Save Search

Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Fairer Private Health Insurance Incentives Bill 2011



Download PDFDownload PDF

ISSN 1328-8091

Parliamentof Australia Departmentof Parliamentary Services

Contents

Purpose .................................................................................................................................................... 3

Background .............................................................................................................................................. 3

2009-10 budget measure ................................................................................................................... 4

Introduction of new tiers ............................................................................................................... 6

Estimating income and claiming the correct rebate ..................................................................... 7

Provisions that differ from 2009 Bill .............................................................................................. 8

Basis of policy commitment .............................................................................................................. 10

Committee consideration ................................................................................................................. 10

Policy position of non-government parties/independents .............................................................. 10

A fiscal measure ........................................................................................................................... 11

Position of major interest groups and main issues .......................................................................... 12

Relevant new material ................................................................................................................. 13

Treasury and other modelling ................................................................................................ 14

Has the rebate eased pressure on the public system? ................................................................ 15

Financial implications ............................................................................................................................. 16

Key provisions ........................................................................................................................................ 17

Schedule 1 ......................................................................................................................................... 17

Income Tax Assessment Act 1997 ............................................................................................... 17

Private Health Insurance Act 2007 .............................................................................................. 17

Concluding comments ........................................................................................................................... 18

BILLS DIGEST NO. 20, 2011-12 22 August 2011

Fairer Private Health Insurance Incentives Bill 2011

Amanda Biggs Social Policy Section

Fairer Private Health Insurance Incentives Bill 2011 3

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Fairer Private Health Insurance Incentives Bill 2011

Date introduced: 7 July 2011

House: House of Representatives

Portfolio: Treasury

Commencement: Schedule 1 commences on the later of 1 January 2012, or the day either the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Act 2011, and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Act 2011, receive Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

This is one of three Bills which propose amendments to various Acts to give effect to a 2009-10 budget initiative. Together the amendments in these Bills would proportionally lower the private health insurance rebate for those in higher income tiers, and increase the Medicare Levy Surcharge for those on higher incomes who elect not to purchase private health insurance. The other two Bills are the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2011, and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2011.

The proposed provisions in this Bill would introduce from January 2012 three new income tiers— tiers 1, 2 and 3—to be used to assess eligibility for the private health insurance rebate (the rebate). These income tiers would determine the level of the rebate to apply to individuals and families covered by private health insurance.

It should be noted that the implementation of the provisions in this Bill is dependent on the successful passage of the two accompanying Bills.

Background

Australia's health system is financed through a mix of government funding, private health insurance (PHI), individual out of pocket payments and third party payments. The national health insurance scheme, Medicare, provides patient rebates to patients for the cost of many health services like GPs; funding agreements between the Commonwealth and the states finance public hospitals, and PHI helps fund many other health services. For example, PHI can assist with the cost of health services provided through private hospitals or with ancillary services, such as those provided by dentists.

4 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Around 45 per cent of the Australian population is covered by some form of private hospital cover— a figure which has remained relatively stable over the last few years. Some 37 registered private health insurers offer a range of private health insurance policies, and together paid benefits to policy holders totalling around $12.23 billion in 2009-10.1

Currently, consumers who purchase appropriate PHI receive a 30 per cent Government rebate on the cost of the premium (those aged over 65 receive a 35 per cent rebate; those over 70 receive a 40 per cent rebate).2 Introduced in 1999, the rebate aimed to: 'help the private sector, take pressure off the public hospitals, and help restore much needed balance to our health-care system'.3

Expenditure on the rebate has grown steadily over the last decade. In 2001-02, Government expenditure on the rebate totalled $2.1 billion.4 In 2010-11, expenditure had increased to $4.7 billion.5

2009-10 budget measure

In the 2009-10 Budget the Government announced it would introduce measures that would 'rebalance' support for PHI. The 2009-10 budget measure proposed that people on higher incomes who purchase private hospital cover would receive a lower Government rebate (those in the highest income bracket would receive none at all). The effect would be to apply a means test to the rebate entitlement.

The amount of the rebate to which the income earner would be entitled would depend on which of three proposed income tiers they fell into. Those on incomes below the lowest income tier would remain unaffected and retain eligibility for the full rebate. This measure was to be implemented through the Fairer Private Health Insurance Incentives Bill 2009, which failed to win Parliamentary approval.

