett back from the inception of Medicare and then a few years after that, in 1987, when he stated that payments for doctors in public hospitals et cetera were never designed for the CMBS to apply. In other words there was an acceptance by the government of the day that rebates are different from fees. That was then corroborated further at that point in time in the 1980s when there were a series of inquiries into scheduled fees for rebate purpose. A member of the federal industrial commission presided over that inquiry. Again, it was stated in those inquires that the inquiries concerned with fixing fees for medical benefits purposes were not the fees to be charged by, let alone the incomes of, medical practitioners.

There has always been a healthy debate, at best, as to adjustments to Medicare rebates and what that has meant in terms of gaps, which this seeks to deal with. The Commonwealth Auditor-General, in audit report No. 32 of 1990-91 commented:

Developments in recent years—

this is going back—

would suggest that the scheduled fee simply represents the amount the government, having regard to budgetary and economic considerations, is willing to pay for the provision of particular medical services.

In other words, there is no logical mechanism, post the inquiries, for adjusting Medicare rebates. It is simply adjusted on report of pay basis so it did not necessarily reflect movements in practice costs and the costs of delivering quality care.

Subsequent to that there was a lot of debate in the 1990s leading to a relative-value study into medical rebates and fees. That was commissioned, if I recall correctly, by Dr Carmen Lawrence at the time. That was a work-value analysis of Medicare rebates and doctors’ fees. It came up with a number of recommendations which would have been very expensive for government to implement so they did not address the deficiencies that were in the schedule at that time. I do note that at this point in time the average gap in the safety net report of 2007 was $72.

What I would like to table is a series of indices in recent years that put it into perspective as to where they are. What this does is simply track CPI, average ordinary time earnings—so it proposes an indexation methodology—and the movement in the CMBS. This will give you an insight into why there is an imbalance and why this might in fact deteriorate even further. Essentially, from 1999 to 2008 the compound CPI was 36.3 per cent. The average weekly earnings compound effect, from Australian Bureau of Statistics figures, was 49.19 per cent. The CMBS had actually increased by 25 per cent. In a graphical sense, and I have copies of this, what I have here illustrates that the CMBS has been adjusted by that amount, the CPI has gone up by that amount and average weekly earnings has increased by that amount, so there is a gap because rebates have not kept pace with inflation.

If you want to look at that in another way and adjust for inflation so that you have inflation as zeros, it shows that weekly earnings have actually gone up by about 13 or 14 per cent and Medicare rebates have decreased on average by 11 or 12 per cent. The costs of employing staff and nurses and of running practices have of course gone up and the rebate has gone down. So, against that backdrop and the Auditor-General’s acknowledgement that rebates have been purely adjusted for economic reasons and for what the government wants to pay, it is little wonder that there are gaps. They are not the fault of doctors per se, so I make that point. So we have gaps and in particular areas we have got large gaps as to the safety net in fact designed to deal with that situation.

The bill itself seeks to enable the minister to determine by legislative instrument the particular items for which a safety net will be capped and the maximum benefit that will be applied in that particular instance. The notes to the bill suggest that the powers have been separated to clarify that the minister may make changes to the instrument or to the caps only and that the index will be the CPI, not average weekly ordinary time earnings as is proposed in the other piece of legislation that we will be discussing shortly. So there is actually an inconsistency in methodology between the two pieces of legislation.

The interesting thing is the report justifying this approach, and I believe that will be commented on in a lot more detail by federal AMA members, who will be making a separate submission and appearing in separate capacity from me as the WA representative. It has been used to justify this, but there are a number of flaws within that report that I think they will go into on another occasion before this committee. One of the issues is that the whole report and concept is predicated on averages. Medical services do not necessarily fall into an average category nor do the circumstances under which they are provided fall into an average category. The very concept of a safety net recognises that fact and hence deals with situations where people are out of pocket beyond the thresholds that are described in the legislation that exceed a certain amount and provide them with an 80 per cent cover.

Obviously, there are particular examples where, logically, costs will be different. These include rural services where viability issues and costs can be problematic compared to the metropolitan context. This is also so in relation to small services. I will use IVF, for example, where there might be only one service within a state and the costs of providing that may well be substantial and there is not opportunity for people to go elsewhere given the nature of the beast and so on, so there are the particular problems there. In the context of specialist services in the bush, in the Western Australian situation the vast majority of specialist services are in fact visiting services. A very high proportion are visiting services including ophthalmology. There are some resident obstetric services principally at Bunbury, Geraldton and Kalgoorlie, with not much beyond that other than by non-specialist service, for example, up in the north-west. The remainder are largely dealt with by visiting specialists who incur substantial costs in going to the bush. The alternative is for patients to come to Perth under the PAT Scheme, which presumably you are familiar with, at a greater cost. So there is an economy in a specialist going to a country setting and seeing a number of patients rather than a number of patients coming to a metropolitan setting and all claiming under the PAT Scheme and the like. So the concept underpinning the legislation does not really take into account that the safety net is predicated on dealing with issues that do not comply with averages. If an average is applied it could have detrimental effects as to the provision of services in certain circumstances; for example, rural costs are going to be different.

