Today, over 1.38 million New Zealanders have health insurance. Why? Because, like any other insurance, it provides peace of mind in times of difficulty.

You cannot tell what health problems may affect you in the future. And you can't foresee how they will impact on your family, your lifestyle or your earning ability.

Not all treatments or costs are covered by the public health system, and you often have no control over the timing or quality of care you receive.

Having health insurance, however, means that you can choose your doctor or specialist, and you can choose when and where you are treated. All with the assurance that you can recover all or most of the costs.

In short, health insurance takes away the uncertainty of your future health care.

Public health in New Zealand

We are fortunate in New Zealand to have a good public health system, but there are limitations as to what it can provide.

If you are very ill or require emergency treatment, you should always go to your public hospital, where you will receive immediate attention. But if you don't require immediate treatment, then you'll need to go through an assessment process and qualify for elective services in the public system - a process which could take months, even years.

And if you don't qualify for publicly funded surgery you will need to consider paying for surgery in a private hospital, which can be costly - unless you have health insurance.

The costs of surgery

'Elective services'
Elective surgery can be vital to improving a person's health and quality of life.

Elective services are non-emergency treatments (including diagnostic services), where the condition is not life-threatening and does not require immediate surgery. The term 'elective' may be misleading, as it implies that the surgery is not necessary.

Common elective services include:

• hip replacement
• knee replacement
• heart surgery
• hysterectomy
• cataract removal
• cancerous tumour removal
• diagnostic services such as endoscopy, laparoscopy, MRI scans.

Many diagnostic procedures are essential before a decision can be made to proceed with surgery, and there can often be delays in obtaining these services through the public hospital.

*As at February 2008 (incl.GST). Procedure costs will vary depending on the location, the medical practitioner/s and any medical complications, and the medical procedure and technology used.

The role of health insurance

While the public health system focuses on acute (emergency) services, private health insurers are able to cover the cost of many semi-urgent and non-urgent procedures. The health insurance industry complements the public health system, by 'bridging the gap' between what the public health system can sustain and what we, the public, want for our health.

The health insurance industry makes an enormous contribution towards the health and well-being of New Zealanders. In 2006 health insurers spent around $700 million on healthcare, the majority for the 15-64 age group.

The insurance contract
You can insure against the risk of getting a disease - but not against the certainty of already having one. When you apply for health insurance, you will be asked to provide information on your health, lifestyle and family history. The information is used to assess the likelihood or risk of you requiring medical care. The financial soundness of health insurers and their ability to pay claims largely depends on their skill in assessing, classifying and pricing risks in a way that is attractive to customers.

Insurance policies are contracts of utmost good faith. The insurer relies on the information given by the applicant in assessing the risk, and the applicant is bound by a legal duty to disclose any material facts relevant to the application for insurance. Disclosure of all relevant health information is very important, as failure to disclose a material fact entitles an insurer to avoid the insurance contract.

Two kinds of policy
There are two main types of health insurance policies:

• Comprehensive Care policies. These cover primary care costs, such as doctor's visits, prescription charges, physio costs and other everyday medical bills, as well as surgical and hospital costs - sometimes up to a preset limit.
• Elective Surgical and Specialist Care policies. These only cover health problems that require hospitalisation. You pay for your day-to-day medical costs, such as doctor's visits and prescription charges. Sometimes additional cover can also be purchased for extras such as dental treatment or diagnostic or screening treatments.

Both kinds of policy usually exclude certain conditions or treatments, such as cosmetic surgery or fertility treatments.

In addition, many employers offer 'group schemes' where premiums are based either on the individual risk or on the estimated claims costs of the group as a whole. Group schemes may also offer additional benefits.

Pre-existing conditions
Pre-existing conditions are health problems that exist at the time you apply for insurance. Most insurers treat these in one of three ways:

• by excluding your pre-existing condition from your insurance cover, or
• by charging a higher premium to cover your pre-existing condition, or
• by covering your pre-existing condition only after your policy has been running for a set time (usually three years).

It is very important to inform your insurer of any existing medical conditions. Failure to do so may lead to a future claim being declined.

Another thing to remember is that if you decide to change your health insurance policy, your new policy may not cover you for any health problems you have at the time you transfer. That's why it's important to take out the right health insurance policy early, before you develop a medical condition that may be excluded from your cover.

Setting your premiums

Your health insurance premium can be set using a risk rating system, a community rating system or a combination of both.

Community rating
Premiums are based on the average cost of insuring a broad age group. Everyone within the group pays the same premium. This means that your premiums will not greatly increase as you age within your 'community group'.

Risk rating
Premiums are based on age (and sometimes other factors such as gender). People of a similar age and risk are often grouped together in 'age bands' (eg, five-year bands). People within the same age band pay the same premium.

Under this scheme, the premiums more accurately reflect the true health costs of each age band, which means that your premiums will increase regularly as you get older.

Premium 'swings and roundabouts'
When you're thinking about any kind of insurance cover, it helps to think of all your insurances collectively as a single package. As you get older, you'll pay more for some kinds of insurance and less for others.

For example, when you are younger, you'll probably pay higher premiums for car and household insurance, but lower premiums for life and health insurance. As you get older, the reverse applies, and you may even no longer need certain kinds of insurance, such as life cover.

So while it is true that your health insurance premium is likely to increase over time, you should balance this against the savings you may make with your other kinds of insurance.

Why do premiums go up?

Premiums go up when the cost of paying out insurance claims increases. Factors that contribute to higher claims costs include:

• restricted access to public health care (more people claim on private insurance)
• new medical technology (more costly to provide)
• an ageing population (with higher average claims amounts)
• rising 'medical inflation' (ie, increasing consultation, treatment and equipment costs).

Why are older people charged higher premiums?
Insurers can set premiums based on age, as long as they are based on good statistical data or reasonable medical knowledge. Because older people tend to claim more, there is an increased cost to the insurer, and so their premiums are generally higher.

The average claim per life insured for the 12 months ending 30 September 2007 showed the claims mostly rose with age (lowest claims less than $200 in the 0-4, 5-9, 10-14 and 15-19 age bands), to a peak of between $1400 and $1600 at the 75-79 age band (dropping slightly to around $1200 with the 80+ age band).

Under the Human Rights Act, a health insurer cannot refuse to insure you because of your age or disability, but they can defer for a period, or exclude specific health conditions. However, the good news is that once you have health insurance, your level of cover will generally remain unchanged, even if you develop an illness or serious health problem in later years.

Choosing a health insurer
When choosing a health insurer, remember to consider the impact of their pricing (age-banding) structure on the cost of your insurance over the life of your policy. Will you be able to afford health insurance in retirement? When planning your retirement income, don't forget to allow for the cost of your future health needs. For more information, talk to your insurer. If you have any questions about how your premium is set or your risk assessed, contact your health insurer, who will be happy to discuss these issues with you.

Related articles

• New Zealand Health System - where to find healthcare
• New Zealand Health System - what you might pay for healthcare

Original material provided by Health Funds Association of New Zealand Inc. Information current at February 2008. Reviewed by everybody, March 2008.