The health insurance time-bomb

By ANDREW LAXON

How much are Southern Cross premiums going up?

That depends on how old you are. Southern Cross is belatedly following its competitors to an age-based system of setting premiums, but it has gone a step further.

Unlike its competitors, which set premiums in age bands of five years, Southern Cross has set different rates for every year - sending rates for some elderly customers through the roof.

The worst affected will be 50 to 64-year-olds on comprehensive plans such as RegularCare, which cover everyday medical expenses such as doctor's visits, as well as hospital care. A 62-year-old couple on this plan will find their monthly premium jumps 72 per cent, from $102.34 to $176.06. Over a year they will pay $884 more.

Young families with children of primary school age are likely to face a slight increase. Southern Cross gives an example of two parents, aged 40 and 38, with two children 7 and 5, who would pay $122.49 a month - a monthly increase of $6.41. A single 25-year-old pays $36.36, a saving of $2.99 a month.

Overall, Southern Cross says:

* 20 per cent of its 800,000 members will pay no more or up to 10 per cent less.

* 15 per cent will pay up to 10 per cent more.

* 26 per cent will pay 10 to 25 per cent more.

* 25 per cent will pay 26 to 50 per cent more.

* 14 per cent will pay over 50 per cent more.

Why are older people being forced to pay more?

Because they cost health insurance companies the most money.

Last year, Southern Cross paid $27 million more in claims and operating expenses for people aged 50-plus than those members paid in premiums. This problem has been getting steadily worse for the insurer as the number of 50 to 65-year-old members has risen by 40 per cent in the past 10 years.

Other telling figures from last year: the number of claims for surgical procedures rose 10 per cent across all age groups, with one in three members over 65 claiming for surgery. And across the health insurance industry in New Zealand, the average 60-year-old with health insurance claims almost four times as much as the average 30-year-old.

There is also the rising cost of operations, as medicine finds new but expensive ways to keep people alive longer. A typical hip replacement costs $12,000 and cardiac bypass surgery costs an average $23,000.

But did they have to put premiums up so much, so fast?

Yes, says Southern Cross, because it cannot go on losing money on its day-to-day operations.

"We have been paying out more in claims and operating expenses than we have been receiving in premiums for the past four years," says chief operating officer Mike Ashby. "Clearly that can't continue."

Until now, Southern Cross has avoided an overall loss through income on other investments. That will change in September when the company announces a loss - Ashby will not say how much - for the year to June.

Southern Cross has released two financial covering letters supporting its decision. One is from PricewaterhouseCoopers, which was asked for a comprehensive independent financial review of Southern Cross after a mismanaged changeover to a new computer system during the New Year led to a public relations disaster and the resignation of chief executive Roger Bowie.

PricewaterhouseCoopers says Southern Cross' underwriting losses on claims are eroding its $222 million reserves and cannot be sustained indefinitely. It says it is imperative that Southern Cross raises premiums to at least match the level of claims made by members.

It says the new user-pays pricing structure will do that and move the friendly society (Southern Cross is not a company, as it does not return profits to shareholders ) towards a financially sustainable pricing structure.

Will this work?

A second letter by strategic advisers Tacit Group describes the change as the only viable long-term strategy in a competitive market.

Tacit adviser Murray Hilder calls the new prices fair, as members will pay a premium close to the expected cost for their age. He warns that unless the change is introduced, Southern Cross' financial position will grow worse as its members age, people fail to join and healthier, younger members leave, forcing costs up further.

Even competitors agree. Jim Minto, chief executive of the country's number two health insurer, Tower NZ, and acting spokesman for the health insurers' organisation, the Health Funds Association, says an insurer would never normally inflict such heavy premium increases on its members. He can only assume - based on the two letters Southern Cross released - that financial necessity forced the society to move so fast.

Ashby admits that Southern Cross would like to have started these changes sooner. But he says it was unable to charge its members premiums by age until it introduced its new computer system.

Why should older members pay more now when they subsidised the elderly in the past?

Angry policyholders in their 50s and 60s have flung this argument at Southern Cross for 10 years as the insurer steadily cranked up premiums for older members. (One reason Southern Cross fully expects an angry response is that this premium increase is the latest in a long line - some elderly customers have already seen their premiums triple in the past decade.)

