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COMMUNITY AFFAIRS LEGISLATION COMMITTEE
14/07/2009
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 (Senator Moore) —Good morning everyone. I welcome back Catholic Health Australia. Thank you for making yourselves available this morning. We do appreciate it. We have a mixed day today. We are dealing with a few bills in the one day because of availability. This morning we are starting on the private health insurance incentives bills. Then we will move to NRAS for the rest of the day. You are very familiar with information on parliamentary privilege and the protection of witnesses. After your appearance before the Senate Standing Committee on Economics you sent us the Access Economics report which you mentioned. I invite you to make an opening statement and at the conclusion of your remarks we will move to questions.

Mr Laverty —Thank you for having us before the committee and on this topic for a second time. When we last appeared we expressed some uncertainties about our response to this legislation, and those uncertainties were represented on behalf of the 75 not-for-profit hospitals that exist within our network. Those 75 hospitals represent about 10 per cent of all hospital beds in Australia. Some of those hospitals are public; some of them are private; so we speak in a slightly unusual capacity in that we are represented in both the private sector and the public sector—quite proudly so—and have been for in excess of some 175 years. The work that we have been able to do since appearing before the committee that dealt with this issue previously—

CHAIR —The economics committee.

Mr Laverty —Thanks. The work that we have been able to do was to have our external advisers look at the Treasury estimates as to what the likely impacts of this legislation would be. Treasury has said that, as a result of the changes to the 30 per cent rebate, some 25,000 individuals are likely to withdraw from private health insurance. The estimate that Access Economics has provided to us is that that number is likely to be closer to 100,000.

Why is there a difference between the Treasury estimate and the estimate that we are putting forward as our evidence, given that both Treasury and Access Economics have used exactly the same data? It is a very simple explanation. Treasury is assuming that an income earner on $75,000 a year has the same spending power as an income earner on some $250,000 a year. Treasury has applied a price elasticity formula to someone on $75,000 as it has to someone on $250,000. If you think about that for a moment, it is assuming that, if there is a 10 per cent increase in the cost of private health insurance for someone on $75,000, that would mean an average policy is going to be about $2,000. That would represent 3.4 per cent of the take-home income of someone on $75,000 as opposed to 1.2 per cent of the take-home income of someone on $250,000.

I am not an economist, but I am going to propose to the senators before me that someone on $75,000 does not have the same spending capacity as someone on a quarter of a million dollars. That is, in essence, how we have come to a different outcome using the same data as Treasury has to determine that it is possible that upwards of 100,000 people may drop their private health insurance as a consequence of these changes against Treasury’s estimate of some 25,000 people.

In that capacity, our own forecast is relatively conservative. The private health insurance association is actually estimating that some 240,000 people might drop their private health insurance. It has used an entirely different formula, market research, to come to that. But the evidence we are putting before you is that the Treasury estimate needs some scrutiny. This inquiry should ask itself: is it satisfied that someone on $75,000 behaves in exactly the same way as someone on a quarter of a million dollars when it comes to making purchasing decisions around private health insurance? We are suggesting that you are likely to see some different behaviours at higher income levels compared to lower income levels and that these factors have not been properly considered by the Treasury.

The Treasury assessment also has not given consideration to what the second round of future impacts of these proposed changes might be. We have suggested that, even if you accept a Treasury assessment that only 25,000 people will drop out, that means there will be a decline in the pool of insured funds available to provide for private care and that, at some point in the future, the cost of a private health insurance product is likely to increase. If you have people dropping out, it means over time the cost of private health insurance is likely to increase. It has not been considered by Treasury in its work to date.

We are also just as concerned that a more likely consequence is that larger numbers of people will downgrade their product, that as the private health insurance product increases in cost a rational response of a consumer would be to downgrade the type of product that they have. That also reduces the total amount of insured funds available. It is a cost pressure on the future cost of a premium for someone holding private health insurance. But it also raises the question of what happens when a consumer who has downgraded their product enters the health system for a procedure and unexpectedly sees that they now have a larger gap than they may have had previously. There has not been a significant consideration of the consequence of the downgrade of those who hold insurance on the prevalence of gaps. Are we likely to see, as a consequence of this change, a modest or a large increase in the number of gaps that are paid because people have decided to downgrade their insurance product because private health insurance has become more expensive for them? They are uncertainties. I do not have specific forecasts to give to you, but I raise those questions as uncertainties at this time.

