Here's what's actually driving up health insurance premiums (hint: it's not young people dropping off)

Last week the government announced a raft of changes aimed at slowing the rise in health insurance premiums, as well as initiatives to improve access to mental health care.

Commentators have already expressed scepticism on the ability of these initiatives to effectively slow the inexorable rise in premiums, with discounts for young policy holders and small excess increases only one-off measures. If we look at what is actually driving the increase in premium cost, it becomes clear these measures are aiming at the wrong target.

We’re using it more

Giving discounts to young people implies cost increases are being caused by young people abandoning their health insurance, meaning the majority of insured patients are older and thus more in need of health care.

Read more: Changes to lure young people into private health insurance won’t slow increase in premiums

There has been some drop off in young people holding insurance, with the proportion of insurance customers aged 20 to 29 falling from 10.3% to 9.4% over the last five years. But this slight ageing of the insured population is not large enough to explain recent premium increases.

The main source of the increase is the fast-growing costs of insuring customers. Benefits paid per customer have increased by around 4.7% per year over the past five years. And the number of hospital visits funded by health insurance increased by an average of 5.5% per year over the past five years, which is more than enough to explain the increase in benefits being paid out by health funds.

The simple answer is we are paying more for health insurance because we are using more health care. Looking at some specific examples can help us understand which parts of the health care system are expanding fast and whether this is a cause for concern.

What procedures are on the rise?

To look at whether we’re using our insurance more, we can look at the number of hospital procedures where patients are treated privately. Although this includes some patients who are self-funded, the vast majority will be funded by private health insurance.

Private hip and knee replacements and cataract surgery, are growing at between 4.9% and 8.1% per year. These are all highly effective, quality-of-life improving elective surgeries which have substantial waiting times for treatment as a public patient.

Colonoscopy and upper-endoscopy (inserting a camera up the colon or down the throat) are primarily diagnostic procedures which have yearly growth rates of 3.9% and 4.4% and account for a large number of privately-funded procedures (just over one million combined in 2015-16).

Finally, chemotherapy and cardio-thoracic (heart) surgery (growing at 5.5% and 5.1%) include innovative life-extending treatments for cancer and heart disease.

These figures show fast growth rates in privately funded procedures can be found across a broad range of health care. It’s therefore hard to “blame” the rise in premiums on one patient group or area of medicine. All areas of private hospital treatment are expanding, explaining the increase of premiums.

And although there is some evidence of low-value care in the Australian system many areas of growth are in highly effective life-improving or life-extending treatments.

Read more: Most private patients are wasting money on costly rehab after major knee surgery

Is there anything we can or should do?

In general, this isn’t a trend we can (or necessarily should) want to moderate. Public spending is increasing at a similar rate to private spending, so this is not just an issue with private health insurance. Australian government spending on health increased by 4.4% in real terms in the decade to 2013-14.

Australia is not alone in facing these cost issues and sits near the middle of the pack of OECD countries’ health care spending growth (who average around 4% in real terms).

We’re spending more on health care because it’s increasingly valuable to us both as a society and as individuals taking out insurance contracts. More effective treatments are increasingly becoming available to be used to improve the length and quality of our lives.

While efforts may continue to tweak the system to increase uptake with young people or to remove interventions without proven efficacy, we should not be surprised if this doesn’t slow our insatiable appetite for more health care, and the resulting higher insurance costs.

Read more: Is the investment in private health insurance worthwhile?

Explainer: why do Australians have private health insurance?