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Economics References Committee
30/10/2015
Cooperative, mutual and member owned firms

KOCE, Mr Matthew, Chief Executive Officer, hirmaa

ACTING CHAIR: Welcome. Would you like to make a brief opening statement?

Mr Koce : First, I would like to thank the committee for the opportunity to present here today. Hirmaa represents 18 community based private health insurers, comprising both industry or employer-focused, restricted-access insurers, and open insurers, serving particular regions. Collectively hirmaa funds provide health insurance to over one million Australians across the country. Hirmaa funds are predominantly not for profit and identify as mutuals or member owned insurers. Twenty-four health insurers are non-profit and mutual or member owned by structure, with three for-profit insurers wholly owned by Australian domiciled mutual organisations. Underlying this is an awareness by these organisations that the mutual and member-owned model is sustainable and that these mutual and member-owned insurers make an important contribution to the communities they serve.

Hirmaa welcomes the points made to this inquiry by the Business Council of Co-operatives and Mutuals. The benefits that mutual and member-owned business have brought to the Australian community have been threefold: economic, social and environmental. This certainly applies in the context of private health. Looking at the agenda today, clearly there is a demonstration as well of the diversity and range of mutuals that are serving different communities.

The 27 health insurers that are mutual, member-owned or wholly Australian domiciled mutual organisations represent 35 per cent of the health insurance marketplace. Their contribution to the wider Australian economy is undeniable. In total, member-owned private health funds contribute $6 billion to the country's economy, in the form of benefits paid for hospital and ancillary treatments.

Unlike for-profit funds, which must return dividends to shareholders, mutual and member-owned funds can focus solely on providing the best possible benefits for their members. They serve only their members, not shareholders. As a result, mutual and member-owned funds pay out almost 90 per cent of premiums received back to members as health benefits—so roughly 10 cents in every dollar is retained, but 90 cents in every dollar goes back in benefits.

More specifically, during the 2013-14 financial year mutual and member-owned health funds paid 88.5 per cent of premiums back to members and ran average net surpluses of 1.7 per cent. Meanwhile, for-profit health funds paid back less than 85 per cent of premiums and banked an average net profit margin, for external shareholders, of 6.8 per cent. By retaining that surplus in the organisation, mutual and member-owned funds can build healthy and prudential capital reserves, which provide added security against economic shocks, such as stock market fluctuations, allows them to operate at lower net profit margins, and leaves them better equipped to provide consistent top-tier cover to their policy holders. We tend to provide cover with far fewer restrictions and exclusions than the big for-profits, such as the Medibanks, the Bupas and the NIBs of the world.

The data shows that member-owned funds are better able to beat the market on incremental premium increases, and subsequently play a crucial role in upholding competitive values and diversity in the overall private health insurance market. We see ourselves as very important to competition and choice. Between 2010 and 2015, mutual and member-owned private health funds averaged a premium increase of 5.3 per cent while those of for-profit funds increased at 5.51 per cent annually.

Furthermore, mutual and member-owned health insurance funds have developed significant trust with the communities they serve, bolstered by their long presence in Australian society. Mutuals tend to pre-date the for-profits. We have been around since before the turn of the century.

Senator XENOPHON: Give me an example of some of your funds. For the record, I have been a member of Mutual Community for many years, and it is now Bupa. Is Bupa one of your members? It is an overseas co-op, isn't it?

Mr Koce : It is not.

Senator XENOPHON: So it is not a member.

Mr Koce : An example of one of ours is Doctors' Health Fund. That is a restricted-access fund, for doctors only. But we also have open health funds, such as St.LukesHealth, which is based in Tasmania and is the largest local health fund there.

Senator XENOPHON: What are the others?

Mr Koce : There is the Phoenix Health Fund, which arose out of the steel industry down in Newcastle; Latrobe Health Services, in the Latrobe Valley; TUH, which is teachers; Teachers Federation Health; Westfund Health, based in Lithgow; the Queensland Country Health Fund, based in Townsville—

Senator XENOPHON: Is Health Partners one of yours?