Aligned with this measure, the budget also proposed that those on higher incomes who chose not to purchase PHI would face a higher financial penalty in the form of an increased Medicare Levy

1. Private Health Insurance Administration Council (PHIAC), Operations of the private health insurers: annual report 2009-10, PHIAC, Canberra, 2009, p. 9, viewed 29 July 2011, http://www.phiac.gov.au/resources/file/110201%20264-15%20Annual%20Report.pdf

2. Australians can claim the rebate if they are eligible for Medicare and have a complying health insurance policy that provides hospital treatment and/or general treatment (also known as ancillary or extras cover). 3. Hon. M Wooldridge, MP (Minister for Health and Aged Care), 'Second reading speech: Private Health Insurance Incentives Bill 1998', House of Representatives, Debates, 12 November 1998, p. 263, viewed 2 August 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F1998-11-12%2F0073%22 4. Australian Institute of Health and Welfare, National health expenditure, current and constant prices, 1985-86 to 2002-03, Datacube, viewed 10 August 2011, http://www.aihw.gov.au/expenditure-data-

cube/?id=6442475222&libID=6442475203 5. Australian Government, Budget strategy and outlook: budget paper no. 1: 2011-12, Commonwealth of Australia, Canberra, p. 6-22.

Fairer Private Health Insurance Incentives Bill 2011 5

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Surcharge (MLS). The MLS is a one per cent levy on income tax for higher income earners who opt to not purchase PHI. Increasing the MLS for higher income earners (those who would be most affected by the new means test) is meant to encourage these policy holders to retain their cover, if they do not, they would face a higher financial penalty.

This measure was to be implemented through the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2009; both Bills failed to pass.

When these measures were announced in 2009, the Government claimed they would make PHI 'fairer' because those with a greater capacity to pay would do so. As well they would make PHI more fiscally sustainable into the future. By reducing the PHI rebate to higher income earners, the Government expected to make substantial savings—in the order of $1.9 billion over four years.

The Government twice tried to implement this measure during the last Parliament, but both times the legislation was rejected by the Senate. More details on these Bills and the debate which occurred are available in the Bills Digests that were prepared at the time.6

Despite these setbacks, the Government indicated it would continue to pursue implementing this measure in the 43rd Parliament.

Two of the three Bills which comprise the current suite of legislation do not substantially differ from the earlier Bills (except for the addition of some transitional provisions).7 However, there are a number of changes to the proposed provisions of the Private Health Insurance Incentives Bill 2011 which differ from the respective 2009 Bill and these are discussed in more detail below.

The proposed income tiers to apply from 2011-12 reflect the effect of indexation.8

6. See A Biggs, Fairer Private Health Insurance Incentives Bill 2009, Bills Digest, no. 152, 2008-09, Parliamentary Library, Canberra, 2009, viewed 8 March 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FWNRT6% 22; A Biggs, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009, Bills Digest, no. 154, 2008-09, Parliamentary Library, Canberra, 2009, viewed 8 March 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2F9PRT6%2 2; A Biggs, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2009, Bills Digest, no. 153, 2008-09, Parliamentary Library, Canberra, 2009, viewed 8 March 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FBPRT6%2 2

7. Transitional provisions have been added to the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2011. For more detail refer to the relevant Bills Digest. 8. The income tiers that were first proposed were: tier 1 — $75 000 (singles) and $150 000 (families); tier 2 - $90 000 (singles) and $180 000 (families); tier 3 - $120 000 (singles) and $240 000 (families).

6 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Introduction of new tiers

The Bill proposes three new income tiers which will be used to determine the amount of rebate to which a person would be entitled. Those who fall into these proposed income tiers would have their rebate proportionally reduced, or removed altogether.

The proposed income tiers are the same as those proposed in the 2009 Bill, but they differ for singles and families. For singles, the proposed tier 1 is over $70 000, the proposed tier 2 is over $90 000 and the proposed tier 3 is over $120 000. For families, the Bill proposes that these amounts be doubled. In the case of each additional dependent, the income tier threshold would increase by $1500 for each dependent. For each of these income tiers the amount of the rebate is reduced.

Those who are on incomes below the tier 1 thresholds, that is, below $70 000 for singles or $140 000 for families who purchase PHI, would retain the full rebate.

The Bill also proposes annual indexation formulae that are to apply in 2011-12 and following years. After indexation is applied for the 2011-12 year, the income tiers would be adjusted upwards. The following table reflects the income tiers and rebate entitlements that would apply for singles and families in the 2011-12 financial year. It also shows the impact of the proposed increases to the Medicare Levy Surcharge, which as noted, are proposed in the two other Bills:

Table: Income tiers for the rebate and Medicare levy surcharges for singles and families to apply from 1 January 2012 for the 2011-12 income year

Unchanged Tier 1 $ Tier 2 $ Tier 3 $

Singles Families

80,000 or less 160,000 or less 80,001-93,000 160,001-186,000

93,001-124,000 186,001-248,000 124,001 or more 248,001 or more

Rebate on private health insurance premiums (%)