Another facet of the legislation is that there is there does not seem to be a process within the legislation itself as to how the minister comes to a conclusion. Generally speaking, advice to ministers in relation to the Medicare Benefits Schedule is through the Medical Benefits Advisory Committee, which is constituted under sections 66 and 67 of the Health Insurance Act and would advise the minister on the inclusion of new items and on, for example, the descriptors that would apply and on the schedule fee for rebate purposes level. This particular legislation does not seek to do that. The association does not support it in its current form. We would argue that clearly it should be varied to be consistent with the overall legislation in generality, that the minister should take into account the advice of the Medical Benefits Advisory Committee on matters and that, where the minister feels a matter should be explored, that matter should be referred to the MBAC to provide advice. Another facet is that the scope of that advice might be also to provide flexibility to take into account rural and access to service issues and whether a cap should apply and whether a cap should apply differently in different circumstances such as rural areas or in states where there is only a single service. Another facet is indexation, which I have mentioned. If a cap is to be applied, then clearly it should be indexed in line with average weekly ordinary time earnings. That is all I want to say in relation to that particular bill. I am happy to answer any questions. Thank you very much, Chair.

CHAIR —Does anyone have questions on that part of the particular bill?

Senator CORMANN —Yes, Madam Chair. Mr Jennings, you pointed out how at the beginning when the CMBS was conceived it was never the intention that the rebate would equal the fees, so there was always a view that there would be some gap. That is what you said, isn’t it?

Mr Jennings —Yes. In fact if you go back further between 1953 and 1969 the then medical benefits were adjusted, I think, about twice with creeping 1½ per cent inflation. That led to the new inquiry. That led to the Hayden healthcare plan. That led to Medicare et cetera.

Senator CORMANN —So when were those statements made? By that I mean the ones that you referred to in your opening statement.

Mr Jennings —The opening statement in relation to Dr Blewett was in 1987. The Auditor-General’s statement was in 1990. The other statement in relation to the inquiry before Mr Justice McKenzie I have not notated. That would have been around the 1985 to 1986 period.

Senator CORMANN —I do not want to waste too much time, but when it was introduced it was envisaged that there would be a gap?

Mr Jennings —Yes.

Senator CORMANN —And your profession—the AMA—would support the concept that there would be a gap? Is that a fair statement?

Mr Jennings —We support doctors charging reasonable fees pertaining to the particularities of the patient and the circumstances in which the service is delivered, and of course they discount their services in many instances.

Senator CORMANN —So your key argument, if I were to sum up what you have been saying, is that the Medicare safety net has really been a Band-Aid for a problem caused by not keeping up with increasing the CMBS rebates.

Mr Jennings —Yes.

Senator CORMANN —So if the government were to go down the path of limiting the Medicare safety net, they really have to have another look at what happens to the CMBS rebates. Is that your submission?

Mr Jennings —Logically, they should. You will see from the figures that I have tabled that the CMBS, essentially, in every year for the last 10 years has been two per cent to 2.3 per cent maximum. All of you would recall that CPI has been well in excess of that and average weekly earnings, and hence the costs for practitioners who employ staff et cetera, have increased by greater than that. You would also be aware that the cost of the health system in general—for example, the public hospital system—is a reflection that those sorts of underlying practice costs on a mega scale have increased by six, seven or eight per cent a year. For example, the state government’s budget in this state has gone up in gross terms in the last four or five years by an average of 11 per cent a year. Those are the cost pressures.

Senator SIEWERT —I want to go to the point you were talking about concerning advice to the minister. The Health Consumers’ Council raised concerns about the ability of the minister to make the decision and needing expert advice. They, for example, said that they potentially would support an experts panel. But what you are suggesting is that the Medical Benefits Advisory Committee would have to provide advice to the minister before any legislative instrument with any cap was tabled.

Mr Jennings —That has been the normal process in relation to, say, new items, benefits levels and the like—division 2, Medicare Benefits Advisory Committee, section 65 onwards, under the Health Insurance Act.

Senator SIEWERT —This is a question that we will probably have to ask the government: there is legislation now for the cap but under that we already know that the government has got a number of proposals—IVF, the other obstetrics measures, ophthalmology—

Mr Jennings —Cataracts.

