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Select Committee on Red Tape
Effect of red tape on health services

BOWSKILL, Mr Andrew, Manager, Research and Data, Medicines Australia

DAVID, Dr Rachel, Chief Executive Officer, Private Healthcare Australia

DE SOMER, Ms Elizabeth, Director, Policy and Research, Medicines Australia

KARPISH, Ms Larissa, Manager, Industry and Regulatory Policy, Medicines Australia

CHAIR: Welcome. Thank you for appearing before the committee today. I invite you to each make a brief opening statement, should you wish to do so.

Dr David : Thank you, Senators, for the timely opportunity to present to this inquiry and good morning to you all. Private Healthcare Australia is the peak representative body for Australia's private health insurance industry, representing 20 of the largest health funds with a combined membership of 12.9 million Australians, or 96 per cent of the sector on membership. Promoting the value of private health insurance to consumers in the Australian economy and keeping premiums affordable for our members, giving them access to high-quality health care, is the No. 1 priority of our member funds. Today, I'm representing the 13. 5 million Australians with some form of health insurance, who need and value the product because of timely access to surgery, dental, maternity and mental health care that it offers, and who are increasingly struggling with its rising cost. You'll appreciate that premium increases hurt consumers and the reason they're upset about them is that they so value the health care that their insurance gives them access to. Eighty per cent of consumers who have health insurance value the health care they get as a result, and they desperately don't want to give it up. These folks are not the rich. On average, they are people with incomes under $50,000 a year, many of whom are pensioners and superannuants.

I'd like to begin by outlining how private health insurance has been strangled by inappropriate regulation over many years and how well-intentioned interventions by government have contributed to the creation of an overly complex and cumbersome system. It is to the great frustration of our health funds that they cannot do more to contain costs and increase quality for their members, as a result of regulation.

I'd like to bring to your attention some examples from the recent two decades. These have been examined by Senate committees and the Productivity Commission in the past, and I'd be happy to provide the reference materials. The establishment of the Commonwealth Prostheses List to fix the price of medical devices was an attempt, again, to help consumers with out-of-pocket costs, but it backfired majorly. It was initially a response to legitimate concerns about price inflation of medical devices. Eventually, this became the cause of enormous waste, with Australian consumers with private health insurance forced to pay as much as five times more than for the exact same device in the public hospital system and in equivalent economies. The government had effectively incentivised a bubble in medical device utilisation that created huge premium increases and resulted in poor outcomes for patient safety, as exemplified by the terrible case of pelvic mesh for pelvic organ prolapse. The coalition government has recently taken some steps to address this well-documented problem by reducing the fixed benefits, but there's a lot more that can be done to add transparency to this market.

A further example is the second-tier default benefits scheme, which was introduced originally to protect small rural and regional hospitals but now mostly props up the large corporate hospital networks by providing them with an arbitrary price floor for their negotiation with health funds. The scheme means that, if a hospital falls out of contract with a health fund, even if this is because of concerns about quality or safety, the fund is basically forced to pay them anyway, at 85 per cent of the contracted price.

Government policy settings also impede the efforts of health funds to apply rigour to potentially fraudulent claims. Health funds are forced to pay for any service involving an insured patient for which a Medicare benefit is payable. So, if the MBS pays, even if the health fund has uncovered evidence the claim is potentially inappropriate or fraudulent, health funds are forced to pay. Health funds are required to pay public hospitals for the treatment of patients who elect to be treated privately, even when the hospital has refused to provide the details of the treatment provided or if no private doctor has seen the patient.

I now come to last week's announcement that a future Labor government would impose a two per cent premium cap for two years, which is another example of a well-intentioned policy aimed at consumers that potentially could have catastrophic consequences. As frustrating as it is that PHI premiums have risen by around five to six per cent per year for a decade, the reality is that these increases are caused by health funds having to pay out more for health care each year in benefits, not by health funds taking higher profits.

Health fund profitability has remained stable at around five per cent for a decade. As The Australian Financial Review noted earlier this week, in this time premiums have risen by 89.2 per cent, while the benefits paid by insurers have increased by 91 per cent, in lock step. A two year, two per cent cap on prices does nothing to curb input costs and would lead to a significant premium increase in the third year as funds would be forced by the regulator to restore sustainability and ensure that premium income is sufficient to cover claims. If claims growth were five per cent per year over this period, as it has been historically, that would mean that insurers would need a premium increase of at least 11.3 per cent in the third year, and many funds would need more than this because their prudential position would have eroded to below the acceptable threshold set by APRA.

