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© 2013 Finity Consulting Pty Limited
Risk Equalisation:
Can We Do Better?
Health Insurance Summit – July 2013
Jamie Reid – Finity Actuaries and Consultants
Risk Equalisation – Can We Do Better?
Why is risk equalisation important?
Current System: What works and what doesn’t?
Options for change
2
Ever present and ever changing
3
0
200
400
600
800
1,000
1,200
1,400
$ m
illi
on
s
Age
Premiums Claims (Before Risk Eq)
Community Rating Requires Risk Equalisation
4
Sub
sid
y
Source: Finity analysis of PHIAC data, year ending June 2012
Cost Differences By Age Largely Eliminated
5 Source: Finity analysis of PHIAC data, year ending June 2012
0
200
400
600
800
1,000
1,200
1,400
$ m
illi
on
s
Age
Premiums Claims (After Risk Eq)
More than 40% of claim costs are shared
6
0%
10%
20%
30%
40%
50%
60%
0
2
4
6
8
10
12
% o
f C
laim
s E
qu
alised
Cla
ims ($b
n)
Year Ending June
Hospita l Claims Paid Claims subject to risk equalisation Risk equalisation %
New RE arrangements
Lifetime health cover introduced
New RE arrangements
Source: Finity analysis of PHIAC data, various years
More Than Half of Claim Costs Shared by
2020
7
30%
35%
40%
45%
50%
55%
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14F
20
16F
20
18F
20
20F
% o
f C
laim
s E
qualis
ed
Year Ending 30 June
Historical maximum: 46% (1994)
High
Low
Source: PHIAC data, Finity projections
What works and what doesn’t work?
8
+ Age cost differences removed
+ Fairly simple and well- understood
- Other cost differences remains
- Insurers share efficiency gains
- Affordability challenge for under 65s
Options for Change
New System
• Risk based capitation
Change Current System
• High cost claim pool
• Encourage younger joiners
• Capping growth
9
Risk Based Capitation
Based on expected rather than actual claim costs
Insurer incentive to control actual costs
Increased complexity
Netherlands provides a case study
No appetite for Australian RBC in 2003
10
High Cost Claims Pool (HCCP)
Covers claims above $50,000
While claim costs increase each year, threshold has not
changed
If HCCP remains then threshold should be indexed
11
0
100
200
300
400
500
600
700
800
900
20
07
20
08
20
09
20
10
20
11
20
12
20
13
F
20
14
F
20
15
F
20
16
F
20
17
F
20
18
F
20
19
F
20
20
F
HC
CP
(
$m
)
Year Ending 30 June
Encourage Younger Joiners
12
0
1,000
2,000
3,000
4,000
5,000
6,000
$ p
er
pers
on
Age
Premium Claims (Before Risk Eq)
Subsidy
Conclusion
Risk equalisation systems don’t last forever - change is
inevitable
Life of the current system can be increased
HCCP changes look like an easy win
RBC should remain under active consideration in Australia
Making changes sooner rather than later allows any adverse
impacts to be addressed
13
