Launching a special investigation on Australia’s private health insurance system, Melissa Davey reports on why analysts say it is ‘virtually impossible’ for the average person to compare policies • Help us continue to cover the stories that matter. Support Guardian Australia with a monthly or one-off contribution

Market failure: private health insurance only worth it for 'the pregnant, the rich and the sick'

Laura Rolfe has always had private health insurance, because her mum always had it and she believed that “it’s just what you do”.

The 29-year-old account manager convinced her husband, Jason, that it was something he needed to have as well, fearing he might be left in the lurch if illness or injury struck.

“He didn’t have it when we first got together,” Rolfe says.

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They pay $100 each in premiums a month, an investment Rolfe thought would prove worthwhile when they found out Jason, a music teacher, had a deviated septum, affecting his ability to teach and play his primary instrument, the trumpet.

“One of his nostrils was fully deviated and he was only getting 10% airflow through it,” Rolfe says.

“But when we went and saw the ear, nose and throat surgeon, he told us we were not covered by our insurance. We were entitled to nothing on the anaethetist, or the surgeon. It was going to cost us about $9,000.”

It’s virtually impossible for the average person to make a comparison or indeed know what their cover is Graeme Samuel

The couple could not afford it. But the public system, Rolfe has learned, will cover the entire surgery, though the downside is they will have no control over when that surgery is scheduled or how long he will spend on the waiting list.

“I feel like we’ve been paying for private health insurance for so long now that we should have at least been covered for something. This process made me realise just how uninformed I was about what was covered and what was not, but also how hard it is to decide what kind of insurance to get.”



‘No easy answers’

Rolfe is far from alone. The private health insurance ombudsman reports that it received 4,265 complaints from consumers in the 2014-15 financial year, an increase of 24% on the previous year.

“There are no easy answers about how to address the rise in complaints about health insurance, as many are related to decisions made by health insurers in attempting to keep health insurance premiums lower by making changes to health insurance policies; and by consumers choosing health insurance policies with restrictions and exclusions, in return for paying a lower premium,” the ombudsman’s annual report says.

There is market failure when there is such a gap of information Graeme Samuel

The former Australian Competition and Consumer Commission head, Prof Graeme Samuel, a former adviser to the federal government’s private health insurance review, says there are about 40,000 variations of private health insurance policy available.

“Can you imagine how complex it is for people to compare policies, or to understand the cover they have got?” Samuel, a professor at Monash business school, tells Guardian Australia.

“There is market failure. That is, although you have 34 insurers in the market, because of the complexities of policy and obfuscation about exclusions, gaps cover, and inclusions, it’s virtually impossible for the average person to make a comparison or indeed know what their cover is.

“The insurers say, ‘Of course there is competition. We have 34 insurers’. But there’s not. There is market failure when there is such a gap of information that the consumer can’t easily find what it is that they’re getting and compare the cost of the insurance with the extent of the cover.”

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Samuel says even he found the issue of private health policy difficult to navigate. He recently looked into a “gold” policy with a private health insurer that offered cover for cataracts, hip and knee replacement and “other common procedures”.

“What does ‘other common procedures’ mean?

“I looked through their entire website and couldn’t find an answer. I called them and asked. I said would I be covered for intussusception, a folding of the bowel? Would I be covered? They said; ‘We don’t know.’ I said what about hernia? They said, ‘We’re pretty sure that would be covered.’ Pretty sure? So how would I know?”

For people who are healthy and not yet approaching old age, the incentives for getting private health insurance are financial rather than health-related, he adds. The Medicare levy surcharge means people without private health insurance and who earn more than $90,000 are taxed more than $1 for every $100 they earn.

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And the lifetime health cover surcharge goes up by 2% every year a person delays taking out private health insurance after the age of 31 and until the age of 65. Many people simply take out one of the lower cost private health insurance policies because it works out cheaper than these surcharges. There are also means-tested government rebates for taking out private health insurance.

“State governments would prefer you going into the private system as it relieves their health budget,” Samuel says.

“The problem is that whether it is worth it for you depends on your tax position and personal circumstances and then analysis about lifetime cover and Medicare surcharge and the like, so it gets quite complicated and it is very, very difficult to work out.”



Private health insurance – ‘not a rational choice’

Centre for Policy Development research fellow Ian McAuley, who has undertaken extensive research into the private health insurance industry, is a self-confessed “great critic of private health insurance”.

