25 February 2011
Manager
Philanthropy and Exemptions Unit
Personal and Retirement Income Division
The Treasury
Langton Crescent
PARKES ACT 2600
By email: [email protected]
Dear Sir/Madam
Request for feedback and comments – scoping study for a national not-for-profit regulator
Attached is the submission on behalf of the Health Insurance Restricted Membership Association of
Australia (HIRMAA) regarding the Consultation Paper for the scoping study for a national
not-for-profit regulator.
This submission may be treated as a public submission.
Please do not hesitate to contact me if you have any further questions or queries.
Yours sincerely
HIRMAA SUBMISSION REGARDING THE SCOPING
STUDY FOR A NATIONAL NOT-FOR-PROFIT
REGULATOR
The Health Insurance Restricted Membership Association of Australia (HIRMAA) welcomes the opportunity to comment on the consultation paper regarding the scoping study for a national not-for-profit regulator (Consultation Paper).
1. EXECUTIVE SUMMARY
HIRMAA represents 17 "not-for-profit" private health insurers. HIRMAA considers that its members are a special category of not-for-profit entity which are already subject to considerable regulation (including prudential supervision) and standards of governance that are similar to the standards of ASX-listed public companies.
With one exception, HIRMAA's members are public companies limited by guarantee.1
The requirement that private health insurers be regulated as Corporations Act companies is fundamental to the effective prudential regulation of private health insurers because of the "base level" of regulation – as to governance, disclosure and accountability – that the
Corporations Act 2001 (Cth) provides for.
Private health insurers are subject to a high level of regulatory supervision (including prudential supervision) by a specialist Commonwealth regulator, the Private Health Insurance Administration Council (PHIAC) under the Private Health Insurance Act 2007 (Cth). The regulatory regime already applicable to not-for-profit private health insurers meets or substantially exceeds the standards proposed for a national not-for-profit regulator in the Consultation Paper.
HIRMAA supports minimising regulatory duplication, streamlining reporting and certainty in regulation. However, HIRMAA does not consider that a "one-stop shop" is necessarily appropriate for all not-for-profit entities including, in particular, its members as not-for-profit private health insurers.
HIRMAA's members participate in a competitive private health insurance market and should not be disadvantaged by regulatory measures which may adversely impact the ability of not-for-profit insurers to compete on a level playing field with the significantly larger for-profit participants in the market. To the extent that the Consultation Paper proposes an additional not-for-profit regulator (or proposes to take private health insurers which are companies limited by guarantee outside of the jurisdiction of ASIC), HIRMAA does not support the proposals.
HIRMAA is itself established as an incorporated association, operating on a not-for-profit basis, regulated under the Associations Incorporation Act 2009 (NSW). HIRMAA submits that the legal form of an incorporated association has continuing utility for organisations which are of comparatively small scale, do not hold substantial assets and present little or no prudential risks. The lesser governance requirements applicable to incorporated associations are suitable and proportionate to the scale of activities and level of risk. HIRMAA does not support the regulation of incorporated associations being moved to a national regulator.
2. ABOUT HIRMAA
HIRMAA is the peak industry body representing all thirteen "restricted access" private health insurers and four "open" regional private health insurers. HIRMAA member funds exist because of their unique historical and contemporary links to various professions, trades, industries, unions, employers and geographic regions. A number of characteristics distinguish the HIRMAA member funds. They:
are value-based as opposed to being profit-based;
1
continue to offer various levels of insurance at competitive premiums; optimise benefit entitlements and premiums;
continue to tangibly grow their membership numbers in a greater proportion from the overall industry; and
in the case of members who are restricted access insurers, have their unique nature acknowledged in the Private Health Insurance Act 2007 (Cth).
HIRMAA also plays a significant role in the structure of the Australian private health insurance system. For example:
HIRMAA founded, and its members provide the majority membership of, the Australian Health Service Alliance (AHSA). The AHSA is recognized as a highly effective negotiator of hospital and medical arrangements for health consumers; HIRMAA founded, and its members provide the majority membership of, HAMBS, the software provider and developer for 23 private health insurers;
HIRMAA works cohesively and maintains positive relationships with Government, PHIAC, the Private Health Insurance Ombudsman and other relevant stakeholders. HIRMAA is itself established as an incorporated association, operating on a not-for-profit basis, regulated under the Associations Incorporation Act 2009 (NSW). HIRMAA was founded in 1978 and has advocated for the interests of its members for more than 30 years.