Access Economics has also led us to another factor which at the moment, in their words, ‘might have a larger impact’ on the number of people with private health insurance in Australia than these changes—that is, the potential impact of the economic downturn on those who hold private health insurance. Treasury has forecast that unemployment, which at the moment is somewhere around 5.5 per cent, is likely to rise to 8.5 per cent. Some commentators say that that forecast is a bit pessimistic. I am not able to comment on what unemployment is likely to reach, but I would suggest that if unemployment increases in any significant way it will be another pressure on the ability of an individual or a household to hold private health insurance.

What are the combined effects of the recession on the likely cost increase of private health insurance as a result of these charges? More people withdrawing from private health insurance suggests an increase on public hospital waiting lists. This is an argument familiar to this committee. It is an argument that we made previously, when changes to the Medicare levy surcharge were being considered last year. Treasury affirmed at that point, and it has reaffirmed this year, that some 490,000 people at some point in time are expected to forego their private health insurance as a result of changes in the Medicare levy surcharge. If you add those who are expected to let go of their private health insurance this time, we can estimate that some 216,000 people are likely to join public hospital queues as a consequence of last year’s and this year’s budget changes. If we are specific about the changes being considered by this inquiry, the Treasury estimate is that some 8,000 people will join public hospital waiting lists. Our estimate is that it is closer to 36,000—that if you accept our initial assumption that some 100,000 people will forego private health insurance that is likely to mean 36,000 people joining public hospital waiting queues. That is our principal concern.

There has been some discussion around whether our forecasts are accurate, whether the private health insurance association’s forecasts are accurate and whether Treasury’s forecasts are accurate. I would like to put that aside and say that in the last year the waiting time on public hospital waiting lists around Australia has grown by about six per cent. The average hospital waiting time in Australia has grown from 32 days to 34 days. Within that environment, whether Treasury is right or whether Access Economics is right, any pressure on public hospital waiting lists is an unwanted one, and why would we be taking a risk without putting in place a safety net, a monitoring mechanism or a compensation arrangement to ensure that those public hospital waiting lists are not increased? That is the principal concern that I put before this inquiry. Because we have a foot both in private hospitals and in public hospitals and because the mission imperative of Catholic hospital services in Australia is ultimately for low-income earners, for those poor and marginalised, any pressure on public hospital waiting lists is not something that we would be comfortable with.

I am grateful for the opportunity to make those opening remarks, and of course as usual we welcome scrutiny of our views.

CHAIR —Mr Tobin, do you have anything to add at this stage?

Mr Tobin —No, I am happy to go to questions.

Senator CORMANN —Did you see this measure coming?

Mr Laverty —No. If I can speak on behalf of the CEOs who work within our hospitals, they took quite seriously the commitment that was made by the government prior to its election and that was repeated since the election that the 30 per cent rebate was not to be considered or revised—it was not to be reformed in this term of government. So the CEOs in our hospitals were somewhat surprised when this measure came in. Within that, the CEOs of our hospitals have also made capital expenditure decisions and budget forecasts, long-term forecasts, around there being no substantial change to the rebate within this term of government. It did come as a surprise in that context. In making business decisions, planning decisions were made around commitments that were given by the government not to visit the 30 per cent rebate during this term of government.

Senator CORMANN —Last year we had the changes to the Medicare levy surcharge. This year we have the changes to the rebate. Are you worried about what might be in next year’s budget?

Mr Laverty —We recognise that the budget position has changed dramatically in the last 12 months, and it is appropriate within that context that government gives consideration to its expenditure. The case we have made repeatedly is that key to the efficiency and the easy ability to access the public health system is a strong and robust group within the Australian community of those who hold private health insurance. We believe in a strong balance between private health insurance and access to public services. In fact, we would say a key to the current ability of public hospitals to perform their job correctly is to have a strong pool of people with private health insurance. It takes the pressure off the public system. Anything that downgrades or changes the balance between those who hold private insurance and those who do not is going to impact public hospital waiting times around Australia.

Senator CORMANN —Treasury, and the government in its budget estimates, still expects about 492,000 fewer people to be in private health as a result of last year’s measure. You estimate up to 100,000 fewer people as a result of this year’s measure and you come to the conclusion that this means some 216,000 extra admissions to public hospitals. Can you talk us through the methodology or your thought processes for how you get to that 216,000 extra admissions?

