It was a very key plank of what was dubbed the most significant package of private health insurance reforms in more than a decade. From the 1st of April this year, private health insurers have been permitted to offer a youth discount – lower premiums for people under 30.
But the early signs are not good. New data released today by the private health insurance regulator show 7,000 fewer young people (25 to 29 year olds) were insured on June 30, 2019 than three months earlier when the new discount regime started.
In the three years to June 30, 2018, an average of about 2,100 young people dropped private health insurance every month. For the first six months of this year, the decline was 1,700 a month.
Also Read: Premiums up, rebates down, and a new tiered system – what the private health insurance changes mean
So the new policy may have stemmed the bleeding, but young people are still leaving private health insurance. This does not augur well for the future of private health insurance.
It’s time to consider a bold option to encourage young people to stay in private health insurance, which reduces their premium costs based on their likelihood of getting sick.
As we pointed out in a recent Grattan Institute working paper, the industry fears a death spiral where young and healthy people drop out of insurance, forcing up premiums for everyone left, then more young and healthy people drop out, premiums go up again, and the cycle continues.
Australian private health insurance is based on community rating. This means insurers must charge all consumers the same premium for the same product: they are not permitted to discriminate based on health risk (such as age, gender, health status, or claims history); and they cannot refuse to insure an individual.
Community rating is designed to enable higher-risk people to take out private health insurance, by forcing lower-risk people to cross-subsidise them. It means lower-risk people have to contribute more than what their expected use would require.
But faced with a higher-than-fair premium, low-risk people – typically the young and the healthy – make an economically rational decision to drop their private insurance. Hence the death spiral.