Health Reforms Unlikely To Dent The Trend

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The Australian government's changes to health insurance centre on prostheses and addressing the decline in the insured 20-30-year olds. Overall, brokers are sceptical the reforms will be enough to make a dent in the trend.

-Health insurance likely to continue to be a discretionary item for many
-Reduction in claims likely to be partially offset by lower premium growth for insurers
-Improved access to mental health services and travel & accommodation benefits to add costs to the system

By Eva Brocklehurst

The long-awaited reform package for Australia's private health insurance industry has been delivered by the Australian government. The proposed changes should result in up to $1bn in claims savings across the system over four years of operation, mainly via reductions in the prices paid for medical devices and prostheses. Brokers generally believe the reforms are a net positive for the industry but suspect they will go only a small way to turning around the declining trend in participation.

The main positive centres on addressing the decline in the insured 20-30-year old age group, with the government offering cumulative discounts to attract younger people back to private health insurance. Nevertheless, Deutsche Bank is one broker pointing out that if consumer confidence remains low and unavoidable costs such as electricity and rent continue to rise, discretionary items such as private health insurance may still prove a choice beyond the reach of many.

The broker raises forecasts by 2% for the major health insurers Medibank Private ((MPL)) and nib Holdings ((NHF)) to reflect lower claims costs on the back of the announcement, but calculates the positive outcome on claims is partially offset through -1% lower premium growth.

The one question UBS is left asking: if the government is committed to constraining runaway growth and applying significant pressure to premiums, how can that ultimately translate into a larger profit pool for the private health insurers?

On balance, the initiatives suggests claims growth may slow but the broker is not sure that an orderly trajectory will occur, as some initiatives are inflationary. Improved access to mental health services and the option to add accommodation and travel benefits to hospitals should add costs to the system. However, initiatives to tackle low-value care and eliminate a range of natural therapies are positive outcomes, given the questionable costs that are borne by all policy holders.

The overall impact will not be known for some years but Credit Suisse does not believe the changes will fundamentally alter affordability issues in the private health insurance industry. As long as premiums continue to inflate at a rate that is faster than wages growth and, given the alternative services provided in the form of the public system, the decline in participation is likely to continue, although perhaps at a slower pace.

The Youth Push

There may be some slowing down of the exit rates from insurance in the younger age bracket but this also comes at a revenue cost to insurers through lower premium revenue and may not provide a great net benefit, in Credit Suisse's view.

Citi also expects lower premiums will be offset by lower claims and makes no change in the earnings estimates for Medibank Private and nib. Overall, the broker considers the reforms make the system more attractive to younger people and approving overall affordability while suspecting the reforms will initiate intense competition for younger members.

Morgans is sceptical that even the maximum 10% price discount will change younger people's perceptions of private health insurance. The broker considers the upside is heavily linked to whether the changes actually increase industry volumes and maintains Hold calls on both Medibank Private and nib, given current fair trading multiples.

Morgan Stanley calculates that if insurance participation rates among 20-29 year-olds were similar to that of 30-40-year-olds an additional 430,000 customers could be added, equating to a 4% one-of boost to the customer base. However, the broker considers it highly unlikely that the discount will lift participation rates to such a level.

The broker is also surprised that that given former health ministers attempted and failed to implement tiered levels of products, the gold, silver and bronze proposals are included. How will a bronze policy compare with a basic policy? Credit Suisse agrees the streamlining and categorising of insurance products is unlikely to materially impact on consumer perceptions regarding private health insurance.

Options related to privately insured patients in public hospitals will be discussed with the states as part of the negotiations for the next national health agreement. Credit Suisse suspects that any attempt by the federal government to restrict private patient admissions to public hospitals could have revenue implications for the states.

Medical Devices Pricing

For private hospital operators, such as Ramsay Health Care ((RHC)) and Healthscope ((HSO)) the main impact is via the proposed reductions to prostheses prices and the likelihood of reduced supplier rebates. The main benefit will flow to consumers in reduced insurance premium increases but Morgans suggests cost reduction benefits may be over-estimated by the government in terms of prices.

A critical assumption in assessing the earnings impact is that the brunt of the reductions is borne by the device suppliers and, in determining the level of bargaining power retained by the hospital operators, Credit Suisse finds it difficult to ascertain. All up, the broker does not envisage any material change to current private hospital volume growth or price/mix contribution.

Ord Minnett is encouraged by the comprehensive nature of the reforms but believes the net impact for a reduction to prostheses prices will be modest and may offset a recovery in participation rates and the opportunities from an expanded mental health cover.

Moreover, the more intractable problems such as a growing volume of private patients in the public system and rising out-of-pocket charges by doctors have not been addressed directly. The broker suggests that the most likely outcome of policy will be a slowing of the growth in this trend rather than any action that leads to a material transferring of this patient grouping to private hospitals.

Reforms

$188m will be cut from prostheses expenditure from February 1, 2018, a further $188m in 2019 and $115m in 2020. Private health insurers have stated that every $200m in prostheses benefit reductions will decrease private health insurance premiums by -1%.

The government will also require health insurers to remove the waiting period for mental health cover. An expert committee to address low-value care will be established to eliminate or replace admitted mental health and rehab services which deliver low-value or inefficient care. Insurers will be able to offer cover for travel and accommodation benefits under hospital policies for people in rural areas that need to travel for treatment.

There will be four categories of hospital products: gold, silver, bronze and basic and three categories of general treatment (extras): gold, silver and bronze. Categories will take effect from April 1, 2019. Also taking effect from that date, insurers will also be able to offer discounts on hospital cover of up to -2% for each year that a person is under 30, to a maximum of -10% for 18-29 year-olds.

The discounts will be gradually clawed back once a policy holder turns 40 (ie the person then faces a 6% increase in premiums per year from age 40 to 45, assuming underlying premium increases of 4% in those years). The government will also raise the cap on excess that is used to lower premiums. Excess will be raised to $750, from $500, for singles and to $1500, from $1000, for couples/families.
 

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