I think it is important to stress that we have committed to a major reform program with the government and stakeholder groups from across the healthcare sector. This will mean that we are committed to transparency in our sector around ways in which we can help consumers choose and use their private health insurance. Details of this reform package have been made public, and I won't repeat them now, but it does aim at putting downward pressure on premiums and making it easier for consumers to choose and use their health insurance. We commend the federal government for its work on these reforms, and particularly for starting to tackle the kickbacks and non-transparent conduct that over time have become a feature of the prosthesis supply chain, leading to poor outcomes for consumers in cost and safety. We have welcomed these reforms, we have been willing participants in these reforms and we have pledged that all savings made as a result will be passed on to consumers in the next two premium adjustments, in 2018 and 2019. We've already seen the positive impact of these, with the recently announced average premium increase of 3.9 per cent being the lowest in 17 years.

In our submission to this inquiry, we have proposed a second wave of regulatory reform that will help further to improve the value and sustainability of the private health sector by removing, or at least improving, some of the regulatory impediments currently faced by health funds. As with our contribution to the government's recently completed PHI review, which led to the reforms outlined earlier, the eight recommendations we proposed to this committee have been carefully considered, modelled and tested over an extended period. It's not an exhausting shopping list of industry demands or thought bubbles, and we're not asking for additional funding from the government, but it is a small number of detailed proposals to improve the regulatory environment for private health insurance for the benefit of the 13½ million Australian people who have it.

I'm happy to respond to any questions the committee may have.

CHAIR: Thank you. Medicines Australia?

Ms de Somer : Thank you, senators, for the invitation to appear today. My name is Elizabeth de Somer and I am the director of policy and research at Medicines Australia. I'm joined today by two of my policy managers, Ms Larissa Karpish and Mr Andrew Bowskill. I understand and saw that representatives of one of our member companies, Roche, appeared before you already, so there may be some repetition in some of the issues we raise.

Medicines Australia is the peak body representing the research based pharmaceutical industry in Australia. Our industry plays a significant role in healthcare delivery in Australia, demonstrated by the fact that it provides up to 86 per cent of prescription medicines currently available to patients on the Pharmaceutical Benefits Scheme, by value and other associated services. Our position on red tape is fundamentally about three key principles: recognising the importance of balanced regulations to ensure that medicines provided to Australians are of high quality, safe, efficacious, and cost-effective; recognising the value of our industry in advancing the overall health and wellbeing of Australians; and incentivising the presence of industry in order for Australia to remain competitive internationally.

We're proud of the work we're doing to deliver on this partnership with the Australian government, and in 2017, Medicines Australia entered into a strategic agreement with the Australian government. This five-year agreement sees both parties committed to a viable innovative medicines sector in Australia by delivering access to medicines for patients, confidence to industry and savings of $1. 8 billion to the Australian taxpayer. The agreement will see us work together to address some inefficient and unnecessary red tape—for example, streamlining the Pharmaceutical Benefits Advisory Committee processes. This is very timely, given the parliament has agreed to priority review and provisional approval pathways for marketing authorisation through the TGA. The PBS listing processes must keep pace.

We're committed to working together with government so that Australians can continue to access the medicines they need when they need them, and at a price they and the community can afford. We hope the parliament will soon pass the bill associated with that agreement. We note that cost recovery issues are part of that mix, and we hope that the examination of cost recover arrangements results in adequate and appropriate capacity and capability being allocated to this work. You may have seen some industry media regarding this today.

The pharmaceutical industry is one of the most heavily regulated industries in the world. A viable medicines industry relies upon appropriate, balanced and fit-for-purpose regulations. Industry acknowledges that periodic, structured, planned and meaningful reviews of the processes and systems that support regulatory frameworks are necessary for regulations to keep pace with the rapid evolutions we're seeing in science and medical research, and that mechanisms do assist in activating those considerations. However, we contend that blanket sunsetting of the therapeutic goods regulations may not be the best way to initiate regulatory review in the medicine setting. Balanced regulations serve to provide comprehensive safeguards to the public whilst encouraging local business investment by global manufacturers. This is also consistent with the goals of the National Medicines Policy, which includes maintaining a viable Australian medicines industry.