Mr Laverty —The experience of Treasury, the Department of Health and Ageing and Access Economics, and our own experience, is that for every 100,000 people in Australia there will be on average 36,000 or 37,000 separations per 100,000 people. So, if 100,000 people who previously held private health insurance would have received their treatment in the private system, you can make the assumption that that same group are going to need treatment somewhere, but because they do not hold private health insurance anymore it would have to be in the public sector. The very simple maths, which is the assessment of the Treasury, the Department of Health and Ageing and Access Economics—

Senator CORMANN —So it is 36,000 times six, essentially?

Mr Laverty —Pretty much.

Senator CORMANN —The government has told us that they expected about 25,000 people to leave. But the real impact, as you have said in your opening statement, is that the most rational response is to downgrade your cover, go for a cheaper policy. There are two things you can do to make your policy cheaper. One is to increase your out-of-pocket expenses, and you have touched on that. The other is to exclude services like orthopaedics, cardiac et cetera. What happens to those who downgrade and exclude services from their cover?

—They are the people who join the public hospital waiting queue. There will be a group in the community who still hold private health insurance but have made a decision as a result of these changes to downgrade the type of cover that they hold. They then, perhaps unfortunately, find that a procedure that they require is not covered by the insurance product that they actually hold. They have two choices—they pay for that out of their own pocket or, more likely, they join a public hospital waiting queue. In their assessments, Treasury and Access Economics have not assessed the impact of those who will downgrade their insurance to a lower type of product and who will not have all of the previous cover that they had but will still need to receive treatment. They will be a group of people who will join public hospital waiting queues in numbers that we are not able to assess.

Senator CORMANN —For the people in the top two tiers, those who are hit both with a reduction in their rebate and an increase in the Medicare levy surcharge, the most rational response, if they want to avoid the impact of the increase, is to go for a cheaper policy. Treasury has not made an assumption around that at all, so, really, it is fair to say that the Treasury modelling underestimates the ultimate impact on public hospitals, isn’t it?

Mr Laverty —That is the evidence that we have presented. I would say of our own assessments that we are only able to use the data that Treasury has made available. Using that data, the only opportunity we have had to scrutinise their numbers is around the level of price elasticity that Treasury has applied, and that does not give consideration to this much larger prospect of downgrading and what it means for out-of-pocket costs. I think it is quite important to consider that we are likely to see more consumers complaining about the out-of-pocket costs or the gaps that they are likely to pay. We have not been able to assess what that impact will be and Treasury has not been able to assess what that impact will be. It is an uncertainty, and in that context we would ask: if it is that uncertain, should we support this particular measure?

Senator CORMANN —Do you think that Treasury should do some more work on the basis of a scenario where the effects of downgrading cover are taken into account and where perhaps those second-round effects are taken into account?

Mr Laverty —I would welcome a further scrutiny of Treasury’s work on the forecast that it has made public. I also want to indicate that I have received a letter from the Department of Health and Ageing within the last fortnight inviting our participation in a workgroup that has the name ‘private health insurance rebate tiers implementation group’, or words to that effect.

CHAIR —That is extraordinarily catchy!

Mr Laverty —That group was extending an invitation to a number of participants in this particular debate to move to the implementation stage of these measures.

Senator CORMANN —It is a bit premature, isn’t it?

Mr Laverty —There are two observations that I would make. Firstly, the Senate has not passed this measure and yet the department is moving to implementation.

Senator CORMANN —It is a very confident government.

Mr Laverty —I should commend the department for anticipating the likely decision of the Senate, but perhaps that group could undertake some further scrutiny and some further work on these forecasts.

Senator CORMANN —I am very short of time. I do not mean to cut you short. One of the witnesses before our inquiry has suggested that the private health insurance rebate was bad policy because it had not taken pressure off public hospitals and because it had shifted professional staff resources away from public hospitals to private hospitals. Given your role across both public and private hospitals, you are probably in a unique position to comment on the extent to which private hospitals have absorbed a large part of the growth in demand in recent years.

Mr Tobin —The AIHW in its latest report clearly sets out the respective rates of increase of separations in the public and private sectors. Certainly, separations in public acute hospitals between 1998-1999 and 2000-2008 have increased by 23 per cent in public hospitals and 66.9 per cent in private hospitals. That in itself demonstrates that the demand for health care overall is increasing. It is going to increase a lot more. The private sector has been taking a much increased proportion of that increased demand, and anything that might impact on the ability of the private sector to continue to do that is going to be a problem for the public sector.

Senator CORMANN —When you released your Access Economics report, one of your comments was:

Our experience is that changes to private health insurance have their biggest impact on public patients.

