Demands on public health drive insurance rises

By Peter V O'Brien

Friday 2nd August 2002

New Zealand and its health financing system must deal with two fundamental and growing pressures, according to a report to the Health Funds Association (HFanz) from the Institute of Economic Research.

The first is the growing mismatch between individual expectations and what the public healthcare system can provide. A second pressure related to the ageing population.

"Per capita expenditure is highest in the older age groups, with per capita public health spending on people aged 75 and over almost 20 times higher than on people aged 24-44.

"The implications for health spending as the population ages are clear. In addition, the size of the older population will be much greater compared with the working-age population, who will be financing that care. This coincides with a similar pressure from superannuation spending."

HFanz members' experience of average costs for surgical and medical procedures are summarised in the table. The procedures include some that were unavailable until relatively recent times or which have limited applications.

References to the "growing mismatch" between individual expectations and the capacity of the public health system reflect the increased sophistication of medical technology.

That increased pressure on public health facilities led to more reliance on private health insurance and changes to the insurers' premium structures as providers coped with higher claims costs.

HFanz distinguishes between health insurance premiums set on a "risk rating" system and community rating system.

With community rating, premiums are based on the average cost of insuring a broad age group. Everyone within the group pays the same premium, meaning premiums do not increase greatly as the insured age within the community group.

With risk rating, premiums are based on age and sometimes other factors such as gender. People of a similar age and risk are often grouped together in "age bands," for example in five-year bands. Those within the same age band pay the same premium.

The association says with the risk-rating scheme, premiums more accurately reflect the true health costs of each age band, which means premiums increase regularly as people age.

HFanz executive director Andrea Pettett told NBR Personal Investor it was difficult for a community-rate insurer to sit logically alongside a risk-rated insurer.

Ms Pettett said the premium-setting methodology had got more complicated. That some people had entered a community-rated scheme and were now risk-rated was a sticking point.

It is clear that, irrespective of the methodological merits of risk-rating, its effect on older age groups upset older people, with Southern Cross Healthcare drawing the most criticism.

Southern Cross is the biggest private health insurer. Its decision to change the premiums for different age bands from this month is expected to draw the biggest flak from those in the older age groups. They face substantially increased payments in the move to reduce cross-subsidisation from younger people.

A graph in the HFanz literature shows the average claim for each life insured rose steeply through age bands in the year ended June 30, 2001.

The average claim was about $200 in the 25-29 age group, moving to about $700 at 60-40, and peaking between $800 and $900 in the 70-74 group. It dropped, perhaps curiously, to less than $700 from 75 onward and into the 80-plus group.

Work has been conducted between insurers and other interested parties to draft guidelines to reflect appropriate procedures.

Ms Pettett said the association had developed its own guidelines for the industry's consensual view that premiums should reasonably follow risk.

She said the situation should be properly communicated to people when they bought an insurance policy so they could be aware premiums rose with age.

The industry was mindful that rising premiums came at a time people could be on fixed incomes. New products might be devised to help that group.

It was in nobody's interest that insurers were making operating losses and eating into reserves.

Currently 1.37 million New Zealanders have private health insurance, including family groups.

In 1999-2000 the industry contributed about $561 million to national healthcare costs. That was 22.5% of the total, the publicly funded sector contributing 77.5%.

The proportions in 1979-1980 were 11.9% private and 88.1% public.

There has been a decline in numbers insured in recent years, although the private sector is growing again.

The current 1.37 million people insured is about 35% of the population, compared with 45% in 1992, 42% in 1997 and about 33% in 2000.

The earlier percentage declines coincided with a downscaling of the government's contribution to total healthcare costs, a consequent increase in the claims made on insurers and their reaction in the form of increased premiums.

Higher premiums and a change to assessing premiums on an age-band, risk-rating basis led to people "dropping out" in the mid and late 1990s.

A Personal Investor survey of the private health insurance industry in 1997 noted the industry was saying a cut from the government's then 76% total contribution of total healthcare costs to 70% would lift insurers' contribution from 6% to 12%.

In 1997 individuals paid 18% of the total.

The insurers' contribution has stabilised in percentage terms but the monetary amount is much higher than in the 1990s for reasons noted earlier.

The major insurers have an extraordinary range of options available in health plans designed to provide policyholders with what best suits personal situations.

The products differ according to whether they cover, for example, single people, couples, a single parent and one child, single-parent families, couples with one child or couples with families and the payment periods which may range from fortnightly to annually.

Individuals may decide to confine insurance to major medical and surgical procedures, paying the cost of routine doctors' visits and prescriptions themselves.

Others may opt for comprehensive schemes that cover everything, although it makes little sense to pay, say, $1200 a year on comprehensive insurance if the insured is incurring costs of only $600 a year.

AVERAGE COST OF PROCEDURES (2001)

HFanz members' experience

Procedure	Average cost
Cardiac bypass (heart surgery)	$25,600
Angiogram (diagnostic test)	$3300
Angioplasty (heart surgery)	$12,000
Total hysterectomy (surgery)	$6500
Prostate removal (cancer surgery)	$4500
Excision of cancerous tumour	$700
Colonoscopy (diagnostic test)	$1100
Radical mastectomy (breast cancer surgery)	$4700
Gastroscopy (diagnostic test)	$700
Laparoscopic cholecystectomy (gall bladder surgery)	$5000
Total hip replacement (surgery)	$11,400
Total knee replacement (surgery)	$12,400
Cataract removal (eye surgery)	$2600

Source: Making Sense of Health Insurance, HFanz, 2001

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