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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. As experienced witnesses, you know about the protection of witnesses and evidence. As departmental officers you will not be asked to give opinions on matters of policy, though this does not preclude questions asking for explanations of policy or factual questions. Professor Calder, I understood you were not going to make a statement. Do you have an opening statement?

Prof. Calder —Because of some feedback from the earlier hearings, we have prepared a statement which really goes into how this operates. However, we could just hand it over, if that would be useful.

CHAIR —It would be better to table it. It may come up in Senator Cormann’s questions anyway.

Senator CORMANN —The figure of 8,000 additional public hospital admissions has been mentioned and we touched on it during Senate estimates. I went back through the evidence, and it is an underestimate, isn’t it? You said the methodology you used was based on Ipsos survey data that 35 per cent of people will require hospital treatment over a two-year period. Even just looking at that level, 35 per cent is 8,750 rather than 8,000. Why was it rounded down rather than rounded up, if it was going to be rounded at all?

Ms Shakespeare —It was just an estimate and I think the general figure was rounded to the thousand.

Senator CORMANN —The nearest thousand from 8,750 is 9,000. I am just trying to understand why 8,750 becomes 8,000. Anyway, I think I have made my point. We have heard from Treasury and you made the comment during estimates that the government did not expect any downgrading of cover. There is a slight difference between the evidence from the health department vis-a-vis the evidence from Treasury. Treasury say they have not made any assumptions on it because they did not have any reliable data, whereas your statement at estimates was a bit firmer. You essentially said the government did not expect any downgrading of cover. It is a bit different to say ‘the government doesn’t expect any downgrading’ than to say ‘we haven’t got any basis on which we can assess it’, so which one is it?

Ms Shakespeare The —We have had a look at it from the perspective of working out whether there is going to be significant downgrading. We do not think that there will be for a number of reasons. We have not just been looking at it in terms of: if we were to model it, what would the impact on the rebate be? I am happy to take you through again why we do not expect that there would be a significant downgrading.

Senator CORMANN —I am not sure that you did take us through it before. Everybody, including people that are very supportive of what the government is trying to do, is saying to us that the most rational response of anybody trying to avoid the increase in the cost of private health insurance as a result of this measure, given that there is also an increase in the Medicare levy surcharge, would be to go for a cheaper policy. Are you saying there is not going to be any of that?

Ms Shakespeare —When you look at the reasons why people take out private health insurance, by far the most significant reason that people give is that they want to buy private health insurance for protection, security, peace of mind. That comes from national health surveys. In the most recent data from 2007-08, 54 per cent of people gave that as the primary reason they took out private health insurance. If you are buying private health insurance for those reasons you are less likely to buy an exclusionary product, particularly in the circumstances where, if you are facing a cost increase, that is offset by significant tax cuts that by far exceed the increasing costs for most people in the affected tiers.

Senator CORMANN —I am not sure about what you describe as ‘significant tax cuts’, but let us leave that aside, because the measures are not related. There are people who are going to be facing increases in the cost of their health insurance of up to 66.7 per cent. I think that is now well established. You were expecting that some people would leave. It is actually less likely that people would leave than that people would downgrade, I would have thought, yet you are not expecting anybody to downgrade. Your evidence there is different from what Treasury tell us. They tell us they think it might happen, but they just do not have a basis on which to calculate how many people would or would not.

Prof. Calder —What we are saying is that we think, on the basis of a number of factors, that the impact of downgrading is not likely to be significant. We are not saying that we do not expect any downgrading.

Senator CORMANN —If it is not going to be significant, how much downgrading do you expect?

Ms Shakespeare —We have not worked out the number that we expect. It would be very difficult to tell if somebody did downgrade their insurance. People do downgrade. I think from the last Ipsos survey something like four per cent of people had downgraded their insurance from when they had first taken it out.

Senator CORMANN —People do it now, yes.

Ms Shakespeare —But that might be for other reasons.

Senator CORMANN —It is generally because the cost goes up and as part of your total budget it becomes—

Ms Shakespeare —Not necessarily. It is not just because cost goes up. People might reassess their health needs. We generally find, because these are the reasons people give for taking out health insurance, that people are purchasing insurance to suit their health needs and the health needs of their family.

Senator CORMANN —I have got to move on because I have not got that much time, but what we have established is that you think there will be some downgrading, although you do not think it will be significant. You have not put a figure to that. The way people downgrade is by increasing the number of exclusions or having high out-of-pockets. Increasing the number of exclusions means that those people would have to present at a public hospital, wouldn’t they, if they needed access to hospital care?