Can you give us a bit more detail around that? That is quite a strong statement, so I am interested in a bit of context around that.

Mr Laverty —The average waiting time for elective surgery in a public hospital today is 34 days. That has grown at six-and-a-bit per cent in the last 12 months. Despite the very good efforts of the Commonwealth and the constructive work of state and territory governments around the country it is still the case that public hospital services are patchy, struggling and pressured. Within that context we have a network of private hospitals around the country that have the ability to relieve the load on the public sector. If you look to Queensland, where the average hospital waiting time is 27 days, well below the national average of 34 days, Queensland Health is adequately utilising the infrastructure of the private hospital system. It runs a terrific scheme called Surgery Connect, where on a regular basis public patients are transferred to the private sector to have their procedures, recognising that private hospitals are just as capable as public hospitals in providing the same quality of care with efficiency and with an ability to lessen the load on the public system. I, as an administrator or an overseer of 75 hospitals around the country—public and private—do not see the difference between them. I see them as hospitals—places that provide care and treatment to Australians. I think it is time we changed our attitude around how we define them. We should not be just defining our hospitals by how we finance them, by their inputs—public financing and private financing. I see them as hospitals. They are all capable of providing quality treatment and care.

Mr Tobin —Senator, could I add to a previous point you raised about a previous witness saying that resources will follow if there is a shift from public to private and vice versa. It is true that a lot more resources have gone to the private sector as a proportion in recent years. That is mainly because of the increase in contributions—the increase in the number of people covered by private insurance—made to the system. If there is a shift back to the public system from the private system I do not think you could automatically assume that resources will follow. What will have to happen is that if resources are to move then the financing will have to increase, which means that there will be an increased burden on the tax system. I do not think it is quite as glib as that witness indicated.

Senator FURNER —As you have indicated, Treasury has used a different modelling process than Access Economics. They use the tax micro-simulation model. I think that is one of the relevant questions we will need to ask them this afternoon: how that differs to the modelling of Access Economics. However, Access Economics indicate that the downgrading will also reduce the effect on the rebate expenditure. Are you able to comment on what they inferred in the report based on that?

Mr Tobin —Access Economics accept the premise of using the micro-simulation model. One of our issues is that Treasury appear, on the public information available, to have based their assumptions on there being an average private health insurance product when in fact what Access Economics have done is develop a number of scenarios of different reasons for which people have private health insurance. If you are going to be accurate in working out what might happen you need to look at the reasons why different groups of people hold private health insurance and then analyse their responses by the different income tiers. That is one aspect that we would certainly like to develop with Treasury. I think downgrading is the big black hole. It is certainly difficult for organisations such as ours to know what the full composition of the privately insured is in terms of the different products that they have, but if you are going to make changes to the rebates and to the underpinning incentives to have private health insurance I think we need to get some more information on the public record so that all of the groups can have a look at what sorts of decisions people might make based on the levels of cover and motivations that they have.

Senator FURNER —The assumption has been drawn that there will be downgrading, but there could possibly be downgrading currently as a result of the global financial crisis as well, couldn’t there?

Mr Tobin —Yes.

Mr Laverty —We are very comfortable to say, and to take Access Economics’ advice, that the global economic downturn may in fact have a much larger consequence than these measures being considered today. Within that context it would be important to consider, if you are going to have a decline in private health insurance because of the economic environment and you then create another pressure, what measures we have in place by way of a safety net for the public system. The evidence that we have put to you is really quite simple: we are uncertain.

We have some advice from Treasury that there might be a 25,000-person decline in private health insurance. Access Economics says it is 100,000. Overlay that with a global economic crisis and I think we can all agree there is likely to be a substantial downgrade in the number of people who hold private health insurance. Within that context, what measures are we putting in place to ensure that there is not a significant burden on the public sector around Australia so that we do not have a continuing trend of an increase in waiting times for public elective surgery, given that in the last 12 months it has increased by 6.5 per cent, which is a trend up and a trend that we do not welcome?

Senator FURNER —Really, there is no evidence to demonstrate that there is downgrading currently or that there is to be in the future. In fact, a number of the submissions that we have received, submissions from Mr Wells, Mr McAuley and also Dr Deeble, indicate there is a strong likelihood that that will not happen. In fact, they draw the assumption in a number of fields that the 130,000 people who will be caught up in the new surcharge will certainly compensate to some extent people who might possibly join private health insurance as well.

