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Private Health Insurance Legislation Amendment (Base Premium) Bill 2013

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2010-2011-2012-2013

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

 

 

 

 

 

PRIVATE HEALTH INSURANCE LEGISLATION AMENDMENT (BASE PREMIUM) BILL 2013

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Circulated by authority of the Minister for Health, the Hon. Tanya Plibersek, MP)





PRIVATE HEALTH INSURANCE LEGISLATION AMENDMENT (BASE PREMIUM) BILL 2013

 

OUTLINE

 

On 22 October 2012, the Government announced reforms to private health insurance as part of the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO). The reform included changing the Government’s contribution to private health insurance.  The Government announced that from 1 April 2014, the Government’s contribution to an individual’s private health insurance rebate would be indexed annually by the lesser of the Consumer Price Index (CPI) or the actual increase in the premium charged by insurers.

 

The Bill amends the Private Health Insurance Act 2007 (the PHI Act) so that from 1 April 2014 the Australian Government private health insurance rebate (the Rebate) for each private health insurance policy will be set as a proportion of the premium charged for that policy as at 1 April 2013.  The premium charged for a policy as at 1 April 2013 will be set as the base premium for that policy. From 1 April 2014, each private health insurance policy base premium will be indexed by the lesser of the CPI percentage change (using the All Groups Consumer Price Index number, being the weighted average of the 8 capital cities for the December quarter to December quarter published by the Australian Statistician) or the change of the premium charged by a private health insurer that is approved by the Minister under section 66-10 of the PHI Act .

 

Australian Government Rebate on private health insurance (the Rebate)

 

The Australian Government Rebate encourages people to take out private health insurance by contributing an income tested rebate to private health insurance premiums.  Over recent years there has been substantial growth in private health insurance membership and, therefore, rebate expenditure. The rate of new membership continues to outstrip population growth with 46.9 per cent of the population now holding hospital cover.  As at December 2012, 54.6 per cent of the Australian population held some form of private health insurance.

 

Currently, the Rebate is paid as a percentage of the premium charged by insurers. The Bill seeks to make Australian Government Rebate expenditure sustainable by linking the amount of the Rebate to 2013 premium prices.  From 1 April 2014, increases to the Rebate in future years will be indexed by the lesser of the CPI or the percentage change for the premium charged by a private health insurer .   If insurers decrease the premium they charge the Rebate will decrease commensurately.  The Bill will reduce the level and rate of the Government’s Rebate expenditure.

 

The process for purchasing health insurance and claiming the Rebate will remain unchanged.

 

Under this Bill, indexation of the Rebate will occur for each product subgroup made available by every private health insurer under the insurance products they offer.  A product subgroup is defined in section 63-5 (2A) of the PHI Act. Product subgroups are differentiated by the groups of people they cover (such as singles, couples and families) and by the jurisdiction where they reside. An insurer can offer different product subgroup policies under their products.  Insurers are permitted to charge different premiums for policies in the same product.

 

Every product subgroup will be assigned a base premium, which will be the premium that is charged by insurers on 1 April 2013 or, for product subgroups made available after 1 April 2013, the premium charged on the day the product subgroup is first made available after 1 April 2013.  From 1 April 2014, the Rebate will be calculated as a percentage of the base premium.

 

Indexation will be applied on 1 April each year to align with the existing premium process when insurers change their annual premium prices.

 

The Rebate will continue to be calculated using the existing income testing tiers in the PHI Act which came into effect on 1 July 2012.  For example, individuals and families in the Tier 3 income tier (as defined in section 22-30 of the PHI Act) are not entitled to the Rebate and will therefore not be impacted by these changes.

 

Financial Impact Statement

 

The payment of the Rebate on a base premium will result in savings to the Government of $699.7M over four years.

 



 

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

Private Health Insurance Legislation Amendment (Base Premium) Bill 2013

This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview of the Bill

On 22 October 2012, the Government announced reforms to private health insurance as part of the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO). The reform included changing the Government’s contribution to private health insurance.  The Government announced that from 1 April 2014, the Government’s contribution to an individual’s private health insurance rebate would be indexed annually by the lesser of the Consumer Price Index (CPI) or the actual increase in the premium charged by insurers.

