Private health insurance in Australia: Community rating, but at what price(s)?

Australia has voluntary private health insurance (PHI) markets in which open enrollment and community-rated premiums are mandated by government. Historically, adverse selection in these markets led to a substantial decline in coverage, giving voice to fears about the viability of PHI markets in the longer-run. In order to preserve community rating but improve the PHI pool, the Australian government instituted a novel scheme of age-based penalties (ABPs) for individuals who join a PHI fund later in life. This article computes the price of PHI under the so-called Lifetime Cover (LC) scheme and shows that the LC scheme per se is not appropriately calibrated to prevent another adverse selection death spiral.1 Based on our results, we recomputed age-based penalties that would result in a fair price of PHI for all age groups. The premium multipliers we derive suggest a premium ratio of 10:1 for the oldest and youngest joiners. Our premium multiplier sequence is well-approximated by a linear ABP scheme that is approximately three times that of the present LC scheme for older joiners. © 2010 Aspen Publishers.