The history and purposes of private health insurance

by Stephen Duckett and Kristina Nemet


Australia’s private health insurance industry fears it is in a death spiral, and politicians need to rethink whether or to what extent taxpayers should continue to subsidise the industry.

Australians are increasingly dissatisfied with private health insurance, and policy reform is urgent.

Premiums are rising much faster than wages or inflation. People are dropping their cover, especially the young and the healthy. Those who are left are more likely to get sick and go to hospital, driving insurance costs up further.

Meanwhile, taxpayers subside the industry to the tune of about $9 billion every year: $6 billion for the private health insurance rebate, and $3 billion on private medical services for inpatients.

It’s inevitable that government will have to make tough decisions about whether more subsidies are the answer to the impending crisis.

Governments have failed to clearly define the role of private health insurance since Medicare was introduced in the 1980s. The upshot is we have a muddled health care system that is riddled with inconsistencies and perverse incentives.

Australia needs to confront a fundamental question: what is the purpose of private hospital care?

If its purpose is to complement Medicare, offering people choice of specialists and a wider range of services, then the argument for taxpayer subsidies is weak. But if its purpose is to substitute for public hospital care, then the argument for subsidies is stronger.

Policy makers must grapple with two further questions:

  • Do the current design features of the private health insurance system, including incentives, penalties and regulation, support its desired role (as a complement or substitute or both) in the overall health system? And if not, what other mechanisms or combination of arrangements are needed?
  • Does government support for private health insurance and private hospital care promote overall economic efficiency and the most effective and equitable use of government and community resources? And in the long run, are there better ways of providing support to the sector?

The question then becomes whether government should support private health care directly, or via public health insurance – or not at all.

Future Grattan Institute work will tackle these questions and propose solutions to Australia’s private health insurance woes.

Read the media release