 

The Bill amends the Private Health Insurance Act 2007 (the PHI Act) so that from 1 April 2014 the Australian Government private health insurance rebate (the Rebate) for each private health insurance policy will be set as a proportion of the premium charged for that policy as at 1 April 2013.  The premium charged for a policy as at 1 April 2013 will be set as the base premium for that policy. From 1 April 2014, each private health insurance policy base premium will be indexed by the lesser of the CPI percentage change (using the All Groups Consumer Price Index number, being the weighted average of the 8 capital cities for the December quarter to December quarter published by the Australian Statistician) or the change of the premium charged by a private health insurer that is approved by the Minister under section 66-10 of the PHI Act .

 

The Bill will reduce the level and rate of Rebate expenditure of the Government.

 

Human rights implications

 

The right to health

The right to health - the right to the enjoyment of the highest attainable standard of physical and mental health - is contained in article 12(1) of the International Covenant on Economic, Social and Cultural Rights. The UN Committee on Economic, Social and Cultural Rights (the Committee) has stated that health is a ‘fundamental human right indispensable for the exercise of other human rights’, and

that the right to health is not to be understood as a right to be healthy, but rather entails a right to a system of health protection which provides equality of opportunity for people to enjoy the highest attainable level of health.

 

Discussion of the Bill

The Committee states that the notion of ‘the highest attainable standard of health’ takes into account both the condition of the individual and the country’s available resources.  The right may be understood as a right of access to a variety of public health and health care facilities, goods, services, programs and conditions necessary for the realization of the highest attainable standard of health.

 

Currently, the Rebate is paid as a percentage of the premium charged by insurers depending on income and age of the policy holder. The Bill seeks to make the Rebate expenditure sustainable by linking the amount of the Rebate to 2013 premium prices.  From 1 April 2014, indexation of the Rebate in future years will be calculated by the lesser of the CPI or the percentage change of the premium charged by a private health insurer .   If insurers decrease premiums the Rebate will decrease commensurably.  The Bill will reduce the level and rate of Rebate expenditure of the Government.

 

The process for purchasing health insurance and claiming the Rebate will remain unchanged.

 

Eligibility for the Rebate will continue to be subject to income testing so that those people who most need Government assistance continue to receive that assistance.  The Bill does not change the current income testing thresholds for eligibility for the Rebate.

 

This Bill may increase the cost of obtaining private health insurance for consumers who choose to purchase private health insurance. However, there is no incompatibility with the right to health because the legislation is for a legitimate objective and reasonable, necessary and proportionate in the circumstances.

 

Conclusion

This Bill is compatible with human rights as it does not raise any human rights issues.

 

The Hon Tanya Plibersek MP, the Minister for Health

PRIVATE HEALTH INSURANCE LEGISLATION AMENDMENT (BASE PREMIUM) BILL 2013

 

 

NOTES ON CLAUSES

 

Clause 1 - Short Title

This clause provides that the Bill, once enacted, may be cited as the Private Health Insurance Legislation Amendment (Base Premium) Act 2013.

 

Clause 2 - Commencement

This clause provides the table of commencement for the Bill.

 

Sections 1 to 3 and anything in this Bill not elsewhere covered by the table commences on the day this Act receives Royal Assent.  Schedule 1, items 4 and 5 and items 7 to 12 also commence on the day that the Act receives Royal Assent.

 

Schedule 1, items 1 to 3 and item 6 commence on 1 April 2014.

 

Schedule 1, Part 2 commences immediately after the commencement of the provisions covered by the table at item 2.  However, if item 2 of Schedule 1 to the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2013 does not commence before 1 April 2014, Schedule 1, Part 2 will not commence at all.  The amendment in Schedule 1, Part 2 will only be needed if the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2013 commences before this Bill commences.

 

Schedule 1, Part 3 commences on the day this Act receives Royal Assent.

 

The amendments that affect private health insurance incentive benefits directly are to commence on 1 April 2014.  Amendments that provide for how the calculations of the base premiums are to be determined commence on Royal Assent.  This allows time for calculation of the base premium before 1 April 2014, which will then affect private health insurance benefits from a start date of 1 April 2014.

 

Clause 3 - Schedule(s)

This clause provides that each Act that is specified in a Schedule to this Bill is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Bill has effect according to its terms.  The Bill amends the Private Health Insurance Act 2007 (the PHI Act).

 



SCHEDULE 1 - Amendments

 

Part 1 - Main amendments

 

Private Health Insurance Act 2007

 

Item 1- Paragraphs 22-15(1)(a), (b) and (c)

Item 1 omits the words ‘amount of the premium, or of the amount in respect of a premium, paid or payable in respect of days’.  Item 1 substitutes the words ‘*base premium amount for each day’.  The omitted words are needless as a result of this Bill because the share of the private health insurance incentive benefit (PHII benefit) will be determined by the base premium.