“And I have a stock answer to the question, ‘Is it worth it?’” he says.

“If you’re over 75, or if you are a heavy drinker and smoker and grossly overweight and having random unprotected sex and take up hang-gliding, private health insurance is a great product. If you are thinking of getting pregnant, get it, and as soon as you have a baby, drop it.”

The biggest users of private health insurance are those aged between 60 and 79, who are more likely to need knee and hip replacements, heart surgery and suffer from chronic diseases.

People try to buy out of risk in certain areas of their life. We can’t, but we try to. Ian McAuley

For this reason, McAuley describes private health insurance as “an instrument transferring funds from the young to the old”.

There is also good evidence that people were increasingly downgrading their cover to the bare necessity in the face of rising premiums, which had almost doubled since 2002, he says.

“Over the last three years or so, average incomes in real terms have hardly moved,” McAuley says.

“In fact they’ve gone down by some measures. When incomes fall, people’s response is to look at discretionary spending and say, ‘Where can we save a buck?’ Either they drop private health insurance altogether or – more likely – they lower their level of cover.”

He says another issue with private health insurance is that the average consumer doesn’t discover whether their policy is worthwhile until the time they need to use it, which could be years after they start paying premiums. For most consumers, it is hard to predict which health problems might strike down the track and take out insurance accordingly.

“Markets work well when you get quick feedback, but what’s going on here is a market with a hell of a lag,” McAuley says.

“If you go and buy a bottle of beer and it’s pretty bad you don’t buy it again. The trouble with insurance is you take it out at age 31 or because you hit the income limit, with luck you probably won’t claim for a long, long time.

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“If you go 20 years without a major claim and then you get a serious ailment and suddenly you get hit with all these surcharges you didn’t know about, you feel pretty ripped off.”

As of 30 June 2015, 11.3 million Australians were covered by hospital treatment cover (47% of the population) and 13.3m had some form of general treatment cover (55.8% of the population).

McAuley says surveys show the main reasons people take out insurance are security and peace of mind, which override even financial incentives.

“It’s not a rational choice,” he says. “People try to buy out of risk in certain areas of their life. We can’t, but we try to. It means people can pay for a long time without question. People tend to over-insure, particularly for small risks, and that’s why ancillary cover [also known as extras cover] is so popular. It’s a lousy product, ancillary cover, even with all the tax breaks. But a lot of people get it.”

The public hospital myth

McAuley says some are surprised to learn that the public hospital system often provided equal care to the private system, and that many surgeons working in the private system also operate in the public one.

I don’t think as as society we should accept that money gets you priority treatment for healthcare Ian McCauley

For heart attacks, serious cancers, and emergencies, people could expect treatment in the public hospital system straight away, he says. Many obstetricians also work in both the public and private systems.

Those requiring hip or knee replacements and other elective surgery will likely find themselves waiting longer without private health insurance, he admits. But he says this demonstrates an unfair health system, rather than the effectiveness of private health insurance.

“All that’s happening is the queue getting reshuffled,” he says. “There is only a certain number of surgeons and operating theatres in Australia so if you get preference because of private health, someone else is getting knocked back down the line.

“It should be catered for on a needs basis. We might accept that if you are well-off you pay a higher copayment but I don’t think as as society we should accept that money gets you priority treatment for healthcare.”

A lack of transparency

Jennifer Doggett, a health policy analyst who has worked as a political adviser within the federal health department, says surgeons often have influence over how quickly their public hospital patients are operated on, and having private health insurance isn’t always a benefit.

“Hospitals decide whether people get treated in the public or private system, and that’s a process which is very non-transparent,” Doggett says.

“Often doctors have a big say. Often the same doctor works in public and private and now, with private hospitals colocated next to public ones you’re often talking about a trip across the walkway.

“They’re not supposed to do this but if they know you have private health insurance they [doctors] might only offer you private rooms or paint a picture of the waiting lists being longer than they are.

If you talk to private health insurance, there is a beat-up that the public hospital system can’t be relied on Stephen Duckett

“There is a reasonable amount of discretion from doctors about when and where they treat patients and bumping public patients up lists. People might be surprised our public health system offers world class conditions and care beyond what you’d get in private.”

She adds that good data that existed on the performance and post-surgery outcomes for surgeons is not publicly available, so it is not as though consumers can make informed decisions about which surgeons they prefer.