However, at times, our industry has encountered significant regulatory roadblocks to the detriment of the Australian public. This is particularly evident when it comes to the area of ethics and governance approvals of clinical trials, which you've heard a little bit about today, but we can expand upon. Members of this committee will already be aware of the inquiry into funding for research into cancers with low survival rates and the issues of red tape in clinical trials that were raised there. We welcome the recommendations that seek to streamline ethics and governance approvals in Australia, but now is the time for meaningful reforms to be progressed. We know that this is in the economic and health interests of Australia. Our members alone conducted 970 clinical trials over 4,200 individual sites across Australia in 2016. Clinical trials have the potential to create highly skilled jobs as well as save taxpayers money by providing an opportunity for early access to new, innovative medicines, and that's not including the health benefits that are gained from that early access. If reforms are not progressed, red tape will continue to hamper industry's ability to bring more clinical trials to Australia. The problems arise from differences in the regulations between the states and territories and, at times, the Commonwealth.

The interim report of the Review of Pharmacy Remuneration and Regulation also identified opportunities to reduce the red tape burden by harmonising state and territory and federal regulations. We support this objective. We're ready to work collaboratively with policymakers and regulators to ensure systems are appropriate and well balanced. To that point, we would like to acknowledge the significant progress with the implementation of the Expert Review of Medicines and Medical Devices Regulation. This represents a significant regulatory reform in the Australian therapeutic goods sector in decades. It highlights the benefits of review of regulation and consultation. We applaud the measures that deliver expedited access for some medicines in areas of high unmet need, and are pleased to see the first medicine registered on the Register of Therapeutic Goods via the new priority review pathway, just seven months after it came into effect. A second expedited provisional approval pathway could further reduce the time to access to life-saving therapies by as much as two years.

In summary, the industry acknowledges the importance of regulation in our sector but does not support regulation that is insufficient, duplicated, inflexible and outdated, and welcomes an opportunity to highlight where efficiencies and enhancements can be found. I table the statement and welcome your questions.

CHAIR: I was going to suggest that both opening statements are probably worth tabling, if you're able to do that. Does the committee agree? Yes. You could give them to the secretariat, please. I don't want to spend any time on the TGA bill. It was listed for consideration this week, but we never got to it in the Senate. It is listed again for next week. I anticipate it will be dealt with next week. I have quite a range of questions, probably more for private health insurance, but I have a few for Medicines Australia. You mentioned in your statement the issue of clinical trials, the issues of approvals and governance, and you also mentioned patient recruitment as a matter of concern. You heard the discussion with the previous witness on this issue. I don't think any of us on this committee are enthusiastic about the idea of regulating this, but clearly there is a problem. Is there any way that the problem can be addressed without risking the heavy hand of government?

Ms de Somer : Medicines Australia's position on coordination across the states and territories was to develop a national coordinating body, but we take the point that this does add regulation and another layer of bureaucracy. We think that there are opportunities to create national coordination that may not require the institutionalisation of an office. It's not unprecedented to have national coordination across activities with the states and territories. Indeed, that's why the COAG exists. The best way to do that might be discussion with the COAG on what their appetite for change is. Clearly, each of the states and territories have an interest in improving clinical trial activities in their state and territory. We see that there is national coordination of medicines scheduling, for example. We see that there are attempts at national coordination of compounding pharmacies and, indeed, the opioid and monitoring systems, doctor-shopping activities and My Health Record. All of them could benefit from better coordination. We still see that there are barriers in that from states and territories. I don't think I have a silver-bullet solution, because it will rely on the COAG's willingness to participate in anything that is proposed.

CHAIR: Yes. I think that's probably right. The COAG process is the logical approach. It's a far-from-efficient approach, but I can't think of a better one. Thank you for that. Another issue that you raised in your submission, and it was pursued earlier, is the increasing interest of the ACCC in the regulation of medical matters and pharmaceutical matters. Do you have comments on that?

