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

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.