A health economist with the Grattan Institute, Stephen Duckett, says, “if you talk to private health insurance, there is a beat-up that the public hospital system can’t be relied on”.

“I don’t think that’s true.”

He adds that there is little incentive for healthy people on a low income to take private health insurance policies out.

“My daughter turned 21 this year and we got letters from my insurers saying she’s no longer covered,” Duckett said. “She said; ‘Should I take out health insurance, dad?’ I said no. Between 21 and 30, she doesn’t have to worry.”

How to choose and junk policies

A spokeswoman for the consumer advocacy group Choice, Nicola Breen, says there are some key questions people need to consider in determining whether private health insurance is worth it. For hospital cover, people should consider why they want it, she says.



“Is it primarily for tax reasons or peace of mind?” she says.

“Are you planning a family, concerned about mental health or a specific issue which could mean a lengthy wait at a public hospital? Choice believes top cover policies with an excess are often the best value as they provide full private hospital cover, but the excess means premiums are heavily discounted.

“Try considering extras cover as a budgeting tool rather than insurance. It’s worth it if you can claim more back than you spend on premiums. If not, avoid it.”

There are several types of policies Choice describes as “junk” and advises consumers to avoid altogether. These include public hospital policies which only allow treatment in a public hospital because they do not mean patients can bypass the public hospital waiting list, a key reason people take out insurance.

And private hospital policies that only cover a small number of procedures like accidents, wisdom teeth removal, appendix surgery, knee investigations and reconstructions, but exclude everything else, are also fairly worthless, Choice believes. These include policies that offer private hospital cover for accident and ambulance only, with all other services and illnesses excluded.

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Choice identified the following policies as being in the “junk” category: AHM White Starter, AHM White Lite and AHM White Lite Saver, Australian Unity Basic Hospital, Defence Health Essentials Hospital, HBF Super Saver Hospital Cover and HBF Super Saver Hospital With Gap Saver, HIF Gold Vital, Medibank Hospital Essentials, NIB Basic Hospital, Qantas Basic Hospital, HCF Accident Hospital Only Cover and Medibank Accident Cover.

“Don’t expect to be able to claim the entire bill when it comes to extras,” Breen says.

“On average, only around 50% of the bill is refunded, a greater percentage back means more expensive premiums. Also, be sure to check how much you can expect to claim for specific services. For example a $1,000 limit for dental won’t help if you can only claim $40 for a consult.



“For hospital cover, look at exclusions and restrictions. A restriction means the policy will only cover you as as a private patient in a public hospital for that service, which means it would still be subject to public hospital waiting lists.”

Moves towards reform

Late last year the health minister, Sussan Ley, acknowledged that the private health insurance system was in need of reform and consulted widely with consumers and other interested groups. More than 40,000 people also responded to an online survey.



A spokesman for Ley tells Guardian Australia that almost 200 written submissions were received from interest groups during that process, and that Ley is currently considering a summary of those reports.

The consultations raised common themes around people’s concerns, he says: poor value for money; high out-of-pocket costs for consumers; lack of transparency; a lack of sustainability; and complex regulation.

It echoes the findings of a ReachTel poll of 1,144 residents across Australia conducted on 12 September and commissioned by the Medical Technology Association of Australia which found 78% of respondents either strongly agreed or agreed with the statement “private health insurers put profits before patients”.

The poll found 69.2% had considered downgrading or dropping their policy in the past 12 months, jumping to 75.4% of those aged 18-34. Findings from Apra showing a small decline in membership from 47.4% to 47% in the year to June 2016, and that most people are lowering their coverage rather than dropping it altogether.

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As part of the 2016-17 budget, the government announced it would establish a private health ministerial advisory committee to provide technical and specialist advice on designing and implementing reforms to private health insurance. Dr Jeffrey Harmer, who led the 2008 review of the adequacy of the aged and disability support pensions, was announced as chair of that committee last month.

“It’s an area of health where, if Ley can really get this going, a large number of Australians will really thank her,” Samuel says.

Do you have a story about private health insurance to share? Tell us your experience in the comments below or contact melissa.davey@theguardian.com

• Should you get private health insurance? Try our interactive calculator

• My patient had private health insurance for peace of mind. Then he got cancer | Ranjana Srivastava

• Help us continue to cover the stories that matter. Support Guardian Australia with a monthly or one-off contribution