Money: Honest health policies

By Philip Macalister

You would expect that with growing waiting lists and increasing medical costs, health insurance would be an area for huge growth in the insurance market.

But not so.

For several years now the number of people with health insurance has declined, and those with cover are moving away from the traditional comprehensive policies, which cover everything, to hospital-only policies.

The head of marketing at BNZ Financial Services Group, Nigel Fairless, says 51 per cent of New Zealanders had health insurance at the start of the decade, but that figure has dropped to about 38 per cent.

This move is being fuelled by smaller companies wanting to take market share off the dominant player, Southern Cross, and a perception that premiums are too high.

It is estimated that Southern Cross has just over 60 per cent of the health insurance market, and the large majority of that (about 80 per cent) is in traditional comprehensive policies such as RegularCare, which cover everything from doctor visits, physiotherapy and x-rays through to major surgery, but has limits on payouts.

The smaller players in the market, such as National Mutual Health, Tower Insurance, Bank of New Zealand and American International, have been promoting their so-called "new generation" hospital-only policies as a cheaper alternative.

Jeff Bailey, of National Mutual Health, says changing to a surgical policy is one way people can keep their health insurance premiums down yet remain covered for the big-ticket items.

He says people should buy cover for the major components only - namely surgery - and pay for the smaller items, such as doctor visits, out of their usual budget.

He compares insuring our bodies to car insurance.

"Do we insure our cars for the oil change [doctor visits] and new wiper blades [prescriptions], or do we insure them for the big accident or theft?

The answer, as we all know, is that we pay for the general, small-item running costs, and the big-ticket, accidental, or unexpected costs are covered by insurance.

Part of his company's marketing exercise has been to point out to consumers that while the comprehensive policies purport to pay out a maximum percentage of costs incurred, often the real payout, is proportionately much lower.

This was highlighted last week when Southern Cross and number two player Aetna reached an out-of-court settlement with the Commerce Commission and agreed to pay nearly $200,000 to policyholders. The commission said that some patients with comprehensive policies who needed heart surgery and kidney operations had received only 20 per cent of their medical costs, after being promised 80 per cent or 100 per cent.

The reason for this discrepancy lies in the way payouts are calculated by the insurance companies. Instead of paying out, say, 80 per cent of the actual costs, they pay out 80 per cent of scheduled costs.

Each company has a schedule which breaks down the components of an operation and sets maximum price limits on each part. Often, the true cost is much higher.

AIA health insurance manager Russell Edwards gives an example of a cancer claim where the true cost of the operation was $36,813 but the 80 per cent, traditional policy paid out only $16,559.

Heart attack victim Derek Hunter, who took the matter to the Commerce Commission, says Aetna offered to pay him only $4200 for heart sur ery which was going to cost $11,000.

Southern Cross chief executive Roger Bowie defends the practice and says the society is putting out new documentation which "clarifies areas within our plans where maximum payouts may not always meet members' costs."

He acknowledges that in some cases the "level of grant paid has been significantly less than 80 per cent or 100 per cent of the actual cost of those operations."

Mr Bowie says he is "disappointed" about the Commerce Commission's actions, because Southern Cross was working on clarifying its documentation at the time. He says the schedules have realistic prices on them and Southern Cross periodically re-examines them to make sure they are appropriate.

While other insurers are selling more hospital-only cover, the mix at Southern Cross remains leans heavily to comprehensive policies. Mr Bowie says that in the past five years hospital-only cover has gone from about 15 per cent of its business to 25 per cent.