Ben Eltham | Baby Steps on Health Reform

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Subjecting the private health insurance rebate to a means test is a good start to more equitable – and cheaper – health policy but there’s a way to go yet, writes Ben Eltham.

Subsidising private health insurance is a clumsy and wasteful way of spending money on health care. The Centre for Policy Development’s Ian McAuley and John Menadue point out in a recent paper that while private health insurers received about $16 billion in premiums last financial year, they only paid out about $13.2 billion in health expenses. The remainder, nearly $3 billion, was simply skimmed off in the form of administration costs (including things that have nothing to do with health care provision, like advertising) and, of course, profits. (I should disclose here that I am a Fellow of the Centre for Policy Development).

Because of its big reach and centralised nature, Medicare has far lower costs as a competing system of health resource allocation. For instance, the sheer size of Medicare means it can effectively set the rates it is prepared to pay for most medical services — a fact perennially hated by doctors and specialists, who would of course prefer to compete in a market where they could use their own collegial advantages to negotiate increased fees. In contrast, highly privatised health systems see rapid cost inflation from health providers.

This is because health is quite unlike many areas of economics, as McAuley and Menadue write today. For instance, customers often have very little information when it comes to making health care consumption decision, but are nonetheless prepared to spend their life savings. The power of doctors to determine the spending of their patients means that over-servicing in many health systems is rife. As a result, health is one of those areas of human life where public provision is generally cheaper than private provision. You only have to look to the US for the key example.

Read the full article in New Matilda here

Want some more information on the health care debate? Read John Menadue and Ian McAuley’s discussion paper Private health insurance: High in cost and low in equity

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