3. HIRMAA MEMBERS
HIRMAA represents 17 of the 35 private health insurers registered to operate in Australia (as set out in Attachment "A"). Of those 17 private health insurers:
13 are "restricted access" private health insurers, meaning they are restricted by law to insuring only members of particular professions, trades or industries or employees of particular employers (and their families); and
four are "open" private health insurers, meaning they are not restricted to insuring a particular group. Any person is eligible to take up private health insurance with an "open" private health insurer. Those four private health insurers have strong community ties and are focused on serving the needs of particular regional communities.
HIRMAA members are exclusively not-for-profit organisations.
HIRMAA members are public companies (specifically, companies limited by guarantee).2
The Consultation Paper defines the not-for-profit (NFP) sector in the following terms: The NFP sector broadly consists of organisations which seek to achieve a community, altruistic or philanthropic purpose, and who are involved in the supply of goods and services that have a social value greater than the price that a consumer could or would otherwise pay. The NFP sector can also be defined in broad terms, as encompassing all those in the economy who are not households,
government or businesses that operate for-profit.
By that definition, each of HIRMAA's members would comprise part of the not-for-profit sector.
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4. HIRMAA'S INTEREST IN THE SCOPING STUDY 4.1 HIRMAA's interest on behalf of its members
HIRMAA generally welcomes the expressed intention in the Consultation Paper to ensure smarter regulation and ensure transparency and accountability in the not-for-profit sector. HIRMAA considers that its members are already subject to considerable regulation (including prudential supervision) and standards of governance that are similar to the standards of ASX-listed public companies. HIRMAA's interest, on behalf of its members, is to ensure that any reforms do not inadvertently impose additional and unnecessary
regulatory and compliance burdens on not-for-profit private health insurers.
Private health insurers have only recently undergone a significant change in regulation with the introduction of the Private Health Insurance Act 2007 on 1 April 2007. The introduction of that legislation was a major change for the industry and included a full re-registration process.
HIRMAA supports best practice regulation and good governance in the not-for-profit sector. However, HIRMAA's interest is to ensure that its members participate in a competitive private health insurance market and are not disadvantaged by regulatory measures which may adversely impact the ability of not-for-profit insurers to compete on a level playing field with the significantly larger for-profit participants in the market. HIRMAA believes that the preservation of effective competition in the private health insurance market, supporting a viable and efficient private health care sector, is essential to the health and wellbeing of all Australians.
4.2 HIRMAA's interest
HIRMAA is an association formed for the promotion and protection of the interests of an identifiable sector within the private health insurance market. It operates on a not-for-profit basis and exists solely to advance the interests of the members of the association. HIRMAA does not solicit donations from the public. Its members are sophisticated commercial parties who are able to adequately protect their own interests. Its members are represented by an active executive committee. HIRMAA's operations present no prudential risks.
HIRMAA considers the legal form of an incorporated association to be a suitable form for small-scale, non-profit and non-commercial activities of the kind undertaken by HIRMAA. HIRMAA has operated for more than 30 years and considers existing state-based regulatory arrangements to be suitable.
5. ABOUT PRIVATE HEALTH INSURERS
All private health insurers are required by law to be Corporations Act companies.3 The
vast majority of private health insurers – including HIRMAA's members – are public companies. Private health insurers are subject to the same corporate regulation as other
Corporations Act companies. This includes:
directors and officers duties;
financial reporting and audit requirements;
general corporate filing and lodgement obligations; restrictions on related party transactions; and
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mechanisms for external administration in the event of insolvency. Those private health insurers which are public companies are subject to the same corporate regulation as other public companies including, for example, in relation to the preparation and audit of financial reports. HIRMAA acknowledges the recent changes to the financial reporting obligations of companies limited by guarantee.4 However, these
changes have limited application to HIRMAA's members. Even the smallest of its member organisations substantially exceed the $1 million annual revenue criteria for reporting relief. Private health insurance is not a "financial product" for the purposes of the Corporations
Act.5
This means, for example, that private health insurers are not required to have an Australian Financial Services Licence. However, many private health insurers hold an Australian Financial Services Licence for other activities.