Under 65 30 20 10 0

65-69 35 25 15 0

Over 70 40 30 20 0

Medicare Levy Surcharge (%)

All ages 0.0 1.0 1.25 1.5

Source: Minister for Health and Ageing9

9. Hon. N Roxon (Minister for Health and Ageing), Opposition caught crying wolf over Medicare Levy Surcharge changes, media release, 5 July 2011, viewed 27 July 2011, http://www.health.gov.au/internet/ministers/publishing.nsf/Content/mr-yr11-nr-nr134.htm?OpenDocument&yr=2011&mth=07

Fairer Private Health Insurance Incentives Bill 2011 7

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Estimating income and claiming the correct rebate

There are three ways in which a person who purchases PHI can currently claim the rebate: an up-front discount on their premium through the Premium Reduction Scheme (PRS), claiming reimbursement from Medicare Australia through the incentive payments scheme (IPS), or claiming a tax offset through the tax system.10 Most people opt for the first of these, receiving an up-front discount on the cost of their premium when they purchase PHI.11

This Bill broadly retains these claiming options. However, in order to ensure the correct rebate amount will be applied, a person's income for the financial year will need to be known. In some cases, a person may not know with certainty what their income will be, or they may under or over-estimate their income and receive an incorrect rebate amount. This Bill proposes provisions to deal with circumstances where income is not reported at the time a rebate is claimed, or is estimated incorrectly and an incorrect rebate amount is paid.

This Bill introduces provisions to ensure that, for example, a person who incorrectly claims a higher rebate because they underestimated their income at the time they claimed it, would be liable to the Commonwealth to repay the difference. Provisions relating to recovery of these debts are also proposed. The Bill also proposes provisions that would reimburse an individual through the taxation system if the rebate amount they had claimed was less than their entitlement.

Of note, are the proposed provisions to the way the entitlement to the rebate is calculated where there are multiple adults covered by the same health insurance policy.

The Bill proposes that for a couple/family the combined income of both adults would be assessed against the proposed income tier thresholds and this combined amount would determine their entitlement to the rebate. However, the way the entitlement would be calculated in the case of multiple adults covered by the same policy, but who are not a couple or family, would be different.

This Bill proposes that in the case of multiple adults (who are not a couple/family) being covered by the same health insurance policy, each person's income would be assessed separately against the proposed income tiers. The amount of the rebate would then be divided between them, and their individual share of the rebate would be determined by which income tier each individual fell into.

The recovery and reimbursement mechanisms mentioned above in the event of incorrect claiming would also apply in the case of multiple adults. The Bill also proposes that where an individual on behalf of other adults who are covered by the same policy makes a claim for the rebate through the incentive payments system, that person would be liable to account for that rebate amount to the

10. The first two methods of claiming the rebates are administered by Medicare Australia, and the Australian Taxation Office administers the third method. 11. Some $4.3 billion of the rebate was paid through the PRS in 2009-10. Medicare Australia, Annual report 2009-10, Medicare Australia, Canberra, 2010, p. 46, viewed 8 March 2012,

http://www.humanservices.gov.au/corporate/publications-and-resources/annual-report/0910-annual-reports

8 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

other person(s). However, it does not specify how this accounting would be done, or how the other adults could ensure they received their fair share of the rebate from the individual who claimed the rebate.

It should be noted that the proposed provisions around calculating income tiers and rebate entitlements in relation to multiple adults who are covered by the same policy, were not proposed in the original 2009 Bill. The current provisions are being proposed in order to close a potential loophole whereby a higher income earner could arrange for a lower income earner to purchase a health insurance policy, in order to maximise the amount of the rebate entitlement.12

Provisions that differ from 2009 Bill

It should be noted that some provisions in this Bill differ from those that were proposed in the original 2009 Bill. Accordingly, clarification was sought from the Department of Health and Ageing to ascertain why some of the provisions in the current Bill differ from the earlier Bill. The Department responded that the differences in provisions are largely 'technical' in nature and have 'no effect on the broader intent or general operation of the Bills.'13

The proposed new provisions are designed largely to close loopholes, clarify how the rebate will be calculated or improve the recovery of liabilities. The following table prepared by the Department compares the provisions of the original Bill that differ to those in the current Bill and explains their effects.

Table: Summary of minor changes to the Fairer Private Health Insurance Incentives Bill 2009 (FPHIIB)

Existing provision

2009 Bill

Proposed change and its effect

2011 Bill

1. The means test would be applied to the person who receives the Private Health Insurance Rebate (PHIR), who may not be the person covered by the policy - e.g. if children pay for their elderly parents’ cover.

The means test would be applied to the person who is covered by the policy. This would close a loophole whereby a high income earner could avoid the means test - e.g. by arranging for a lower income earner to pay for their policy (see above).

