PHI 13/10

This circular issued by the Private Health Insurance Branch contains information regarding Removal of Lifetime Health Cover Loadings after ten years

Page last updated: 09 October 2013

Printable version of PHI 13/10 (PDF 45 KB)

22 March 2010

Removal of Lifetime Health Cover Loadings after ten years

Important Note: This circular supersedes Circular 54/09 dated 19 August 2009, regarding the removal of the Lifetime Health Cover (LHC) loadings after ten years of continuous cover. Circular 54/09 has been revoked and is replaced by this circular.

Background

LHC is a private health insurance incentive which commenced on 1 July 2000 and involves a financial loading which may be payable in addition to the basic premium for private health insurance hospital cover. LHC was designed to encourage people to purchase hospital cover earlier in life and to maintain their cover.

The Private Health Insurance Act 2007 (PHI Act) commenced on 1 April 2007. The Act included a new provision, in section 34-10, requiring health insurers to cease increasing premiums due to LHC loadings after ten years’ continuous hospital cover. This means that from 1 July 2010, some members will no longer need to pay LHC loadings on their hospital cover. From an implementation perspective, members who pay 12 months in advance may need to have had their premiums adjusted to reflect the lifting of their loading after July 2009.

A number of insurers are already reviewing their systems to ensure that they will be compliant with the requirements under the new LHC 10 year provision and enable them to identify members who will have loadings removed. There may be some circumstances when it will be more complex to establish when a member has paid a LHC loading for 10 years, for example when a member has transferred between insurers a number of times and/or utilised different types of permitted days without hospital cover. To facilitate compliance, it may be useful for insurers to communicate with members paying LHC loadings who have joined within the last ten years, inviting them to update their records.

Many health insurers use the transfer certificate template provided on the AHIA website (referred to as the “Common Clearance Certificate”), or an adapted version. In view of the new LHC 10 year provision AHIA has reviewed the Common Clearance Certificate and the updated version is now available on the AHIA website.

When using transfer certificates to provide LHC information about members, insurers are encouraged to provide as much information about the member’s LHC status, length of hospital coverage and recorded permitted days without hospital cover as possible.
Accurate records are important to ensure that consumers who reach ten years accumulated hospital cover do not continue to pay LHC loadings on their premiums.

Legislation overview

Section 34-10 of the PHI Act states that a private health insurer must stop increasing the amount of premiums payable for hospital cover if the adult has held hospital cover for a continuous period of ten years or ten years with permitted days without coverage.

The accumulation of a policy holder's ten years can be interrupted by permitted days without hospital cover (described in section 34-20 of the PHI Act) without reverting back to zero. However, any permitted days without hospital cover do not actually count towards the accumulation of the ten years.

Therefore, only days on which policy holders are actually paying their LHC loading will count towards the ten years accumulation. If a member’s ten years of continuous hospital cover is broken by any permitted days without hospital cover, then the ten year period is simply extended by that number of days. The member is not required to complete a new ten year period before their LHC loading is removed.

If a member who is paying a LHC loading is without hospital cover for even one day that is not a permitted day without hospital cover, then under the PHI Act, that member's ten year period must begin counting down again from zero, as the period would no longer be ‘continuous’.

Permitted days without hospital coverare defined in section 34-20 of the PHI Act as any of the following that occur after a person ceases to have hospital cover for the first time after his/her LHC base day:

  1. days on which the cover was suspended by the private health insurer in accordance with the rules for suspension set out in the Private Health Insurance (Lifetime Health Cover) Rules 2007;
  2. days (not counting days covered by paragraph a.) on which the adult is overseas that form part of a continuous period of more than one year; and
  3. the first 1,094 days (not counting days covered by paragraph a. or b.) on which the adult did not have hospital cover.

Further to b. (above), it should be noted that any period in which a person returns to Australia for less than 90 days counts as part of a continuous period overseas.

Questions and answers

Question 1: Do permitted days without hospital cover count towards the ten years?

No. Permitted days without hospital cover do not count towards the ten year period for LHC loading removal.

When a member claims to have been paying a LHC loading on their hospital cover for ten years, it will be necessary to factor permitted days without hospital cover into your calculations. Any such days do not count towards the accumulation of the ten continuous years because the member was not paying a LHC loading on those days.

Question 2: What LHC loading would apply after the member has used the 1,094 days without hospital cover while serving their 10 year period?

If a person uses their 1,094 days while serving their 10 year period (third clause of permitted days without hospital cover) then on the 1,095th day they are without cover, their LHC loading will be calculated based on a combination of any previous loading they had incurred plus 2% for each additional year. A person’s LHC loading continues to increase by 2% for each 365 days they are without hospital cover from then onwards.

Please note that a person in this situation has broken their ten continuous years without hospital cover (unless either of the other two types of permitted days without hospital cover applies). Therefore, any subsequent LHC loading the person pays must be paid for ten continuous years before it is removed.

Question 3: Do periods of suspension count as “non payment” of LHC?

Yes. Suspension of hospital cover is the first clause of permitted days without hospital cover and therefore counts as non payment of LHC. As with any of the three types of permitted days without hospital cover, a period of suspension does not count as a break in continuity of the ten year period, but neither does it count towards accumulation of the ten year period.

Question 4: Can a person’s ten year period for LHC removal be spread across membership with multiple insurers?

Yes. A person paying a LHC loading is always accumulating days towards their ten year period regardless of whether they change insurers or hospital cover products during that time.

Question 5: If a new member is transferring from another insurer, what evidence should be requested to substantiate how much of their ten year period has been observed?

