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Health Legislation Amendment Bill (No. 3) 1999
Bills Digest No. 14 1999-2000
Health Legislation Amendment Bill (No. 3) 1999
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Health Legislation Amendment Bill (No. 3) 1999
Part 2 of Schedule 2 commences on the transfer date for the purposes of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No.1) 1999. If the transfer date is prior to commencement of Part 1 of Schedule 2, then Part 2 of Schedule 2 will commence immediately after Part 1.
Schedule 3, which deals with private health insurance incentives, will be deemed to commence on 1 January 1999.
The Health Legislation Amendment Bill (No.3) 1999 (the Bill) amends the National Health Act 1953 and seeks to address concerns about the prudential regulation of the private health insurance industry. The Bill transfers the function of approving the registration and merger of health funds from the Department of Health and Aged Care to the Private Health Insurance Administration Council (PHIAC). PHIAC is also empowered to set solvency and capital adequacy standards for private health funds. The industry will be prudentially regulated independently of the government.
The Bill also amends the Private Health Insurance Incentives Act 1997, the Health Insurance Commission Act 1973 and the National Health Act 1953 to correct anomalies and adjust the operation of the recently introduced 30 per cent rebate for private health insurance.
Measures contained in this Bill continue the Government's recent changes to the private health insurance arrangements and complement measures in the Health Legislation Amendment Act (No. 2) 1999 and the Private Health Insurance Incentives Act 1998 . Measures in the Bill were broadly foreshadowed in a Media Release by Dr Wooldridge on 22 September 1998.(1)
The private health insurance industry plays a significant role in Australia's health care system. As at 30 June 1998 there were 44 registered health benefits organisations, or health funds. Th e overwhelming majority of health funds are non-profit, with only three of the forty-four registered funds operating on a 'for-profit' basis in 1997-98.
Contributions to private health insurance raised some $4.7 billion in 1997-98, of which $4.2 billion was paid out in benefits.(2) Private health insurance provides about 10 per cent of Australia's total health expenditure which is more than is raised by the Medicare levy but considerably less than the amount paid by individuals in out-of-pocket costs. For example, in 1996-97, the latest year for which a full breakdown is available, private health insurance accounted for $4.7 billion in recurrent health expenditure, while individuals contributed $7.07 billion by way of out-of-pocket costs.(3) The Medicare levy raised approximately $3.6 billion in 1996-97.(4) Private health insurance is an important source of finance for private hospitals, accounting for 70 per cent of their total recurrent health expenditure in 1996-97.(5)
The private health insurance industry is heavily regulated by the Commonwealth Government, with the National Health Act 1953 (the Act) devoting over 80 pages to private health insurance matters. In some areas, this regulation has been necessary to achieve government objectives, such as community rating of insurance premiums, but in other areas it is less clear that the level of regulation is essential. It can be argued that the extensive web of regulation has been responsible for inhibiting innovation within the private health insurance industry. However, it is equally arguable that the level of regulation has also shielded some less than efficient practices.
One area of regulation which the Health Legislation Amendment Bill (No. 3) 1999 proposes to make more flexible is the requirement for minimum reserves. The Act specifies that as a condition of registration, registered organisations must maintain minimum reserves. These are: either $1 million or two months contribution income, whichever is the greater (section 73BAB). The Act provides that the Minister may grant an organisation an exemption from the minimum reserves requirements (section 73BAC). However, the Minister is required to first seek the advice of the Private Health Insurance Council (PHIAC). At 30 June 1998 there were 5 health funds which could not meet the minimum reserves requirements, all of which had been granted an exemption.
In its report on private health insurance, the then Industry Commission questioned the appropriateness of the $1 million reserves requirement, noting that some small health funds had obtained longstanding exemptions from the requirement for a $1 million reserve limit. It observed further that a 'one-size fits all' approach to reserves is likely also to be inappropriate for large health funds and for the 'for-profit' funds.(6) In regard to the reserves of health funds, the Commission recommended (recommendation 15) that:
- a clear protocol for breach of reserves be developed
- flexibility be introduced into reserve requirements for funds facing different levels of risk and
- clearer guidelines of what constitutes acceptable liquidity and diversification of reserves assets be produced.(7)
The Commission emphasised in its report that in making any changes to the reserves requireme nts, 'the overriding purpose of any regime should be protection of consumers, and not protection of inefficient funds'.(8)
Private health insurance is actually two distinct forms of insurance: hospital insurance and anc illary (extras) insurance. Both forms of insurance are community rated, which means that the premium of an insurance table or policy offered by a particular health fund must be the same for all contributors and intending contributors to that table. Community rating aims to ensure that the aged and chronically ill are protected from high premiums. The alternative to community rating is experience or risk rating, which applies to most other forms of insurance, such as car, household and life policies.