2. The FPHIIB does not recognise situations in which two or more adults with different The PHIR would be calculated separately for each adult covered by a policy (by dividing the

12. Personal correspondence with the Department of Health and Ageing, dated 25 July 2011, published with permission. 13. Personal correspondence with the Department of Health and Ageing, dated 25 July 2011.

Fairer Private Health Insurance Incentives Bill 2011 9

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

incomes are covered by the same policy but are not treated as a family for income testing purposes, allowing any adult covered by the policy to claim the PHIR and be means tested - e.g. divorced couples.

total premium cost by the number of adults covered and means testing each individually). This would close a loophole whereby two or more unrelated people could maximise the PHIR - e.g. by electing the individual with the lowest income as the one who has paid for the policy (see above).

3. There is uncertainty about how to calculate the PHIR when: ­ a policy crosses financial years; and ­ a person turns 65 and 70 (as the PHIR is

generally 30%, but 35% where the oldest person covered by the policy is a 65-69 year old and 40% if aged 70 and over).

Clarify that the PHIR will be calculated on the basis of:

­ a person’s adjusted taxable income in the financial year in which the premium is paid (rather than the financial years in which the policy provides cover); and

­ a person’s actual birth date (rather than the financial year in which the birth date falls). For example, a person who turns 65 on 30 June 2012 will be able to claim the increased PHIR from that date, rather than 1 July 2011.

4. People who claim the PHIR through the incentives payment scheme (one of three options for claiming the PHIR) would be required to inform Medicare Australia every time their income changes.

Remove this requirement from the Private Health Insurance Act 2007 (PHIA), as it is burdensome and unnecessary: an individual’s income and PHIR will be assessed by the Australian Taxation Office (ATO) at the end of each financial year.

5. The Private Health Insurance Incentive Scheme (PHIIS) was replaced by the PHIR from 1 January 1999, but individuals remained eligible for the PHIIS until their PHIR amount exceeded their PHIIS payments.

Remove PHIIS provisions from the PHIA and Income Tax Assessment Act 1997, as this scheme is redundant because there are no longer any PHIIS claimants. Without this change, it is possible that high income earners would become eligible for PHIIS payments when their PHIR amounts are reduced by means testing.

6. People claiming the PHIR through the incentives payment or premiums reduction schemes will be asked to predict their future incomes, with any liability to be recovered by the ATO at the end of each financial year.

Improve the ATO’s capacity to recover PHIR liabilities by:

­ allowing the PHIR to be claimed only by the person covered by the policy (except in the case of child-only policies); and

­ clarifying that PHIR entitlements are shared equally between adults on a policy to enable

10 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

effective recovery of any liabilities.

7. The due date for an individual’s PHIR liability would be 21 days after receiving a written Notice of Assessment from the ATO.

Align the due dates for PHIR liabilities with the existing provisions for income tax liabilities, in order to take account of individuals who lodge their tax returns early or late.

8. The increased PHIR rates for older Australians are exempted from the Age Discrimination Act 2004 (ADA).

Clarifying how to calculate the PHIR for older Australians (see item three) will move those provisions within the PHIA and sections of the ADA that refer to those provisions will need to be amended accordingly.

Source: Department of Health and Ageing14

Basis of policy commitment

As noted above, the basis of the policy commitment is to implement a 2009-10 budget measure.

Committee consideration

The 2009 suite of three Bills was originally referred to the Senate Economics Legislation Committee in May 2009. However, the Senate subsequently transferred the inquiry to the Community Affairs Legislation Committee in June 2009. The Committee reported on 5 August 2009. Details of the inquiry are at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=clac_ctte/fai rer_private_health_09/index.htm

In its report, the Committee majority recommended the Bills be passed. The Committee agreed with Treasury modelling that the impact of the Bills' measures on private health insurance membership and public hospital demand would be 'relatively minor'.15

Policy position of non-government parties/independents

The Federal Opposition has consistently opposed the means testing of the private health insurance rebate and the increases to the MLS. In the last Parliament the Opposition voted against the

14. Personal correspondence with the Department of Health and Ageing, dated 25 July 2011, published with permission. 15. Senate Community Affairs Legislation Committee, Fairer Private Health Insurance Incentives Bill 2009 and two related bills, The Senate, Canberra, 2009, p. 28, viewed 8 March 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=clac_ctte/fairer_private_heal

th_09/index.htm

Fairer Private Health Insurance Incentives Bill 2011 11

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

measures in both chambers. The two Independent Senators at the time, Steve Fielding and Nick Xenophon, also opposed the original legislation.

