Australia’s private insurers have received sustained criticism on account of their low-cost policies, typically known as junk policies. Specialists have pointed to the fact that these policies are likely to be ripping off the customers.

However, there is a need to understand some factors contributing to their existence so that the conversation transforms from a blame game to a meaningful discussion. To set the tone for a range of reforms, some of which were announced as a part of the reform package by Federal Minister for Greg Hunt, on 13 October 2017.

Recent reports from the ACCC (Australian Competition and Consumer Commission) indicate that most consumers signing up for new private health insurance policies tend to choose lower-cost policies with fewer benefits.

Almost 40% of health insurance policies currently have exclusions to help keep premiums down. Between June 2014 and June 2016 there was a 400,000 reduction in the number of hospital policies with no exclusions, while hospital policies with exclusions increased (by an additional 600,000).

Does low cost = low value?

Yet the cheaper or so-called junk policies offered by Australian health insurers have received heavy criticism by industry bodies over the past few months. The main argument is that Australians purchasing insurance premiums with basic cover and a range of exclusions are receiving limited value for their money.

Counterarguments by health insurers claim that it’s impossible to offer a one-size-fits-all policy. The combination of market demand, government policies and consumer behaviour may have to be factored into the existence of low-cost policies.

For instance, consumers choosing low-cost health insurance policies tend to be unaware of the fine print in their cover and therefore might be surprised as well as disappointed when they need to claim a procedure. On the other hand, insurance providers justify low-cost policies by claiming that they are driven by demand from those not willing to pay higher premiums.

Additionally, there is the medical inflation factor. According to the Department of Health, health inflation in Australia has outpaced general inflation in most years during the past decade. From 1995–96 to 2005–06, the average rate of health inflation was 3.1% a year, while general inflation was 2.7%. This means that what consumers are covered for over time is reducing because the cost of the service is increasing.

Time to ban junk policies?

Banning junk policies may not be the best solution, for consumers should be able to opt for a low-cost policy. However, it involves taking into consideration each party’s requirements. Nevertheless, it is important to acknowledge that designing the right package for individual needs is a complex task for insurers.

The debate can be endless since it involves too many parties with strongly held, different opinions. However, it highlights the need for a reform in the industry. When we look at other countries, it is clear that there is no magic formula for a perfect health system.

However, government, insurance providers and industry bodies can certainly start a conversation that would benefit all the parties involved. For instance, community-rated, mandatory coverage with tightly regulated minimum benefits and no direct payments at the point of need should be a good starting point.

Civica has been an active participant in the private health insurance sector for more than 40 years, and is one of the largest software systems providers to the industry.