The objective of this audit was to assess the Private Health Insurance Administration Council's (PHIAC's) administrative effectiveness as a regulator of private health insurance. In making this assessment, the Australian National Audit Office (ANAO) addressed the following criteria: whether PHIAC monitored compliance with its legislative requirements and analysed related data; whether PHIAC addressed and managed non-compliance with its legislative requirements; and whether PHIAC's governance and organisation supported the performance of its legislative functions. Although the Department of Health and Ageing (Health) also has a role in the regulation of the private health insurance industry under the National Health Act 1953 (Health Act), Health's regulatory activities were outside the scope of this audit.
The objective of this audit was to assess the Private Health Insurance Administration Council's (PHIAC's) administrative effectiveness as a regulator of private health insurance. In making this assessment, the Australian National Audit Office (ANAO) addressed the following criteria:
- whether PHIAC monitored compliance with its legislative requirements and analysed related data;
- whether PHIAC addressed and managed non-compliance with its legislative requirements; and
- whether PHIAC's governance and organisation supported the performance of its legislative functions.
Although the Department of Health and Ageing (Health) also has a role in the regulation of the private health insurance industry under the National Health Act 1953 (Health Act), Health's regulatory activities were outside the scope of this audit.
Overall audit conclusion
Overall, PHIAC's administrative effectiveness as a regulator of private health insurance was sound. In performing its functions, PHIAC maintained an appropriate balance between its objectives of fostering an efficient and effective health insurance industry; protecting the interests of consumers; minimising the level of health insurance premiums; and ensuring the prudential safety of individual Registered Health Benefits Organisations (RHBOs). PHIAC monitored the RHBOs' compliance with requirements and analysed related data, and it addressed and managed non-compliance by taking enforcement action when necessary.
PHIAC's governance and organisation supported the performance of its legislative functions.
ANAO has made four recommendations and a number of suggestions to enhance PHIAC's regulation and governance. PHIAC has agreed to all recommendations.
PHIAC provided the following summary response to the audit:
PHIAC welcomed this audit of its functions. As a small organisation, it can be difficult to find the resources for an objective assessment of our activities and to ensure that we are both efficient and effective. The audit provided useful information to PHIAC to enable ongoing improvement of our operations.
PHIAC fully accepts the recommendations. Recommendations 1 to 3 have already been implemented and the implementation of Recommendation 4 is in progress.
PHIAC is the independent prudential regulator established under the Health Act to oversee the operations of the RHBOs. It is a body corporate within the Health and Ageing portfolio.
PHIAC's primary role is to ensure that the RHBOs comply with legislative requirements, that they retain a sound financial position, and that they conduct their businesses in the best interests of consumers. In carrying out its role, the legislation requires PHIAC to achieve an appropriate balance between the following four main objectives:
- fostering an efficient and effective health insurance industry;
- protecting the interests of consumers;
- minimising the level of health insurance premiums; and
- ensuring the prudential safety of individual registered organisations.
PHIAC has been given extensive powers to monitor, investigate and supervise the RHBOs, and to take action on issues of non-compliance. However, private health insurance policy matters and other regulatory activities related to products and contribution rates, are the responsibility of the Minister for Health and Ageing (the Minister) and Health.
PHIAC's general administrative costs are funded through levies on the RHBOs, based on their membership. In 2004–05, PHIAC's revenue was $4.2 million and its budget for 2005–06 is $4.4 million. PHIAC is located in Canberra, and comprises a
five-member Board and a Secretariat of 16 staff.
PHIAC maintained close relationships with a number of stakeholders other than the RHBOs which it regulates. These included the Minister, Health, the Private Health Insurance Ombudsman (PHIO), the private health insurance industry bodies, the Australian Government Actuary, other government agencies, and other corporate regulators such as the Australian Prudential Regulation Authority (APRA).
About the industry
Since 1984, private health insurance has co-existed with Australia's universal public insurance scheme, Medicare. For those insured, private health insurance is designed to provide such benefits as choice of doctor in hospital, choice of hospital and choice of timing for a procedure. It can also assist with the costs of ancillary services, such as dental and optical, which are not covered by Medicare. Private health insurance is an important component of health care funding, with members' premiums and the Australian Government's Private Health Insurance Rebate accounting for over ten per cent of the total.
