From reform to fairness: Scale Price Relativities in Private Health Insurance
Community rating in Private Health Insurance limits the complexity of pricing approaches insurers can offer – with only variation by state and scale allowed for a given product. However, even with this scope there has historically been very limited variation in premium relativities by scale. We explore market practice, including those insurers who are starting to test moving away from traditional relativities, and where there might be scope to break the norms.
Couples and family scales
Finity’s analysis of PHI resident market premium rates confirms the dominant pricing strategy for couples and family policies is 2x the single scale. Health insurers have been pricing in this fashion for some time – we found evidence that some insurers have been using this relativity since 1946!
While traditional scale rating structures dominate, we observed eight insurers with family scale relativities greater than 2x the single rate for ancillary coverage. Such a model may better reflect the incremental cost of dependants’ claims, particularly as dependants can be relatively high users of gap-free preventative dental offers. On the hospital side there was less experimentation but we did observe products where family and couple pricing is different (e.g. couples 2.0x the single rate and families 2.2x), as well as, a small set of products where the singles price appears to come at a relative ‘premium’ to address the potential for higher risk of adverse selection (e.g. both couple and family pricing on these products is less than 2.0x the single premium rate).
Single parent family scales
CHOICE magazine recently published analysis highlighting the high cost of insuring children for single parents, effectively challenging the premium differential between single and single parent policies relative to the typical ‘free’ addition of children to a couples policy. The article inspired this blog post and certainly challenges the industry about whether current pricing structures are fair.
Single-parent policies represent 3.3% and 3.6% of industry hospital and ancillary policies respectively, up from 2.5% and 2.9% ten years ago suggesting this is a scale that is increasing in relevance. We observe that the most common pricing structure for single parent policies is 1.7x the single rate for hospital policies and 2.0x the single rate for ancillary policies. However, there is a wider range of pricing relativities in market than for any other scale.
With respect to hospital policies: seven insurers have relativities of 1.5x or lower, two have 2x – with the remainder scattered between 1.5 and 2.0.
With respect to ancillary policies; relativities are slightly higher than hospital; fourteen funds have 2x relativities, four less than 1.6.
Single-parent policies have existed since 1996, however, the catalyst for the lowering of premium rates below the level of family premium rates was the April 2007 change to risk equalisation which reduced the share of the risk equalisation pool borne by single parent families. Insurers took a variety of approaches to this change, and perhaps in the face of low policy volumes some insurers have maintained the status quo. As we expect some tightening of the PHI growth outlook it might be time to reflect on the competitiveness and fairness of your single parent pricing approach?
Extended family scales
Some insurers have had to actively consider their extended dependant pricing relativities following the introduction of dependant reforms in April 2021 which allowed insurers to increase their maximum age for dependants from 24 to 31 years and to offer coverage for dependants with disabilities1
As a result extended family scales have seen some of the largest shifts in relativities over the last two years, and we anticipate further shifting as insurers await credible margin data to better understand their claims exposure. The chart below shows the range of insurer price relativities in the market.
Insurers appear to have clustered around a 2.5 pricing multiple (i.e. 2.5x the single premium rate) for hospital products, however, there is a wide range of approaches taken for ancillary products. It seems that larger insurers have implemented some of the higher pricing relativities with smaller insurers more likely to adopt similar multiples for hospital and ancillary products. Time will tell whether these variations in pricing strategy are sufficient to encourage extended families to change insurer.
As part of deliberations in the 2024 premium round and beyond, insurers might consider the appropriateness of their scale premium relativities. For example:
What defines 'fair' relative pricing? A portion of your membership will be going through changes in their lifestage and may switch scales – are the premium changes at these times fair? Are they consistent with community expectations – do they pass the pub test? Historical gross margin experience at the product level, market pricing comparison and frontline staff or distribution partner feedback will illuminate various perspectives.
Where do you want to be positioned competitively? Does your commercial or market pricing only consider the singles market? How does your perspective change when looking at other scales, like single parents?
How do we move effectively to our desired state? Do you have the operational capacity and/or processes in place to make scale pricing adjustments? What are the implications for existing members, could there be unintended consequences? Where premium rates need to increase, consider what is a reasonable transition period. Where premium rates need to decrease, what are the implications for margins and existing cross subsidies?
Many scale pricing relativities have their origins in historical regulatory and legislative settings. Traditional relativities have maintained pricing simplicity and also heavily influence the competitive environment (there are often consequences if you step too far out line with the market). However, some insurers are starting to experiment with prices, and questions have been raised as to the perceived fairness of the traditional pricing model. Perhaps it’s time to re-examine your pricing strategy with respect to scale and whether there are opportunities to adjust the cross subsidies to ultimately deliver a fairer deal for your members.