Regulation of private health insurance premiums: Can performance assessment play a greater role?

Private health insurance premiums in Australia are regulated by the Commonwealth Government. Premium increases often well exceed the national consumer price index, which suggests that consumers are not receiving value for money for health insurance products. The current regulatory framework does not encourage health insurers to minimise costs. Health fund management costs are assessed relative to an average industry benchmark instead of industry best practice. This paper examines the scope to reduce the premium increases under incentive regulation. This type of regulation is used to set utility and transport prices in Australia. Data envelopment analysis (DEA) methodsare used to assess the potential efficiency and productivity gains for health funds. This information is used to help set premiums for individual funds. Our results suggest that incentive regulation could potentially reduce the average premium increase across all private health insurance products and health funds by about ½ per cent per annum.