 

Item 2 - After section 22-15

Item 2 inserts a new section 22-17.  Section 22-17 defines the ‘base premium amount’ for the purposes of determining the share of the PHII benefit in section 22-15 (for single PHIIBs) and in section 22-20 (for multiple PHIIBs insured under a policy).  

 

Subsection 22-17(1) provides that the base premium amount, in respect of a premium paid on any day, is the base premium (as defined in Subdivision 22-C) that applies to a particular insurance policy, within a product subgroup, in existence on that day the premium is paid.  For the purposes of calculating a base premium amount for a premium period, in respect of a premium paid on any day, is the *base premium on that day (expressed as an amount per day) multiplied by the number of days of that period to which the premium relates.

 

Example

 

Kate purchases six months cover under a private health insurance policy.  The policy has a base premium (as defined in Subdivision 22-C), for the policy subgroup to which her policy belongs, of $5.40 per day on the day Kate pays her premium.  Kate’s base premium amount for her six months of cover purchased is equal to the number of days within the six months of purchased cover multiplied by $5.40. If there are 182 days within the six months of cover, Kate’s base premium amount for the purpose of calculating her Rebate is:

           

            Kate’s base premium amount = 182 x $5.40

                                                            = $982.80

 

Subsection 22-17(2) deals with circumstances where parts of a premium for a particular premium period are paid at different times. For example, if a premium period provides cover for a year, but the person pays premiums in monthly instalments.  In such a case, the person’s base premium amount for each instalment would be one month’s worth of the base premium amount for the whole year.  In accordance with subsection 22-17(1), for each payment, the applicable base premium amount is the base premium for the product subgroup to which the policy belongs on the day the payment is made.  This clause avoids the situation where someone is covered for a premium period, splits their payment for that premium period, but tries to claim the base premium applicable for the premium period for each payment.  Rather, because of this clause, the base premium for each payment will be proportional to the actual payment made.

 

Subsection 22-17(3) provides that for the purposes of working out the total premium in respect of a premium period in subsection 22-17(2), changes in the premium payable or paid as a result of the application of Part 2-3 (lifetime health cover) and any discounts allowed under subsection 66-5(2) are to be taken into account.  Reductions in the premiums payable or paid as a result of the application of Division 23 (premiums reduction scheme) are to be disregarded.

 

The ‘total premium’ referred to in subsection 22-17(2) is required to ignore reductions made under the premiums reduction scheme (Division 23 of the PHI Act) because the PHII benefit in Subdivision 22-A of the PHI Act is determined by reference to amounts paid or payable before any reductions are applied under Division 23.

 

For example, if Division 23 results in a person paying 70% of what they would otherwise pay for a premium period, and the person pays that 70%, the proportion referred to in subsection (2) would be 1 (and not 0.7). Similarly, if a lifetime health cover loading under Part 2-3 results in a person paying 105% of what they would otherwise pay, and they pay that 105%, the proportion in subsection (2) would also be 1 (and not 1.05).

 

It is noted that changes in premium resulting from Division 23, Part 2-3 or discounts allowed under subsection 66-5(2) are not otherwise taken into account in determining the base premium (see subsection 22-50(7) of this Bill).

 

Subsection 22-17(4) makes clear that although a PHII benefit in relation to an amount of premium is determined on the basis of the base premium that applies when the amount is actually paid, a premium reduction in relation to an amount that is payable, but not yet paid, can be determined by reference to the anticipated future day of payment.  As the PHII benefit in relation to an amount of premium is determined on the basis of the base premium that applies when the amount is actually paid, it may be necessary to work out a PHII benefit in respect of a payable premium at a time before the premium has been paid. Subsection 22-17(4) allows a premium reduction in relation to an amount that is payable, but not yet paid, to be determined by reference to the future day of payment.  It also provides for the actual base premium that applies on the actual day of payment to be used in determining the reduction that is ultimately applied.

 

Item 3 - Paragraph 22-20(b)

Item 3 repeals paragraph 22-20(b) and substitutes a new paragraph that uses the term ‘base premium’ for the purposes of calculating the Rebate where there is more than one PHIIB in respect of the premium amount.

 

Where there is more than one PHIIB insured under an insurance policy, the share of the PHII benefit for each of the PHIIBs is calculated by dividing the base premium for the policy subgroup to which the policy belongs by the number of persons who are PHIIBs in respect of the premium paid.  The base premium is split equally between PHIIBs.



