Private health insurance could be cheaper if insurers lowered their own expectations of returns from the business, says former competition boss Graeme Samuel.
Returns on investment enjoyed by health insurers are well above the returns achieved by other insurers, the former Australian Competition and Consumer Commission chairman and adviser to the federal government's private health insurance review, said on Thursday.
At the same time, rises in private health insurance premiums are outstripping inflation, prompting consumers to downgrade their policies.
Mr Samuel, speaking at an Actuaries Institute seminar in Melbourne, said premiums have risen by about six per cent each year over the past decade, while private health insurers have enjoyed a return on capital employed (ROCE) of about 17.5 per cent.
Professor Samuel said the average ROCE for the general insurance sector was about 10 per cent.
Private health insurers were significantly exceeding return levels that might be regarded as adequate by the Australian Prudential Regulation Authority (APRA), he said.
"I would say to insurers: go back, reduce your capital employed, notionally, to that which is required by APRA to maintain capital adequacy standards," Prof Samuel said.
"And then come back to me with a premium increase which reflects a return on capital employed of something more akin to that which the industry and share market might expect - around 12.5 or 13 per cent."
Once that is done, health insurers could suggest what premium increases might be required.
"I suspect that the result of that will be that premium increases would fall back to close to two to 2.5 per cent per annum," Prof Samuel said.
Premiums could also be lowered if the provision and cost of artificial limbs and body parts, human tissues and device implants was reviewed and reformed, he added.
The private health insurance industry could save up to $800 million each year if the prices it pays for prostheses were more aligned to the lower prices paid in the public health system, Prof Samuel said.
Private Healthcare Australia has said there are more than 40 brands of hip replacements on the prostheses list, which were mostly made at the same factory in Europe at a cost of about $100.
In one example, Prof Samuel said in a public hospital each prosthetic hip cost about $4,900, while a private health fund would pay $11,000 for the same device for a procedure in a private hospital.