Senator SIEWERT —and I think there is another one as well.

Mr Jennings —It would probably be otolaryngology, which is very hard to pronounce!

Senator SIEWERT —Yes, I am not even going to try! Are you aware of whether that committee was consulted about those issues?

Mr Jennings —I am not aware. The problem with those areas, as I said before, is that it is predicated on averages but the patients and the circumstances in which you deliver services do not conform to an average. So, for patients in the bush who require cataract surgery or obstetrics, the costs of delivering those services are fairly problematic in a lot of instances and they are cross-subsidised to some degree by clinicians who do the outreach services—going out into the bush for professional reasons, not economic reasons. If a cap were to be introduced, the viability of that is going to be teetering in a number of areas. Patients could suffer not just in terms of reduced benefits but also in terms of access to services, and then the state could end up picking up the tab because the patients use the PAT scheme to come in to the public system. So I do not believe it has been very well thought out.

The other facet is that if you take the legislation to its theoretical extreme, which obviously is an extreme, then under this proposal the minister could unilaterally determine that there will be a zero safety net. There is no proper process underpinning it.

Senator SIEWERT —The minister may, but the minister is unlikely to get something like that through the Senate because these are disallowable instruments.

Mr Jennings —I understand that but I said it was a theoretical extreme. But if they are reducing patients’ access by several hundred dollars today on one item then it could be another $100 more next year. And when we come to the next bill—I rest my case. That is exactly what they are doing.

Senator SIEWERT —I am not actually arguing against the issue about an independent panel or about getting advice—it seems to be to be quite a sensible idea—but the ultimate check on that is that it is a disallowable instrument and will have to go through parliament.

My other question is about the regional and rural issues, because it comes up time and time again, and the issue particularly about access to specialty services, such as obstetrics. I understand that some of those have been discussed with the obstetrics changes but, with the ophthalmology changes, there is a great deal of concern about the impact it is going to have on the bush. Have you got any suggestions about how it could be dealt with? If this legislation were to go ahead, what changes would you suggest we put in place to actually address these issues, particularly around rural and remote access?

Mr Jennings —I think that is partly why I have suggested that the MBAC have that role and its role not be in relation to establishing necessarily an average cap. If a cap is going to be accepted, which obviously we do not support, it should be a cap for the situation. If you take, for example, rural cataract services it might have a different approach to metropolitan services, similarly obstetrics. We are having grave difficulty in this state, for example, in getting specialists to go out to rural areas and we have an ageing specialist workforce, where they do exist, in the bush. I instance Bunbury which is obviously a major centre in WA. The obstetricians there are all around my vintage onwards—55 plus. For five or 10 years now they have had great difficulty in attracting people. This is not going to help. The nature of the beast in the country is obviously vastly different also to Perth. If you take obstetrics, they are not just servicing their patients but they are the backup for the GPs who deliver as well. So the lifestyle is even more extreme in the bush whether it is as a solo practitioner or as a small number of specialists servicing a community and indeed a region. It is a very tough life and this sort of thing will not help in terms of recruitment.

CHAIR —In terms of the legislation around the Medicare safety net, my understanding is that the process came out of the review that was made public in early 2009. Have you seen that review?

Mr Jennings —Yes, I have.

CHAIR —The figures in that I found quite confounding in some areas in terms of the growth of expenditure. Did you find some of those figures difficult to understand?

Mr Jennings —I found the report itself quite confounding. I think if it were subject to the normal peer review study, it would not stand up to scrutiny.

CHAIR —Your organisation has in principle opposition to the report.

Mr Jennings —What we are saying is that the assumptions, the extrapolations and, for example, the assertions about the movements in fees are inaccurate and there are some substantial flaws in the report. It needs to be recognised for example—

CHAIR —I am sorry Mr Jennings, I totally take your point. It is difficult for me to question when the committee has not seen a submission either from your organisation or the AMA yet on this issue. But because you are raising it here, your point is that your organisation has particular issues with the 2009 CHERE review, I heard it called yesterday—the centre for health economics report. Your opposition would be based on a disagreement with that. I did not know that.

Mr Jennings —My comments are in relation to your question as to whether we accepted the report as being a sound document. The answer to that is no. That I believe will be evidenced by the federal AMA.

CHAIR —Somewhere we are going to get a submission that allows us to have a look at that.

Mr Jennings —Yes, I understand that is the case. I would make the point though just to expand on that that the percentage movements claimed in there are based upon inadequate data. For example, the assertions about the increases in obstetric rates do not reflect the reality because they did not capture the base data correctly at all and they excluded costs and fees being charged in doctors’ rooms in terms of antenatals as part of the overall process. They did not capture those to determine what the percentage increase was. They overestimated the percentage increase very substantially indeed. I understand there will be evidence to that effect.