Private health insurers are separately regulated from general insurers by specialist regulators. A summary is set out below:
Body Function
Private Health Insurance Administration Council (PHIAC) – a Commonwealth authority first established in 1989
PHIAC provides prudential regulation of private health insurers through the supervision and enforcement of various prudential standards (including standards in relation to solvency, capital adequacy, governance and disclosure) and certain obligations under the Private
Health Insurance Act 2007.
Minister for Health and Ageing (through the Department of Health and Ageing)
Supervision of all other legislative obligation outside of the jurisdiction of PHIAC under the Private Health
Insurance Act 2007.
Private Health Insurance Ombudsman (PHIO) – a Commonwealth authority first established in 1996
Functions include complaints resolution between consumer and private health insurers; mediation of disputes between private health insurers and health care providers; and general public education functions.
6. RESPONSES TO SPECIFIC QUESTIONS
As noted above, HIRMAA's predominate interest is to ensure that any of the reform proposals outlined in the Consultation Paper do not inadvertently impose additional and unnecessary regulatory and compliance burdens on the not-for-profit private health insurers who comprise HIRMAA's membership. HIRMAA's responses and comments are limited to those consultation questions relevant to that interest.
Consultation Question # 1
Are these goals [as outlined on pages 7 and 8] appropriate and adequate for national regulation? Which of these are most important?
HIRMAA supports minimising costs, to enable its member organisation to maximise value to policy holders by returning private health insurance premiums to members as benefits (rather than incurring unwarranted compliance costs). HIRMAA supports minimising regulatory duplication, streamlining reporting and certainty in regulation.
However, HIRMAA does not consider that a "one-stop shop" is necessarily appropriate for all not-for-profit entities including, in particular, its members as not-for-profit private health
4
See Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth).
5
insurers. HIRMAA's members, whilst comparatively smaller in size than larger for-profit private health insurers, are substantial businesses in their own right. For example, the smallest of HIRMAA's members had annual revenues of $8.5 million in FY 2010; the largest had annual revenues of $310 million in FY 2010.
The regulatory regime for private health insurers assumes a "baseline" level of regulation by requiring private health insurers to be Corporations Act companies. Whilst some HIRMAA members have existed in other legal forms previously (as friendly societies, incorporated associations and so on), the vast majority have conducted themselves as
Corporations Act companies for a considerable period of time.
HIRMAA supports the idea that monitoring and compliance is essential to public
confidence and minimises the risk of malfeasance. However, as noted elsewhere in this paper, HIRMAA's members are comprehensively regulated and subject to extensive prudential supervision.
Consultation Question # 3
What should the scope of a national NFP regulator be? What types of entities should be regulated by a national NFP regulator?
Consultation Question # 4
Should some legal forms be treated differently? If so why?
HIRMAA will respond to Consultation Question #3 and #4 together.
The Consultation Paper notes that 11,000 not-for-profit organisations are constituted as companies limited by guarantee and regulated by ASIC. 16 of HIRMAA's 17 members are companies limited by guarantee, regulated by ASIC as public companies. (The remaining member is an ASIC regulated proprietary limited company, which is a subsidiary of a rare form of company type known as a company limited by shares and guarantee).
The requirement that private health insurers be regulated as Corporations Act companies is fundamental to the effective prudential regulation of private health insurers. The Commonwealth has specifically amended the Private Health Insurance Act 2007 to ensure this outcome. The Explanatory Memorandum to the relevant legislation6
explains the issue in detail:
Since the [Private Health Insurance] Act commenced the [Private Health Insurance Administration] Council, as the prudential regulator of the private health insurance industry, has expressed its desire that all private health insurers be companies within the meaning of the Corporations Act, in order to regulate the industry effectively and consistently.
The [Private Health Insurance Administration] Council has indicated that it will be difficult for the Council or the Department of Health and Ageing to enforce the [Private Health Insurance] Act in relation to the four insurers who are registered bodies in the event of breaches of solvency or capital adequacy or indeed breaches in relation to payment of benefits or inappropriate treatment of policy holders and insured persons.
[…]
Regulation of directors in respect of the conduct of business in their home State or Territory is the responsibility of the authority in that State or Territory responsible for administering the incorporated associations legislation in that State or Territory.
6
A registered private health insurance organisation, Goldfields, which was an incorporated association in Western Australia, failed in December 2002. Policyholders were transferred to another health fund and they were protected from that failure. The claims were paid and their membership has continued. The [Private Health Insurance Administration] Council identified a number of breaches of the NHA and what would appear to have been breaches of the Corporations Act. However, as Goldfields was an incorporated association, the directors could not be held accountable under the Corporations Act. The Council referred the matter to the state Government for action.
