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Community Affairs Legislation Committee
07/08/2018

GATH, Mr Shaun, Private capacity

[13:27]

CHAIR: Welcome. Do you have any comments to make on the capacity in which you appear?

Mr Gath : I appear as a principal of a consulting firm called Narrabundah Partners, but I suspect I'm really here because I used to occupy the position of chief executive officer of the private health insurance regulator, the Private Health Insurance Administration Council.

CHAIR: Could you please confirm that information on parliamentary privilege and the protection of witnesses and evidence has been provided to you?

Mr Gath : Yes, it has, thank you.

CHAIR: We have your submission. I now invite you to make some opening remarks, and then we will ask you some questions. Please go ahead.

Mr Gath : I would like to thank the committee for inviting me to participate in today's hearing. I do so not merely as a courtesy but because my attendance today is, I would respectfully suggest, rather noteworthy in its own right. The program of today's hearing is, in most respects, a typical one for this and many other parliamentary committees, and yet, here I sit, a sole individual sandwiched between the great and powerful interests that dominate discussion about the direction of this vital industry.

I do not suggest, of course, that I am a mere bystander. Obviously, with the benefit of seven years as the CEO of the specialist regulator of the industry I have enjoyed privileged and probably unique access to the inner workings and dynamics of the private health sector. All that is true. On the other hand, this is one of the few occasions, at least as far as I am aware, that rather than just going to the usual parade of industry interests—funds, big and small, hospitals, doctors, device manufacturers, dentists and, naturally, the Department of Health—a third party or disinterested voices are going to be articulated on a range of issues that the minister has claimed are the biggest changes to the PHI system in many years.

If I am to claim a degree of disinterest, I should make clear the approach I bring. The organisation I used to lead, PHIAC, had three statutory objectives which directed all its work. These were: first, to ensure the prudential soundness of the private health insurance industry; second, to promote competition; and, third, to protect and promote the interests of consumers. In my view, these remain sound and appropriate guideposts. They underpin what is in my submission and what I will say today. I would respectfully suggest that they will be relevant as well to the committee as it goes about its important work. By following these three guideposts, in my view, that way lies the public interest, which I believe is the destination we are all seeking to reach.

Have we lost the connection? I can't hear the committee.

CHAIR: Sorry about that, Mr Gath.

Mr Gath : Chair, I was just pontificating. If I could resume—

CHAIR: Continue.

Mr Gath : I was talking about the public interest, and I will repeat a sentence that I think I was in the middle of when the line dropped out. I was referring to the three guideposts which were an important part of the work of my old agency and my view that those point the way to the public interest, which I believe is the destination that we are all seeking to reach.

That is the conclusion of my opening statement—save for one housekeeping matter. I need to make a general qualification in relation to the views expressed in my submission. You will note that it is dated 3 July. At that time, I did not have access to the exposure draft of the proposed amendments to the Private Health Insurance (Complying Products) Rules and significant components of the changes proposed at that time. These are now available to the public as an attachment to the department's submission, which was released on 16 July. The result is that I have only really had an opportunity to cursorily examine those important parts of the package. I'm happy to offer my—obviously, less well-informed—views about that, but with that important caveat. Thank you.

CHAIR: Thank you, Mr Gath. My question is as to a couple of things that came up earlier in today's hearing. I'm not sure how much you have been sitting in for, but a couple of concerns have been raised—one about the increase in excess that is in the bill, and another about the potential impact on community rating. Would you care to comment briefly on each of those issues and how you see the bill impacting?

Mr Gath : I do address that issue in my submission, and I do think that that is a very important feature of the package that is proposed. The change in the excess arrangements will increase by 50 per cent the amount of excess that is permissible, both for individuals and family products, and—although I'm not an actuary, and I would obviously defer, ultimately, to somebody who can run the numbers, with that background and experience—I'm quite confident that that change in the excess arrangements will result in a quite significant reduction in premium cost. Many people, I believe, will take up maximum excess products, and they will obviously go into the market at substantially reduced premium prices. That may well also flow through into the number of people who are interested in purchasing the product in the first place, because obviously the price entry point will be substantially reduced.