Hospital insurance offers contributors benefits additional to Medicare: choice of doctor for hospital care and treatment and, to a more limited extent, quicker admission to hospital. In return, contributors pay whatever fees their doctor decides to charge for the procedure(s) less the schedule fee for each procedure.(9) Medicare provides a rebate of 75 per cent of the schedule fee for each procedure, while the health fund contributes a further 25 per cent. Where health funds have reached agreements with individual doctors and signed Medical-Purchaser-Provider-Agreements, health fund contributors with the appropriate level of cover are eligible for reimbursement of fees charged above the schedule fee. The private health insurance fund will also provide coverage of hospital accommodation charges, theatre fees etc. The amount covered will vary with the type of policy held by the contributor. Some 5.7 million people were covered by hospital insurance at 30 June 1998.
Ancillary insurance offers contributors coverage for services, products and treatment not covered by Medicare, including dental and physiotherapy services and contributions towards the costs of vaccinations and some pharmaceuticals. Some ancillary insurance products offer benefits for alternative therapies and rebates for membership of health and fitness clubs. A small proportion of the population have ancillary cover only, whereas approximately 75 per cent of people who have hospital insurance also hold ancillary cover.
The Health Legislation Amendment Bill (No. 3) 1999 proposes a significant revamp of the responsibilities of the Private Health Insurance Administration Council (PHIAC). PHIAC was established with effect from 28 June 1989 by amendments to the National Health Act 1953 which inserted new Part VIAA. Upon establishment, a range of functions which had previously been the responsibility of the then Department of Community Services and Health were transferred to PHIAC. The main powers and functions of PHIAC are set out in section 82G of the Act and include:
- to monitor the financial performance of health funds to ensure that the statutory reserve requirements are being met
- to administer the reinsurance account arran gements
- to collect and disseminate financial and statistical data, including tabling of an annual report to Parliament on the operations of health funds
- to establish uniform reporting standards for funds
- to impose levies to cover the operating costs of the Council and any unpaid claims of a collapsed fund and
- to receive applications for the review of acute care certificates and application fees, and administer the funding arrangements for the operation of the Acute Care Advisory Committees.
Section 82F of t he Act provides for the Minister to make guidelines for appointments to the Council. The original guidelines were made on 28 August 1989 and were amended on 24 April 1992. These guidelines were withdrawn on 16 June 1998 with effect from 1 July 1998. PHIAC's 1997-98 Annual Report notes that 'the appointment of a new independent Council removes the need for the guidelines'.(10)
The Health Legislation Amendment Act 1995 conferred additional functions onto PHIAC. These additional functions are:
- to collect and d isseminate information about private health insurance to allow consumers to make informed choices about the product
- to distribute and make available copies of the Private Patients' Hospital Charter at the PHIAC office and to publicise the existence of the Charter in PHIAC publications, and
- modelling, evaluation and research of data derived from the Hospital Casemix Protocol (HCP), the provision of such data being with the approval of the Minister. This determination is a disallowable instrument. The data is derived from the HCP as supplied to the Department of Health and Aged Care under subsection 73AB(1) of the Act.
In 1998, several changes were introduced by the Health Legislation Amendment Act (No.2) 1998 which affected the role and functions of PHIAC, including:
- amendment of the Health Insurance Act 1973 gave PHIAC the responsibility for approving Simplified Billing Agents. This change took effect on 28 April 1998
- amendment of the National Health Act 1953 changed the structure of Council from an advisory Council to an independent Board with voting rights. Members of the new Board of the Council are independent of both the Department and the industry. The position of Director of PHIAC was changed to Chief Executive Officer. These changes took effect from 1 July 1998, and
- these amendments also removed the requirement on health funds to supply PHIAC with data from the Hospital Casemix Protocol (HCP), and required the Department to supply aggregated data derived from HCP data to the Council. This change took e ffect from 28 April 1998.
Schedule 1 deals with registration of registered organisations (health funds) and proposes amendments to the National Health Act 1953 (NHA). The schedule transfers functions and powers from the Department of Health and Aged Care to the Private Health Insurance Administration Council (the Council).
Item 2 repeals section 68 of the NHA , the proposed new section 68 allows health funds to apply to the Council for registration as a registered health benefits organisation. Currently, the Minister holds this function.
Proposed subsection 68(2) provides that a health fund cannot apply for registration unless:
- it is a company limited by shares, guarantee or both, and
- its constitution and rules provide the organization is established solely for the purpose of conducting a health funds and incidental purposes and
- there is to be credited to that fund the whole of the income of the organization arising out of the carrying on by the organization of business as a registered health benefits organisation.
