Redirect the subsidy to cure insurance headache

by Stephen Duckett

Published by The Australian,  Wednesday 7 January 2015

For an industry that attracts a government subsidy of more than $5 billion a year — more than the wildest aspirations of the carmakers — the private health insurance industry has escaped a serious look for almost 20 years.

The industry we see today is the linear descendant of the industry of the 1950s, with more than 30 funds, over-regulated, over-subsidised and over-protected. Two for-profit funds dominate the industry — BUPA (owned by a British not-for-profit) and newly listed Medibank Private. These dominant funds have about 80 per cent of all issued policies, with Medibank Private losing its position as market leader to BUPA in the past six months, continuing a slow decline that had been evident for years.

The latest tweak to industry regulation is apparently to be the withdrawal of subsidies for unproven natural therapies, a good move that will promote greater use of evidence in healthcare. There has also been a recent call to target subsidies only to those products that offer comprehensive coverage (The Australian, January 1), based on the argument that products which only cover public hospital care by definition don’t reduce demand on public hospitals, one of the arguments for the subsidy in the first place.

The government’s 2014 budget also proposed realigning the regulation of private health insurers so they would be regulated by the general insurance regulator rather than having their own specialist regulator. But all this tweaking and finetuning raises the question of whether this is an industry ripe for the chill winds of competition to sort out the sheep from the goats.

The espoused object of the government subsidy was indeed to take pressure off public hospitals but academic study after academic study shows that hasn’t happened.

A very large subsidy, about 30 per cent of the price paid for insurance, has meant that the industry needs to be regulated to set rules for who gets the subsidy and how much. The result is an over-protected industry that runs to the government every time it can’t tackle its problems.

The time is ripe for a cleaning out of the accumulated detritus of industry regulation and subsidy. We now have the technology and competence to start completely afresh.

If the policy problem is that we want to encourage use of private hospitals instead of public hospitals, we should do this directly through a subsidy to private hospitals. The original design of Medicare had a private hospital subsidy that subsequent Labor governments slowly whittled away.

The private health insurance subsidy has been factored into family budgets. Both Labor and Liberal governments are committed to keeping it. But an alternative approach to subsidising funds is to reallocate the same level of funding to private hospitals.

This could easily be done by the commonwealth paying a subsidy for each treated patient, with the payment varying by the type of procedure. This is exactly the same approach currently used for commonwealth payments to public hospitals.

If desired, the payments could be restricted to those patients who have private health insurance, as an incentive to take out private health insurance. It could be capped in the same way pathology payments are capped through an agreement where prices decrease as volume increases to cap taxpayer exposure. Similarly, a haircut to the funding could be applied in line with budget imperatives.

If the subsidy is paid directly to private hospitals, private health insurance could simply be regulated in the same way as other insurers. This would greatly benefit consumers. A highly regulated industry finds it difficult to innovate and products are generally targeted to the generic consumer rather than to market niches. More flexibility in product offerings might even entice more consumers to take out private health insurance.

New entrants into the market might have lower overheads, potentially leading to lower costs for consumers and innovative products such as no-claim bonuses.

Restructuring the payment so it is paid directly for services, based on an “efficient price” — the term used for public hospital payments — would also drive efficiency in private hospitals, which could compete more effectively with public hospitals, reducing waiting times for uninsured patients and allowing for reduction of the red tape that constrains the private insurers. The insurers could stand on their feet and develop products that meet consumer needs, without a public handout.