At the time the original Bills were debated, the Greens indicated support for the Government's proposal to means test the rebate—based on their view that the rebate is both inefficient and ineffective. But they declined to support the associated legislation to raise the MLS for high income earners. They argued that those who decided not to purchase private health insurance should not be further penalised.16 As the Bill to means test the rebate was dependent on the passage of the Bill to raise the MLS, the Greens voted against the original package of legislation in the Senate.

However, the Greens have subsequently announced they would support both the means test and the increase to the MLS in order to allow savings from the measure to be directed to the public health system.17

If the Greens continue to support the full measure, this should assure that the legislative package will pass through the Senate, but the passage through the lower house is less certain. The support of a majority of Independents in the House of Representatives will be required in order for the Bills to pass the lower house. Media reports suggest that a number of Independents have concerns that the measure could impact negatively on their communities, in particular that it would impose additional pressure on public hospital services.18 Independent Member for Denison, Andrew Wilkie, however, has recently indicated he will support the legislation. Media reports suggest his support was won after the Government provided advice to him that most people in his electorate would remain unaffected by the change.19

A fiscal measure

The Government has warned opponents of the means test that without the savings from this and other savings measures, returning the budget to surplus by 2012-13 would be at risk.20 More

16. Senator R Siewert, Private health money needs to go to public health services, media release, 19 August 2009, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2FLXFU6%22

17. Senator R Siewert, Govt misses opportunity to boost mental health, but Greens decide to back Private Health Bills, media release, 24 February 2010, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2FVXZV6%22

18. S Lewis, 'Indies dig in against reform bid', The Courier Mail, 7 July 2011, p. 16, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F900426%22 19. P Coorey, 'Wilkie offers support for rebate means test', Sydney Morning Herald, 8 July 2011, p. 4, viewed 2 August 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F906277%22 20. Hon. Penny Wong (Minister for Finance), Opposition threat to the budget surplus, media release, 7 June 2011, Canberra, viewed 2 August 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F830596%22; see also Hon. N Roxon, (Minister for Health and Ageing), 'Second reading speech: Fairer Private Health Insurance Incentives Bill 2011’, House of Representatives, Debates, 7 July 2011, p. 7979, viewed 9 August 2011,

12 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

recently, however, the Minister for Health and Ageing has indicated that future funding for key health areas, such as subsidising new drugs under the Pharmaceutical Benefits Scheme, would be dependent upon capturing savings from means testing the rebate:

And I also need to make it clear that in the future, listing innovative new drugs like Erbitux and Gilenya will become harder and harder if the Opposition continues to block sensible savings measures. It's time for the Opposition to stand up and act responsibly to recognise that savings that are captured in measures like the private health insurance proposals and the Chronic Disease Dental Scheme are essential if we are to keep Australia's health system and Pharmaceutical Benefits Scheme sustainable.

21

The Government statements so far would seem to indicate that it regards the means test as both a fiscal measure to assist it return the budget to surplus, and as a means of funding other areas of the health budget without incurring a higher deficit.

As the Greens stated support for the measure appears to be contingent upon savings from the means test being re-directed to public health spending, it is not clear how the Government would satisfy both goals.

Position of major interest groups and main issues

The major arguments of those opposing or supporting the means test were canvassed in earlier Bills Digests and the Senate report and were recently summarised in this Parliamentary Library Flagpost.22 Broadly, those opposing the legislation, including the Australian Health Insurance Association (AHIA) representing health insurers, argued that means testing the rebate would result in significant numbers of patients dropping or downgrading their cover. This in turn would push up premium costs and place greater demands on an already over-stretched public hospital sector.23

Those supporting the means test, including the Australian Healthcare & Hospitals Association, a public health care advocacy group, argued that the rebate was both inefficient and ineffective and

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F87d261d 6-f563-435c-93e2-7e59821ab07d%2F0020%22 21. Hon. N Roxon, (Minister for Health and Ageing), Transcript of Press Conference, Canberra, 21 June 2011, viewed 2 August 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F863464%22 22. Amanda Biggs, 'Means testing the private health insurance rebate—one more attempt in a changed Parliamentary environmnent?, Flagpost, Parliamentary Library, 6 May 2011, viewed 22 August 2011,

http://parliamentflagpost.blogspot.com/2011/05/means-testing-private-health-insurance.html 23. Australian Health Insurance Association, 'Means testing will hurt heath care', media release, 16 August 2011, viewed 22 August 2011, http://www.ahia.org.au/news/media_releases/means-testing-will-hurt-health-care/ .