Ms Shakespeare —If somebody buys an exclusionary product and they need the service that has been excluded, then they cannot have it covered by their private health insurance. It does not mean necessarily that they have to present at a public hospital. People do self-insure the costs at private hospitals on occasion.

Senator CORMANN —Gee, you are really going for the realistic scenarios, aren’t you?

Ms Shakespeare —I am just setting out what the options are.

Senator CORMANN —So somebody is going to drop their cover because they are trying to avoid a price increase in their health insurance and, if they need access to a service, then you think that they are most likely to pay for the cost of the hospital service.

Ms Shakespeare —No, I did not say that they were most likely to.

Senator CORMANN —Do you know how much it costs to have open-heart surgery or to have a defibrillator installed?

Prof. Calder —Again, the evidence in the Ipsos survey and the National Health Survey is that people choose health insurance to match their health needs. On that basis, there is an expectation that any exclusionary policies would be related to health care they do not expect to use.

Senator CORMANN —We have gone through all of that. Given that I have not got much time, I am just going to go very quickly. On the cost of administration, how much has been allocated to the Department of Health and Ageing to administer the implementation of this measure and to manage the operation of means-testing the rebate moving forward?

Ms Shakespeare —One-point-nine million dollars over the forward estimates period.

Senator CORMANN —In the private briefing, you said that you did not anticipate significant additional administrative costs to insurers. There is the word ‘significant’ again. Can you tell us how much ‘not significant’ is expected to be?

Ms Shakespeare —What we mean by that is that the implementation of the incentives tiers has been designed in a way to minimise the impact in terms of administration costs on insurers. They will not have to collect income tax data or check income tax data. They will be able to rely on nominations made by their members. The administrative costs to insurers will be associated with making systems changes to allow them to recognise the additional rebate tiers. At the moment, they would need to be able to recognise four different levels of rebates. After these changes are introduced, they will need to recognise eight different levels of rebate. We have actually had a look back to see what happened last time we introduced additional rebate tiers that their systems needed to recognise, and that was again doubling from two to four, in 2005. For premium submissions made in that year no insurer mentioned additional administrative costs associated with the introduction of the additional rebate as a reason for additional premium increases. In fact, management expense ratios decreased.

Senator CORMANN —You are now answering a question I have not asked yet, because you are anticipating what you think I might ask down the track. The question that I asked specifically was: what is your assessment of what constitutes ‘not significant’ in terms of an additional administrative cost for health funds? Have you costed it? Is there any modelling?

Ms Shakespeare —No.

Prof. Calder —We do not have an estimate. We have an expectation.

Senator CORMANN —But that is a sort of ‘gut feel’ expectation.

Prof. Calder —Based on previous experience.

Senator CORMANN —Well, we have not had an experience like this before.

Prof. Shakespeare —We have, when we introduced two additional rebate tiers in 2005.

Senator CORMANN —How many are there now—eight? Have you costed how much of an increase there was at the time?

Prof. Calder —Previously it was a doubling of the existing tiers. This is a doubling.

Senator CORMANN —Quickly going back to the downgrading, Treasury said that they did not have any basis on which to make an assessment. I meant to ask them but I will ask you and I will put it on notice for them: is this going to be something that you track moving forward? Your expectation is that there will not be significant downgrading, but will you track the impact of this policy on people downgrading their level of cover?

Prof. Shakespeare —We do track exclusionary policies. There is PHIAC data available. We already track what is happening there.

Senator CORMANN —You have set up a meeting for 23 July with stakeholders to start organising the implementation of this measure. Given that this is only due to come into effect on 1 July 2010 and the parliament has not actually made a decision yet on the measure, is it not a bit premature to move on implementation now?

Prof. Calder —It is to start the conservation about implementation,  not to move into implementation—to understand their issues.

Senator CORMANN —Yes, but you are moving to implement something. The government implements what parliament decides. The parliament has not decided anything yet, and you are trying to implement something that has not gone through parliament yet, a year out from when it is supposed to be coming into effect, even if it is passed by parliament. There are some issues there, aren’t there?

Prof. Calder —Can I correct: we are not trying to implement; we are starting a conversation with the stakeholders about the issues that will be raised if this moves to implementation so that we can anticipate some of those and do some forward thinking.

CHAIR —Is this a standard practice, Professor?

Prof. Calder —Yes.

