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Ballooning healthcare costs are getting out of hand. In a recent letter to private health insurers, the Australian Prudential Regulations Authority (APRA) called upon healthcare insurers to swiftly address financial sustainability challenges. Are we drawing too much attention to the baby boomers hitting retirement and not being able to fund their pensions, forgetting the bigger risk of their worsening health outcomes? Or are we (actuaries) not able to secure a seat at the policy table? Well, action is needed irrespective!
Aside from longevity concerns, baby boomers already exert pressure on the existing healthcare systems, irrespective of geographical location. In approximately 10 years, when many of them celebrate their 75th birthdays, the expected healthcare cost may double from increases in the expected number of claims, and the expected individual claim amounts.
Firstly, the expected number of claims per period will surge, resulting from the increased population at risk. Secondly, although the expected claim amounts per person per period may remain unchanged, the expected aggregate claim amount per person would increase due to increasing life expectancy, compounded by technological and medical advances. To manage the skyrocketing claims costs, private insurers would either increase the premiums charged or reduce the size of cover. These would be perceived as too expensive or poor value for money by healthy lives (who are meant to provide cross-subsidy), leading them to lapse their policies (if they have one) and discouraging prospective policy uptakes.
Arguably, insurers can 'split' the coverage cohort-wise to have high-risk cohorts charged higher premiums, possibly retaining the mix required to keep the business afloat. The anti-selection risk can be managed. This is, however, thwarted if premiums are community-rated.
We need not wait until the affordability situations go through the ceiling to act, nor be over-reliant on the regulator or the state to fix this. The health insurance business may struggle to break even in future if we do not give it the attention it deserves now. We need to rethink our strategies and, more importantly, encourage innovation in product designs that will not put businesses in a quagmire in the future. As put by APRA, we should not stop at identifying sustainability threats and risks. Some of our desirable skills as actuaries include scenario analysis and stress testing. Although not silver bullets, they improve preparedness and resilience.
Titus Rotich, Australian National University
26 July 2019