CHAIR —I am looking forward to reading that. It makes it very difficult to question when I do not know what the situation is. I can go no further because I do not know what the basis of the argument is.

Mr Jennings —But I think that is, again, one reason why we would suggest that a professional process under the act, rather than commissioning a particular organisation with a process to engage or consider various aspects, is a more appropriate approach. It would put it on a proper footing.

CHAIR —On that basis we will move to the next piece of legislation.

Mr Jennings —Again, thank you for the opportunity to speak on it, and I am really speaking from a WA perspective. The AMA in WA is probably a little bit different to some of the other AMAs, in that we represent all the doctors across the whole spectrum, both public sector and private sector. In states like New South Wales, for example, there are three organisations. We are a one-stop shop in WA, so we cover doctors both in public and private. The interesting aspect of this, of course, is that this could have a very profound effect indeed on private health insurance—the private sector and the state situation itself. The general outline accompanying the bill seeks to introduce three new private health insurance incentive tiers. The bill is headed up as ‘Fairer Private Health Insurance Incentives’. The outline goes on to state:

These changes will ensure that those with a greater capacity to pay make a larger contribution towards the cost of their private health insurance—

and that—

… Government support … remains fair and sustainable …

That is the logic of it. It then goes on to illustrate the financial impact. It will have significant revenue implications in 2010-11 of some $695 million in savings to Treasury, $650 million the following year and $680 million the year after that. In other words, $2 billion is being taken out of private health insurance support in three years, which is clearly a very substantial amount indeed.

Interestingly, a year ago almost to the week I appeared before the Senate economics committee considering the other threshold legislation. I am just wondering where I will be this time next year. We would assert that the delicate balance is at risk, a balance that the government stated it supports. I would suggest—and please do not take this wrongly—that commentary about supporting it seems to be spin rather than substance.

CHAIR —We will try not to take that in any negative way.

Mr Jennings —Two billion dollars cannot be spun. Withdrawing $2 billion is hardly supportive. Last year before the Senate economics committee the issue was the government proposal to raise the threshold at which people without private health insurance pay a surcharge. Treasury estimated at that point in time that the effect of that legislation would lead to some 485,000 policies not being renewed, a very substantial effect indeed, and that is still working through the system. That legislation is what I would describe as a bottom-up squeeze on the private sector and private health insurance. It undermines what I refer to as intergenerational transfers, a community rating principle which is fundamental to private health insurance, and potentially encourages what is also called adverse selection, putting pressure on premiums and setting in train an effect over time which could lead to a significant reduction in private health insurance levels and increased pressure on the public system. The implications could be quite profound and, in terms of the effect of this on top of last year’s and so on, in my view it is not a wise policy mix at all.

This year, of course, the legislation seeks to reduce the private health insurance rebate for those on modest incomes of $75,000 by 33 per cent, from 30 to 20 per cent, and by greater amounts for higher income earners and, indeed, to abolish it in its entirety above a certain level. I describe that as a middle- and top-down squeeze, on top of last year. Again, the potential adverse effects on the public sector, with increasing demand and reduced access for patients on waiting lists, have to be taken into account. As you will probably be well aware from the PHIAC figures, 50 per cent of people within Western Australia are privately insured; hence those 50 per cent will be affected in one way or another. The other 50 per cent, those that are uninsured, are seeking to access the public sector and they will also potentially be affected.

The public sector in this state is constantly stressed. It is going through a major recapitalisation program, but its capacity to deal with demand, on present projections, is problematic. We are a huge state geographically and demographically, and the cost of providing services within this state is arguably higher than in more concentrated states. Again, I come back to the incentive for rural patients to be privately insured and that being undermined by this legislation. The other interesting facet is that income may also vary from year to year. If I am a farm worker, a crayfisherman or a miner, the income that I enjoyed last year might well have been a lot more than I will get this year. In fact I am being penalised for having a good year, in terms of the rebate going down.

Within the public system, occupancy is often 100 per cent currently. It is not 85 per cent, which is the recognised efficient standard and indeed the safe standard. We have constant arguments about inadequate capacity in beds. We have access problems—ramping and other issues. We have research that has demonstrated unequivocally—and been accepted across the board—that these problems affect very directly the quality of care and outcomes in hospitals and lead to avoidable deaths. We cannot afford to put excess pressure on the public system to the detriment of public patients, which is what this initiative may well do.

The private sector currently provides a very significant level of services. Forty per cent of separations are undertaken in the private sector and 50 per cent of surgery. It takes a huge load off the public system. That level has been achieved because of the private health insurance incentives introduced from the late 1990s onwards. They have taken huge pressure off the public system, to the benefit of both public patients and private patients.