Fairer Private Health Insurance Incentives Bill 2011 13

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

funds to support the rebate should be re-directed to support hospital and health services. It also rejected arguments that means testing the rebate would impact negatively on public hospitals.24

Relevant new material

Since the rejection of the original legislation, new material relevant to the debate has emerged. This material includes a report from consultancy firm Deloitte, commissioned by the industry body AHIA. The report assessed the economic impact of the proposed reforms. Among its key findings were that the reforms would result in:

• 1.6 million consumers dropping private hospital cover and a further 4.3 million downgrading their

cover

• a further 2.8 million dropping their general cover (ancillary cover, for example, dental)

• as a consequence, private health insurance premiums would rise 10 per cent more than would

otherwise be expected, making it less affordable • this would result in public hospitals having to treat significantly higher numbers of patients—

some 845 000 additional separations—as people withdraw from private cover.25

In addition, the AHIA commissioned polling firm ANOP to conduct a telephone survey on the likely impact of the changes on consumer behaviour. This survey was also considered by Deloitte in its report. The ANOP survey found that if the reforms went ahead:

• around 11 per cent of those surveyed would drop their hospital cover and a further 24 per cent

would downgrade it • more than half would be likely to either downgrade or drop their general (ancillary) cover. 26

Soon after these reports emerged, the Government released a report it had commissioned from consultancy firm KPMG. The report reviewed the impact of changes which lifted the Medicare Levy Surcharge thresholds in late 2008.27

24. Australian Healthcare & Hospitals Association, Submission no. 9, Senate Community Affairs Committee Inquiry into Fairer Private Health Insurance Incentives Bills 2009, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=clac_ctte/fairer_private_heal th_09/submissions/sublist.htm

25. Deloitte, 'Economic impact assessment of the proposed reforms to private health insurance, Australian Health Insurance Association, 28 April 2011, p. i, viewed 2 August 2011, http://www.ahia.org.au/news/research/economic-impact-assessment-of-the-proposed-reforms-to-private-health-insurance/

26. ANOP, 'Means Testing the Private Health Insurance Rebate: The Impact on Private Health Insurance Membership in Australia', April 2011, pp. 5-6, viewed 2 August 2011, http://www.ahia.org.au/wp-content/uploads/ANOP-full-report-for-AHIA2011.pdf

27. KPMG, Review of the impact of the new Medicare Levy surcharge thresholds on public hospitals: Year 2 Review Report, KPMG/Department of Health and Ageing, 2011, viewed 9 August 2011, http://www.health.gov.au/internet/main/publishing.nsf/Content/KPMG-review-+medicare-levy-surcharge-thresholds-public-hospitals

14 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

When lifting the income thresholds for the Medicare Levy Surcharge (MLS) in order to apply indexation was first proposed, the industry warned that thousands of people would abandon their private cover, as this Parliamentary Library Flagpost notes.28 Many in the industry as well as the Opposition warned that lifting the income thresholds at which people without PHI were liable to pay the MLS, would increase the number of people not purchasing PHI. This in turn would increase demand for public hospital services as well as push up premiums for PHI. These arguments are similar to those mounted by current opponents of the means test.

The KPMG report assessed what occurred following the introduction of the higher MLS income thresholds. The report found that private hospital activity following the changes to the MLS actually grew at a faster rate than public hospital activity, which also grew. The Government claimed the report disproved opponents' arguments that people would abandon their private cover and vindicated its current approach to reforming the rebate arrangements.29

Treasury and other modelling

When the 2009 Bills were first being considered, Treasury modelling on the impact of the reforms was provided to a Senate Estimates Committee. This modelling showed that around 25 000 individuals (or around 0.26 per cent) with private hospital cover would drop their cover.30

More recently, the Treasurer released an Economic Note, which estimated that the drop-out rate from PHI if the means test was implemented would be 0.3 per cent—a figure not markedly different to the original Treasury estimate.31 The Government's modelling suggests that 99.7 per cent would retain their PHI.

This estimate, however, is not consistent with leading insurer Medibank Private's internal modelling. Medibank Private estimated that means testing the rebate could lead to around 1 per cent of its members dropping their cover, and a further 2.5 per cent possibly downgrading their cover.32 These

28. Amanda Biggs, 'Legislation to means test the private health insurance rebate re-introduced—debate continues' Flagpost, Parliamentary Library, 7 July 2011, viewed 2 August 2011, http://parliamentflagpost.blogspot.com/2011/07/legislation-to-means-test-private.html

29. Hon. N Roxon (Minister for Health and Ageing), Opposition caught crying wolf over Medicare Levy Surcharge changes, media release, 5 July 2011, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F899398%22

30. Treasury, 'Private health insurance—fair and sustainable support for the future: costing details', Tabled Document no. 8, Senate Economics Legislation Committee, Budget Estimates, 2009-10, 1-4 June 2009, p. 3, viewed 2 August 2011, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=economics_ctte/estimates/b ud_0910/index.htm

31. Hon. W Swan, MP Treasurer's Economic Note, no. 022, 19 June 2011, viewed 2 August 2011, http://www.dpm.gov.au/DisplayDocs.aspx?doc=economicnotes/2011/022.htm&pageID=000&min=wms&Year=&Doc Type=

32. M Sammells (Chief Financial Officer, Medibank Private), Finance and Public Administration Legislation Committee, Finance and Deregulation Portfolio, Estimates, 25 May 2011, pp. 101-102, viewed 2 August 2011,

Fairer Private Health Insurance Incentives Bill 2011 15

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

estimates, however, are still well below the 11 per cent of members the ANOP poll reports would drop their cover.