While the four insurers remain as registered bodies, the [Private Health Insurance Administration] Council is hampered in its ability to achieve its legislated objectives of:
fostering an efficient and competitive health insurance industry; protecting the interests of consumers; and
ensuring the prudential safety of individual private health insurers.
Protecting the interests of the members of the four insurers would be particularly problematic, as the [Private Health Insurance Administration] Council would have limited power to take appropriate action in respect of breaches of prudential regulation that may result in a loss for consumers.
Health funds are in a competitive marketplace and the same rules should apply to all participants. Most insurers started as incorporated associations and over time have incorporated under the Corporations Act.
There is a considerable public subsidy through the private health insurance rebate. Taxpayers are entitled to be assured that all insurers that receive that subsidy are publicly accountable in an identical manner. This ensures appropriate levels of competition and transparency. (emphasis added by HIRMAA)
The Corporations Act provides a "baseline" level of regulation for all private health insurers, whether for-profit or not-for-profit. This includes:
specifying the duties of directors and officers;
specifying the requirements for financial reporting and audit;
specifying requirements for accountability and transparency, including formal meetings of members and general corporate reporting and lodgement mechanisms; providing mechanisms for external administration and orderly winding up in the event of insolvency or financial distress;
providing mechanisms for court-convened arrangements and reconstructions. HIRMAA supports the national and consistent regulation of private health insurers. To the extent that a national not-for-profit regulator may involve not-for-profit private health insurers ceasing to be subject to the jurisdiction of ASIC or being subject to the jurisdiction of an additional regulatory body (such as a national not-for-profit regulator), HIRMAA does not support the proposal.
Consultation Question # 6
Should regulation of incorporated associations (including reporting and governance) be moved to a national regulator? Should there be a residual role of the states in regulating incorporated associations?
HIRMAA considers that existing regulation of incorporated associations is adequate and appropriate for small-scale, non-profit and non-commercial activities such as that undertaken by industry associations like HIRMAA.
HIRMAA recognises that the incorporated association is not an appropriate legal form for larger-scale organisation (particularly where those organisations have substantial activities across a number of States and Territories).
HIRMAA does not solicit donations from the public. Its members are sophisticated commercial parties who are able to adequately protect their own interests. HIRMAA's operations present no prudential risks.
Whilst HIRMAA acknowledges that governance requirements for incorporated association are less comprehensive than, for example, Corporations Act companies, HIRMAA disputes the characterisation of the governance requirements as "minimal".
HIRMAA submits that the legal form of an incorporated association has continuing utility for organisations which are of comparatively small scale, do not hold substantial assets and present little or no prudential risks. The lesser governance requirements applicable to incorporated associations are suitable and proportionate to the scale of activities and level of risk.
HIRMAA does not support the regulation of all incorporated associations being moved to a national regulator. To the extent that the legal form of an incorporated association is inappropriate for certain not-for-profit organisations (because of the scale of activity, because the association has substantial operations inter-state, or because more stringent governance requirements are warranted) the appropriate mechanism is to encourage the transition of those organisations to a different legal form. HIRMAA understand, for example, that incorporated associations legislation typically provides for transition to incorporation under the Corporations Act.
HIRMAA notes for completeness that whilst the legal form of an incorporated association has previously been used by private health insurers, the use of the legal form of an incorporated association is now no longer permitted. The last of the incorporated association insurers transitioned to Corporations Act companies in 2009.
Consultation Question # 12
What information do NFP entities currently provide to government agencies? Do these include general purpose financial reports and fundraising reports? What other reports are currently required? What do the reporting requirements involve? What information is required for the purposes of grant acquittals?
Private health insurers are subject to stringent reporting requirements. These include (not exhaustively):
(a) Lodgement of audited financial statements with ASIC in accordance with Chapter 2M of the Corporations Act
(c) Certain lodgements to PHIAC relating to prudential requirements (certification of capital adequacy etc).
(d) Detailed statistical lodgements to PHIAC quarterly and annually, as required by the
Private Health Insurance Act 2007.
(e) Various lodgements and returns necessary for the purposes of various private health insurance related levies under the Private Health Insurance Act 2007. (f) Detailed statistical lodgements to the Department of Health and Ageing under
various data collection programs established under legislation (including Hospital Casemix Protocol data).