You ask, however, what the implications of that will be for community rating. I agree that they are potentially substantial. But in my view community rating is already a proposition that is under quite substantial challenge through the introduction, back in the mid-2000s, of the capacity for insertions and exclusions into products. As you probably know, the history of that provision in the legislation was that it was largely ignored for many years. Most of the funds continued to sell products which were, if you like, the full package of coverage. Then the last 10 years, and in particular in the last three or four or five years, there has been a substantial growth in the number of products with significant carveouts and exclusions. It's really the emergence of that feature or dimension of the industry which has created the case for the formalisation of that structure through the setting up of the new nomenclature that we see in this package—gold, silver, bronze and basic. What we're seeing is really a substantial change in the profiling of the industry and a very significant reallocation of risk within the industry with a substantial outsourcing of risk back into the pockets of individual consumers, particularly those purchasing low-cover products. In a sense, that horse has already bolted and is well down the track already. I think this simply adds to that.

But it does bring to mind a very important, larger conversation about the role of community rating within our system of health care. As I've said in my submission, I see here are a clash or contest of competing, equally valid community interests or public interests: the public interest in the retention of community rating and products which are going to be universally priced; but on the other hand, a quite legitimate public interest in having access to cheaper products and a range of products that are not going to be quite so financially demanding on consumers.

Senator PRATT: In terms of increasing maximum excesses, will it increase the number of people who choose not to claim and revert to the public system? What's the interaction of that with other perceptions around out-of-pocket costs when it comes to gaps?

Mr Gath : I think it probably will. The excess can apply to any one of the different categories of products. If you're gold with an excess of $750 as an individual, and you're about to undertake an expensive procedure, you probably won't see the $750 as a barrier to making that claim. You need to look at it set against the actual product that you're going to run the excess against. On the other hand, if you have a basic product with an excess of $750, I'd suggest to you that that is not a product that is likely to be claimed on ever. What we see here and will see—and perhaps this is a matter for concern—will be the emergence of a category of products which are deliberately put into the market with the expectation, on the part of those issuing them, that they won't actually be claimed on. Large excesses would simply underscore that likelihood.

Senator PRATT: How does that combine with other out-of-pocket costs, in terms of that disincentive?

Mr Gath : Out-of-pocket costs are largely a problem associated with the medical component of the services, not the hospital component. I'm sure you'll appreciate that of the private health insurance dollar, 70 per cent or so of that money is spent on hospital accommodation and services provided while people are in hospital. The medical component only comprises 15 per cent, with the other 15 per cent usually being taken up with prosthetic-type costs. So when you look at it as being focused in that quadrant of the total expenditure, out-of-pocket costs will still be an important disincentive to people pursuing private hospitalisation options. I think the better option in the longer term is for them to get better information about the costs that the doctors are going to impose upon them well in advance, so that they can make rational and informed decisions about where they want to go for treatment.

Senator PRATT: You mentioned that higher excesses will translate into lower premiums. Do we have a guarantee that that will happen, or are we just relying on the say-so of government and insurers?

Mr Gath : I think it's maths.

Senator PRATT: So you think it's been modelled? Has it been modelled?

Mr Gath : It's not down to me to do the modelling. I'm just a member of Joe public these days. But it seems to me—I think ultimately you would need to have this confirmed by an actuary—what you're doing by increasing the excess is removing risk, because the insurer only has to recover a reduced amount of potential claim. That therefore will sound in the cost of premiums. That's the way risk and premiums are always linked together.

Senator PRATT: In relation to the termination of policies and the capacity for health insurers to terminate a policy, what are the risks in relation to that? How could policyholders be disadvantaged?

