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Australian Health Review Australian Health Review Society
Journal of the Australian Healthcare & Hospitals Association
RESEARCH ARTICLE

Private health insurance incentives and passive adverse selection: is Lifetime Health Cover responsible for the excess ageing of Australia’s hospital cover risk pool?

Jonathon Bruce Ryan https://orcid.org/0000-0003-0349-028X A B C D *
+ Author Affiliations
- Author Affiliations

A Discipline of Surgery, University of New South Wales, Sydney, NSW, Australia.

B Department of Cardiothoracic Surgery, Prince of Wales Hospital, Sydney, NSW, Australia.

C Department of Cardiothoracic Surgery, Prince of Wales Private Hospital, Sydney, NSW, Australia.

D Department of Cardiothoracic Surgery, Eastern Heart Clinic, Sydney, NSW, Australia.

* Correspondence to: j.ryan@unsw.edu.au

Australian Health Review 48(3) 262-268 https://doi.org/10.1071/AH23228
Submitted: 3 November 2023  Accepted: 23 January 2024  Published: 6 February 2024

© 2024 The Author(s) (or their employer(s)). Published by CSIRO Publishing on behalf of AHHA.

Abstract

Objective

Lifetime Health Cover (LHC) was introduced in mid-2000 to increase participation in private health insurance that includes hospital cover (PHI-HC) and improve the risk profile of PHI-HC participants. It initially achieved both objectives, but since 2001 the PHI-HC population has aged faster than the general population. The aim of this study was to determine if the excess ageing of the PHI-HC risk pool has been due to passive age-based adverse selection, an inherent risk of LHC. This study has potential implications for the retention of LHC.

Methods

A descriptive population-level analysis of publicly available administrative datasets was performed. Data relating to PHI-HC were obtained from the Australian Prudential Regulatory Authority. National population data were obtained from the Australian Bureau of Statistics. Trends in demography, PHI-HC participation rates and LHC loading payments were analysed.

Results

By 2021, age-based adverse selection had returned to the pre-LHC level. Based on the available data, this was due to passive age-based adverse selection not active age-based adverse selection. Specifically, it reflected the combination of an avoidable unintended consequence of the introduction of LHC (the over-representation, in 2001, of individuals aged 45–59) and one of LHC’s intended effects (incentivisation of insured individuals to retain PHI-HC).

Conclusions

This study supports the retention of LHC. Nonetheless, it highlights the risk of passive age-based adverse selection created by incentivising insured individuals to retain PHI-HC in the presence of distortions in the age distribution of the PHI-HC risk pool. Early targeted interventions are required when such distortions arise.

Keywords: adverse selection, Aged-Based Discount, health policy, health systems and financing, Lifetime Health Cover, Medicare Levy Surcharge, policy instruments, private health insurance, private health insurance incentives, private health insurance rebate.

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