Mental health support challenged by fragmented safety net: Report

New research from the Actuaries Institute has confirmed the presence of a “complex financial safety net” that is challenging the ability to provide affordable and equitable mental health support for Australians, necessitating immediate reform.

The report, titled The Mental Health Financial Safety Net, Unifying Australia’s Fragmented Systems, found there were 22 separate support systems, including Medicare, the Pharmaceutical Benefits Scheme, workers’ compensation schemes, helplines, and life and private health insurance, that were designed to collectively provide a “financial safety net” for people to access mental health care without experiencing poverty or falling into debt.

However, the report indicated there were several “structural gaps” that impaired the mental health care system’s ability to provide holistic support and access, as well as secure funding from several different sources. This “complicated patchwork” across funding sources, service providers and administrative structures has impacted the system’s achievement of its ultimate goal – “to deliver cohesive, equitable and timely support”.

“Australia’s mental health safety net is being challenged significantly and its long-term viability is at risk,” lead author and Actuaries Institute member, Cindy Lau, said.

“Rising demand is exposing structural weaknesses across the system – from inconsistent access and affordability to duplication, regulatory misalignment, and unmet need. The financial safety net is uneven, with a growing risk that people experiencing mental ill-health will fall through it.”

The report made several recommendations to improve the system as a whole, urging in particular for reforms to life insurance product design to deliver “more appropriate and cohesive” mental health support.

This comes as mental ill-health has accounted for a total increase of 433 per cent or $169 million in total and permanent disability (TPD) claim payouts from 2014 to 2022, according to previous KPMG research commissioned by the Council of Australian Life Insurers (CALI).

“While it’s positive that this life insurance benefit is responding to genuine community need, spiralling claim rates worsen affordability and pose a wicked problem given the voluntary take-up of individual life insurance. Insurers continue to wrestle with difficulties of providing affordable insurance cover for mental health that continues to meet community expectations. The story is the same in private health insurance where meaningful mental health coverage is confined to Gold-tier policies at prices out of reach for middle Australia,” Lau wrote in the report.

“Many risk-rated insurance products respond in some way to mental health conditions, noting however that mental health conditions can be difficult to assess in terms of severity, permanence and recovery trajectory. More generally for insurance benefit designs to be sustainable, they must cover risks that are insurable, and a sufficient number of consumers must be prepared to pay the cost. For individual consumers, the best and most generous policy without any exclusions would likely be unaffordable. To be valuable for consumers, coverage needs to strike a balance between responding to the needs of people who need to claim (due to mental ill-health or otherwise) and being affordable for consumers.

“There are also some particularly difficult challenges with the inherent product design of TPD insurance. With around 60% of life insurance payments due to a mental health condition now as a single lump sum through TPD insurance, there is growing acknowledgement that single lump sum payments may not be the best way to support people who experience serious mental health issues. Experience has often shown that products that pay significant lump sums, such as TPD insurance, provide perverse incentives that can work against the original design and intent of the insurance, since they rely on a person establishing that they are permanently unable to work. A lump sum benefit may be less appropriate for mental health conditions than income stream products, which assume an eventual return to work may be achievable.

“However, the inflexible funding structures in other parts of the safety net sometimes affect how life insurers can support consumers to access the care that may speed up their return to work or wellbeing. Life insurers
are not permitted under existing rules to directly fund the psychological care required, even if it is clinically recommended, if that treatment is coverable by Medicare or private health insurance. As a result, consumers with higher needs are often left to pay for themselves, or navigate overlapping rules and exclusions across funding systems, with little flexibility or integration. The issue impacts people claiming on their TPD insurance, where some TPD claims arguably could have been prevented had treatment been provided earlier.

“All of these pressure points — at product design, underwriting and the claims stages — present a common dilemma. On the one hand, insurers are responding to affordability pressures from growing claims volumes and higher payouts through the design of these products. On the other, they face persistent criticism for excluding individuals from cover. Fairer, more nuanced, contemporary treatment of mental health conditions is increasingly expected. There is a common understanding that risk should be assessed through evidence-informed models that distinguish between different diagnoses, treatment histories and levels of functional impact. This shift in mindset is happening slowly17 and advocates call for more and continued progress.”

The report also encouraged insurers to make some changes in the way policies and cover are provided, including:

• design cover to ensure the insurance benefit is not excessive when compared to the financial loss and consideration of benefit designs that indemnify people for lost income, which may include (in combination, not in silos):
  • coverage to care companions
  • refining strategies to balance the mix of lump-sum and income-stream payouts; and
• promote a fair, efficient and contemporary experience for consumers that seek to access, purchase and potentially claim on their life insurance in relation to mental health.

The report also recommended the gap between private and public sector support provisions be bridged by coordinating response via the life insurance system and contributors across all levels of government-funded programs.

“Beyond these federal programs, Australia’s financial safety net also extends to private health, general and life insurance systems that provide additional coverage for those who can afford premiums, state-based workers’ compensation schemes that insure employees from work-related injuries and illnesses, and other employer-funded health and wellbeing initiatives.

“Together, public and private mechanisms, given their different scope, funding and eligibility criteria, form a complicated, many-layered approach to financial protection for the funding of health and disability.

“[A recommendation included] develop a shared, evidence-based framework for assessing mental health conditions across both private and public sector contexts to improve consistency across products and sectors (e.g., DSP, Life Insurance).

“This includes designing processes that recognise the psychological impact of repeated assessments and complex documentation requirements and therefore embeds safeguards against re-traumatisation, particularly for individuals experiencing mental health challenges. Assessment processes would prioritise empathy, transparency and simplicity, reducing the need for consumers to retell distressing experiences, navigate fragmented systems or manage excessive paperwork.”