Understanding Health Insurance

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It all begins:

1975 and Medicare is introduced to Australia, offering universal health care for all Australians. Suddenly going to the Doctor was no longer going to be a drain on your finances, and neither was going to the hospital. Services were going to be covered by the federal government. This system was further expanded in the 80’s. In determining the services that were to be covered, the Medicare Benefits Schedule (MBS) was introduced. The MBS set a fee for each type of service that the government believed was necessary, at a price they were prepared to pay.  This was known as ‘The Schedule Fee’. Public hospitals were to be funded by state governments with some money provided by the federal government.

When it came to private hospitals, the state governments were not responsible for providing funding. The federal government as part of Medicare agreed to also fund procedures in private hospitals under the MBS. A private insurer was created by the then government – Medibank Private (which was later morphed into Medibank and listed on the stockmarket) to help with the costs, as it was recognised that the MBS was not able to adequately cover private health cover. The extra costs include things like the bed and paying nursing staff! This is where the story gets interesting.

Determining what the Private fund can cover and how much:

We now have an insurer to pay for the hospital costs, and the government also saw a way to have Medibank Private also pay some of their costs too.  It would be a good idea they considered, if Medibank Private can also pay some of the fee we would normally pay to the doctor as well. Obviously, the amount the insurer pays can’t be open ended as the incentive would be there for doctor’s to charge as high a fee as they could get away with if there was no restraint. So the decision was made-

When admitted to a private hospital, Medicare will cover 75% of the MBS Fee and the insurer can cover the remaining 25%. Legislation was passed in the federal parliament to enable this, and to also set this in law.

Private health insurance was designed to cover expenses incurred when admitted to hospital. This prevented private insurers from paying anymore than their share and limiting the rebate for things like surgery only. There were several problems with this system that have been worsening over the years.

  • Since private health insurance was envisaged to cover procedures performed in hospitals, it was actually made against the law for a fund to cover any medical costs incurred on an outpatient basis. This includes any costs associated with visits to a GP or Specialist unless you are admitted to a hospital. Many of our patients are unaware of this, and are disappointed that their fund covers none of their medical expenses when seen in our clinic.
  • The Schedule Fee was set at a level that the government was prepared to contribute, not what a procedure cost. This meant that many procedures were not fully covered by the fee and patients were left with out of pocket costs
  • The Schedule Fee is not always indexed with the inflation rate. Over the years since 1975, the gap between what the Schedule Fee should be had it kept pace with inflation and the actual fee are widening.  This has been exacerbated in recent years by a freeze on indexation of the Schedule fee since 2012 (The Medicare rebate freeze).

This widening of the gap between the Schedule Fee and the fees being charged resulted in the introduction of ‘No, or Known Gap’ Insurance Policies.

Gap Health Insurance:

A new deal was reached with insurers and some of the medical community over the increasing out of pocket costs. Doctor’s were no longer willing to accept the Schedule Fee and patients were being left hundreds and even thousands of dollars out of pocket for procedures in hospitals. To help, it was decided to introduce a new structure whereby insurers were allowed to provide a rebate above the Schedule Fee (usually a set percentage like 50% more) if the Doctor agreed to either accept that fee entirely (‘No Gap Policy’) or with a set maximum gap (‘Known Gap Policy’).

This was a carrot and stick approach. The carrot was if you accept the fee we offer you now, your patient gets a higher rebate. The incentive here was that if the doctor takes a little less your patients can afford the surgery and you get more work.  The stick was if you don’t accept the ‘The Schedule Fee +50%’ we are offering and charge more than that, the rebate is back to the same old 25% of the schedule fee.  This means your patient has higher costs and may not be able to afford the surgery.

In general, this was a great compromise. The problem has remained that since the Medicare rebate was frozen in 2012, there have been minimal increases in what the doctor is being paid to perform the surgery. As a consequence, out of pocket fees are on the increase as many doctor’s abandon working with these policies as they don’t consider that it adequately covers the costs and skills.

So what does this mean?

Health insurance only covers medical expenses related to procedures performed in hospital. It is unfortunate that many non-medical expenses are covered out of hospital but not those associated with seeing a doctor outside of hospital. This is legislated and the only way to effect change is for the politicians to have the will to do so.

Out of pocket costs are likely to continue to rise as the gap between rebates and costs widens as a consequence of the Medicare rebate freeze. The increases you may be experiencing in your premiums aren’t due primarily to the cost per procedure by your doctor, but other factors.

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