Mr Koce : Yes, it is.

Senator XENOPHON: It is a well-regarded South Australian fund.

Mr Koce : Absolutely. It has one of the largest dental practices in South Australia as well, which it runs.

Senator XENOPHON: So you are not the big ones?

Mr Koce : No. Our biggest fund would be Teachers Federation Health, which has around 100,000 policyholders, followed by Defence Health.

Senator XENOPHON: Through you, Chair: do you want to table details?

Mr Koce : With the indulgence of the chair, I can table a little booklet we have that has a listing at the back of all the funds that are members of hirmaa and has some facts about our organisation and private health.

Senator XENOPHON: I move that it be tabled, Chair.

ACTING CHAIR: Thank you. There being no objection, it is so tabled.

Mr Koce : May I continue?

Senator XENOPHON: Yes.

Mr Koce : Thank you very much. Member owned funds have very high levels of customer satisfaction, and that is illustrated by above-average retention rates. The Private Health Insurance Ombudsman's data indicates that the percentage of fund members that have remained with their member owned fund for two years or more was 89 per cent in 2013, compared to 81 per cent across the for-profit insurers. Building on this strong retention, Australia's mutual and member owned private health funds have experienced combined annual compound growth rates of 4.17 per cent, compared to the for-profit funds, which have seen a 2.05 per cent average growth over the past five years. So we are off a smaller base, but we are growing much faster than the bigger funds.

Equal in importance is the direct contribution that member owned funds make to their communities through employment and investment in local health care, which in turn helps to strengthen local business and commerce. The important contribution of mutual and member owned insurers is emphasised by the fact that regional Australia is underserviced for health care by comparison to metropolitan Australia. With offices, dental branches or optometry branches located in places like Smithton, in Tasmania, Mildura, in Victoria, and Jimboomba, in Queensland, the role of mutual and member owned private health funds in improving health and quality of life in these regions is clear. We provide meaningful employment opportunities in some regional areas that simply would not be available without our funds.

It is worth noting, on the subject of industry competitiveness, that hirmaa strongly disagrees with suggestions that smaller community and member owned funds are the biggest beneficiaries of Australia's risk equalisation scheme. Of our 18 members, eight are contributors to the risk equalisation scheme. In contrast, the two largest beneficiaries also happen to be the two largest for-profit insurers in the market.

In closing: member owned private health insurance should be supported by complementary regulation and policy settings in recognition that it is a historically superior business model for consumers and that it is very, very consumer orientated. I can further demonstrate that by perhaps tabling our customer satisfaction research. We record 97 per cent customer satisfaction.

Senator XENOPHON: Chair, I move that that be tabled.

ACTING CHAIR: Yes, thank you.

Mr Koce : That concludes my testimony.

ACTING CHAIR: Thank you very much.

Senator XENOPHON: In the context of this inquiry into co-ops and mutuals, what do you say ought to be done? Sorry, I will go back a step. When you look at some of the big private health insurers, are you saying that there is not a level playing field in terms of these mutual or cooperative based health funds?

Mr Koce : I think that some of the proposals put forward by the Business Council of Co-operatives and Mutuals would be very helpful. In particular, there are some innovative ideas around capital raising. Mutuals traditionally cannot borrow money. They cannot issue shares. So growth tends to be sometimes slower than you can get with listed companies. So I would echo what the Business Council of Co-operatives and Mutuals has said.

Another issue would be a greater focus on education. There seems to be a lack of understanding, particularly amongst younger sections of the community, about what mutuals do and how they function—a general lack of understanding around mutuals. So I think there is an opportunity there for further education around that. I also think it would be great to see a greater government focus on mutuals as well—in particular, having a minister who had responsibility for mutuals.

Senator XENOPHON: Before we do that, we need to look at some legislative changes in the health insurance space between the two. I have been a member of Bupa—it was Mutual Community—and I have to say that I do not know what happened there. I have no complaints with them, but I do not quite understand what happened there. Were they basically taken over by a UK mutual?