The state health budget this year is $5 billion on the recurrent side, separate from capitalisation. The Commonwealth contribution to state health is still well less than half. The Commonwealth’s proposals will clearly increase demand on the state, for which it arguably will not fully compensate. We would argue with senators representing your states that, if this legislation were to proceed, you should demand that the Commonwealth fully compensate the state. Of course, we are arguing that the legislation should not proceed.

The Commonwealth has talked about the blame game, but in reality, whilst it has increased some funding—and some of that is one-off, not recurrent, and this is a recurrent problem—again, when you look at the substance, this will put additional pressure on both the private system and the public system. Pre Medicare, interestingly enough, private health insurance premiums were tax deductible, which in today’s terms would mean that somebody in the $80,000 to $180,000 range would effectively have a 38 per cent rebate. That is the current marginal tax rate between $80,000 and $180,000. If the old regime of tax deductability occurred, they would get a 38 per cent rebate. Above $180,000, it would be a 45 per cent rebate. The current 30 per cent rebate compares to that. When Medicare was introduced, tax deductability did not continue and, as a consequence, private health insurance plummeted down to about 31 per cent, from, I think, 68 per cent immediately pre Medicare.

Senator CORMANN —That is in Western Australia?

Mr Jennings —Yes. Progressively it went down. The 30 per cent rebate was introduced, along with other initiatives, to reverse this trend, and it has been a key element in absorbing surgical demand and reducing growth in the public sector. It has also been fundamental to providing an environment of relative certainty conducive to private and public sector planning and investment based on projected demand figures. In other words, the rebate is part of what I have referred to previously as an integrated trilogy—the three pillars sustaining the balance—of lifetime community rating, the rebate and the surcharge. This legislation underpins the pillars. It sends the wrong signals and is indeed a second breach of an election commitment to retain the rebate—on top of last year’s threshold legislation. It penalises those who are taking responsibility for their health care and puts added pressure on premiums as income earners either drop out or downgrade their policy. And it creates further uncertainty and concerns in both the public and the private systems.

The bill characterises itself as fairer. Fairer? Hardly, if those with private health insurance will be disadvantaged directly if the rebate is reduced. Is it fairer on those who are not directly affected by loss of the rebate because they have maintained private health insurance and still retain the 30 per cent but as a consequence their private health insurance premiums increase because of effects on community rating and adverse selection? Again, hardly. Is it fairer on those in the public system, where demand will increase, queues will lengthen and access will diminish? Again, hardly. I note again that Treasury is estimating that it is going to pull out some $2 billion over three years, and that is a great concern.

The bill, of course, seeks to reduce the amount of private health insurance rebate an eligible taxpayer receives, according to various thresholds. It effectively removes carrots. If you are single person earning between $75,000 and $90,000 the rebate will drop by 10 per cent, from 30 per cent to 20 per cent. What is the effect of that? I confess a conflict of interest. Like many people, I am privately insured—I have family insurance. I think everybody actually has a conflict of interest in this argument. If I am a public patient and I am not privately insured, I have a conflict of interest because I have an interest in making sure the queues do not get longer, so I think that probably nullifies the conflict. But, if a person is paying $4,000 for top family hospital and family essentials as standard, which is the current HBF rate in this state, they cannot really receive a rebate of $1,185—for simplicity’s sake, let’s call it $1,200. If they are earning above $75,000, then the rebate drops to $800, a $400 drop. That constitutes a 14.3 per cent increase in their net premium. So the effect of this legislation is to disadvantage anybody earning above $75,000 who has family cover of that nature and impose a 14.3 per cent increase on their premium. If they fall into the next category, above $90,000, and the rebate drops from 30 to 20 per cent, the effect of that is a 28.5 per cent increase in their premium. If they fall into the next category, above $120,000, it is a 42.8 per cent increase in the premium. It is obviously higher again for other groups, who will lose it in its entirety.

The net effect of that is that people are not going to go into private insurance. People are going to downgrade according to the affordability et cetera. That will then lead to what I have talked about before in terms of adverse selection, which means that you end up with a pool of people remaining in health funds who do so because they have a high need. The whole principle of community rating is that you spread the risk and people pay an equal premium and that there is an intergenerational fund transfer by attracting younger people in, who pay premiums et cetera and then achieve the benefit later in life—they contribute a bit like superannuation. If we do not attract those people in and we are left with an ageing group of fundholders, then the premiums will not go up by 14 per cent, 28 per cent or 43 per cent; they will go up by even more. We will see, again, a very significant reduction in private health insurance levels and a significant increase in demand in the struggling public sector. That is a real problem.