Mr Gath : You're asking about the termination provisions in the legislation? I don't think that's a major concern. Most of the policies that are subject to the termination arrangements are small and obscure and little used. In my submission I've said—and I think this is a role for the committee—to seek from the government assurances that people who are going to be subject to termination arrangements are going to be property treated as they are translated across to other policies. There's going to have to be a proper oversight and fairness issue addressed there. I don't believe it's going to be a major issue. Most of the policies that the vast majority of Australians are in are going to remain open. This is really a housekeeping and tidying up exercise.

Senator SIEWERT: You made a comment that you had only seen the rules subsequent your submission.

Mr Gath : Yes.

Senator SIEWERT: Do you have any comments to make on the rules as you've looked at them to date?

Mr Gath : I do. I'm aghast at how complex they are and how much detail there is in there. It just adds to my strong feeling, one which I articulated in a submission to this committee last year, that the legislative framework of this industry is just horrendously complex. As I read through all the details of what's required in all those other additional dimensions of the government's reforms, even I, as a more than usually informed reader of that material, continue to be completely overwhelmed by the complexity and difficulty that sits around regulating this industry. I'm despairing a little bit of the overall longer term objective of this being a less complicated and easier product for people to have access to.

Senator SIEWERT: So the level of complexity and the difficulty in regulating the industry as you've articulated—what impact does that have? Where to from here? You just said that this new set of rules are complex and have a lot of detail. What's your view on where we go to from here? I take from your comments just then that you see that as a negative.

Mr Gath : Certainly it is negative. My longer term and broader view is the one I express at the end of my submission: I think this whole mess needs to be tidied up by a broad, sweeping and general examination of the whole sector. We are simply succumbing in a mire of complexity. Every attempt to complete or improve one element of it often seems to result in just greater complexity in some other part of the system. It's a system which is encrusted with special deals and sweetheart arrangements that have been in place for decades in many instances, which are distorting the market and are quite damaging to the interests of customers, and which are ultimately corrupting the proper operation and delivery of an important part of our medical system. So I believe we need a general, overarching and expert-driven examination—my preferred provider of that service is the Productivity Commission—of the entire system, where we can almost start again to some degree—certainly, start anew from basic, fundamental points.

Senator SIEWERT: I suspect that answers my next question, which is to ask you for a broader overview of how the market is operating at present, and then whether these reforms in this package are going to help out, and the degree to which that is going to help, if it is.

Mr Gath : My general view of the market for private health services—in particular for the provision of medical services—is that it is dire and not even remotely operating correctly and that consumers are enormously disadvantaged. Largely, that's because of an information asymmetry. The range of ways in which that is managed includes, I think, uncalled-for and unjustified claims that provision of information to consumers at appropriate times would constitute some form of managed care. This is a regular call by people who want to keep consumers in the dark. I think it's quite adverse to the longer term interests of consumers and a properly operating market for the delivery of services.

In terms of these particular reforms, I see the introduction of this nomenclature model of gold, silver, bronze and basic as being helpful in that direction. I think it will provide a better opportunity for consumers to compare like for like and make more meaningful judgements about where value sits. I suspect what would probably happen is that the level of competition between the insurers around those products will narrow quite closely, a little bit like when I was completing my motor vehicle registration recently. I don't know whether you've had this experience, but I was offered, I think, four different insurance products to cover my compulsory insurance needs. Between the four of them, I think there was about $4 difference in premium over a $600 premium. So these sorts of things might happen, but nevertheless I think that by drawing consumers directly and more specifically to the content of their products and making them think more proactively about what type of cover they want, and also by encouraging an environment where consumers are going to be more engaged and understand that private health insurance is not a 'set and forget' type product—it's something that's going to evolve and change as you go through life, and your needs are going to alter—people will be more involved and more prepared to make properly informed decisions about the level of cover they need. Giving them that critical information at the critical time, I think, will be an important part of that process.

CHAIR: Thank you very much, Mr Gath, for your time today. We will have to leave it there. We have to take a short break, but thank you very much for your participation today.

Proceedings suspended from 13:47 to 14:25