Mr Koce : HBA was probably the original company you had insurance with. They were purchased by Bupa, which is a UK domiciled mutual. So it is a mutual, but operating out of the UK, and Bupa, the Australian health insurance arm, is a for-profit.

Senator XENOPHON: So there is a difference between the two. To what extent is there an uneven playing field between the cooperative model the health funds that you represent—Westfund, Health Partners, Police Health, Navy Health and others—operate at the moment, and those that are in the for-profit space?

Mr Koce : I think the evidence shows that we are very competitive with the big guys in private health insurance.

Senator XENOPHON: No, that is not my question. My question is to what extent is there is an uneven playing field in your regard? To what extent do you think there should be an acknowledgement that you are a mutual or a cooperative in the health insurance space? Sorry, I am not expressing it very well. Are there some impediments that you have at the moment that you ought not to have, given your status representing mutuals or cooperatives, that would make it easier for you to operate, to reflect your community ownership status?

Mr Koce : It would be perhaps those reforms recommended by the Business Council of Co-operatives and Mutuals around the Corporations Act. One of my concerns is that there needs to be recognition that the director's role is sometimes different in a mutual not-for-profit. That unique role needs to be recognised. I would probably echo what has already been presented from the business council.

Senator XENOPHON: That is fine. I want to ask you another thing. This is an issue that I have been critical of the coalition on—that will get Senator McKenzie's attention—and even more critical of the opposition on.

ACTING CHAIR: Excellent!

Senator XENOPHON: You are both bad on this one! On the 30 per cent rebate, the coalition did not keep its promise to the private health insurers for the rebate to be indexed. What impact has that had? Also, they have not wound back Labor's changes, which I thought would get people to scale down their membership—so that they would just go for basics—which puts more pressure on ancillary services being provided through the public system. Can you tell us anything about that, without being too political? I have done the political bit! What has the impact been?

Mr Koce : We are noticing affordability is increasingly becoming an issue. Means-testing of the rebate has had an impact on affordability, and its indexing to CPI adds a degree of complexity. It is difficult to communicate that change in a way that the end consumer can understand. It would be much better, from the industry's perspective, if the government could land on a specific rebate figure, whatever that would be, and it would stay constant.

Senator XENOPHON: So what is it now?

Mr Koce : It has dropped a couple of per cent. It sits down around 28 per cent or thereabouts.

Senator XENOPHON: So it is effectively 28 per cent, and it is going to keep going down, isn't it?

Mr Koce : It is. It will keep going down and whittling away around a per cent a year. It varies based on your income.

Senator XENOPHON: Which is unsustainable in the longer term, isn't it?

Mr Koce : Our preference would be for the full 30 per cent rebate to be restored, and for it not to be means-tested. I understand the coalition has promised to do that when budget circumstances allow.

Senator XENOPHON: So in about 40 years time!

Mr Koce : The sooner the better. There were three great Howard government reforms: lifetime health cover loading, the Medicare levy surcharge and the 30 per cent rebate. We got private health insurance up from historical lows of around 30 per cent, where the industry was in absolute crisis, up to now where we are around the 50 per cent mark. But we are noticing there is pressure on consumers to downgrade because of affordability.

Senator XENOPHON: That was the Labor changes.

Mr Koce : We would love to get that full 30 per cent back.

Senator XENOPHON: I am sure Senator McKenzie will take all these concerns to the coalition party room.

CHAIR: Do you have more questions, Senator Xenophon?

Senator XENOPHON: No. Do you have any more questions, Chair?

CHAIR: No, I do not actually. I think you have covered it all. My questions were all around for-profit versus for members, which I think you covered really extensively. The tabled documentation, I think, will further inform us. Thank you very much for appearing before the committee. Is there anything else you would like to add?

Mr Koce : I have nothing further. It has been an absolute pleasure.