Senator CORMANN —Is this a standard practice?

CHAIR —It is a standard practice in planning in your organisation.

Prof. Calder —It is, to work with stakeholder advisory groups about implementation planning, yes.

Senator CORMANN —The thing is, I would have thought that there would have been some consultation to identify issues before the measure is introduced. You are now essentially identifying issues after it has been introduced. Should we then wait before finalising this before we know what sort of issues will come out of your process between July and October 2009? How can we make a decision on this if we do not know what the issues are going to be that you will identify between July and October 2009?

Prof. Calder —As I said, this is to start a conversation with the stakeholders who are involved in this.

Senator CORMANN —The additional COAG funding for public hospitals has been mentioned in the private briefing. That was to deal with demand pressures. They were already in the system, weren’t they? That was certainly committed well before this measure was introduced, wasn’t it?

Prof. Calder —Yes.

Senator CORMANN —I will finish on this, Madam Chair. To enable you to clarify some comments that were made by you, Professor Calder, in relation to the 40,000 people modifying insurance, you said in the private briefing that 40,000 people ‘modifying’ insurance meant taking out cheaper cover. That is not quite right, is it? It is 25,000 people dropping hospital and general treatment cover, 10,000 people dropping general treatment cover from their joint hospital and general treatment cover and 5,000 people dropping general treatment cover who have only that cover. That is right, isn’t it?

Prof. Calder —From memory I think that is correct.

Senator CORMANN —Reading the Hansard of the private briefing, if somebody was to work on that basis, the way it was written was that modifying the insurance of those 40,000 people meant taking out cheaper cover. I want to clarify for the record that that is not the case.

Prof. Calder —Yes, that is correct.

Senator FURNER —Firstly, I would like to explore the point that certainly Senator Cormann has been consistent with—the 66.7 per cent increase. I would like to know from your point of view who that particular group is and what the dollar amount represents. It is fine presenting percentages, but I would like to get some understanding from your point of view of what that dollar amount is and who it represents.

Ms Shakespeare —The 67 per cent would be the increase in cost experienced by a person who was aged 70 or more and who was in tier 3, so as a single earning more than $120,000 a year or a family earning more than $240,000 a year. At the moment the average policy cost for a single is $1,667. A person who is aged 70 or over at the moment would be paying $1,000 and the government rebate would be funding $667 of the policy cost on an annual basis. After these changes are implemented that person would no longer receive any rebate, so they would be paying an extra $667 a year for their policy. That is a 67 per cent increase on what they were paying before, which was $1,000 a year. That would be the most extreme example of somebody affected by these changes.

According to PHIAC data, at the moment there are about nine per cent of people receiving the 40 per cent rebate and of that nine per cent a much smaller proportion would actually be earning more than $120,000 a year and be a single or more than $240,000 a year and be a couple or a family. Most people aged over 70 are either retired or not working full time.

Senator FURNER —Is that nine per cent of policyholders or nine per cent of persons on that particular income?

Ms Shakespeare —Nine per cent of people receiving rebates.

Senator CORMANN —Treasury told us that 30,000 would be over 70 and losing the rebate altogether.

Ms Shakespeare —But that is people in all income ranges aged over 70 receiving the 40 per cent rebate. A much smaller proportion of that nine per cent would be in tier 3.

Senator FURNER —Half of the issue identified by the insurance firms is that they do not keep data on the income of their policyholders. It is extremely difficult to get a conclusion on those sorts of results.

Ms Shakespeare —That is right. It is quite difficult to match up data on private health insurance membership, whether it is collected by insurers or by PHIAC, and the Treasury income data.

Senator CORMANN —Treasury have done exactly that. That is what they have told us before.

Senator FURNER —In respect of downgrading and exiting altogether PHI, certainly throughout the inquiry people have raised that as an issue and made the observation that that will have impacts on funds, but in some cases conversely this will mean a reduction in claims and a possible reduction in premiums as a result of fewer people making claims or having access to hospitals or whatever the case might be as a result of those circumstances. Is there any way to ascertain what that impact might be—and I know it is difficult because there certainly has not been any modelling that I am aware of on downgrading? I am wondering whether you can provide us with some information on what the result might be on funds if it were the case that people downgraded their cover or exited from funds.

Ms Shakespeare —It is very difficult to work out, first of all, the impact on funds. As you say, if someone does take out an exclusionary policy then, while that will result in less premium income to the fund, if that person requires services the fund will not pay for them so there should also be a decrease in outlays for the fund. If people take out a policy with a higher excess or a higher copayment, the individual will be contributing more to the costs of their medical treatment if they then use their private health insurance when they do need medical treatment.