After a steady decline during the 1990s, the number of persons covered by private hospital insurance grew significantly in 2000, but has since remained relatively stable. The increase followed the introduction by the Australian Government of measures designed to increase the take-up of private health insurance, including the Medicare Levy Surcharge, the Private Health Insurance Rebate and Lifetime Health Cover.
At 30 June 2005, almost ten million Australians (or 49 per cent of the population) were covered by some form of private health insurance. Some 8.7 million persons (43 per cent) had hospital coverage— 7.1 million with combined private hospital and ancillary insurance and 1.6 million with hospital only insurance. A further 1.3 million persons (six per cent) had ancillary cover only.
RHBOs provide private health insurance. In 2003–04, these organisations collected $8.6 billion in members' contributions and paid out $7.6 billion in benefits. The industry is volatile in that it operates on small profit margins and is price sensitive in terms of whether or not people take out or retain a private health insurance policy. Six of the 40 RHBOs operating at 30 June 2005 had around 77 per cent of the hospital cover business and received 76 per cent of the total premium income, which meant that the other 34 funds shared only around 23 per cent of the market.
The Health Act is the main legislation governing private health insurance in Australia. It provides that organisations must be registered in order to carry on the business of health insurance; it specifies the types of services which may be offered and the way the business is conducted; and it allows conditions to be set in relation to any fund's registration. It also sets out the regulatory framework for the industry.
Regulatory monitoring (Chapter 2)
PHIAC was carrying out the range of activities expected of a regulator, including promoting its legislative requirements to members of the industry, monitoring and surveillance of the industry, taking enforcement action in cases of non-compliance, and providing information to, and educating, the industry.
ANAO found that PHIAC was performing its functions as specified in the Health Act, with one exception. Rather than obtaining hospital casemix data from Health for modelling, evaluation and research, PHIAC was using data from its own collections because it considered that these were more timely and up-to-date. ANAO considers that if PHIAC believes that this function is no longer relevant, it should seek an amendment to the legislation to remove the requirement.
PHIAC's prudential supervision of the private health insurance industry under the Health Act requires it to establish solvency and capital adequacy standards, impose uniform reporting requirements, require actuarial assessments for RHBOs, and monitor and analyse financial and other data provided by the RHBOs to confirm their prudential viability.
PHIAC developed Solvency and Capital Adequacy Standards, together with an Interpretation Standard, and implemented these in January 2001. After appropriate review and consultation, PHIAC recently revised these standards to take account of the introduction of Australian Equivalents to International Financial Reporting Standards (AEIFRS).
PHIAC follows appropriate monitoring and analytical processes in reviewing the prudential well-being of RHBOs, in line with the requirements established by the prudential standards.
PHIAC implemented Appointed Actuary requirements for RHBOs with effect from 1 July 2004. This was an effective and far-reaching initiative as it strengthened decision-making within RHBOs and reinforced governance, as directors of RHBOs are required to certify that they have appropriate risk management and business plans in place. It also ensured that RHBOs were obtaining appropriate actuarial advice. ANAO noted that all RHBOs had complied with PHIAC's requirement by 31 July 2004.
PHIAC also administers the Health Benefits Reinsurance Trust Fund (HBRTF), through the quarterly calculation and redistribution among RHBOs of the costs of hospital treatment for high-risk groups. In 2004–05, this involved the transfer of $163 million between the RHBOs. PHIAC expected this to increase to $180 million in 2005–06.
ANAO found that PHIAC had established and communicated to RHBOs policies and guidance on the reinsurance data collection process. PHIAC had implemented appropriate monitoring and analytical processes in administering reinsurance, including validation checks on the data.
ANAO noted that a key risk to the reinsurance calculation was the accuracy of data submitted by the RHBOs. PHIAC recognised this risk and addressed it. Despite assurances given by the RHBOs, the validation checks carried out by PHIAC found inaccuracies. ANAO observed that PHIAC queried discrepancies with the relevant RHBO and required it to correct any errors prior to processing the returns.
From time to time, Health requests PHIAC's advice on whether any increase in contribution rates requested by an RHBO might adversely affect the financial stability of that RHBO by failing to cover anticipated increases in the cost of providing services, or being excessive and so reducing the number of contributors. ANAO found that PHIAC had developed appropriate procedures to assess and advise on the impact of such changes.