Ms de Somer : We absolutely believe that the ACCC has a role for consumer protection, quite obviously. The comments that were made in our submission—and I will attest to them today—go to the communication between regulatory bodies. There are some suggestions that there is duplication of effort and perhaps not the level of communication one would expect between two regulators working for the same government. The point that we made in our submission goes to evidence that the ACCC were exploring the regulatory processes around complementary medicines. That may be well validated, but there is also a lot of work being done by other agencies in the government around the regulation of complementary medicines, and those efforts should be potentially coordinated rather than duplicated. That isn't necessarily affecting Medicines Australia members today, as we represent the prescription medicines industry, but it's just flagging the thought that that is an obvious area where there is duplication of effort.

CHAIR: That's a good example.

Senator PATERSON: My questions are mostly for the private health insurance industry. Dr David, you can probably imagine what I think of the Labor policy to cap rises on health insurance premiums. One devil's advocate argument to the concern you raised before, that if you cap it at two per cent for two years there will be an enormous increase in the third year, is to make it a permanent cap of two per cent forever. Obviously, there would be other consequences from doing that. Can you outline to the committee what those consequences would be.

Dr David : As much as we don't like it when it hits our hip pockets every year, the reality is that health fund premium increases are going up in lockstep with demand for health care, and it's because health funds are paying for more health care that premiums go up. This is the effect of the baby boom population now moving through the health system and starting to become unwell. The effect is also being felt on the public hospital side, as their costs have been going up by seven to eight per cent over the same time frame and very consistently. Without addressing those underlying cost drivers and removing every dollar of waste, inefficiency, inappropriate care and payments on the supply side, we are not going to be able to really bring the cost of premiums down.

What will happen if you impose artificial price fixing in this sector is very clear. The first thing is that if you do nothing about it, health funds will start to hollow out their products and offer more products with exclusions, because consumers will start to demand a cheaper product. They will go to the health fund and say, 'I don't want to pay for pregnancy; I'm too old. I don't want to pay for joint replacements; I'm too young. This is all I can afford.' So they will offer them a product which covers less. I believe the opposition has also suggested they're going to limit products with exclusions and get the ACCC to police that in a further round of regulation. What will happen then is that consumers will need to migrate up to a higher cost product to be able to access health insurance, so, in fact, they will be paying a higher premium anyway. So they will go up.

Senator PATERSON: So the average premiums might rise by two per cent but individual consumers will jump up

Dr David : The second factor is that health funds within the limited means available will need to start to control the outgoing costs. The first thing they will look at is what benefits they are paying out for medical and allied health, medical specialist gap cover and the rebates for dental care, which is the majority of the extras benefits that are paid, and the other allied health professionals. They will end up being capped. The net effect of that is that consumer co-payments at the point of service will increase.

The third effect is that the hospital contracts that the funds have in place to pay for hospital accommodation will need to be frozen also. That will have an effect on the hospital side in terms of the range of services they're able to offer: the basic quality measures they are able to offer in terms of staff ratios, whether their bricks-and-mortar services are renovated and so forth. The worst case scenario is that we may even see waiting times in private health.

Senator PATERSON: That would be quite a disappointment to many consumers who take out private health for that precise reason.

Dr David : Indeed.

Senator PATERSON: I guess the aggregate impact of all of that would be fewer people taking out private health insurance.

Dr David : That's right. The effect of that is that your risk pool deteriorates. You need a good spread of the community to be involved and be getting benefits appropriate for their life stage to be able to make this system work. If the risk pool deteriorates so you only have one cohort in it all claiming for the same thing—like the older baby boomer cohort going through—what you will get is a premium increase that will put pressure on the system and the need to pay up benefits which greatly exceeds the two per cent.

Senator PATERSON: It could spiral once it gets past a certain point and become worse every year.

Dr David : Correct. Then the impact goes to public hospitals. Public hospitals are not designed for the high through-put of elective or non-emergency surgery that we see in private. At the moment, the private sector funds two-thirds of elective or non-emergency surgery and more than half of mental health admissions. The publics are at the moment not tooled to absorb that. If the private funds were to disappear overnight, it's not just a matter of taking that money and throwing it at the states for the public system. A whole infrastructure would need to be developed, including a workforce, a mechanism to manage demand and physical infrastructure to be able to absorb those claims.

Senator PATERSON: I want to move on now to the Prostheses List that you've mentioned. Is there any reason why we should have a Prostheses List at all?