All private health insurers (not-for-profit and for-profit) are subject to significant reporting and disclosure obligations which are broadly similar to those applicable to ASX-listed public companies.
HIRMAA, as an incorporated association, presents its financial statements to members at an annual general meeting and lodges those statements with the NSW Department of Fair Trading. HIRMAA considers this to be an adequate level of disclosure for an organisation of its kind.
Consultation Question # 19
What powers does the regulator require to improve governance and regulatory oversight?
Paragraphs 102 to 112 of the Consultation Paper discuss governance, disclosure and compliance. As noted elsewhere in this paper, private health insurers are subject to strict governance, disclosure and compliance obligations.
The Governance Standard applicable to private health insurers was developed having regard to equivalent standards developed by the Australian Prudential Regulation Authority and the ASX Corporate Governance Principles.
The core governance, disclosure and compliance obligations for private health insurers are set out in the Corporations Act and the Private Health Insurance Act 2007. Responding to the three "core" governance rules set out in paragraphs 107 to 109 of the Consultation Paper:
Duties of responsible individuals – for private health insurers, these include:
general Corporations Act directors duties (care and diligence, good faith and proper purposes etc);
powers vested in ASIC to disqualify persons from acting as directors and officers and additional powers vested in PHIAC to disqualify directors and "senior managers" (including on the basis of their not being "fit and proper" to act as a director or senior manager)7; and
potential personal liability for directors where a private health insurer fails to comply with a notice of contravention of the Private Health Insurance
Act 2007 which has resulted in a loss to a health benefits fund conducted
by the insurer.8
Decision making framework – for private health insurers, the decision making framework is
not prescriptive. However, the Governance Standard requires that all private health
7
See Division 166 of the Private Health Insurance Act 2007 (Cth).
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insurers maintain a Board Charter to document the roles and responsibilities of the board members, committees and senior executives. Written delegations are required to be kept and monitored.
Accountability framework – for private health insurers, there is an extensive accountability
framework which includes:
stringent financial and non-financial reporting requirements set out in greater detail in the response to Consultation Question #12;
detailed investment rules (for example, detailed capital adequacy and solvency standards which factor in exposure to different asset classes) which are supervised by an appointed actuary (a mandatory requirement under the Private Health Insurance Act 2007);
limitations on related party transactions under Chapter 2E of the
Corporations Act9; and
in the case of not-for-profit insurers, restrictions on distributions to members are specified in corporate constitutions and in the Private Health
Insurance Act 2007.10
The proposed regulatory powers set out in paragraph 111 of the Consultation Paper are all vested in the various regulatory bodies to which private health insurers are subject
(particularly ASIC and PHIAC). For example:
"asset protection, which would enable the regulator to protect an NFP’s assets if malfeasance were detected" – PHIAC has the power to
investigate and appoint external managers.
"suspension and/or replacement of responsible individuals in the case of any breach of core duties" – PHIAC has the power to disqualify directors
and senior managers and the power to appoint external managers.
"powers to register and deregister any NFP" – PHIAC has the power to
terminate a health benefit fund conducted by a private health insurer.
"the power to enforce governance rules" – PHIAC and the Minister
(through the Department of Health and Ageing) have a full suite of powers to enforce governance rules, including enforceable undertakings, civil and criminal penalties and compensation orders. These powers supplement those held by ASIC under the Corporations Act.
"the power to commence investigative processes to uncover actual or potential malfeasance" – PHIAC and the Minister (through the Department
of Health and Ageing) have a full suite of powers to investigate malfeasance, including powers to require documents to be produced, require persons to give evidence, and examine books and records. These powers supplement those held by ASIC under the Corporations Act.
9
Excluding insurers who are proprietary limited companies.
10
ATTACHMENT "A" – HIRMAA MEMBERS
ACA Health Benefits Fund Ltd. CBHS Health Fund Ltd. Defence Health Ltd. Doctors' Health Fund Ltd. Health Care Insurance Ltd. Health Partners Ltd. Navy Health Ltd. Lysaght Peoplecare Ltd. Phoenix Health Fund Ltd. Police Health Ltd.
Queensland Country Health Fund Ltd. Queensland Teachers' Union Health Fund Ltd. Reserve Bank Health Society Ltd.
