Premiums on the rise...But is Private Health Cover worth it?

May 23, 2018

Welcome to Finance & Fury, Say ‘What’ Wednesdays! where we answer your questions on finance and economy.

Today’s question comes from Mike – ‘Hey mate, loving the show, what’s your view on Private health insurances, I keep seeing my premiums going up and am wondering if you think it is worth having or not’.

Thanks Mike!

1. Hikes in premiums over the past few years

 

2. Media articles are stating that Australians are dumping their covers ...but are they?
   • Roy Morgan Research – 265,000 Australians have dumped their covers for Private Health
   • Industry body – Private Healthcare Australia say that more Australians have private health than ever
     • An extra 50,000 Australians have taken out covers in 12 months – 13.58 million with hospital, extras or both
     • Up from 13.52 million
   • What is true? The percentages are down, but the number of Australians are up
     55. 55.2% in March 2017 to 54.6% in March 2018
   • Why are people dumping it?
     • Getting too expensive obviously – not enough value in it unless you claim that value back…and how much will it pay back?
     • Premiums have gone up an average of 72% in the past decade – greater than inflation and wage growth
   • Looking for someone to blame? The greedy companies, or the system setup?
     • Premiums rose 4% to $23.75 billion in 12 months
     • Benefit payments rose 3% to $20.1 billion
     • Gross margin - $3.65 billion
       • Expenses - $2.21 billion
       • Tax $441,000 and state ambulance levies of $226,000
       • Profits = $1.38 billion
3. Why do a lot of younger people have it? The Government is this industry’s enforcer
   • One reason - If you are likely to claim on it
   • Another reason - If you are going to be charged the additional tax
   • Customers are pushed through the door – the cattle prod here is tax penalties
   • Medicare Levy – Introduced 1984 at 1%, now 2%
   • Lifetime loadings – Introduced in 2000
     • Lifetime Loading – Increase premiums by 2% each year above 31
     • Take it out at 35 – 10% loading, take it out at 65 – 70% loading
     • Most people don’t really start using it until their 50s
4. Medicare levy Surcharge – 1997
   • MLS is levied on Australian taxpayers who do not have an appropriate level of private hospital insurance – Earning more than $90k, or $180k for families.
   • Tax – 1% to 1.5%
   • It is designed to ‘encourage’ individuals to take out private hospital cover and to use the private system rather than the public health
   • But the Medicare levy they still pay…2%
   • Over the years, as taxes go up, people have less money to spend on their own health, as they are paying for others.
     • So, people rely more on Public than private in the end

Behind the scenes

1. Moral hazard –
   • Economic definition for transaction costs, it has an incentive to take unusual risks in a desperate attempt to earn a profit
   • Theory of if you get covers, you will change behaviours
     • Try to maximise your use
     • Behave in ways you wouldn’t otherwise
   • Example – phone insurance – Case/Protection or not?
   • If you are sick – Are you more likely to get cover or less?

2. Subsidising the sick – if you are going to claim, you get it and are willing to pay more
   • The total costs are the same regardless of your health hazards, ages, extracurricular activities.
     • A heroine junkie (if they haven’t spent their money on the tar), would pay the same as you.
   • Premiums are based on the likelihood of claims – But at the industry level!
     • Claims go up – premiums go up
     • Costs of health goes up – premiums go up
   • As the number of people paying in decrease – premiums go up.
3. The more that people ditch it, and the more the system is run with inefficiencies, the more that the price of insurance will increase.
4. ESPECIALLY: with no incentives for companies to make it better, as there is the cattle prod provided by the government to round you all up.

How to fix it: Healthier Australians…or change the process of getting cover - needs based on how healthy you are. Underwriting in the same way as Life, TPD or Trauma insurance covers to assess individual levels of risk

• Pre-existing condition exclusions
• Focus is always on insurance companies – greedy CEOs looking to make money
• If they can’t, they go out of business though.

To answer Mike’s question - Is it worth it to have private health cover?

• If you are likely to claim on it
• If you are going to be charged the additional tax