Private health insurance and competition

Special counsel David McMullen explores the subtleties of ‘no gap’ health insurance deals and the impact on competition.

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Private health insurance is critically important to Australia’s two-tiered health system and, yet, private health cover is reportedly in a so-called ‘death spiral’ with mass desertion of young healthy people because of the increasing cost of cover.

Those who are left are more likely to need health care, which drives insurance premiums up.

Criticism isn’t just coming from the consumer. Some in the health sector often complain about the various private health funds and their ‘preferred provider’ schemes.

• Common features of these schemes may include:
• higher rebates for visits to preferred providers compared to those for non-participating providers;
• reimbursement only for visits to preferred providers;
• requirements for preferred providers not to charge above pricing set by the health fund;
• free visits/check-ups to preferred providers only.

Criticisms of preferred provider schemes vary. Some label the arrangements unfair, an intrusion on professional and clinical practice, a misuse of market power and/or anti-competitive.

So what effect are private health funds having on competition, and why hasn’t the regulator put this to an end?

Regulating competition

The Competition and Consumer Act 2010 (Cth) (Act) is Commonwealth legislation that aims to promote competition and fair trading, and protect consumers. The Act has a wide reach, impacting almost every aspect of business activity in Australia. It is administered and enforced by the Australian Competition and Consumer Commission (ACCC).

Amongst other things, the Act prohibits certain anti-competitive conduct so that both consumers and businesses enjoy the benefits of a competitive, efficient economy.

There are some key concepts for present purposes:

• Anti-competitive conduct is, broadly speaking, conduct which can reduce the level of competition between businesses.
• The Act generally prohibits contracts, arrangements, understandings or concerted practices that have ‘the purpose, or would have or be likely to have the effect, of substantially lessening competition’.
• Exclusive dealing, is conduct which may occur when a party imposes restrictions on another party’s freedom to choose with whom they do business, and in what manner. The practice of exclusive dealing is prohibited where it ‘has the purpose, or has or is likely to have the effect, of substantially lessening competition’.
• Third line forcing is a type of exclusive dealing. It is third line forcing to supply goods/services (or to supply them at a particular price or with ‘a discount, allowance, rebate or credit’) on the condition that the purchaser acquires the goods/services from a particular third party. It is also third line forcing to refuse a supply because the purchaser will not agree to such a condition. Before November 2017, third line forcing was strictly illegal under the Act, but the Act has since been amended. Like other exclusive dealing, it is now permissible so long as it does not substantially lessen competition.

What would constitute a ‘substantial lessening’ of competition?

• This depends on a range of circumstances, including (in the case of private health funds):
• the particular insurer and their market share;
• details of the ‘preferred provider’ scheme;
• the size and nature of the market;
• whether activities have an important or a large effect on the market;
• substitutes or alternatives that are available (or not available) to consumers.

In contrast, damage to an individual’s business would not be sufficient to satisfy the ‘substantial lessening of competition’ test.

Assessing impact on competition requires economic analysis. This can be complex in a health setting, particularly because decision making by patients and providers is affected by a range of factors – including clinical factors – and is not solely based on pricing or economics.

Competing perspectives

Funds’ perspective

To the extent it is possible to distil the position advanced by the private health funds, it would be that preferred provider arrangements either do not substantially lessen competition, or actually enhance competition. Some of the main reasoning includes:

1. Consumers are free to exercise choice and find the best plans and providers to suit their needs.
2. Patients are not ‘forced’ to acquire services from any particular provider. Higher rebates are simply paid as a consequence of a ‘voluntary’ choice being made.
3. Providers who meet a fund’s recognition criteria can apply to participate in a preferred provider scheme, and can opt out at any time.
4. A guarantee of no-gap or a low-fixed gap is of substantial net benefit to fund members and the community as a whole.
5. Preferred provider schemes foster competition among providers and between funds. i.e., the preferred providers of a given fund will compete against each other, as well as competing against the preferred providers of other funds.
6. Market competition increases and customer outcomes are improved through:
   1. improved consumer understanding and ease of comparison of private health insurance products;
   2. increased transparency;
   3. reduced cost of growth for small- and medium-sized funds;
   4. a more prominent consumer ‘voice’;
   5. portability provisions – ensuring no new waiting periods or exclusions when changing policies;
   6. consumer control and choice in providers, hospitals and timing of health procedures.

Industry perspectives

Not surprisingly, many health professionals and industry bodies take a very different view to that of health funds. The argument is that health funds in essence choose who will provide services, and on what conditions. This limits competition between providers.

Some of the main complaints are:

1. Preferred provider arrangements discourage patients from using their own providers of choice, and therefore inherently lessen competition.
2. Health fund advertising promotes preferred providers above others, which creates an uneven field of competition and is disadvantageous to practitioners who choose not to participate.
3. Differential rebates lessen competition by disadvantaging patients if they choose a provider who is not ‘preferred’ by their fund.
4. The lack of uniformity (between preferred and non-preferred providers) on rebates per service, annual limits etc. lessens competition because it is impossible to directly compare coverage.
5. Using terms such as ‘preferred’ provider implies that a non-preferred provider is somehow inferior.
6. Health funds are privy to commercially sensitive information, which they can use to their advantage and to the detriment of providers.

ACCC stance

The ACCC has considered the practices of private health funds on various occasions. In summary, the position has been:

1. Health funds can have sound commercial reasons for the selection of contracted providers, without necessarily having an unlawful anti-competitive purpose.
2. Preferred provider arrangements with health care service providers can deliver benefits to health fund members in the form of higher and more predictable rebates.
3. In general, businesses decide for themselves who they wish to deal with.
4. Preferred provider arrangements could in some circumstances substantially lessen competition, and therefore contravene the Act. But the ACCC makes no general finding that preferred provider arrangements are anti-competitive, in contravention of the Act.

Conclusion

Private health insurers will typically seek to grow their membership by keeping premiums as low as possible, and paying rebates that are as high as possible. How exactly they go about this will determine whether or not their conduct is anti-competitive – as opposed to merely unpalatable to providers.

This is a complex area, and there may well be argument for reform to the way private health funds are regulated. Reforms may well translate to increased uptake of private health insurance in Australia.

For now, it appears that this is an area that the regulator will continue to monitor, but preferred provider schemes are here to stay.

ED: David McMullen is special counsel at Panetta McGrath Lawyers. This information is intended as a general overview and discussion. The information provided is not intended to be, and should not be used as, a substitute for taking legal advice in any specific information. Panetta McGrath is not responsible for any actions taken on the basis of this information.