It is also very difficult to work out what the impact would be on public hospitals because everybody who is eligible for Medicare is entitled to be treated as a public patient in a public hospital whether or not they have private health insurance and whether or not they have comprehensive private health insurance. It would be quite difficult for us to tell if somebody were presenting to a public hospital because this measure had resulted in them taking out a product with an exclusion or whether they would have decided to be treated as a public patient anyway.

Senator FURNER —We do not have any data on PHI policyholders using the public hospital system; is that data just not available?

Ms Shakespeare —I do not have any reliable data about that. People are not required to identify whether or not they have private health insurance when they present at a public hospital, either at an emergency department or as an admitted patient.

Senator FURNER —There was some evidence given and the scenario was put that people with private health insurance accessing public hospitals were still obliged to pay, in some cases, emergency fees as a result of gaining access to the hospitals. Are you familiar with any policies that provide 100 per cent coverage on any fees, using that type of example?

Ms Shakespeare —For a private emergency department?

Senator FURNER —That is right.

Ms Shakespeare —No. There is difficulty with funds actually covering costs. They are not able to cover non-admitted medical costs, so funds are not permitted to actually cover all of those costs. They can cover facility fee charges and some other costs but there are prohibitions under the Health Insurance Act for covering the medical fees there.

Senator FURNER —The notion of 130,000 people being caught up in the new Medicare levy surcharge and that balancing out or sustaining towards a lessening of the impact of the changes—have you got a position on how that will affect the outcomes?

Ms Shakespeare —We know that, according to the Treasury modelling, there are 130,000 people who do not currently have private health insurance who will experience an increase in the Medicare levy surcharge that they have to pay. We have not modelled that a proportion of those people would take out private health insurance, because it is difficult to model their behaviour. If they were going to take out private health insurance because of the Medicare levy surcharge, you would assume that they would have done that already, but for some people the increase that they will experience in the surcharge might be enough to tip them over into private health insurance.

Senator FURNER —Some witness indicated that the stick was not big enough. Should the stick have been greater to get them into PHI, or do you think that we have struck the right balance?

CHAIR —Ms Shakespeare, you do not have to answer that question.

Prof. Calder —We cannot express an opinion on that.

Senator BOYCE —I want to follow up from some of the questions that Senator Cormann was asking about the consultation process that is now underway. We have quite a bit of evidence suggesting that the insurance bodies are very concerned and confused as to what is going to happen. Did I understand you to say before, Ms Shakespeare, that people who have insurance policies will have to nominate their income to their private health insurers?

Ms Shakespeare —No. The opposite is the case. They will not have to nominate their income to their private health insurer or to Medicare. The reconciliation, if people have underestimated or overestimated their income in nominating a rebate that they want to receive as an upfront premium deduction, will occur through the tax office and through tax returns. So the only people that will be receiving income tax information are the tax office.

Senator BOYCE —What will then happen if people have overclaimed their rebate?

Ms Shakespeare —Then there will be a tax debt that they will need to pay through their income tax return.

Senator BOYCE —This would not have been a very normal situation in the past. There have not been a lot of people who have needed to do that, have there?

Ms Shakespeare —It is a similar approach, I suppose, as has been used with other government payments, such as family tax benefit.

Senator BOYCE —Which we have just simplified so that it does not have to happen at all, presumably. Your meetings are with the tax office, the Department of Health and Ageing and private health insurers. Is that correct?

Ms Shakespeare —We have had quite a range of meetings. We have had bilateral meetings with private health insurers, private health insurance associations, brokers, consumer groups and hospital groups. We have also had public information sessions about the legislation to explain the detail to people and how it would be implemented at a high level. We have held those in different cities around the country.

The implementation working group, which we are now setting up to meet on 23 July, again, includes representatives of a range of people. Insurer groups have been nominated and some particular insurers have been asked to provide representatives; actuaries; brokers, again; the Consumers Health Forum; and the Private Health Insurance Ombudsman.

Senator BOYCE —And the ATO?

Prof. Calder —The ATO attended the public information sessions and provided advice on how it will work.

Ms Shakespeare —The ATO and Medicare Australia will also be attending the implementation working groups.

CHAIR —Thank you. There are a couple of questions on notice. We will just check with the secretariat. We do appreciate your time.

[4.36 pm]