Why do health insurance premiums change every year?

By HBF

8 minutes

21 December 2020

First published: 2 February 2018

Have you ever wondered why health insurance premiums get adjusted every year? The truth is there’s several factors that affect your premium adjustment.

The good news? It’s not as complicated as you might first think. Let’s start by understanding how the Australian health system works.

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Health insurance is community rated

Most insurances (like car insurance) are ‘risk rated’. This means your insurer calculates your premiums based on your individual circumstances including how likely you are to claim (i.e. your level of risk can affect your premiums when it comes time for your annual policy renewal), and often offers a ‘no claims bonus’ when you don’t claim.

In contrast, health insurance in Australia is ‘community rated’. This means your premiums are not based on your individual ‘level of risk’ or how likely you are to claim. Instead, community rating stipulates that health insurance must be equally accessible and cost the same for everyone regardless of their health status, claims history or personal traits like gender or age. It is also the reason that—unlike other types of insurance—there are no 'no claims bonuses' in health insurance.

Community rating is part of the legislation that governs health insurance in Australia and was introduced by the Australian government in the National Health Act 1953. It is practiced in just a few other countries, including Switzerland and the Netherlands. Thanks to community rating, Australians can relax knowing if they get sick, injured or have a history of illness they will be treated fairly and won’t be locked out of the private system or penalised with higher premiums.

Community rating ensures a strong and financially accessible private system that takes pressure off the public system. But world class health care comes at a cost—one that, in recent years, has seen sharp growth.

To cover the rising cost of health care, health funds must change their premiums accordingly. So how do they do this when premiums are community rated?

Your premium price depends on the product you have and the state you live in

Every year, health funds in Australia go through a process called ‘rate review’. During this time, health funds assess how much they’ll need to adjust their premiums in order to manage the rising cost of health care.

It kicks off with the Minister of Health’s office announcing the submission period for the new year’s health insurance premium adjustments.

Health funds crunch their numbers to work out what the company currently receives in premiums versus pays out in claims. They use this data to work out how much money they will need to generate in premiums in the coming year to continue to cover their costs.

In line with community rating, premium adjustments depend on the kind of cover you have and the state you live in. This means everyone living in the same state, with the same product and excess (e.g. Gold Hospital with a $500 excess) will have the same premium adjustment.

Once they have finished their calculations, each health fund puts forward a proposed average premium adjustment. These submissions are scrutinised by the Minister of Health’s office and the Australian Prudential Regulation Authority (APRA) and, once fully reviewed and approved, the minister announces the new average rates via the media.

The rate that gets reported by the media is an average adjustment across a health fund’s entire range of products. Depending on your product, you might get a premium adjustment that is below or above the reported average. You are notified of your individual adjustment in a private letter or email from your health fund early in the year (typically February or March). The new rates come into effect on 1 April every year. Read more on this here.

The cost of health care is rising at double the rate of inflation

A common complaint around rate review is that health insurance increases are more than double the rate of inflation. What many people don’t realise is that the rate of inflation often reported in the media is the overall rate of inflation, calculated using the Consumer Price Index (CPI)1.

The CPI represents the average change in cost over time of a basket of goods and services in Australia. It’s calculated quarterly and includes things you literally put in a shopping basket—like bread, butter and toilet paper—to more expensive things like health care and education. For the past five years, overall CPI in Australia has risen around 1.5 – 1.9% year on year.2

If you take health care out of the basket and look at it in isolation you get the figure for health inflation—the average increase in the cost of health care. The Australian Bureau of Statistics indicates that the rate of health inflation in Australia has been between 2.6 – 4.0% every year for the past five years.2

Inflation graph for years in review

Source: Australian Bureau of Statistics. (2021). Consumer Price Index, Australia, December 2020.

The Australian Bureau of Statistics indicates that health inflation is outpacing overall inflation for lots of different reasons3. There’s our ageing population, the increasing costs of medical and hospital services and the fact that more people using the health care system.

When health insurers adjust their premiums, they are tackling health inflation, not overall inflation, to ensure they can responsibly cover the rising cost of claims.

Just keep in mind that there’s a difference between the costs that for-profits and not-for-profits need to account for.

For-profits and not-for-profits manage their money differently

A not-for-profit uses any money it makes to further its cause and cover the cost of running the business, like paying utilities bills and staff. Any surplus earnings (profits) are also used to help further the not-for-profit’s mission.

For-profit businesses have the same overheads as not-for-profits, however they use some or all profits to pay shareholders or investors. Basically, some of the money that flows into a for-profit business will always go to shareholders or investors.

While it’s helpful to know where your money is going, unfortunately, regardless of whether you’re with a for-profit or not-for-profit health fund your premium will still be adjusted annually.

So, what can you do to keep your premiums low?

Here are some simple ways to save

There are a few things you can do to help get your costs down. Here are some quick tips to get you started:

  1. Talk to your health fund to see if they offer a discount for paying in bigger chunks, like yearly instead of every fortnight.
  2. Increase the excess on your hospital insurance. That means if you need to go to hospital, you’ll have to pay the agreed excess amount upfront, out of your own pocket. A bigger excess generally means a smaller premium. However, when you review your excess level, consider what you can actually afford to pay upfront in excess if you are admitted to hospital.
  3. Review the services on your policy to make sure you’ve got the cover that’s right for you. Just make sure you’re not dropping services you might need in the future, or cutting the amount you’ll get back on extras services you’ll use more regularly.

For more advice on ways to save and potential things to avoid, read our article on Things to consider when reviewing your health insurance policy.


Sources:
1 Australian Bureau of Statistics - What is a Consumer Price Index (CPI)?
2 Australian Bureau of Statistics - Consumer Price Index, Australia (2021)
3 Parliament of Australia - Private health insurance premiums