The industry regulator, on the other hand, appears not to be convinced that there would be a substantial decline in PHI membership numbers. Shaun Gath, the chief executive of the industry regulator, the Private Health Insurance Administration Council has reportedly stated that 'we are generally persuaded by the Treasury modelling - not least because they know about people's incomes and no one in the industry has that information'.33

Has the rebate eased pressure on the public system?

In considering the measures in this Bill it is timely to assess whether the rebate has lived up to its original aims, which include easing pressure on the public hospital sector.

Whether the rebate has eased pressure on the public system has been contested, as this recent Parliamentary Library Flagpost notes.34 The Flagpost observes that if the rebate had been effective in reducing pressure on public hospitals, it would follow that the use of public hospitals would have declined while use of private hospitals would have increased, as people switched from the public to the private sector. Private hospital utilisation rates have indeed increased significantly since the introduction of the rebate. But a decline in public hospital use has not occurred. Utilisation of public hospitals has also increased along with a lengthening of waiting times for elective surgery.35

The reasons for this result would appear to be complex, as the Flagpost explains. Demand for health services are driven by a range of factors, often inter-related. These include the emergence of new medical technologies, the level and type of funding for health services (including incentives like the rebate), the ageing of the population, and the rising prevalence of chronic conditions, the clinical needs of patients and the limited capacity of the health workforce to treat patients (often the same doctors work in both the public and private sectors). The expectations of patients and their attitudes towards the health system overall can also play a major role.

Although this makes attributing the growth in demand for hospital services to a single factor, such as the rebate, problematic, it also makes it harder to argue that the rebate itself is to blame for not taking pressure off the public system. In a complex, multi-faceted and interactive system it is not a simple task to assess the impact of one single component, such as the rebate.

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F2477b 5cc-9f9f-43c8-b538-64fc5cb66886%2F0005%22 33. E Connors, 'Means test won't hurt: regulator', Australian Financial Review, 27 July 2011, p. 13, viewed 2 August 2011, 34. A Biggs, 'Debate: does the private health insurance rebate relieve pressure on public hospitals?', Flagpost, Parliamentary Library, 1 June 2011, viewed 2 August 2011, http://parliamentflagpost.blogspot.com/2011/06/debate-does-private-health-insurance.html 35. The median waiting times for elective surgery increased from 32 days in 2005-06 to 36 days in 2009-10. Australian Institute of Health and Welfare, Australian hospital statistics 2009-10, AIHW, Canberra, 2011, p. 258, viewed 8 August 2011, http://www.aihw.gov.au/publication-detail/?id=10737418863&tab=2

16 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Financial implications

The original savings forecast announced in the 2009-10 budget were in the order of $1.9 billion over the forward years.36

The Explanatory Memorandum now estimates the savings at $2.78 billion over the forward years.37 This is an increase in expected saving of some $880 million since the original measure was proposed. Government estimates of the number of people it expects to drop their private health cover have not altered significantly, so it appears unlikely that this additional saving is derived from a higher drop out rate. It is likely that in estimating the savings the Government has taken into account a number of other factors.

Firstly, the effect of premium increases needs to be considered. Although the Government does not know in advance what level of premium increases private health insurers will seek (although the Minister must annually approve these) it is likely that a premium rise has been factored in to the savings estimate, possibly based on previous premium increases. For the 2011 premium round, the weighted industry average premium increase was 5.56 per cent.38

An increase in the cost of premiums would see an increase in the rebate amount that the government would pay to policy holders, under the current rebate arrangements. So the savings it would realise if the means test is implemented could be expected to be higher, also.

Secondly, as people's incomes rise the number of people moving into the income tiers where they would be eligible for a lower rebate (or none at all in highest income tier), would be expected to rise, thereby reducing government outlays for the rebate.

Thirdly, compared to the 2009 Bill there are additional provisions in this Bill which seek to close a number of loopholes regarding who can claim the rebate and that improve recovery of incorrectly claimed amounts. These provisions may have also contributed to the higher savings forecast.