ANAO found that PHIAC produced and disseminated a range of financial and statistical reports and other publications about the industry, which provided relevant information to the industry, other stakeholders and to consumers. ANAO noted PHIAC's efforts to improve the quality of reports and the services provided.
Regulatory action (Chapter 3)
PHIAC used a range of surveillance mechanisms to identify cases of non-compliance. Along with its regular monitoring and analysis, PHIAC had initiated a program of fund reviews aimed at gaining a better understanding of the RHBOs' administration and financial operations.
However, ANAO's analysis of the time taken by PHIAC to produce reports on the outcome of these reviews found the average was five months, with some taking much longer. ANAO considered that PHIAC needed to ensure more timely advice to RHBOs on the results of these reviews to enable better monitoring of issues raised, and made a recommendation that PHIAC improve its reporting on the review program.
If RHBOs failed to meet either the Solvency or Capital Adequacy Standard, or breached the Health Act, PHIAC took regulatory action. It had established appropriate procedures and guidelines for its management of non-compliance, using a seven-step process, and had provided these guidelines to RHBOs. ANAO found that PHIAC was effectively applying these procedures when investigating and supervising fund performance.
ANAO found instances where PHIAC had used the enforcement actions available to it as the regulator, when required. These included appointing inspectors and administrators to RHBOs. Where it did not have jurisdiction to take action itself, it had passed the responsibility for action to the appropriate authority—the Minister, Health or another regulator.
PHIAC used a number of mechanisms to assist RHBOs understand its requirements and to inform them of better practices. PHIAC developed procedures, guidelines and instructions setting out its requirements and provided these to RHBOs. ANAO noted that PHIAC has also introduced other measures to educate RHBOs and improve their operations and reporting, to maximise their compliance with PHIAC's requirements.
PHIAC set out its objectives and functions in its annual report and in a number of documents on its website. It had also developed clear procedures and guidelines for carrying out its monitoring and analysis of prudential standards and management of non-compliance by the RHBOs. However, ANAO considered that PHIAC could improve promotion of its role and responsibilities to members of the industry, and made a recommendation that PHIAC develop a clear statement that set out its intentions as the regulator and identified the reciprocal responsibilities of the RHBOs.
Governance and organisation (Chapter 4)
ANAO assessed PHIAC's governance and organisation, and found that it provided sound support for its regulatory activities. PHIAC's structure is appropriate to its regulatory functions and it has a logical division of duties and appropriate reporting lines. PHIAC had clearly defined the roles and responsibilities of the Chief Executive Officer (CEO) and staff. ANAO noted that PHIAC was reviewing its structure, as part of its current strategic planning, to identify the best organisational design for the next three to five years.
PHIAC was meeting its responsibilities under the Commonwealth Authorities and Companies Act 1997 (CAC Act). It had developed operating procedures for the conduct of Board business, including a Board Charter, and it provided induction and training for Board members. It also assessed Board performance through regular Board reviews.
PHIAC had relevant internal controls, including an Audit and Compliance Committee, and well-documented compliance instructions, such as an Employee Manual and CEO's Instructions, which included a fraud control plan.
PHIAC had established a comprehensive and effective strategic and operational planning framework to guide the performance of its legislative functions, which included a Corporate Plan, a Business Plan and a Risk Management Plan. It had sound regular annual strategic and operational planning processes. It set strategies and monitored its performance using a risk management approach. However, ANAO recommended that PHIAC could improve this process by conducting more regular reviews of its risk register and extending its risk management reporting to incorporate those risks categorised as ‘significant'.
ANAO found that PHIAC had a performance management and reporting framework that identified the extent to which PHIAC achieved the operational goals established in its Corporate Plan. However, ANAO recommended that improvements could be made in order to better demonstrate the extent to which PHIAC achieved its stated outcome. These would include linking actions in its Business Plan to the performance indicators set out in the Portfolio Budget Statements (PBS), and developing more measurable indicators for public reporting.
PHIAC met its legislative reporting requirements by preparing an annual report on its activities (as required under s. 9 of the CAC Act) and the annual report on the operations of the RHBOs, and notifying the Minister of significant events. PHIAC's annual report included its audited financial statements.