Obviously, the other facet of the bill is to increase the surcharge, which is the stick side of the carrot and stick argument. The proposal there is to index it according to average weekly ordinary time earnings. So, interestingly, the threshold will increase well above the current methodology for adjusting the CMBS I referred to in my previous evidence on the bill—and I would like those comments to also be taken into account in this inquiry.

Another facet of this of course—and I referred to the blame game earlier—is that it is interesting that the Australian healthcare agreement is a cooperative agreement between the Commonwealth and states which seeks to prescribe the basis upon which they would complement each other in meeting the needs of the health system. The healthcare agreement states:

Governments acknowledge that private providers and community organisations play a significant role in delivering health services to the community and will continue to be partners with government in meeting the objectives of this Agreement.

Partners. I am not sure they were consulted about this. I am not sure they agreed. It also goes on to state at section 26 of the healthcare agreement that the government in addition to its joint funding responsibilities with the state will fund access to private medical care and access to the private health insurance sector and will regulate it et cetera. The agreement suggests that there is a partnership. It suggests matters should be dealt with through consultation and changes ideally should be agreed. This legislation completely contradicts the election commitments and the ideology expressed within the healthcare agreement.

It can hardly be said that it is fairer either to private patients or indeed fairer to the states because on my understanding there has been no consultation with the states which will have to absorb the consequences of this. In essence there has been, as I understand it, little consultation with the states, the insurers, the private hospitals and the profession. It is a great shame. It was not an election policy. It is the second breach in this area. In our view there has not been any credible short- or long-term analysis of the implications but clearly history points to the problems.

Again if one goes back to the PHIAC data one can track—and this is an extract from their report—that back in the seventies private health insurance was up in the very high 70s at about 78 per cent and it plummeted down to about 31 or 32 per cent and then with the measures it came up again. During the period of it plummeting I think all of you can recall the problems for state governments and waiting lists and so on. This is what we are facing again—

CHAIR —Are you wishing to table that, Mr Jennings?

—I am very happy to. It is entitled ‘Insured persons covered by hospital treatment insurance June 1971 to June 2007.’ It is an extract from the Private Health Insurance Advisory Committee report. We have the potential to go backwards again. I cannot overemphasise the importance of the concept of community rating, the risk of adverse selection and the fundamental importance of intergenerational transfers and the risk-sharing principle within private health insurance which this directly attacks. Essentially, it is introducing means testing. It is interesting, the logic of that means that they should actually introduce means testing for Medicare, but I will leave you to ponder on that.

I say again it is definitely not good for private, it is definitely not good for public, it is definitely not good for the states and it is definitely not good for private health insurance policyholders. It creates further uncertainty of last year’s initiatives and begs the question as to where we will be sitting this time next year. Public sector planning is extremely complex and private sector investment at this time is obviously extraordinarily difficult to attract. The fundamental question is: what is the commitment of the government to state public hospitals and the private hospital health sector. It states it supports private health. Indeed the Health and Hospitals Reform Commission interim report stated that and affirmed the need for the balance but its actions without consultation or consideration of the implications for all privately insured and indeed public patients generally really does beg the question.

I draw a parallel here with what transpired again in the eighties and early nineties. In that era there were a series of measures that were assessed by Access Economics as constituting raising premiums by 40 per cent—a series of measures taken by government post the introduction of Medicare. Removing Commonwealth bed subsidies, undermining the reinsurance pool and shifting onto health funds Medicare rebate costs for inpatient care were done through the 80s. That led to an aggregate effect of increasing premiums by 40 per cent.

This measure in one fell swoop increases premiums for people working above $75,000 which is a modest income when you look at the occupations who earn that. It is only a middle level income. This measure achieves, in one fell swoop, a 14 per cent, 28 per cent, 43 per cent or even larger increase in premiums overnight. That can have a catastrophic effect. It is a very large slice. It is what I refer to as ‘salami politics’, where you do things a slice at a time and the aggregate effect is that the poloney is gone. We will therefore run the potential for a repeat of what that graph shows.

The Commonwealth government has also raised the issue of seeking to take over state public hospitals. This obviously puts pressure on the states and makes it harder for them to perform. Perhaps it even fuels that debate. We would argue, in closing, that the Commonwealth needs to unequivocally state what mix it is committed to. Obviously you gather that we do not support the legislation. I think it is wrong in principle. It is terrible in its timing, in terms of the recession, when we need to have people retain insurance. It is awful in its magnitude. I do not think its implications can be underestimated.