36. N Roxon, ‘Second reading speech: Fairer Private Health Insurance Incentives Bill 2009’, House of Representatives, Debates, 27 May 2009, p. 2, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F2009-05-27%2F0009%22

37. Explanatory Memorandum: Fairer Private Health Insurance Incentives Bill 2011, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2011, Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2011, p. 1, viewed 2 August 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr4597% 22

38. Department of Health and Ageing, '2011 Private Health Insurance Premium Round Outline of premium approval process', webpage, viewed 2 August 2011, http://www.health.gov.au/internet/main/publishing.nsf/Content/privatehealth-summary-premiumincreases

Fairer Private Health Insurance Incentives Bill 2011 17

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

Key provisions

Schedule 1

Income Tax Assessment Act 1997

Item 3 proposes replacement subsection 61-205(1) which specifies entitlement to a tax offset on the premium of a complying health insurance product.

Item 5 proposes replacement section 61-210 which specifies the amount of the tax offset a person would be entitled to, in the event the PHII benefit was partially reduced through other specified payment or claiming mechanisms.

Private Health Insurance Act 2007

Item 10 inserts new subdivision 22-A. New subsection 22-5 specifies the meaning of a private health insurance incentive beneficiary. It also proposes a definition of a private health insurance incentive benefit and allows for this to be shared where there are multiple beneficiaries. New section 22-15 specifies the amount of this benefit to apply to singles, those aged over 65 years and those aged over 70 years, and the amount this benefit is reduced by if a beneficiary is a tier 1, tier 2 or tier 3 earner. New section 22-20 specifies a method for working out the share of the benefit in the event of multiple beneficiaries. New section 22-25 allows for a person (not a dependent child) who was covered by a policy that also covered someone over 65 to continue to receive the higher rebate that applies to those over 65, if the older person ceases to be insured under the policy.

Item 10 also inserts new subdivision 22-B. New section 22-30 proposes the private health insurance tiers that will apply to families and how families will be defined, and for singles. New section 22-35 proposes the income thresholds to apply to each of the three tiers for singles and the financial years to which they will apply. The singles tier 1 threshold for 2008-09 is $70 000; the singles tier 2 threshold for 2010-11 is $90 000; and the singles tier 3 threshold for 2010-11 is $120 00. New section 22-40 proposes that for families, the income tier thresholds will be double those for singles. For families with 2 or more dependents, the income threshold that will apply will rise by $1500 for each dependent child above the first. New section 22-45 proposes the indexation to apply to the singles tier thresholds for each of the financial years specified under new section 22-30, and that amounts will be rounded down to the nearest $1000.

Item 11 proposes to repeal and substitute subdivision 23-A. New section 23-1 specifies the reduction in the premium for a policy that is claimed through the premium reduction scheme.

Item 14 proposes to replace subsection 26-1 (1), (2), (3) and (4). The new section 26-1(1) determines the entitlement to payment for those not claiming through the premium reduction scheme. New section 26-1(2) specifies the amount of benefit would divided in the event of multiple beneficiaries.

18 Fairer Private Health Insurance Incentives Bill 2011

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

New section 26-1(3) specifies that a person who is paid a benefit amount on behalf of other beneficiaries should be liable to pay those others their share.

Item 19 proposes new subdivision 282-AA in order for the Commissioner of Taxation to recover monies. New section 282-18 specifies the liability or refund arrangements to apply to the reduction of premiums. New sections 282-18(2) and (3) specify how to determine the share of liability or refund in the event of multiple beneficiaries.

Details of the remaining Main Provisions are covered adequately in the Explanatory Memorandum.

Concluding comments

This Bill proposes provisions that would introduce new income tiers to determine the amount of the private health insurance rebate that will apply to those covered by these income tiers. The effect would be to means test the private health insurance rebate, by ensuring that those on higher incomes would have their rebate amount reduced. The Bill is one of three which propose to implement a 2009-10 budget measure.

The Government argues this measure will make private health insurance fairer and more sustainable. The Government is also seeking to realise significant savings from this measure to assist it to return the budget to surplus.

The provisions in this and earlier versions of the Bill have prompted opponents to warn of a series of negative consequences if they are implemented. These include that there will be a significant decline in health insurance membership, insurance premiums will rise and demand for public hospital services will increase.

Supporters of the measure argue that the private health insurance rebate is both inefficient and ineffective. They welcome the means test because it would allow the savings to be redirected to other areas of the health budget.

Although previous attempts to implement this measure have failed due to Senate opposition, now, with Greens support, the Bill should pass the Senate. However, unless the Government can win support from a majority of Independents in the House of Representatives, who have concerns around the impacts on their local communities, it is unlikely that it would even progress to the upper house.

Fairer Private Health Insurance Incentives Bill 2011 19

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Feedback is welcome and may be provided to: web.library@aph.gov.au. Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2514.