Sunday Rant – Risk, the community rating and insuring smokers

“Damn, I wish I wasn’t paying for kids with diabetes.”

The current push by the private health insurance industry to raise premiums for smokers is not about the community good of passing on health costs to smokers. Nor is it about reducing the cost of health insurance for “working families” by protecting them from higher premiums to pay for nicotine addicts.

It’s about fundamentally changing the way our current private health insurance system works, and potentially opens the door to a US-style risk-based insurance system.

Many people’s ideas about private health insurance come from American tv and movies. In the US, health insurers act more like life insurance providers (or even car insurers). They weigh up the costs of insuring you – do you have a pre-existing heart condition? Do you have a family history of cancer or heart disease? Have you ever had a mental health episode, or does you family history suggest that you might?

All of these things are factored into your premiums in US health insurance. Which means many of the people most likely to benefit from insurance were traditionally priced out of the market or denied coverage altogether.

If you’re a champion of the free market, then the ability to discriminate based on the risk associated with insuring a client is part of the merit of the system. In a country where there is essentially no safety net (at least compared to the Medicare system in Australia), and thousands of eligible people regularly apply for access to Medicaid but are turned down because of lack of funding, I’d argue this is governmental negligence.

This is a debate the US is currently going through. Now that the “Obamacare” bill has passed, a whole sector of the private health insurance industry in America looks set to fail: the brokers who confirm or deny coverage for the HMOs. This is because the new legislation makes it essentially impossible to refuse coverage (note: but not discriminate on premium).

Australia’s system is very different. A health insurer cannot bar you from cover based on a pre-existing condition. They cannot even charge you a higher premium based on pre-existing conditions.

This is because Australian health insurance is based on the principle of community rating. This means the cost of the risks associated with insuring people with pre-existing conditions or other risks (think sportspeople, those who don’t exercise, low income, obese and, yes, smokers) are distributed across premiums.

As a healthy, fit person who exercises for at least 30 minutes a day, eats 2 serves of fruit and 3 serves of vegetables, eats 2 serves of fish and no more than 5 eggs a week, has a low/high sodium diet (depending on the research paper), drinks only moderately, regularly exercises their brain, gets 8 hours sleep a night, has no family history of anything untoward and has had protected sex with a small number of partners, I can hear your indignation from here at having to pay for all these risky layabouts!

The upshot for you, my obscenely healthy friend, is that you can be insured at any stage of your life and get the benefits of health insurance in Australia. It also means that should you have a succession of ailments or discover a pre-existing condition once you are insured that you were not previously aware of, the health insurer cannot change your premiums. Despite the fact you are now an established risk, and a burden to your fellow insurers.

There are only two ways that the insurer can “discriminate” against you (I put this in inverted commas, because it applies to all members of the fund and is only technically discrimination). Your fund has the ability to make you wait a standard 12 month waiting period before they will cover you for pre-existing conditions (if you were not previously insured) and also to make you wait up to 2 months before making your first claim (regardless of the condition or service it is for). Most funds either automatically waive the 2 month claim waiting period, or regularly offer to waive it as an incentive for new customers.

The other way is through Lifetime Health Cover loading. This is a 2% loading for every year after the age of 30 (starting at 31) that you do not have insurance that is applied once you take out insurance. The ins-and-outs of LHC loading are boring and take a long time to train to new people working in PHI, but essentially it’s an incentive for you to insure early and often (and offsets the risk of older members who turn up later in life to be insured and thus have an overall burden on the community rating).

So what does this have to do with cigarettes?

Well, if you wish to discriminate based on the current societal health devil, you need to change the private health insurance legislation to allow insurers to discriminate based on a risk. It’s that simple – the current legislation does not allow for discrimination.

To discriminate against smokers means changing the fundamental way private health insurance in Australia works, and its legislative underpinning. The community rating would need to be scrapped for a risk-based system. And this means insurers could discriminate on all kinds of risks to offset the burden to all premium paying members across the fund.

This is beyond working out a process that deals with what is considered a smoker, how you police whether someone begins smoking again, whether they get reduced premiums if they quit, etc.

In the short-term, changing legislation to discriminate against smokers may be of benefit to healthy individuals, couples and families. But creating a risk-based health insurance industry in Australia would more than likely increase costs in the long-term for the average person or family. In the US, a Department of Health and Human Services study found that up to 129 million people under the age of 65 had some kind of pre-existing condition that would be classified as a risk. Even without the demography that’s one third of the population’s premiums affected by pre-existing conditions.

I couldn’t find a single article before the case was overturned discussing private health insurers’ bid to charge additional premiums for smokers that mentioned community ratings or described how health insurance in Australia actually works – only this lone article (pro-changing to a risk-based system) in the Sydney Morning Herald from 12 April this year. In a country where many educated people still associate Australian health insurance with the practices of US HMOs, having the facts on what a change like discriminating against smokers in private health insurance will actually mean for their hip-pocket and their health is fundamental to citizens having an informed discussion on the issues.

Do you want to be insured like a car? I sure don’t.

UPDATE: 

I should probably note that I worked in Health Insurance for 4 years from 2006 – 2010 at Australian Unity, both in the retail fund and at GUHealth, their corporate health insurer. Rohan Mead, the company’s CEO, was quoted publicly on the smoking issue after the plain packaging win this week.

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