If the legislation were to proceed, there should be a consistent approach in terms of indexation, as I referred to earlier. The thresholds are clearly wrong. But we would argue that neither of those should occur and the legislation should in fact be rejected and very firmly rejected indeed. We need to maintain the balance. The legislation should not be passed. If the government want to proceed with this, contrary to their election commitment, they should take it to the next election. Thank you.

CHAIR —Senator Cormann, you have time for two questions.

Senator CORMANN —I want to start off with your final statements, Mr Jennings, pointing to the takeover of public hospitals that has been mooted. Do you think that measures like this put additional pressure on the states and territories and that, it being the second time in two years that this has happened, the Commonwealth is setting the states and territories up for failure?

Mr Jennings —Absolutely. I think the issue here is that this will have an effect over time. It cannot be judged within a year. These things take time to feed through, but, inevitably, yes.

Senator CORMANN —You have mentioned how premiums will go up, membership will go down, out-of-pocket expenses will increase and there will be additional pressure on public hospitals. Is it fair then to say that not only those with private health insurance but all Western Australians, like all Australians, will be hurt by this, inasmuch as there will be some that will not get access to a public hospital service they need because they have to compete with somebody who used to be in private health insurance? There will be resources lost. Is it fair to say that all Western Australians will be hurt by measures like this?

Mr Jennings —Yes. Again, the problems of the eighties and nineties, before the rebate was introduced, evidence that categorically. The most disadvantaged in society, who most need public hospitals—bearing in mind that the Medicare agreement is predicated on the basis that you cannot discriminate based on circumstances; people have to be treated in accordance with clinical need—and who are on longer queues, suffer the greatest. That is the problem.

Senator FURNER —You indicated there would be increases in premiums. What sort of modelling have you done to indicate that is going to be the case?

Mr Jennings —What I said was that the net increases in the premium in the first instance would be 14, 28, 43. That is self-evident because the rebate is reduced and, generally speaking, depending on your arrangements, the rebate is taken out upfront by the employer health fund. That is the immediate effect. The secondary effect is—

Senator FURNER —Excuse me. I asked you what sort of modelling you have done, as the AMA, to determine there will be an increase in premiums.

Mr Jennings —I have not done modelling per se. What I can tell you is that adverse selection and price elasticity issues would lead to people—those who do not perceive they have an urgent need for health care—dropping their premiums. That will leave people in the fund who have a higher need, leading to adverse selections. That has been identified consistently as giving rise to increases in premiums. People will also downgrade their policies, so there will be less cross-subsidisation.

Senator FURNER —Have you done modelling to determine that?

Mr Jennings —No. As I have indicated, I have not.

Senator FURNER —So you are not relying on any data or any research to give you that assumption.

Mr Jennings —I referred earlier to the Access Economics studies about the 40 per cent increases during the eighties and nineties as evidence. There is a lot of evidence supporting that.

Senator CORMANN —Did you see this measure coming?

Mr Jennings —No.

Senator CORMANN —Why is that?

Mr Jennings —The government said it supported the rebate.

Senator CORMANN —That was a pretty emphatic commitment, wasn’t it?

Mr Jennings —Yes.

Senator CORMANN —What are your thoughts about the opposition proposal to increase the excise on tobacco by 5½ per cent as an alternative to means-testing the rebate to avoid the fiscal impact?

Mr Jennings —We would clearly support that. I think that our position on antismoking is very well known. I think smoking is one of the great burdens on the health system.

Senator CORMANN —I would like to spend a little bit of time considering the impact of people downgrading to cheaper policies. What is the effect from your members’ point of view if there are more and more people going for cheaper private health insurance policies?

Mr Jennings —It probably means the safety net will increase.

Senator CORMANN —We are talking about privately insured people, of course.

Mr Jennings —The implication is that people downgrading will put pressure on premiums generally. There is a pooled arrangement and a degree of cross-subsidisation, so the premiums will rise. That is point 1.

Senator CORMANN —When we say people will go for cheaper policies, we mean they are taking exclusions and large out-of-pockets through the form of increased front-end deductions.

Mr Jennings —That is correct.

Senator CORMANN —What does that mean in practice? When privately insured people present at private hospitals, your members treat them and—

Mr Jennings —In practice it will mean two things. In some circumstances, because of the exclusions, they will go into the public system and increase demand on the public system. In other circumstances they will have greater gaps.

Senator CORMANN —The government have said that they expect 8,000 additional public hospital admissions, but that is based on their assumption that only 25,000 people will leave. Treasury assumes that nobody will downgrade their cover as a result of this, which I would argue is the most rational response for people to take. My question is this: the impact on public hospitals will be much more significant than what the government are telling us, won’t it? Even people downgrading cover can result in more pressure on public hospitals.