Item 4 - At the end of Division 22

Item 4 inserts a new Subdivision 22-C which establishes the base premium.

 

Base premium calculation will be determined using two methods depending on whether the insurance product was made available on or before 1 April 2013, or after 1 April 2013.

 

Product subgroups available on or before 1 April 2013

 

Subsection 22-50(1) provides that for a product subgroup made available by any insurer on or before 1 April 2013, the base premium for any insurance policy which belongs to that product subgroup is the premium charged for that insurance policy on 1 April 2013.

 

Subsection 22-50(2) provides that on 1 April every year after 2013, the base premium will be indexed on 1 April in accordance with section 22-55.

 

Product subgroups that become available after 1 April 2013

 

Subsections 22-50(3) and (4) provide that base premiums for insurance policies, as part of product subgroups, that are introduced after 1 April 2013 by existing insurers or, where relevant, new insurers will be subject to the indexation arrangements as set out in section 22-55.  The establishment of a base premium for these types of insurance policies will be determined by using a ‘weighted average ratio’.

 

The weighted average ratio will be applied to the premium charged for that policy on the day that the product subgroup to which the policy belongs is first made available.

 

Subsection 22-50(4) provides that on each 1 April after the product subgroup is first made available, the relevant base premium will be indexed in accordance with section 22-55.

 

Subsections 22-50(3) and (4) apply equally to both existing insurers that introduce new policies after 1 April 2013 and new insurers that come into existence after 1 April 2013.

 

Weighted average ratio

 

The weighted average ratio will be determined in accordance with the Private Health Insurance (Incentives) Rules made under section 333-20 of the PHI Act.

 

The Private Health Insurance (Incentives) Rules will establish the method for calculating the weighted average ratio.



Under subsection 22-50(6), the Private Health Insurance (Incentives) Rules will provide for the calculation method for the weighted average ratio.  Under subsection 22-50(6), the Private Health Insurance Administration Council may assist in determining weighted average ratios.

 

Under subsection 22-50(7), the base premium does not include any Lifetime Health Cover loading, discount allowed under subsection 66-5(2) applied to an individual policy, or reduction as a result of the premiums reduction scheme.

 

22-55 Indexation

 

New section 22-55 provides the indexation to be applied to the base premium.  Section 22-55 sets the methodology for indexation to ensure that base premiums are indexed by the lesser of the CPI or the increase in the premium price charged to consumers.

 

Base premiums will be indexed every year on 1 April by the lesser of the premium indexation factor for the product subgroup to which an insurance policy belongs for 1 April or the CPI indexation factor as defined respectively in section 22-60 and section 22-65.

 

Example

base Premium where the cpi indexation factor is less than the premium indexation factor

On 1 April 2013 the new premium for an individual policy was $1,600.  The base premium for that policy will be $1,600 and it is to this figure that indexation would be applied.

By way of example, if under future premium processes, the Minister agrees to a premium increase on full premiums of 5.5% per year for the policy but the relevant CPI yearly change is 2.5% the Rebate is payable on the base premium as indexed by the lesser CPI increase, rather than being payable on the full premium cost.

 

April 2013

April 2014

April 2015

April 2016

Full Premium Cost

$1,600

$1,688

$1,781

$1,879

CPI indexation factor (increase of 2.5% p.a)

 

1.025

1.025

1.025

Premium indexation factor (increase of 5.5% p.a)

 

1.055

1.055

1.055

Base Premium (indexed by the CPI indexation factor)

$1,600

$1,640

$1,681

$1,723

 



 

base Premium where premium indexation factor is less than the CPI indexation factor

If the cost of premiums charged by insurers increased by 2% per year and CPI is assumed to increase at 2.5% per year, consumers will receive the Rebate on the full premium cost.

 

April 2013

April 2014

April 2015

April 2016

Full Premium Cost

$1,600

$1,632

$1,665

$1,697

CPI indexation factor (increase of 2.5% p.a)

 

1.025

1.025

1.025

Premium indexation factor (increase of 2% p.a)

 

1.020

1.020

1.020

Base Premium (indexed by the Premium indexation factor)

$1,600

$1,632

$1,665

$1,697

 

base Premium where premium indexation factor is less than the CPI indexation factor in some years but not others

 

 

 

April 2013

April 2014

April 2015

April 2016

Full Premium Cost

$1,600

$1,632

$1,713

$1,747

CPI indexation factor

 

1.025

1.023

1.03

Premium indexation factor

 

1.020

1.05

1.02

Base Premium

$1,600

$1,632 ($1,600 x 1.02)

$1,670 ($1,632 x 1.023)

$1,703 ($1,632 x 1.02)

 

Example - Determining the lesser CPI indexation factor or premium indexation factor

 

By way of example, an insurer offers a policy subgroup on 1 April 2013 for a premium of $1,600.  On 1 April 2014 the insurer increases the premium for the policy subgroup to $1,688.

