Mind the Gap

May 07 , 2019 0

Gap or Out of pocket expense is an additional expense incurred when availing extras health, which means the real cost of extras health is the total of premiums paid plus the GAP paid. It is a fact that those with some sort of cover participate more in their health needs and are more likely to have better health outcomes than ones who don't have similar sort of cover.

In a interview with News Corp, the ex CEO Mr. Shaun Gath of Private Health Insurance Administration Council,

extras cover is an irrational purchase" for most people because the premium paid was more than the benefits derived.

“In a world of fiscal purity that (buying extras insurance) probably doesn’t make sense,” Mr Gath said.”

ACCC in a submission to the senate committee points out Average out-of-pocket expenses incurred by consumers from hospital episodes decreased by 0.8 per cent, but increased by 2 percent for general or extras treatments. Does the increase of 2% sound to you like compensation for the decrease of 0.8% in hospital visits. This by the way is data from 2016-2017, but in 2017-2018 there was a slight decrease in the Gap payment by 0.7% and an increase by 3.3% in hospital episodes.

 

A quick Google search on the definition of insurance is

“an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.”

 

The idea of insurance being to have the peace of mind of knowing you have got it covered if that uncertain event happens. Most insurance policies come with an excess which is a way to stop people making silly claims as the cost of replacement of their product might be actually lower than the excess which helps to keep insurance policy costs down. This does not seem to apply with private health insurance extras cover. Take the time to check your cover and you will notice that the extras insurer has set the limit leaving you open and exposed if your costs are higher than the limits. Imagine if you had an accident and needed more than the limit set by the extras insurer, then you are a 100% out of pocket. Meaning you have no cover at all. How is this insurance?

 

“At best it is a co payment system after you have served waiting periods and other restrictive conditions.”

 

I have private health insurance with extras cover since 2004 and now only have hospital cover. I dropped out of extras cover in 2014 after my first encounter of using health insurance. My daughter needed braces as she was missing a tooth that was rather unsightly. So off we choof to the Orthodontist and we got a quote for $5500. Her treatment lasted two years and I thought this would be covered as I have insurance. Boy was I about to be woken up from deep slumber. I suddenly developed awareness and knowledge of the system and how to me it seemed an absolute “con” , where they could call it insurance. It was nothing more than a co payment. At the time I tried to find out what extras part costed and i could not get a straight answer but did my own research and in the bargain found cheaper hospital cover that had all the same bells and whistles. No wonder we have seen a tremendous growth of comparison sites. Back to the point I worked out that extras part was $197 but to ensure I remove my bias. I went to Australian Governments comparison site and entered my data. The data is current as of the 30/11/2018 and as a matter of disclosure I am using the current data from a historical perspective, just to clarify that I may be out a few dollars or at most a few hundreds of dollars. Given that premiums had a free run until April 2018 before someone decided to put a lid on the free run and cap it as last year at 3.95%.

The cheapest extras only cover is $141.66 with a 12 month wait for orthodontics and maximum of $700 per year and the most expensive extra only cover being $365.14 same 12 month wait and $800 maximum per year. Anyone for the math here. The duration that I was in the fund was 10 years.

Type of Cover Total paid over 10 year Cost of treatment Duration Gap Total Cost

Cheapest ($141.66)

($16,922.20)

$5500

18 months - can claim maximum benefits each year

$5500 - ($700 X 2) =

($4100)

Total paid + Gap

($16,922.20 + $4100 = $21022.20)

Top Shelf ($365.14)

($43816.80)

$5500

18 months - can claim maximum benefits each year

($5500 - ($800 X 2) =

($3900)

Total paid + Gap

($43816.80 + $3900=

$47716.80)

I did not expect to be so much out of pocket, especially in the context of insurance which is to limit my liability. Looks like the insurance company paid the excess leaving me to deal with the rest of the liability.  

There are alternatives such as self insurance or dedicated health savings account both of which can deliver substantial savings and better health outcomes. With self insurance you can save on costs such as fees and charges, but that requires control, discipline and absolute commitment to ensuring you don't end up robbing the money set aside for your health needs. The best indicator would be to see if you are already saving up and being disciplined about it. If you are, then give it a try and it may work.If you rather not take the risk then consider Xtras Health Plan Savings Scheme

So assuming you are not inclined to self insure, here is how XHP compares using the same costs for treatment. Monthly minimums is $152.10 from which a contribution fee of 10% is deducted

Cost per month

Total Paid over 10 years Contributions fee (10%) Account Balance Cost of treatment Account Balance post treatment

$152.10

$18252

$1825.20

$16426.80

$5500

$10926.80

Summary of the mathematical calculation is that you are way ahead with XHP compared to private health extras cover. You are left with an account balance of $10926.80 net of XHP fees and treatment costs compared to total out of pocket expenses of $21022 or $47916. This is my case where we are healthy. You should consider your needs.

As Einstein said way back when -

“The biggest decision one has to make is whether to live in a hostile environment or a friendly one”

This happens to be your decision on how you wish to position yourself or what floats your boat. Premium increases by private health insurers have been greater than inflation and wage growth in recent years add to this out of pocket expenses and you have the perfect storm of why Millennials feel disenfranchised. Contrary to the commonly held believe that Millennials are lazy, are the want it now generation, most of us are working harder and sometimes multiple jobs. Next time you jump into an Uber check this fact out you may be being driven around by a Millennial, unemployment among millennials is on the rise and they are often more educated and are lumped with HECS debt on top. Infact, as a generation the millennials are more health conscious and take extra effort at looking after ourselves. Junk Food is not our choice, rather something that is healthy and good for us, exercise, smoke less than baby boomers and the list goes on.

Being healthy is a price that one has to pay with private health insurance. Imagine if you did not drive, you would not need to buy car insurance or if you did drive, and never had an incident (aka being healthy), you are rewarded with no claims bonus and cost of your insurance comes down. This is not the case however with health cover. No incentives to making healthier choices. Which equates to the healthier ones paying to those who have higher health needs. Okay while this is appealing, that is a matter of individual choice and should not be a forced event.

One simple way to test if you are getting value for your extras cover is to ask your insurer for a statement that itemises what they covered. Quarterly statistics from APRA on private health insurance for the September 2018 quarter, states that insurers paid $1,236 million in general treatment (ancillary) benefits. This was a decrease of 4.6% compared to the June 2018 quarter. Ancillary benefits for the September 2018 quarter included the major categories of:

1. Dental $665 million

2. Optical $188 million

3. Physiotherapy $107 million

4. Chiropractic $73 million

Xtras Health Plan Savings scheme was born out of pure frustration to address the inequality and to create a simpler and fairer system for all with simple basic rules to enable health and save money. What is even better is that it is controlled by its Members in how the choose to spend their money and on what? 

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