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Segment Summary
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| How HCF performed compared with the industry |
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| Australian Health Insurance |
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Market Conditions
The number of Australians covered by
private health insurance increased by
2.9% last year to reach 11.3 million at
30 June 2009. 44.6% of the Australian
population has some form of private
hospital cover.
Membership increased in all states with
Western Australia, Northern Territory
and Queensland showing the highest
growth rates.
This year the market was characterised
by consolidation activity among six
of the 11 largest funds with heavy
competition between the major funds
and the online broker, iSelect.
Performance
Industry premium income increased
by 7.3% through a combination of
membership growth plus industry rate
increases of around 6.02%. Published
annual reports suggest most funds would
have achieved a strong underwriting
result. Claims inflation per customer
unit was around 6% and in line with
both this year’s rate increase and prior
years’ experience. There was little or no
contribution to industry reserves from
investment income this year.
Cost Drivers
The key cost drivers of health insurance
are the number of claimed services per
member and the average cost per service.
Many of the underlying drivers of cost are
not under the direct control of health
insurers, with the charges for public
hospitals, pharmaceutical benefits and the
Medicare Schedule Fee set by government,
with doctors deciding the site, cost and
duration of hospital based care.
Hospital Cover
The industry funded 8.3 million days
of hospital care this year, equivalent
to 1.2 days per customer unit.
Utilisation grew by 3.5% on last year
and was a very significant factor in
the increasing cost of hospital cover.
The benefit cost of hospital care was
$8.2 billion, an average of $994 per
bed day made up as follows:
- Hospital accommodation: $694 (+4.4%)
- Medical fees: $158 (+4.1%)
- Prosthesis costs: $141 (+6.3%)
- Total: $994 (+4.6%)
Higher utilisation charges increased
the average cost per hospital customer
unit by 7.3% in 2008/09 compared with
6.2% in 2007/08.
General Treatment (Extras) Cover
Changes to the way these policies
are reported to PHIAC have affected
analysis of utilisation statistics. HCF
estimates based on publicly available
data indicate the industry funded
63 million services at a total cost of
$2.8 billion. The average cost per
service increased by 2.6% to $45.20.
Management Expense
PHIAC’s “Quarterly Statistics June 2009”
suggests the industry management expense
ratio will be slightly less this year
(0.5%). Last year, the industry’s costs
were affected by one-off costs associated
with demutualisations, mergers,
acquisitions and the accompanying
marketing expense. This year there
were again such costs, but probably
on a lesser scale. The industry’s expense
ratio for health insurance business has
fallen from 10.5% to 9.8%, and will
probably fall further in coming years.
PHIAC’s “Quarterly Statistics June 2009”
suggests that industry total costs rose
8.5% this year, of which about 2.3%
can be attributed to membership growth.
Underlying cost growth of 6.0% is similar
to last year and the average rate increase
approved by the federal government
this year.
Regulation Risk
The combination of the Private Health
Insurance Rebates (30% and higher for
members over 65), the Medicare Levy
Surcharge (MLS) and Lifetime Health
Cover have been central to the growth
of private health insurance over the
past decade. From July 2008, the MLS
thresholds were increased from $50,000
for single taxpayers and $100,000 for
couples and families to $70,000 and
$140,000 respectively. These were
subsequently indexed to $73,000
and $146,000 from July 2009.
Many commentators expected that some
of the membership would lapse their
cover, due to the increased thresholds
of the MLS. This did not occur. The
effects on industry membership have
been far less than had been expected.
While the reasons are unknown, much
of the industry has been trying to build
and retain membership in the face of
this challenge.
Despite the economic uncertainty,
industry membership has grown. The
Government introduced reforms in
May 2009 to means-test Private Health
Insurance Rebates from July 2010, with
accompanying changes to rates of MLS.
This did not occur. The legislation was
defeated in the Senate in August 2009,
with the Government stating it will
reintroduce the legislation. The industry
viewed the changes as making private
health insurance more expensive for
higher income earners, thereby
dampening the growth of membership.
The Government’s National Health and
Hospitals Reform Commission’s final
report, released in July contained two
recommendations which would have a
significant effect on the conduct of private
health insurance in Australia. The first is
the establishment of Denticare, a social
insurance program for basic dental care
administered partly through private
health insurers (recommendation 83)
funded by a 0.75% levy similar to Medicare.
This may affect general treatment health
insurance business, as a major share of
existing dental cover could transfer to
the new program.
The second is the development of
Medicare Select, a new governance
model for the health system. Aimed at
greater consumer choice and provider
competition, better use of public and
private health resources to improve
responsiveness and efficiency of the
system and capacity for innovation.
In this model all Australians would
belong to a Government-operated plan,
unless they elected to move to another
operated by a not-for-profit or private
enterprise operator.
Retirement and Aged Care Facilities
During the year the Australian
Government introduced regulatory
amendments designed to update the
funding of residential health care and
provide greater certainty for residents
by imposing strict financial reporting
requirements on providers. In December
2008, the NSW, Retirement Villages Act was
amended with only minor changes. As
Manchester Unity’s management and
governance of its retirement facilities are
of the highest standard, we anticipate no
material financial or operational impacts
from these amendments.
Australian Life Insurance
The Australian life insurance market
has continued to experience strong
growth across all product lines. Low
margin group insurance arrangements
within superannuation funds have grown
particularly rapidly, now representing
over 30% of the market.
HCF Life is focussed on developing
accident and illness policies that are
closely aligned with health insurance
and not available in the superannuation
environment. These products offer the
best opportunity of profitable growth of
HCF into the future.
Industry Outlook
Our overall outlook for private health
insurers is positive with most strategic
factors likely to improve during the
coming year, despite earlier predictions
to the contrary.
Health fund membership is growing in
line with the population and on present
trends this is likely to continue. Industry
underwriting performance has remained
strong throughout the global economic
crisis although hospital related claims
costs in particular continue to exceed
the expectations of members, funds and
government and put pressure on premiums.
In the short term, regulation risk is most
likely to come from changes to the Private
Health Insurance Rebate with the possible
introduction of Denticare posing a longer
term risk for the industry as a whole.
Economic factors are generally positive and
improving. They are expected to have a
positive effect on consumer confidence and
improve returns on industry investments.
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