Time to Rethink Risk Equalisation to Save Gold Hospital

This article, part of the Actuaries Institute’s four-part series on challenges impacting Gold-tier hospital products, examines how Australia’s risk equalisation system impacts customer affordability and insurer sustainability of Gold-tier hospital cover.

Catch up on the series here.

Understanding risk equalisation

Risk equalisation is a risk-pooling mechanism that supports community rating by redistributing hospital and medical benefit costs between insurers.  The system operates through two risk pools:

1. The Age-Based Pool (ABP) which shares a proportion of outlays for claiming policyholders aged 55+, and
2. The High-Cost Claimants Pool (HCCP) which shares a proportion of outlays from individual claimants whose annual claims cost exceeds $50,000.

Nearly half of industry hospital benefits flow through these pools, with this proportion growing annually.  Risk equalisation influences health insurance pricing, the level of cross-subsidisation between groups and incentives for insurers to manage healthcare costs. 

The current risk equalisation system only covers actual hospital and medical costs. Therefore, it provides limited incentives for wellness and preventative healthcare, and may disincentivise insurers from investing in these areas. 

Current design fails Gold products

Gold-tier hospital products cover all 38 clinical categories in Australia’s private health system. This includes high-cost services not commonly available on lower product tiers.  

Three categories – pregnancy, weight-loss surgery and in-hospital psychiatric treatment (collectively referred to here as PWP) – are typically claimed by policyholders aged under 55. They seldom reach the HCCP threshold of $50,000. As a result, the risk equalisation system provides minimal risk-sharing for these services, with individual insurers funding each claim in full. 

To earn a return on risks carried for those policyholders, insurers either increase premium rates or may stop selling Gold products. Both responses reduce access and affordability of Gold hospital products and PWP coverage for policyholders.

Product tiering changes have amplified these pressures. When new product tiers were introduced in 2019, the system remained unchanged. This created a strong incentive for risk selection, in this case, via product design within the tier system through “Plus” categories.

What may have started from a desire for product differentiation to ensure older Australian’s didn’t pay for cover they didn’t need – such as pregnancy – the market adapted with many insurers offering modalities typically used by older members (including joint replacements and cataracts) on Silver Plus products. Competitive dynamics kept Silver Plus pricing sharp, while Gold products became increasingly concentrated with non-risk-equalised PWP benefits. This created sustainability and affordability challenges for insurers and consumers in the market for comprehensive health cover.

Gold-tier products include the highest-cost hospital services, including coverage for chronic conditions. If the risk equalisation system is disincentivising investment in these areas this will impact Gold products in the long term.

Unable to manage PWP risk through the RE system, and faced with escalating proportionate PWP costs, insurers may raise premium rates or close and relaunch Gold products at higher prices to maintain viability.

Reform considerations

The system could be recalibrated to better reflect current market dynamics through two pathways: 

1. directly including Gold-specific services like pregnancy, hospital psychiatric services and weight loss surgery in the RE pool (regardless of member age) 
2. replacing fixed age-based percentages with a more dynamic approach that adapts to actual claiming patterns, or
3. a combination of these approaches would better align risk-sharing with current market realities and allow the system to adapt as healthcare delivery evolves.  Introducing such flexibility requires clear goals and frameworks for measuring effectiveness.

This article explores two reform options aimed at addressing the sustainability of Gold-tier cover, recognising that both involve trade-offs requiring careful consideration.

Option 1: Expanding the risk equalisation pool for Gold-specific categories

Expanding the risk equalisation pool to include higher-cost services claimed by younger members would share these costs across all insured members, improving Gold-tier affordability and availability. However, this would increase premiums for lower product tiers and potential benefits and challenges should be considered. This would create winners and losers:

Potential benefits

• Gold-tier members and future entrants: improved affordability with lower premiums and access to comprehensive cover
• Certain healthcare providers: Larger insured patient pool for maternity, psychiatric and bariatric services.
• Public health system: Reduced demand pressure for as private insurance cover becomes more viable.

Potential challenges

• Non-Gold members: Premium increases on Basic, Bronze and Silver would be required to fund and cross-subsidise the lower premium rates on Gold.
• Lower-tier premium increases may reduce participation, especially among younger, healthier members.
• More high-cost members entering the system could increase overall average premiums. For example, improving private pregnancy-related service affordability could see a shift from the public to private system creating upward premium pressure.
• Weakened system sustainability if good risks leave while higher risks join.

Any expansion of the risk equalisation pool must carefully balance improved access against these potential impacts on system participation and affordability across all tiers.

Option 2: (Expanding the services covered in the risk equalisation pool) AND rebalancing the risk equalisation pool

This option expands the risk equalisation pool to cover PWP while simultaneously reducing age-based pool subsidies to maintain overall system balance.

Potential benefits

• Gold-tier members: Improved affordability and access to comprehensive cover
• System sustainability: Maintained participation rates among younger people. More balanced risk distribution across product tiers. Reduce incentive for risk selection behaviours or reduce predictable gains and losses.

Potential challenges

• Members on Silver or closed Gold products: potentially higher premiums from reduced age-based subsidies.
• Some older members may downgrade or exit private health insurance, placing increased pressure on the public system.
• More high-cost members entering the system could increase overall average premiums (as per option 1).

Neutral

• Basic and Bronze members: premiums broadly unchanged if total subsidisation remains stable.

Potential consequences

Any changes to included services and pool rebalancing must consider fairness and equity between age groups as well as potential unforeseen impacts. Analysis would be needed to understand the full system impacts and ensure unintended consequences are minimised.

Summary

Both options to recalibrate the risk equalisation system address risk concentration in Gold products and result in different trade-offs. Option 1 (expand the RE pool for Gold specific categories) improves access and affordability for Gold services but may drive up lower-tier premiums, potentially reducing participation. Option 2 (option 1 plus rebalancing the risk equalisation pool) seeks to balance these pressures by redistributing subsidies from older to younger members, though at the cost of reduced age-based support.

To reduce demand on the public system and increase health insurance participation, either option may require complementary policy measures – such as rebate adjustments or other incentives to maintain affordability. Policy reform to improve the private health insurance system should be guided by the following objectives:

• to maintain affordable access to comprehensive coverage
• to support overall system efficiency and sustainability
• provide fairness across demographics.

This article was prepared by the Actuaries Institute Gold Hospital Products Taskforce. Views expressed aim to inform policy discussion and do not constitute formal Actuaries Institute policy positions. We welcome feedback and alternative perspectives as part of constructive dialogue on these important issues.