Saving private health 2: Making private health insurance viable

by Stephen Duckett

03.12.2019 report

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The only way that private hospital insurance can survive as Australia’s population ages is to make insurance cheaper for younger, healthier people.

Younger consumers are spending more on private hospital insurance but getting less value for their money. The industry faces a demographic death spiral as costs for older people rise and younger people leave.

Insurers’ incentives to keep members healthy, bargain hard with hospitals, and treat all patients efficiently are strangled by red tape and by excessive regulation. They must charge everyone the same premium – no matter what their age – under the ‘community rating’ principle. And if an insurer innovates to keep costs down, it loses much of the benefit through a process called risk equalisation.

Red tape has created an administrative nightmare that discourages the industry from innovating to reduce costs. Over-regulation has created a complacent industry that is over-reliant on direct or indirect taxpayer subsidies.

The Commonwealth spends around $5 billion each year subsidising private hospital insurance and another $1 billion on ‘general’ or ‘extras’ insurance. This is questionable value for money.

Subsidising private health care might be worth it if it takes the pressure off the public system, but too much of the subsidy goes to people who would have paid for insurance anyway, and pays for private care that complements—rather than replaces—public care.

The report lays out a transition to make private hospital care better value for both consumers and taxpayers, and viable for the long term.

Premiums should be partially deregulated for people aged less than 55, so that what a person pays more closely reflects the benefits that someone of their age can expect to receive from hospital insurance.

The private hospital insurance rebate should be redirected towards older patients. Overall the net premiums paid by older people would rise a little, and younger people would pay less.

Net premiums paid by older people wouldn’t rise at all if governments implemented reforms previously recommended to make private healthcare more efficient.

The remedy for a complex ineffective system of carrots and sticks is not even more regulation, but less. A range of private health insurance regulations should be phased out or reduced, such as subsidies for extras insurance, Lifetime Health Cover, the Medicare Levy Surcharge and risk equalisation.

Unlike self-interested ‘zombie’ reforms that are sometimes floated in the media, these are practical proposals that will help make the private insurance industry more sustainable and will ultimately benefit all members.

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