Mr Tobin —One of the issues with that is that people who are motivated by the surcharge are more likely to go for the lowest cost policies. Obviously there will be some people who will join private health insurance who are not currently insured. But they are not necessarily going to take out the full comprehensive policy, so the impact of those new members will be less, perhaps, than the impact of people who have full comprehensive policies leaving private health insurance. The other observation I would make is that, from our perspective, across the two systems there is a lot of interdependence and fine balance between public and private health sectors. If you do make some significant changes in one then that is going to have an impact on both, and that is certainly something that we see in our sector.

Senator FURNER —Those other submitters who I just quoted also inferred that there is a strong likelihood that people will not drop their private health insurance. They based that on the fact that it is probably the last type of insurance that people, looking at their budgets, will stop, because they do not believe that it is worth the gamble to drop your health insurance to gamble with your health or your family at that particular point.

Mr Laverty —That is perhaps illustrated by the number of people on incomes of less than $26,000 who hold private health insurance. I will be corrected if I am wrong but I understand—

Senator FURNER —They are not affected by it.

Mr Laverty —I understand, but a million people who have an income of less than $26,000 hold private health insurance, indicating that a number of people within the community, regardless of their income, even those who have modest incomes, value private health insurance. There is no question that there will be a group within the community that are going to hold on to it no matter what happens. I think it is very important for the national health system that we have a group in the community that are so committed to contribute to their own health care, which in turn takes pressure off the public sector.

The evidence that we put before this inquiry acknowledging the contributions of the submitters that you refer to, and they are commentators that I have great respect for, is that we are uncertain. There are a number of factors that lead us to an uncertainty as to what the impact of these changes is going to be on the public sector in Australia. We are just as concerned about the global economic downturn as we are about the potential of those who will downgrade or forego their private health insurance because of this particular measure. With that uncertainty, we certainly think that there is an opportunity for the Treasury to better disclose the workings and the forecasts that it has made to date and that government considers, as it did in response to the Medicare levy surcharge changes of last year, a commitment, perhaps through the Council of Australian Governments, to monitoring the ongoing impact of these changes on public hospital waiting lists. That commitment was made, I think very wisely, last year as a result of the Medicare levy surcharge changes.

We are looking for a similar commitment this time around. If the government is certain that the impacts we are suggesting are not going to come to pass, it is no skin off anyone’s nose if we put in place a monitoring and compensation system for that. That would be our quite specific recommendation to this inquiry. Do not trust us—if you like, scrutinise our numbers and do not trust us—but put in place a long-term system to check if there are these impacts on the public hospital waiting times that we are suggesting.

Senator FURNER —Are you referring to the commitment COAG made for $64 billion in the next five years?

Mr Laverty —No. At the time that commitment was made there was specific reference to monitor the impact to the Medicare levy surcharges. That $64 billion dollars that was contributed—the Commonwealth government and state and territory governments deserve a pat on the back for that—is money overdue, but it was not money that was committed in relation to the Medicare levy surcharge changes—

Senator FURNER —No, I realise that.

Mr Laverty —and it was not money committed in relation to these changes. What we are suggesting is that there be a commitment to monitor these impacts, as the commitment was made last time. If it requires a compensatory measure through the health care agreements to the states and territories, that should be considered.

CHAIR —Thank you, Mr Laverty. Both Senator Boyce and Senator Cormann have questions on notice for you.

Senator BOYCE —Just getting back to the subject of uncertainty, we received evidence in Melbourne that there was no way of knowing, given the changes that have gone through, whether the industry is looking at an incremental dismantling of the private health insurance system and the effect that it is having on planning and investment into the future. Would you be able to comment on notice on the effect of this on Catholic Health Australia?

Mr Laverty —I am happy to do so.

Senator CORMANN —You mentioned that for every 100,000 people there are fewer people in private health insurance—there would be about 36,000 additional public hospital admissions. I am interested in any sort of authoritative material around that. You quoted Treasury and Access Economics. The second question is about whether there is an equivalent figure for every 100,000 people who downgraded their cover—whether there is an estimate as to what that would mean in terms of additional public hospital admissions.

Mr Laverty —I will take that on notice.

CHAIR —Thank you very much, Mr Laverty and Mr Tobin. If there is anything else you wish to add in terms of the process, please let us know. You are a regular correspondent.

Mr Laverty —Thank you for having us.

Proceedings suspended from 9.02 am to 3.14 pm