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The explanation behind the rising cost of health insurance

19 February 2018 - 9:06am

The Labour party has come out swinging at health insurance funds. They called yearly premium increases aggressive and claimed health funds made billions in profit every year. Firstly, Australian Prudential Regulation Authority statistics put total profits of all health funds at just over $1.2 billion. Secondly, premium increases aren't an aggressive move to increase profit - they're quite the opposite.

There's a lot of misinformation out there about health insurance, particularly when it comes to premium increases. To clear the air, let's look closer at why health insurance premiums increase in Australia and what's going on in the insurance market right now. 

What are the drivers behind health insurance premium increases?What are the drivers behind health insurance premium increases?

Why do health insurance premiums increase in Australia?

First let's tackle the hot button issue of the moment. Every year on April 1 health insurance premiums increase, usually by between 4 and 6 per cent. This year we've seen the lowest increase in 17 years - just 3.95 per cent on average.

What are the drivers behind these premium increases? In a nutshell, the cost of healthcare is increasing and more people are claiming on their health insurance. Private Healthcare Australia (PHA) data can give us an insight into exactly how much health fund's costs went up during 2017:

  • Payments for hospital treatment increased by 4 per cent to $14.86 billion.
  • Medical specialists increased by 4 per cent to $2.29 billion.
  • General treatment increased by 4.5 per cent to $5.03 billion. 
  • Dental services went up by 4.7 per cent to $2.65 billion. 

With those rising costs in mind, it's unreasonable to call a premium increase of just 3.95 per cent aggressive. It would seem that health fund operating costs are rising faster than their premiums are. 

Health funds pay out the highest percentage of premium back to customers of any insurance class.

How can health insurers counter the drivers behind premium increases?

Health funds consistently pay out the highest percentage of premium back to customers of any insurance class - averaging around 86 cents on the dollar. Compare that to 64 cents for general insurance and 67 cents for property insurance.

That's why the responsibility for slowing premium increases and delivering value to customers doesn't fall only on the shoulders of health funds whose margins aren't at all generous. The government needs to help with smart targeted legislation, as does the medical industry by keeping their costs down. 

These rising costs are an issue that needs a collaborative solution, however, recent legislation has proved promising and helped deliver the lowest premium increase in 17 years. With further help from the government and the medical industry alike, health funds can continue to keep costs down and offer value to customers.

If you're not insured or you'd like to discuss your cover, make sure you get expert advice and choose a suitable, value for money policy. Get in touch with a broker at HICA today.