Demographic Scales for Ex-Ante Risk Equalization in Australia

Presenter: Francesco Paolucci, Australian National University

Abstract

In April 2007, as part of Private Health Insurance Act Comprehensive Reforms, the reinsurance arrangements were substituted by a risk-equalization scheme, in order to protect funds with riskier- than-average populations. . Several policy changes were made to the reinsurance scheme which nevertheless maintained the feature of being a de facto ex-post (retrospective) rather than an ex-ante (prospective) risk-equalization arrangement, which is common in the European systems.
The new risk-equalization scheme is composed of two components: first, an Age-Based Pool (ABP) with a set of different age categories with varying proportions (0-82%) of the claims cost depending on the age of the claimant. Second, a High Cost Claims Pool (HCCP), where benefits in excess of $50,000 in a 12 month period are pooled (after the operation of the age-based pooling).
The main problems with this ex-post (retrospective) risk equalization scheme are the limited set of risk-adjusters and lack of incentives for efficiency and the presence of incentives for selection in the Australian private health insurance market (PHI). A similar level of risk equalization across insurers can be achieved with higher incentives for efficiency and lower incentives for selection with a system of ex-ante prospective subsidies among insurers.
The aim of this paper is to examine several options for an ex-ante (prospective) risk-equalization scheme and their implications on the inter-fund subsidies flows.