In considering an application for registration, the Council must a lso consider whether the health fund will meet the solvency and capital adequacy requirements established by the Council ( Item 11 ).
Item 16 ensures that the Department is aware of the Council’s activities and is intended to promote accountability. The Council must inform the Department of a decision to grant or refuse an application for registration within seven days.
Item 17 proposes new sections aimed at strengthening the protection for contributors to health funds. New section 73AAB provides that registration will cease if a company is no longer incorporated or if it changes its rules or constitution so that a health fund cannot be conducted by it. Proposed section 73AAC imposes a statutory duty on registered organisations to give priority to the interests of contributors to the fund in making decisions on its management. Subsection (2) provides a defence for a breach of section 73AAC if, having regard to the circumstances, it is reasonable to believe that the decision gives priority to the interests of contributors.
Proposed section 73AAD restricts the purposes for which payments may be made from a health fund. Payments that are permissible are those made for the following purposes:
- liabilities incurred in covering contributors;
- payments to the Health Benefits Reinsurance Trust Fund;
- investments for the health insurance business;
- if the health fund has been established for profit-distributing profits to shareholders;
- any other purpose that is directly related to the health insurance business.
Propose d section 73AAE seeks to protect contributors by empowering the Council, or if the health fund is under administration, the administrator or liquidator, to apply to the Federal court to vary or set aside a transaction (a loan, a guarantee or charge) that they believe to be manifestly not in the interests of contributors to the fund.
Item 26 inserts a new section 74A making officers of a health fund liable for fines of up to $10,000 for non-compliance with the NHA or directions made by the Council.
Item 30 is another provision that is intended to give enforcement powers to Council as the regulator of the health insurance industry. The item inserts proposed subsection 79(7 ) which provides that the Council may cancel the registration of a health fund if that body has reputedly contravened its obligations under the NHA or if the Council believes a contravention is serious enough.
Mergers between health funds are, under Item 43, to become subject to the approval of the Council instead of the Minister. The Council must approve the transfer unless action is being taken under Part VIA of the NHA (a Part that deals with the conduct and supervision of the affairs of health funds).
The Administrative Appeals Tribunal will have the jurisdiction to review the decisions of the Council under Items 44, 45, and 46.
Schedule 2 is aimed at providing the council with appropriate powers to prudentially regulate registered funds so as to ensure the assets of the health funds are protected.
Part 1 amends the National Health Act 1953. Item 2 repeals sections 73BAB and 73BAC which specify requirements for minimum financial reserves. In place of these standards item 3 imposes proposed Division 3A - a framework for solvency standards and proposed Division 3B - a capital adequacy regime. Solvency standards are designed to ensure that a health fund has sufficient assets to be able to meet liabilities as they become due. Proposed section 73BCB requires the Council to establish written solvency standards. Health funds must comply with solvency standards (proposed section 73BCD) and are subject to solvency directions by the Council if it has reasonable grounds to believe that a health fund may be insolvent (proposed section 73BCE). In making these standards, the Council must consult with the Australian Government Actuary.
The capital adequacy requirements are concerned with ensuring that health funds are sufficiently financially robust (ie are able to take losses in bad years) in order to conduct their business in the best interests of contributors and comply with the National Health Act 1953. The Council’s powers under proposed Division 3B mirror those bestowed in relation to solvency standards. Health funds must comply with the capital adequacy standards ( proposed section 73BCI ) and are subject to direction by the Council (proposed section 73BCJ).
While the Parliament will no longer be directly responsible for determining solvency and capital adequacy standards for health funds, standards set by the Council are disallowable instruments and are thus subject to the scrutiny of the Parliament. The Minority Report of the Senate Committee on Community Affairs recommended increased transparency in relation to standard setting.(11) The Minority accepted that the advice of the Australian Government Actuary should not be binding on the Council but recommended that the Council be required to state its reasons for disagreement. It was argued that such a practice would enable the Parliament to be better informed in making an assessment of standards when considering a question of disallowance.
In keeping with the Council’s new role as regulator of health funds, the legislation contains a number of provisions which bestow powers similar to those exercised by the Australian Prudential Regulation Authority. Item 6 inserts proposed paragraph 82G(1)(db) , which allows the Council to appoint inspectors to investigate the affairs of a health fund. Pursuant to amendments in item 7, the Council may appoint an administrator, approve the voluntary winding up of a health fund and apply to the Court for the winding up of a health fund.
Proposed section 82XF gives the Council power to appoint an administrator to a fund if the appointment is in the interests of contributors and the fund has breached solvency or capital adequacy standards or other rule imposed under the NHA .
The Bill expedites procedures for the appointment of inspectors under section 82R. Currently, the section requires the Minister to give a fund 14 days to show cause why it should not be investigated. Item 25 repeals this ‘show cause’ requirement. The new section will provide that an investigator may be appointed by the Minister or PHIAC.