Mr Jennings —Absolutely, because the cover would exclude certain services or put a gap on them, so people would choose to go into the public system.

Senator CORMANN —What were the circumstances in private hospitals and public hospitals towards the end of the eighties and in the early nineties in terms of utilisation, and what are the circumstances today? Some people have argued before this inquiry that increasing membership in private health has not resulted in less pressure on public hospitals. I just want you to give us a bit of a perspective as to what the circumstances in private and public hospitals were at the end of the eighties and in the early nineties and what the circumstances are now and to comment on whether or not increased private health membership has contributed to less pressure on public hospitals.

Mr Jennings —Firstly, the circumstances in the eighties and nineties before the rebate was introduced could be described only as dire. Private health insurance had slumped to around about 31 per cent and the projections were it would drop below 20. In other words, it would collapse. There were a number of authoritative people who stated that at the time. The effect of the rebate on community rating et cetera was to provide carrots to go back into private health insurance. What that saw was the escalation in demand on public hospitals for elective surgery basically stabilise. There has been very little growth in elective surgery demand on the public system in recent years. Elective surgery surged within the private sector and went back to levels that had not been seen for quite some time. That meant there was better access to the public system as well, which reduced the pressure on waiting lists.

If you look at the data—and, again, I think that the PHIAC data shows this—you will see that the growth in the last five years plus of elective surgery has been principally in the private sector. The problems with emergencies in the public sector have had a lot to do with medical cases not surgical cases and so on. So there has been a balance and that has allowed the public system to cope to a greater degree, although it is still struggling, principally because of capacity issues. It is still operating in the metropolitan context at 93 to 102 per cent levels day in, day out.

Senator CORMANN —If it had not been for the private hospital sector absorbing a large part of the growing demand, what would have happened to the public system?

Mr Jennings —I think you would have again seen nurses deserting the system, doctors deserting the system, patients in longer and longer queues. I think the burnout and stress cannot be underestimated. That has been one of the big problems with recruitment and retention of nurses in the public system. The effect for patients would be increasing waiting lists and, as I indicated earlier, in terms of the research, further problems with access, leading to a reduction in quality and actually leading to deaths. That is well evidenced, well published and well peer reviewed.

Senator CORMANN —Do you think that the effect of measures like this and the measure last year will be a one-off effect or do you think there will be a series of second-, third-, fourth-round effects, where we will potentially go back into a downward spiral like the one that you have demonstrated in that graph occurred during the eighties and early nineties?

Mr Jennings —It is undoubtedly the latter. I should say that, in another life, I was offered a job by the Productivity Commission—I have economics qualifications as well. I look at it from that standpoint, not just from a straight medical point of view. You can go to the Access Economics analyses, going back to the initiatives. I talked about a salami slice at a time. When you aggregate the slices and you look at the multiplier effects and how they work through over time, it is undoubted that, as that graph indicates, the cumulative effect will be drops and slides, and the only issue is the magnitude and extent. If you get into an adverse selection scenario, where funds are left supporting sicker and sicker patients who are not supported under community rating by well patients at this point in time, and their costs per episode increase or the episodes per policyholder increase and their costs increase, then premiums are just going to escalate inexorably. That is what happened in the past when government cost-shifted onto funds when it removed the reinsurance pool and the other initiatives in the eighties and nineties. That graph can easily be replicated, and the only arguments are going to be about the magnitudes of the drops and the slides, not about whether there will be any.

Senator CORMANN —Just as a closing point: you mentioned that you thought there was little consultation with the states and territories. The evidence that we have had from Treasury and the health department federally is that there has been no consultation with the states and territories. Is that something that concerns you in the context of the commitment before the election to cooperative federalism on health and ending the blame game et cetera? This is the second time now that an initiative like this has been introduced that has a potential for significant impact on state and territory budgets and there has been no prior consultation with the states and territories. What is your view on that?

Mr Jennings —I think it is a tragedy. It is wrong. It is unfair to the states. It is unfair to patients, whether they are public or private. Everybody is disadvantaged by this move. It does not make any sense at all. I said last year, before the economics inquiry, that we hoped there would be consultation in the future. If the Commonwealth is committed to this, then logically it should commit to fully fund the states, both in a recurrent sense and a capital sense, to build the capacity necessary to deal with the fallout from this initiative. It did not last year. There were some one-off payments but not recurrent payments. This year, of course, the money it set aside for the education and hospitals funds was largely dispensed through the $900 stimulus. So that has been withdrawn as well, and yet it has done this on top. It is sad.

Senator CORMANN —Thank you.

CHAIR —Thank you, Mr Jennings.

Mr Jennings —Thank you very much.

 [11.49 am]