Dr David : My strong view—this is a personal view but also shared by many in the private health insurance industry—is that the Commonwealth should transition away from fixing prices in this area altogether and that as an industry, with some regulatory oversight from our existing regulators—it shouldn't be abolished altogether, because, as with the pharmaceutical industry, there are considerable safety issues tied up with medical devices—we need to transition to a shared purchasing arrangement that is separate from Commonwealth intervention so that a market is able to operate where there is some reference pricing to real market prices in Australia and around the world. There are transparency measures that are implemented by the existing regulators, like the ACCC, that look at the rest of the retail market.

Senator PATERSON: I'm just trying to think of any other industry where there is price fixing like that or whether it's worked, and I struggle to think of one. I remember reading a very good article by Matthew Koce, the CEO of the not-for-profit health insurance providers' peak body, saying no-one would accept this for their cars, for example, if car parts were regulated by the federal government and they said a muffler cost this much. No-one would accept that anywhere else, but it seems to be tolerated in this industry.

Dr David : That's right, particularly if you were not allowed to import car parts at a cheaper price but had to accept the five-times-more-expensive one that the government had, when the government had regulated the price. It is an absurd situation, but it's very difficult to transfer away from that quickly, because the manufacturers and the hospitals, under those very high benefits, have developed a whole infrastructure. They have developed a whole service economy underneath that that's not clinically necessary, but it will take a long time to transfer away from that to a leaner model where ideally you'd be using technology for inventory, ordering and quality management, the same as in other industries.

Senator PATERSON: Yes. I think it's a salutary tale for red tape generally: once it gets put in place, whole industries arise around it and depend upon it for their own existence, and they're obviously very powerful constituencies lobbying for it to remain in place. It's very hard to remove once it's there.

Dr David : We now have medical device reps that attend almost every case, including routine and non-urgent cases, with surgeons for the purpose of retaining market share. Some of those reps are paid more than doctors, but they're able to be funded because of the high Prostheses List benefits. They offer no clinically relevant service, but the companies believe they should be there to protect their market share, to service the surgeon and to ensure quality control in the process. This is completely unrelated to patient care. It's horribly expensive, and the cost ends up in private health insurance premiums as a transfer from the health fund member, on less than $50,000 a year, to a big multinational.

Senator PATERSON: I guess that, if you're not allowed to compete on price, the only other way is to do so is by overservicing with an expensive sales team and all the associated things.

Dr David : That's exactly what we've created.

CHAIR: That's interesting. I had some people from the prostheses industry come to see me, and I have to say my first question after listening to them was exactly the same as Senator Paterson's: why do we regulate prostheses? I understand why medicines are regulated: the consumer cannot work out for themselves what's risky and what's not risky without checking that pharmaceuticals do what they're supposed to do and don't have adverse consequences and so forth. But is that true for prostheses? If you have a surgeon making a judgement about what prosthesis to use—a hip transplant, a knee replacement, a pacemaker or something along those lines—what additional benefit does having that prosthesis approved by some offshoot of the TGA bring to the market?

Dr David : There are a couple of issues there, Senator. One is that quality and safety absolutely need to be regulated in the device sector. There have been a number of cases—we've had probably three big scandals in Australia in the last decade—where safety requirements were not met, and this was discovered after the fact when implants were already in patients and they'd already suffered adverse events. Some of them were very difficult to remove.

CHAIR: Which does raise the question as to whether the system is needed if they are occurring anyway.

Dr David : Yes. I think in many ways what's happened is that, by the Commonwealth fixing the prices or the benefits that funds had to pay, which is a proxy for prices, at such a high level, it really incentivised the hospital sector, the device sector, and surgeons and doctors overall to put in a large number of medical devices, because those benefits were flowing to providers. So we saw an enormous number of hips, knees and other implants put in. For those where there had been a safety signal, by the time it was discovered and found out, there were already thousands of people affected. One of the consequences of the Commonwealth fixing pricing is that it has had an impact on patient safety, even though that is taken care of by another regulator, the TGA.

CHAIR: I'm interested in a number of issues that both the health insurance sector and Medicines Australia have raised in your submissions, one of them being the overall cost of our health system. Dr David, you have said that it is a seven to eight per cent increase per year. We know that inflation is below two per cent. Population increase is way down. Yet, our healthcare costs are going through the roof every year. You referred to the baby boomer generation. Is it a bubble? And will it pass? Or are we on a trajectory for an unaffordable health systems?

