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Private Health Insurance: more products

Partner Institute: 
Centre for Health, Economics Research and Evaluation (CHERE), University of Technology, Sydney
Survey no: 
Kees van Gool
Health Policy Issues: 
Role Private Sector
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no yes yes no no no no
Featured in half-yearly report: Health Policy Developments 7/8


Currently, private health insurance (PHI) only covers care performed in-hospital. Hence, many patients seek in-hospital treatment when more efficient out-of-hospital services exist for a particular treatment. The Government is proposing to enable PHI companies to design products that offer people more choice to purchase cover that better suits their health needs. For example, the new PHI products may cover a person with cancer to have chemotherapy in or out of hospital.

Purpose of health policy or idea

Currently, private hospital insurance can only cover those services that are performed inside the four walls of a hospital.  As a result, many patients seek in-hospital treatment in order to use their private health insurance when safe and suitable out-of-hospital services may exist at less cost for that particular treatment. Whilst ancillary insurance covers some outpatient services such as optical products, dental care and physiotherapy, they typically do not cover services that could be regarded as substitutes for in-hospital care such as dialysis and chemotherapy.

The Government's changes will mean that private health insurance companies can design and sell products that offer people more insurance products to suit individual health needs. These changes will be supported by allowing "Outreach Hospital in the Home" services to be covered by the broader health cover and new risk equalisation arrangements.

Main points

Main objectives

From April 2007, private health insurance companies will be able to offer broader products. This means PHI companies will be able to cover a wider range of services that allow patients to receive benefits from their PHI for services regardless of whether they are provided in or out of hospital.

As a result, the government hopes that the needs of Australians will be better met - and private health insurance can cover services that reflect current clinical practice.

Type of incentives

Whilst the details of this reform still need to be fully worked out, they potentially imply some significant changes to the incentives in the Australian health care system.

PHI companies will be free to design and sell products to clients that offer greater coverage for services that are typically associated with chronic diseases.  It effectively means that people with chronic disease - and who want to be fully covered - must purchase additional insurance. This moves us away from the idea of community rating and towards risk-rated premiums. 

In addition, the Government has flagged changes to reinsurance arrangements.  Currently, PHI companies use re-insurance arrangements to shield them from the high cost of insuring people aged 65 and over.  Presumably, the change in re-insurance will broaden this protection to cover individual companies against the cost of those who take out the chronic care insurance products - although this has not been confirmed.  This means that no single PHI company stands to lose from having more people with chronic disease insured.

Groups affected

Private health insurance companies, private health insurance members, especially those with chronic disease

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Characteristics of this policy

Degree of Innovation traditional rather innovative innovative
Degree of Controversy consensual controversial highly controversial
Structural or Systemic Impact marginal rather fundamental fundamental
Public Visibility very low low very high
Transferability strongly system-dependent system-dependent system-neutral

Changing structures to better suit patients' needs

The Government is marketing this policy in terms of offering more choice for insurance products.  The proposed expansion of PHI to be able to insure for services provided beyond the hospital walls is, for Australia, fairly innovative.  The longstanding demarcation between what constitutes inpatient and outpatient care has, to some extent, prevented private hospital providers from introducing modern clinical practice care, for example, enabling a person with cancer to have chemotherapy in or out of hospital and still be covered by their private health insurance. The Government states that the introduction of broader health cover should allow the best care to be provided in the most suitable location for the member.

From community rating towards risk-rated premiums - will premiums for the chronically ill rise?

The policy is still being developed making it hard to come to definitive conclusions about its likely impact.  However, two potential features of this policy will determine the level of systematic impact and the associated level of controversy.  Firstly, the degree to which the policy moves PHI away from community rating and towards risk rating by default.  This will depend on how PHI companies design the new products for people with, for example, diabetes or cancer as well as the potential changes to existing insurance products for those people who do not take out the new insurance. That is, will the new products lead to changes to the basic insurance package. This is critical because currently services such as chemotherapy are covered by PHI (although patients may have fewer choices about where they can have chemo administered).  In 2003/04 there were 276,000 chemotherapy separations.  Of these 52% occurred in private hospitals and 55% were covered by PHI.  If patients have to purchase additional insurance to have such services covered, it implies a step has been taken towards setting PHI premiums through risk-rating.

Greater managed competition?

The second potential systematic impact is to do with the degree to which PHI companies will be able to design and manage the insurance product.  Up to now, PHI companies have had little choice in what services they cover.  Consumers can opt to have some services excluded from their insurance package such as obstetrics, hip or knee replacements and cardio-thoracic procedures but there has only been limited scope for PHI companies to manage the type of care received once a person is covered.  However, under the proposed arrangements the potential exists for PHI companies to be more directly involved in the types of services that can be offered.  This may lead towards greater managed competition. 


Political and economic background

The Government has had a long standing commitment to support the private health insurance sector and has committed large amounts of public funding and implemented a range of reforms to bolster PHI membership.  Whilst it has achieved a significant increase in membership numbers, PHI premiums have continued to rise at much higher rate than general inflation.  In fact over the last six years premiums have jumped by 40%.  This means that many of those who are privately insured may question the value of such insurance - especially considering that when they do get sick they may face high out-of-pocket cost for services that can not be covered by insurance. For example, at present, cancer patients can find themselves with large out-of-pocket expenses if their treatment is delivered outside the hospital setting. In addition, private health insurance companies have claimed that the restriction to only cover inpatient services has prevented them from providing benefits in line with current clinical care patterns and has meant that a lot of services that are provided in hospital could be delivered more cheaply in another setting. 