Division 40 of the Private Health Insurance Act 2007 and the Private Health Insurance (Lifetime health Cover) Rules 2007 set out a range of requirements for data collection and provision with respect to LHC.

Rule 8 of the Private Health Insurance (Lifetime Health Cover) Rules 2007 states that insurers may supply information to each other relating to the LHC status of a person (including information relevant to the ten year rule) provided the person has given their consent. This rule does not specify how the information is to be provided.

Rule 9 specifies what evidence is to be accepted by insurers as proof of a new member having held hospital cover previously (and also of their age).

Sub-rule 9 (1) (a) specifies that, if provided by a new member, the LHC annual statement issued by the member’s previous insurer must be accepted as verification of the duration of the member’s previous hospital coverage and the LHC loading (if any) that was applied to their premium.

The other types of evidence described in that sub-rule relate to less common cases including situations where the person has been a member of the Australian Defence Forces.

In maintaining records for the purpose of fulfilling obligations with respect to LHC, including transfer certificates, insurers should ensure that they maintain a record of all periods of permitted days without hospital coverage which are allowed under section 34-20.

This is because both the insurer and any future insurer need to know:
  • Has the person achieved either 10 years continuous coverage or 10 years with permitted days without coverage; and
  • If no to (a), then how many days of the 10 years has the person served, and when will the 10 year period cease; and
  • If a person has used some or all of the 1,094 permitted days without hospital cover, how many of those days.
The duration for which insurers should keep these records is indefinite, as people may take out and drop hospital coverage throughout their lives.

Insurers should take practical steps to ascertain if a person who has recently become a member has had any permitted days without hospital cover.

Question 6: How do periods of travel outside Australia affect the accumulation of a person’s ten year period?

Periods of travel outside of Australia are not necessarily relevant to the accumulation of the ten year period. As long as the member is paying their premium/LHC loading, then the ten year period is accumulating regardless of where they are.

However, the second clause of permitted days without hospital cover describes periods of travel overseas. It states that any days on which a person is overseas that form part of a continuous period overseas of more than one year are considered permitted days without hospital cover. Under this provision periods of return to Australia for up to 90 days are considered as part of a continuous period overseas.
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This means that a person who is overseas for more than one year is not required to retain their private hospital cover to avoid increases to their LHC loading. For example, someone who knows that they will be outside of Australia for more than one year may request that their insurer terminate their hospital cover on the day that they leave Australia. The person could also organise to commence hospital cover on the day they return.

Alternatively, if the person does not recommence hospital cover immediately, then any days between the person’s return to Australia and the commencement of their hospital cover may be covered by their 1,094 permitted days without hospital cover.

As with any of the three types of permitted days without hospital cover, a period of time that a person spends overseas longer than one year (without holding hospital cover) does not count as a break in continuity of the ten year period, but neither does it count towards accumulation of the ten year period.

To verify that a member has been overseas for a period of time exceeding one year insurers can request that the member obtain a movement record from the Department of Immigration and Citizenship.

Question 7: What happens if a person accumulates ten continuous years of hospital cover during a period of cover that they have already paid for?

Section 34-10 of the PHI Act states that private health insurers must cease applying a LHC loading to a person’s premium on the day following the last day of the person’s ten year period. It is up to the insurer to decide how to achieve this, as long as the consumer receives the full benefit of the ten year rule.

Therefore, the reduction of the LHC loading should be calculated into any advance payments for periods in which the ten years accumulated hospital cover falls.

Question 8: When a person’s LHC loading is removed because of the ten year rule, how does LHC affect them afterwards?

Example: A person pays their LHC loading for ten years and their insurer removes it from their hospital cover premium. The person continues cover for another 2 years (without paying LHC) but then terminates the cover.

The person does not purchase hospital cover again for another 4 years – thereby using 1,094 permitted days without hospital cover. Is the person required to pay a LHC loading on their new cover?

Yes. A person whose LHC loading has been lifted after ten years of continuous hospital cover is not protected from incurring a LHC loading forever. Section 34-10(3) of the PHI Act sets out that a LHC loading must be applied again if after the end of the 10 year period a person ceases to have hospital cover then later takes out hospital cover again and the days in the period between ceasing to have hospital cover and taking it out again are not all permitted days without hospital cover.
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Section 34-5(3) states that any increase in premiums payable by a person who ceases to have hospital cover after his or her LHC base day is in addition to any increase under section 34-1. Therefore, the LHC loading that applied to the individual prior to removal under the 10 year rule is added to any new loading calculated under section 34-5 when they recommence cover after a non permitted period of absence.

So, if a person's LHC loading is removed after ten years of payment and that person later cancels their hospital cover, then on the first day after the cancellation that is not a permitted day without hospital cover they will incur a LHC loading of 2% in addition to any loading that previously existed before it was removed. The loading continues to increase by 2% each year until the person is covered.

In the case set out in the example, the person would incur a loading of 4% in addition to the previous loading.

Question 9: Are a person’s 1,094 days without hospital cover reset when their LHC loading is removed?

No. A person can access 1,094 days without hospital cover under s34-20(3) during their lifetime.

Question 10: Is a person’s LHC age reset to 30 when their LHC loading is removed?

No. Under section 34-10 a private health insurer must stop applying the LHC loading after a person has held hospital cover for 10 continuous years. The individuals LHC age is not reset to 30 when their loading is removed. This means that if that person later drops their hospital cover they may incur a LHC loading which will be calculated under both s34-1 and s34-5 upon rejoining hospital cover.

If you require further information please telephone: (02) 6289 9853/24 hr answering machine or email the enquiry to Private Health Insurance Branch

For more information visit 2010 Private Health Insurance (PHI) Circulars.

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