The Bill imposes personal liability on officers of funds. Proposed subsection 82XT(5) states that an officer of a fund under administration will be guilty of an offence if the officer enters into a transaction or dealing or is otherwise involved in a transaction that is void because the fund is under administration. Proposed section 82XU provides that a court may order compensation where an officer has been found guilty of an offence under proposed section 82XT(5) . A due diligence defence however, is available if it appears to the court that the person acted honestly; and having regard to the circumstances of the case, the person ought fairly to be excused from paying compensation. The onus of proving due diligence rests with the officer.
Further proposed section 82YZE states that if a health fund contravenes the Act and the fund suffers a loss as a consequence and the court orders the fund to be wound up, the officers of the fund are jointly and severally liable to make up the loss. Proposed subsection 82YZE(2) provides for a due diligence defence but the onus of proof rests with the officer.
Proposed section 82YZB details provisions that apply in the event that a fund or organisation is wound up. Firstly, the priority arrangements in section 556 of the Corporations Law apply. The costs of the liquidator and administrator rank first, followed monies owed to the employees. Unsecured creditors then rank equally. If any assets remain after the application of the principles in section 556 they are to be applied first in discharging the liabilities to contributors to the fund, then to other fund liabilities.
The purpose of this Part 2 of Schedule 2 is to remove references to friendly societies from Part 1 . This is because under the Financial Sector Reform (Amendments and Transitional Provisions) Act 1999 regulatory responsibility for friendly societies has moved to the Commonwealth from the States and Territories. Upon the transfer, friendly societies will become Corporations Law companies.
Part 1 of Schedule 3 amends the Private Health Insurance Incentives Act 1998 to correct anomalies which arose as a result of the expedited passage of that legislation. In particular the amendments seek to clarify entitlements to the premium reduction scheme. Items 7 to 28 allow a person to register for a premium reductions scheme once only rather than on an annual basis. Proposed section 11-10 will allow persons who pay premiums but are not covered by the policy (such as employers and parents of dependent children) to claim a premium reduction.
The amendments have a retrospective operation and are taken to commence on 1 January 1999, the same date as the Private Health Insurance Incentives Act 1998 .
Concerns were raised at hearings of the Senate Community Affairs Legislation Committee on the Bill about whether the Council has adequate resources to perform the role of independent prudential regulator of the private insurance industry. The Council has only 6 staff.(12) It was also questioned whether the Council would be sufficiently focused on the interests of contributors to funds. The Minority report of the Committee noted the absence of an objectives clause for the Council.
The Australian Health Insurance Association (AHIA) criticised the Bill before the Senate Committee on Community Affairs (SCCA)(13) on the basis that the Council’s proposed powers were stronger than comparable provisions in the Corporations Law. Examples include the powers to: appoint an administrator, give general directions to an administrator and approve a wind up.
The Department of Health and Aged Care said that as with other forms of insurance, specific legislation overrode the Corporations Law. The Department argued that the special powers given to the Council were a reflection of the requirement that it Act in the interest of contributors.
1. Hon Dr M Wooldridge, 'Reforms to improve efficiency and value of private health insurance', Media Release , 22 September 1998.
2. Private Health Insurance Administration Council, Annual Report on the Operations of the Registered Health Benefits Organisations , PHIAC, Canberra, 1998.
3. Australian Institute of Health and Welfare, Health Expenditure Bulletin , November 1998.
4. Budget Paper No 1, 1996-97, pp 4-28.
5. Australian Institute of Health and Welfare, op cit , p 30.
6. Industry Commission, Private Health Insurance (Report No. 57) , Industry Commission, Canberra, 1997: 362.
7. ibid: p 365.
8. ibid: p 364.
9. Medicare benefits are based on fees determined by the Commonwealth Government for each medical service. The fee is known as the 'schedule fee' after the Medicare Benefits Schedule (MBS) which lists each service and its relevant fee. The fee for any item in the MBS 'is that which is regarded as being reasonable on average for that service having regard to usual and reasonable variations in the time involved in performing the service on different occasions and to reasonable ranges of complexity and technical difficulty encountered' ( Medicare Benefits Schedule: 15).
10. Private Health Insurance Administration Council, Annual Report 1997/98 , PHIAC, Canberra, 1998.
11. Senate Community Affairs Legislation Committee, Report: Health Legislation Amendment Bill (No.3) 1999, April 1999, p 7-8.
12. Senate Community Affairs Legislation Committee, Report: Health Legislation Amendment Bill (No.3) 1999, April 1999, p 7.
13. Ibid, p 5-6.
Paul Mackey and Mark Tapley
29 July 1999
Bills Digest Service
Information and Research Services
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