Purpose and process analysis

Current Process Stages

Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no yes yes no no no no

Origins of health policy idea

There have been regular media reports of this policy change over the last 18 months, with commentary about some of the major negotiations that have taken place between the Government and the private health insurance industry.  According to these reports, debate has been intensive and have centred on how PHI companies could structure reinsurance arrangements.

However, the idea of extending private health insurance beyond the walls of the hospital has been around for a number of years.  The federal government and private health insurance companies ran trials in the late 1990s on hospital-in-the-home type projects for services relating to mental health, rehabilitation and domiciliary care.   

This idea has been opposed by the opposition parties and this may have prevented the Government from introducing it to parliament.  However, given that the Government now has control over both houses of parliament this legislative impediment no longer exists.

Initiators of idea/main actors

  • Government
  • Providers
  • Payers
  • Patients, Consumers

Approach of idea

The approach of the idea is described as:
renewed: The late 1990s. Pilot studies for this policy commenced in 1997

Stakeholder positions

A series of trials were piloted from 1997 onwards to assess whether early discharge and outreach programs for privately insured patients were safe, sound in clinical practice and accepted by all levels of the medical profession as well as private health insurer.  The trials demonstrated the feasibility of extending private insurance coverage to out-of-hospital care although, initially, PHI companies and the providers of private hospital services may have conducted intensive negotiations around the costs of these services and determining the eligibility of patients. 

The government has been supportive of this reform process but has taken a cautious approach.  It co-funded several pilot studies and has waited several years between the publication of the pilot study evaluation and this latest round of negotiations.

The opposition parties have reportedly been against this policy reform - although the grounds of this opposition have not been widely reported.

Private hospital providers and private health insurance companies have been supportive.

The main consumer representative group has cautiously welcomed the proposal. For them, the most important considerations are that the services provided outside of hospital are at least of an equal standard of care, and result in equal or better clinical results than those offered in a hospital. The consumer organisation is consulting widely with its members prior to releasing its formal response to the government later in 2006

Actors and positions

Description of actors and their positions
Department of Health and Ageingvery supportivesupportive strongly opposed
Private Hospitalsvery supportiveneutral strongly opposed
Private Health Insurancevery supportivevery supportive strongly opposed
Patients, Consumers
Consumers Health Forumvery supportivesupportive strongly opposed

Influences in policy making and legislation

Legislative amendments would be required, but this policy has not yet reached this stage.   

Legislative outcome


Actors and influence

Description of actors and their influence

Department of Health and Ageingvery strongvery strong none
Private Hospitalsvery strongvery strong none
Private Health Insurancevery strongvery strong none
Patients, Consumers
Consumers Health Forumvery strongneutral none
Private Health InsuranceConsumers Health ForumDepartment of Health and AgeingPrivate Hospitals

Positions and Influences at a glance

Graphical actors vs. influence map representing the above actors vs. influences table.

Adoption and implementation

PHI companies will be responsible for large parts of the implementation process.  For the first time, they will be able to design and offer products for a:

  • person with a chronic disease, such as diabetes that covers specific programs aimed at assisting them manage their own health needs;
  • person with cancer that will enable them to have chemotherapy in or out of hospital and still be covered by their private health insurance.

In addition, the government is introducing new standards of quality assurance in the private sector. This will involve the Department  of Health and Ageing working with the private health industry and the Australian Commission on Safety and Quality in Health Care to develop safety and quality standards so that privately insured services are provided by suitably qualified providers in accredited facilities.

Monitoring and evaluation

The Government has thus far not announced any plans for the monitoring or evaluation of this policy. 

As mentioned earlier, it has flagged greater involvement by the Department of Health and Ageing to work with the private health industry and the Australian Commission on Safety and Quality in Health Care to develop safety and quality standards.  This may involve some level of monitoring as well as accreditation.

Results of evaluation

None to report.

It should be noted though that the policy has been informed by the favourable results from the pilot studies that evaluated a number of projects on early discharge in the private hospital sector.  These studies showed that hospital-in-the-home type services were feasible in the private sector but also demonstrated cost savings.

Expected outcome

One of the many complexities of Australia's health care system is how inpatient care is defined and therefore how barriers are created around what services can be covered by PHI and which ones cannot.  This has created some articificial boundaries on how and where some patients can be treated.  In many ways it imposes a model of care that may have become antiquated. Therefore, reforms that remove some of these artificial boundaries may improve care and efficiency.

Nevertheless, changing these definitions also runs the risk of making systematic changes which have some unintended (or unforeseen) consequences.  The detail of the policy is yet to be decided/released and this makes it difiicult to anticipate some of these consequences.  In the sections below we have examined some of these potential risks.

Impact of this policy

Quality of Health Care Services marginal marginal fundamental
Level of Equity system less equitable neutral system more equitable
Cost Efficiency very low high very high

To the extent that the proposal moves us from community rating to risk-rating, there may be equity of finance implications with a greater burden of health care financing falling on those with chronic illnesses.

To the extent that services provided out-of-hospital are more efficient than in-hospital there may be overall savings.  The national evaluation of the early discharge pilot did identify some savings but it is yet to be seen whether these results can be generalised, noting that the pilot studies addressed palliative care, rehabilitation, and psychiatric care - not haemodialysis or chemotherapy which have been identified as the major policy targets for this proposal.


Sources of Information

For more information about the proposal see:

For more information about the consumer response see:

Department of Health and Ageing, Evaluation of Private Sector Based Early Discharge and Hospital in the Home Trials: Report of the National Evaluation, July 2000.

Author/s and/or contributors to this survey

Kees van Gool

Suggested citation for this online article

Kees van Gool. "Private Health Insurance: more products". Health Policy Monitor, October 2006. Available at