 

The premium is increased by 5.5% and the premium indexation factor is 1.055 calculated as follows:

 

            Premium indexation factor = $1,688 divided by $1,600

                                                          = 1.055.

 

Additionally, by way of example, the Australian Statistician published All Groups Consumer Price Index number for the weighted average of the 8 capital cities for the December quarter for 2013(the December quarter immediately preceding 1 April 2014) is 102.  The Australian Statistician published All Groups Consumer Price Index number for the weighted average of the 8 capital cities for the December quarter for 2011 (the December quarter preceding the December 2012 quarter) is 99.8.

 

The CPI has increased by 2.2% and the CPI indexation factor is 1.022 calculated as follows:

 

            CPI indexation factor = 102 divided by 99.8

                                                 = 1.022

 

Under subsection 22-55(4) of the Bill, the base premium indexation factor is the lesser of the CPI indexation factor and the premium indexation factor.  In this example the lesser is the CPI indexation factor (1.022).

 

In accordance with subsection 22-55(2) of the Bill, in this example on 1 April 2014 the base premium ($1,600) is indexed by multiplying $1,600 by 1.022.

 

The indexed base premium from 1 April 2014 is $1,635 calculated as follows:

 

            1 April 2014 indexed base premium = $1,600 multiplied by 1.022

                                                                      = $1,635

 

22-60 Premium indexation factor

 

For each product subgroup the premium indexation factor on 1 April in each year is to be worked out by dividing the premium charged under policies belonging to the product subgroup in that year by the reference premium.

 

The reference premium for a product subgroup that was first made available on or before 1 April in the immediately preceding year is the premium charged under policies belonging to the policy subgroup on 1 April in the preceding year.  If the policy was not first made available on or before 1 April in the immediately preceding year, the reference premium is the premium charged under policies belonging to the policy subgroup when the subgroup was first made available.

 

The premium indexation factor is worked out to 3 decimal places.

 

22-65 CPI indexation factor

 

Section 22-65 sets out the standard method for calculating the CPI indexation factor using the CPI index number for the December quarter and comparing the increase with the CPI index number for the December quarter for the previous year.

 

Item 5 - Clause 1 of Schedule 1

 

Item 5 inserts a definition for the base premium

 

Item 6 - Clause 1 of Schedule 1

 

Item 6 inserts a definition for the base premium amount

 

 

Item 7 - Clause 1 of Schedule 1

 

Item 7 inserts a definition for the base premium indexation factor

 

Item 8 - Clause 1 of Schedule 1

 

Item 8 inserts a definition for the CPI indexation factor

 

Item 9 - Clause 1 of Schedule 1

 

Item 9 inserts a definition for the CPI index number

 

Item 10 - Clause 1 of Schedule 1

 

Item 10 inserts a definition for the premium indexation factor

 

Item 11 - Clause 1 of Schedule 1

 

Item 11 inserts a definition for the reference premium

 

Item 12 - Clause 1 of Schedule 1

 

Item 12 inserts a definition for the weighted average ratio

 

SCHEDULE 1 - Amendments

 

Part 2 - Contingent amendments

 

Private Health Insurance Act 2007

 

Item 13 - Subsection 22-15(6)

 

This amendment repeals subsection 22-15(6) of the PHI Act.  Subsection 22-15(6) is inserted by the Private Health Insurance Amendment (Lifetime Health Cover Loading and Other Measures) Act 2013. Subsection 22-15(6) reduces the premium amount used for calculating the PHII benefit by any increase to the premium as a result of applying a lifetime health cover loading.  This provision is redundant from 1 April 2014 as the PHII benefit will be calculated by reference to the base premium amount, not the amount of premium, or amount in respect of a premium.

 

SCHEDULE 1 - Amendments

 

Part 3 - Application

 

Item 14 - Application of amendments

 

The amendments in Schedule 1 apply in respect of a premium or an amount in respect of a premium that is paid after the commencement of Schedule 1, item 1 (1 April 2014).  Changes to the PHII benefit apply only in respect of payments made after 1 April 2014, including payments made in respect of periods before commencement.  The amendments in Schedule 1 do not apply to payments made before commencement in respect of periods of insurance cover after commencement.