Dr David : I might respond to that first, Senator, and then my colleague can pick up afterwards. In some senses it is a bubble. What has happened is that there is this baby boomer group coming through that is now starting to experience health problems. Regardless of that, most of the healthcare expenditure occurs with people in the last five years of their life. So, yes, there is a big population coming through and as they hit those last five years that's when a large amount of the expenditure will occur. What we see on our side is that that's in some high-growth areas, like chemotherapy and the use of cardiac or heart implants, like pacemakers, artificial valves and ventricular assist devices. That's one factor. It's not ageing itself, but the fact that we've got this large cohort coming through. But there will still continue to be increases for two further reasons. The first being that technology in health care is now getting very good and that Australians have very high expectations of the outcomes that its health system delivers. At the moment, we're doing very well. We are easily rated in the top five health systems around the world for good outcomes, with our mixed private and public system.

The second issue is that, over the last 100 years in Australia, we've gained an extra 30 years of life. In those extra 30 years, people are expecting a level of maintenance not only so that they can continue to interact in society but these days so that they can continue to work and earn an income. So it's not just the last five years of life where a huge amount of expenditure occurs but people also want more maintenance during the extra 30 years to keep on going. In the 1970s, people would have had a hip replacement, gone home, sat on the couch and died a couple of years later. These days people are having a hip replacement and they are going back to work or even non-paid work, volunteering, looking after grandchildren, and so forth, and then 10 years later they are having another one. That's what is driving it. The cost will start to stabilise as the baby boomer generation moves through, but that steady underlying increase will not go away.

CHAIR: Before you answer, I'm just thinking that, given the concerns you have with clinical trials, approvals, governance and patient recruitments, if we kick the ACCC out of the area and we do some of the other suggestions in your submission, none of which I'm rejecting at all, that would still leave us with a very expensive health system. I'm wondering whether there's scope for being a bit more adventurous by going down a path of red tape removal that would help at least to mitigate that bubble, if it is a bubble, or long-term trend, if it is a long-term trend. Please, go ahead.

Ms de Somer : I'm interested what you mean by 'go a bit further' before I anticipate an answer on that!

CHAIR: It's no secret that one of my views is that there's a fair amount of over-servicing in the health sector, and that one of the reasons for that is that people don't have enough responsibility for the financial cost of the decisions they make about their health care. That's only one aspect. I don't work in that sector, so I'm on the outside looking in. You're in it—I'm looking for ideas.

Ms de Somer : I absolutely agree with Dr David: it's not just an ageing population, the population is living longer, there are greater community expectations and greater community knowledge. The global internet move to Dr Google and knowledge availability has improved and increased community expectations. The technology is advancing. We have seen recently the listing of medicines that have a 90 per cent eradication rate of hepatitis C. Those are health outcomes that create savings and efficiencies in other parts of different portfolios. I just wanted to correct the record: the health system is growing in expenditure quite significantly; however, it is worth pointing out that the cost of medicines on the PBS has been flat or declining for around a decade. That is related to significant reforms over the last decade.

CHAIR: You argue also, I think, that the use of your members' products, speaking generally, has cost savings elsewhere in the system.

Ms de Somer : Elsewhere in the system. Broadly speaking, we have a very efficient value-for-money assessment conducted on the listing of medicines. That actually leads to some of the regulatory complaints that are in some of the other submissions around the authority system required for accessing medicines for certain patients, and delays in accessing medicines.

CHAIR: Understood.

Ms de Somer : But it is part of that cost-effective valuation of medicines. For example, there is a lot of evidence to suggest that if you manage alcohol abuse you save money in the law enforcement portfolio, but you can't cross-budget across those portfolios. It's the same in the health care setting. If you manage osteoarthritis pain and mobility you can keep people in the workforce, which reduces their welfare dependency, and that saves money in the social services portfolio. But you can't cross-budget for that. I think that is an unfortunate budgetary accounting mechanism that we can't fix, but what we can do is better value the medicines and the services in the health system that we provide and make sure that those services that are provided are value for money. As they are in the medicine system, they could be in other parts of the system.

