Why private health insurance needs a rethink
Published by Pearls and Irritations, 16 July 2019
Australians are dissatisﬁed with private health insurance. Premiums are rising and consumers are dropping their cover, especially younger people, who are less likely to need health services. Those who are left are more likely to use services, driving insurance costs up further. Government subsidies for private health insurance and private medical care – currently running at more than $9 billion every year – and ﬁnancial penalties to encourage people to take out private insurance are becoming less effective. The industry fears a death spiral.
If current trends continue, more younger people will drop their cover. This will put insurers under still more pressure to contain costs, and governments under still more pressure to tackle rising premiums and out-of-pocket costs. Inevitably, government will be faced with the question of whether more subsidies are the answer.
Before responding to the impending crisis, government needs more clarity about the purposes of private health insurance (PHI). PHI has an ambiguous role within Australia’s universal health care system. Is it a substitute for public funding? Or is it a complement, offering access to different providers and a wider level of service, as well as cover for non-medical services? Or is it both? Failure to clearly deﬁne the role of PHI since the introduction of Medicare has resulted in a health care system riddled with inconsistencies and perverse incentives.
A working paper issued today by Grattan Institute provides context for policy makers as they confront the industry’s woes. It highlights some of the deep-seated questions Australia needs to be asking. And it provides a conceptual framework for potential government intervention in the sector, based on the dual role of PHI.
Firstly, it argues that future reforms to PHI should be made based on a clear view of the desired role of private health care given that it functions alongside a universal publicly funded scheme, Medicare. To what extent is private hospital care a substitute for public hospital care? To what extent is it a complement to the public system?
If the purpose of private health care is to complement the public system – providing services, facilities and amenity beyond those considered necessary for public funding – then the argument for public subsidy is weak. If the purpose of private health care is to substitute for the public funding and provision of service then the argument for public subsidy is stronger.
Subsidising private health care might also be justiﬁed on the basis that it reduces the net cost of health care to government. Even if the overall service is less efﬁcient, and costs more, the costs to government might be lower if individuals are prepared to pay for some of the care that would otherwise be publicly funded in the universal public system. Individuals may be prepared to pay for these substitute services because they are bundled with services that complement the health care in the public system.
Secondly, do the current design features of the PHI system, including incentives, penalties and regulation, support its desired role (as a complement or substitute or both) in the overall health system? If not, what other mechanisms or combination of arrangements are needed?
Lastly, does government support for PHI and private hospital care promote overall economic efﬁciency and the most effective and equitable use of government and community resources? In the long run, are there better ways of providing support to the sector?
Policy makers cannot develop good policies on private health insurance unless they are clear about what the industry is about and how it works alongside Medicare. The Grattan Institute working paper is designed to start that conversation.