Why do health insurance premiums keep going up?
It’s that time of year again: the dreaded health insurance premium rise.
For many Australians already feeling the pinch, this is obviously not great news.
So—why do health insurers keep increasing their prices, and how can they justify another increase that’s more than double
the rate of inflation?
It’s a loaded question. To answer it, first we need to talk a little about the Australian health system and how it all works.
Health insurance is community rated
Have you ever noticed how—unlike other insurance—your health insurance never goes up when you make a claim?
That’s because most insurance (like car or life insurance) is ‘risk rated’. This means your insurer calculates your premiums
based on how likely you are to claim i.e. your level of risk, increases your premiums when you do claim, 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 ‘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 insurers—health insurers cannot offer a no claims bonus.
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.
It’s a key reason Australia is considered to have one of the best health care systems in the world—ensuring 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 just depends on the product you have
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 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
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
In line with community rating, premiums are adjusted on a product by product basis and not at an individual member level.
This means everyone with the same product (e.g. Top Hospital) will have the same premium increase, while members on different
products will have different increases.
Once they have finished their calculations, each health fund puts forward a proposed average premium increase. These submissions
are scrutinised by the Minister of Health’s office and APRA (Australian Prudential Regulation Authority) and—once all
parties are happy—the minister announces the new rates around January to February, via the media.
The rate that gets reported by the media is an average increase across a health fund’s entire range of products. Depending
on your product, you might get a premium increase that is below or above the reported average. You are notified of your
individual increase in a private letter or email from your health fund in late February to March. The new rates come into
effect on 1 April. Read more on this here.
No health fund knows what any other health fund’s increase will be until the Minister of Health announces the new rates.
Despite this, rate increases are usually pretty similar. That’s because all health funds face similar pressures when it
comes to keeping their premiums low—the biggest factor being the rising cost of health care.
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 reported in the media is the overall rate of inflation, calculated
using the Consumer Price Index (CPI).
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 – 3% year on year.
If you take health care out of the proverbial basket and look at it in isolation you get the figure for health inflation—the average increase in the cost of health care. The rate of health inflation in Australia has been between 3.6 – 7.7% every
year for the past five years—more than double that of ‘overall’ inflation.
Source: Australian Bureau of Statistics (2017)
Health inflation is outpacing overall inflation for lots of different reasons. There’s our aging population, a rise in chronic illnesses, advancing medical
technologies making procedures more expensive, and 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.
At least, that’s what not-for-profit health funds are doing.
For-profits and not-for-profits manage their money differently
For-profit health funds pay dividends, so if you’re a member of a for-profit health fund, your premium increase includes
a little bit of money that will go straight into a shareholder’s pocket.
With not-for-profit health funds, premium contributions only ever go towards paying claims and covering the cost of running the business.
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 increase.
So, what can you do to get your health insurance premium under control?
Here are some simple ways to save
There are heaps of things you can do to help get your costs down, but here are some quick tips to get you started:
Talk to your health fund to see if they offer a discount for paying in bigger chunks, like yearly instead of every fortnight.
Increase the excess on your hospital insurance. That
means if you need to go to hospital, you’ll pay whatever amount you nominate upfront, out of your own pocket. A bigger
excess generally means a smaller premium.
Review the services on your policy, to make sure you’re only paying for what you need.
If you are considering switching or downgrading your cover, just make sure you’re not accidentally dropping hospital services
you might need in 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 watch outs to avoid, read our article on Things to consider when reviewing your health insurance policy.