Legal Insights

Private healthcare – through the pandemic and beyond

By Aaron Kloczko

• 08 April 2020 • 7 min read

Partner Aaron Kloczko provides an overview of the recent developments in the Australian private hospital and private health insurance environments and identifies a number of implications for this sector arising from the COVID-19 pandemic.

This article was written on 5 April 2020 during the rapidly evolving COVID-19 pandemic and is current as at that date.

This article was intended to be a survey of the Australian private healthcare landscape in 2020 – an overview of new and recent developments in the intrinsically-linked private hospital and private health insurance environments.

Like the best-laid plans in most sectors of the economy, that original intention has been subsumed throughout the course of March 2020 by the rapidly escalating COVID-19 pandemic and resulting global health crisis that has seen entire sectors of the economy put into the economic equivalent of a medically-induced coma. Many hundreds of thousands of workers in Australia have joined millions of others throughout the world displaced from work by the most significant pandemic in a century.

Well before the emergence of the SARS-CoV-2 novel coronavirus at the end of 2019, private health insurers were experiencing challenging operating conditions.

Significant reforms to private health insurance products (most notably the Gold, Silver, Bronze and Basic classification scheme) introduced with effect from 1 April 2019 were nearing the end of a 12 month transitional period, with no positive effect on private health insurance participation.[1]

A series of widely-cited reports by Dr Stephen Duckett of the Grattan Institute[2] in late 2019 described a ‘death spiral’ for private health insurers brought about by higher costs leading to higher premiums, in turn resulting in the young and healthy dropping out of the insured pool, forcing premiums higher still. Dr Duckett proposed a partial departure from community rated private health insurance, towards a system of aged-based risk rating for those under the age of 55 with a regulated, community rated premium for those over the age of 55.

In remarks to a gathering of directors representing not-for-profit private health insurers in February 2020, Australian Prudential Regulation Authority (APRA) member Geoff Summerhayes endorsed the ‘death spiral’ description, warning bluntly that APRA predicts that ‘we’re only a few years away from seeing private health insurers forced to merge or fold’.[3] Unsurprisingly, APRA’s focus has been on insurers’ resilience, with insurers directed to submit to APRA comprehensive recovery plans by 30 June 2020. This has included a particularly confronting task for certain ‘at risk’ insurers of sounding-out potential merger partners as a ‘Plan B’ should their recovery planning fail.

Despite that gloomy picture, pockets of innovation emerged. Within the 2020 financial year we have seen Medibank partner with Nexus Hospitals to offer joint replacement on a ‘Zero Out of Pocket’ (ZOOP) basis; HCF partner with Sydney Adventist Hospital to offer no out-of-pocket maternity service under its ‘Swaddle’ package; and Australian Unity partner with Ramsay Health Care to offer out-of-hospital care through the Ramsay Connect joint venture, with an initial focus on rehabilitation following joint replacement. These innovations are critical to the sustainability of private healthcare as a system and are key examples of private hospitals and private health insurers working hand-in-glove to tackle persistent problems such as low-value care being delivered in acute care environments and significant out-of-pocket costs undermining the value of private healthcare.

The ‘serious but stable’ private healthcare landscape[4] of early 2020 has – like much of the economy – been upended by the shock of the COVID-19 pandemic which, as at the date of writing, has seen the suspension of all non-urgent elective surgery (so called ‘Category 2’ and ‘Category 3’ elective surgery) at public and private hospitals, Australia-wide. This unprecedented development is substantially intended to preserve scarce consumables (and, in particular, personal protective equipment (PPE) through a period of intense demand and global supply chain disruption. On 30 March 2020, the Commonwealth Minister for Health, Greg Hunt, announced a ‘viability guarantee’ for the private hospital sector, strictly conditional on private hospital operators retaining their workforce and infrastructure at full readiness to be deployed in the COVID-19 response. As at the date of writing, operators were still hammering-out finer details of their commercial agreements with the states and territories.

The implications for private health insurance from the COVID-19 pandemic are profound and the following questions need to be considered:

  • What is the value proposition for hospital cover if, through no fault of the insurer, a member cannot access a private or public hospital for anything other than the most urgent categories of elective surgery?
  • What is the value proposition for ‘extras’ cover if, through no fault of the insurer, a member is substantially confined to their home? Will dentists and allied healthcare workers have access to PPE?
  • How will mass unemployment as a consequence of increasingly intense social distancing measures impact participation, through the crisis and beyond?

As of the time of writing, insurers have moved swiftly to announce measures to respond. To date, those measures have been modest and have included deferring the 2020 premium increase (which, by convention, was to take effect on 1 April 2020); implementing hardship programs involving premium waivers and membership suspensions; and confirming cover for COVID-19 admissions (presumably on an ex gratia basis for those covers which do not cover the requisite clinical categories).

Any prediction about the ultimate impact of the COVID-19 pandemic on an already fragile private healthcare system is, at this time, purely speculative. Perhaps all that can be said is that when the withering challenges of the pandemic have been traversed and the private healthcare system – and the economy at large – return to something resembling normality, all of the same structural challenges within the system that existed prior to the crisis will remain to be solved.

The COVID-19 crisis may prove to be a defining moment for private healthcare. The crisis will necessitate the entire healthcare system – public and private; for-profit and not-for-profit – to operate as a system. We are hopeful that the innovation and cooperation we will inevitably see across the entire system throughout the crisis will be brought to bear in re-building the capacity and capability of the private healthcare sector during its inevitable recovery.

[1] Australian Prudential Regulation Authority, Private Health Insurance Membership and Coverage (December 2019).[2] Duckett, S. and Nemet, K. (2019). Saving private health 1: reining in hospital costs and specialist bills. Grattan Institute; Duckett, S., Cowgill, M., and Nemet, K. (2019). Saving private health 2: Making private health insurance viable. Grattan Institute.[3] Geoff Summerhayes, Speech to the Members Health Directors Professional Development Program (4 February 2020) available here. For completeness, many within the industry were critical of APRA publicly commenting on internal analysis which had not been provided to insurers the subject of that analysis.[4] A phrase borrowed from Geoff Summerhayes’ remarks, cited above.

By Aaron Kloczko

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