Ashby's answer is that younger members these days are being asked to pay far more to support their elders.

Twenty-five years ago, when today's 62-year-old members were just 37, the average 37-year-old was cross-subsidising older members by less than $65 a year (in inflation-adjusted figures). By 2000, younger members were paying more than $350 each a year to support the 62-year-olds.

Is it fair for Southern Cross to change the rules on older customers like this?

Consumers Institute chief executive David Russell calls the increases "predictable". He says they are fair in today's health insurance climate but unfair for those who, rightly or wrongly, believed they would be shielded from the user-pays approach for the rest of their lives.

Russell says Southern Cross has been careful for several years not to promise older customers that the broad age bands combining younger and older members (known in the business as "community rating") would continue indefinitely. But as the pricing system was one of the main attractions for middle-aged to older New Zealanders, he expects some insurance salespeople selling for Southern Cross may have offered "guarantees" that were never likely to be met.

Is it still worth having health insurance?

If you can afford it, yes, says Russell. The same rules still apply - if you have a serious accident or illness, the public health system will look after you. But if you need major elective surgery (ie, for non-emergencies), health insurance allows you to avoid the queue of the public system and gives you a better standard of hospital accommodation.

You should also weigh up your family history and consider whether you may be likely to need health insurance as you get older. Bear in mind that health insurers will make the same calculations when they make you an offer.

Cynics might even see Southern Cross' steep price rises as an attempt to get rid of older members who cost the insurer too much money.

Not at all, replies Ashby, who admits that he expects some members to cancel their policies but says Southern Cross has not made any calculations on how this could affect its finances. The new premiums, he says, are designed to be financially sustainable even if no members leave or downgrade their polices.

But is it worth paying so much for the more expensive plans?

While Southern Cross doesn't like to openly encourage its older members to leave, it is now actively encouraging them to shift to cheaper policies. The main change is a shift to plans that cover hospital expenses but do not cover day-to-day medical expenses such as GP visits.

In a list of five premium-change scenarios, Southern Cross offers two alternatives for hypothetical members facing increases. It suggests that a couple aged 55 and 53 who face a 26 per cent increase on their Ultracare 400 policy (up $78.54 a month to $382.24) should consider switching to Ultracare Base.

The cheaper policy would cost them $262.04 a month, a $41.66 saving on their present policy. The tradeoff is that they will miss out on up to $400 of dental care and up to $250 for spectacles and contact lenses each year.

A 62-year-old couple on RegularCare facing the highest increase of 72 per cent could cut that back to 29 per cent (an extra $29.60 to $131.94 a month) if they cut back to a SureCare policy. However, this may prove impractical for many people.

The Southern Cross website says this only covers surgical procedures and limited claims for specialist consultations and imaging expenses, with no cover for existing medical conditions for the first three years.

Is it worth finding a cheaper health insurer?

Probably not - and that's from Southern Cross' biggest competitor. Jim Minto says Tower NZ, which has gone from 185,000 to about 200,000 customers since Southern Cross' public troubles began last September, would like to take a good cross-section of young and old customers from its rival.

But he is not interested in trying to poach the older members hardest hit by the premium rises, for the obvious reason that they would be a financial burden on Tower and its members.

Minto says it is even more uneconomic for a new insurer to take on ageing members with known medical conditions, as they have not been paying their way in premiums over the years.

And while other insurers are unlikely to increase their premiums as sharply as Southern Cross, they are all grappling with the soaring costs of healthcare for older New Zealanders.

Minto says Tower's claims have risen 25 per cent a year for the past two years. The company increased its premiums by 18 to 30 per cent this year and is likely to do so again - although not as steeply - in the coming year.

If you do consider changing, be wary of price comparisons as companies structure their plans differently. For instance, Tower and Sovereign do not offer direct alternatives to Southern Cross' RegularCare plan.

What happens to Aetna policyholders?

Southern Cross has 135,000 Aetna members from its takeover of the company last year. Their premiums are already priced in five-year age bands. Ashby says Southern Cross has not yet decided whether to transfer their details to the Diamond computer system, which would allow the insurer to grade them in one-year bands.

When do members find out their new premiums?

Letters began going out to about 70,000 members yesterday, but many more will not find out until their next bill, which could be months away. Ashby says the timing was decided for administrative reasons.

Southern Cross