The other thing I wanted to say is that in Australia patients do pay a co-payment for their medicines, for example. There is recent evidence to suggest that the out-of-pocket expenses our community will pay for herbal remedies and homeopathic remedies far exceeds the out-of-pocket expenses for a co-payment for a well-researched, clinically-proven medicine. So, there is some appetite for the community to contribute to their health care.

CHAIR: They will pay for something that doesn't work, but then they argue about something that does work. Exactly.

Senator PATERSON: I'm pleased to know there is a willingness to pay. That's a classic case of revealed preference rather than stated preference.

CHAIR: Yes; indeed.

Senator BURSTON: Dr David, I'm one of those baby boomers, so I'm very grateful for that 30-year bonus! Getting back to the two per cent pegging that the opposition are introducing as a policy, I compare that with rate-pegging off councils, where it almost brought some councils to enforced amalgamations. So I'm definitely against that. But how do you reconcile it with some health funds that have been listed on the stock exchange, which implies they are profit-driven for shareholders? Do you see that as an issue?

Dr David : I understand the frustrations that people have when they see premiums going up, but the business model of the health fund has no impact on that. A well-managed health fund will still need to pay out benefits at the same rate as healthcare claims are increasing. Mr Summerhayes, one of the commissioners of APRA, made a statement this week that APRA doesn't believe capital levels in private health insurance companies are too high or should be reduced. Our regulator, which looks into our sector in detail, particularly every year around the time of the rate rises, does not have a view that the net profits are too high or that they should be reduced.

In terms of the for-profit health funds: we have two out of 37 that are listed on the stock exchange. They are both successfully run companies. One of them, NIB, has 100,000 retail mum-and-dad investors. The other, Medibank, has 250,000 mum-and-dad investors. They are both Australian companies. They do pay dividends. When they have a good year, through either their investments or claims variation, they pay dividends back to those shareholders. But they also pay out 86c in the dollar, on average, in claims, to their members. So that's the claims ratio that they pay back to their members. For every $1 in premium income they earn, 86c goes back to their members, which is greater than any other form of insurance. If you compare their net margins to other forms of insurance, the net margins are sitting around maybe six to eight per cent—usually more around six. If you look at other general insurance, it's around nine. I understand the frustrations and want to work on keeping premiums down. And it's an easy thing to say it's all about the for-profit funds, but it's not borne out by the evidence.

CHAIR: Just getting back to the main terms of reference of this committee, red tape: in terms of the health insurance companies, how much better could they serve the public? Could they keep health costs under control, and even lower premiums, if there was less red tape? I'm thinking of things such as the scope of insurance. So you're limited in terms of what you can cover. You're limited in terms of what you can pay out. Are there other limitations in terms of designing policies for particular types of consumers that you can't do because of red tape—because of regulation? What could be possible if the industry was less regulated?

Dr David : Honestly, if I sat here for the rest of the day and talked non-stop without drawing breath, we would still be here and I would be giving you examples—

CHAIR: Supplementary submissions are permitted!

Dr David : but I will give you two examples of perhaps the most frustrating things that we deal with. The first is that, under the original design of the Medicare system, at the time—this is back in the late seventies—it was thought a good idea to lock health funds out of co-funding or covering the co-payment for out-of-hospital care. That was fine in an era when people didn't claim as much: there was a younger population and a lot of people had acute, not chronic, conditions and were getting treated in hospital when they had acute conditions. Now it is quite possibly the stupidest way you could run a health fund. If someone has cancer these days, they have their surgery in hospital; we can cover them for the out-of-pocket for that; but they get the rest of their care—their chemo, pathology, imaging—out of hospital. We can't cover the co-payment—it's against the law. That means that people, even though they have private health insurance, are faced with this huge out-of-pocket cost. Pregnancy and obstetrics: can we cover for management of the pregnancy? No, only the birth. We can't cover out-of-hospital admissions or consultations with a psychiatrist in private, but we can cover someone to be admitted to hospital and have the same consultation there. If they're admitted to hospital, that's $1,000 a day. If they have a consultation in a doctor's rooms, it's $300. This is what is forcing premiums up. It is absurd.

CHAIR: Explain the link. If you could cover those things that you said you can't cover, how would that help to bring premiums down?

Dr David : I'll take mental health as an example. In the acute phase of a mental health episode, people are admitted to hospital. Then they're discharged. What should happen is they see a mental health professional or psychiatrist in their rooms to talk to them, get their medication adjusted, have counselling or maybe attend group therapy. That attracts a co-payment in the current system, because we can't insure for those services. Instead, so the consumer doesn't get a co-payment and the doctor can access gap cover, the patient is admitted to hospital, even if they're having group therapy, at a cost of upwards of $1,000 per day in some cases. What we should be able to do is negotiate with the providers for a no co-payment service. It's not unlimited, we're not covering everything the doctor asks, but for a no co-payment or low co-payment service to occur in the community. But that's not permitted under the current legislative system. That's a big reason why premiums are going up across a number of treatment areas. It impacts patients with cancer, rehabilitation, mental health, pregnancy—things that are much better addressed for most of the treatment programs in the community.

The other thing it does is that we can't fund preventive interventions that occur in the community, like for people with osteoporosis and arthritis. If we were able to better fund allied health and coordinate care in the community it could reduce the chance of a fracture or joint replacement down the track, which requires a hospital admission.

The second example I'll talk about is that we're in negotiations with the government at the moment about being able to offer some discounting to younger people to enable them to better afford private health insurance and get into the system. But there's a whole heap of regulation around discounting that occurs. For example, the level of discounting is regulated. It's written down: you will only be able to offer a certain level of discounting to customers. But the trouble is that there are some situations—I know one health fund that I won't name at the moment has been working out a regime whereby for people that are victims of domestic violence they are able to offer them a reprieve or a discount on their health insurance, as well as some other benefits at the same time. That has been ruled unlawful under the current regulatory environment because it doesn't fit the strict criteria that are laid down in regulation about discounting.

CHAIR: The other area I'm interested in—and I'm wondering whether there may be a third example we can talk about—would be differential premiums for people depending on their risk factors, such as drinking, drug-taking and smoking. I understand you're not allowed to vary premiums based on those sorts of factors. Is that right?

Dr David : No, we have a community rating system where the funds are not permitted to discriminate based on people's health status or habits. The only way in which we can vary a premium is based on someone's age at the time of joining.

CHAIR: That's red tape, obviously. It's regulation—it's bright red tape, I would have thought. If you were able to lower a premium, for example, for somebody who was a smoker and then quit smoking, what do you think the consequences would be both for your members and the health system?

Dr David : I think community rating itself is a good idea, and as an organisation we support community rating. But increasingly, under the pressures of rising costs, it is coming under strain. What we can do under the current system is offer people services and incentives to help them quit smoking. But, under the current system, where we're seeing the strain is in the products coming through with exclusions, and, really, that has meant that, although we have to accept everyone based on their health status, exclusions have enabled us to give consumers at particular life stages an option to pay more or less. As health costs increase, this has been what consumers have demanded of the health funds as a way of varying costs around life stages, and that's been seen by the funds as an alternative to unravelling community rating—not because necessarily we want to but because consumers have increasingly demanded affordable options.

CHAIR: I can see they're demanding it—although Medibank, I think it was, a few years ago, advertised on TV saying 'you choose the cover that suits your life'. I think they had young people in the advertisement and the advertisement said 'so you don't have to pay for things like joint replacements and things like that'.

Dr David : That's right.

CHAIR: Is that not common, that sort of thing?

Dr David : That is very common. Our position is that we support community rating, because it would create a great deal of uncertainty amongst consumers if they thought they may have to pay a hugely higher premium based on their health status. That's become very controversial in areas like life insurance around mental health. However, we are unable to deliver community rating at the moment without having products with exclusions. That's the price of keeping the community rating system in place.

CHAIR: We are running a little bit over time. If you wanted to do a supplementary submission on that question I asked you, about what you could do if you were less regulated, I'd welcome it and I can ensure you it won't disappear into the ether.

Dr David : Thank you, Senator.

CHAIR: Your submission, and Medicines Australia's to some extent too, is just the tip of the iceberg in terms of red tape. I think you made some valid points in it—and I didn't even get into this question of monitoring and performance measurement of hospitals and the people that you insure. I have noted that, though, from your submission. But it seems to me you're so heavily regulated that there must be more scope for improvement in that industry than what you referred to. If you feel like going further, I'd welcome it. Thank you very much for your attendance and your evidence today.