Why health insurance is unsustainable

Private health insurance, in the form currently operating in Australia, is not sustainable. Each year premiums increase ahead of general inflation. Premiums have increased on average 7.5 per cent in the past four years and Australia’s largest private hospital operator has announced that consumers should expect private health insurance premiums to keep rising by twice the inflation rate every year. This is because private insurance has no capacity to control the costs of the services it covers. Consequently, inflation of health costs follows.

By supporting private insurance with its annual $2.5 billion subsidy, the government loses a measure of control over health care costs. This loss of control of health costs covered by private insurance diminishes the capacity of the nation to control health costs in toto. The more private health insurance there is, the less control there is over health care costs, the greater the national health bill and the less sustainable the entire health care system.

Where private health insurance dominates a national health system, deep problems occur. We can see these easily in the US.

Private health insurance is prevalent in the US, although publicly funded programs such as Medicaid and Medicare mean that government outlays on health care in that country are roughly the same as a proportion of gross national or domestic product as in Australia.

Yet, the total health bill in the US now equates to about 14 per cent of GNP. Health care is very expensive. Twenty million working Americans, caught between modest affluence (where they can afford private insurance) and abject poverty (when Medicaid cuts in) have no insurance, public or private, and are at serious disadvantage in accessing health care when they need it. Surveys reveal repeatedly that Americans without insurance often cannot obtain necessary medical and hospital care when they need it. Private health insurance has been sustainable in the US because of that nation’s tolerance of these inequities.

It is politically acceptable in the US for there to be tens of millions of people without insurance. It is also politically acceptable for industry, which withstands the worst of health insurance costs, to pay the large premiums for their employees. However, a recent report quotes Howard Schultz, chair of the Starbucks Coffee chain, as saying that providing health care coverage is a critical business issue. ‘In the last 12 months, we have paid more for employee health insurance than we do to buy the raw materials for our company,’ Schultz said. General Motors has also recently felt the sting of providing health care coverage. When announcing the company’s largest quarterly loss in a decade, company executives attributed substantial blame to the increasing costs of health care coverage – expected to rise from US $5.2 billion in 2004 to $5.6 billion in 2005.

Efforts on the part of private insurers to control the prices of the services for which their enrollees claim have been energetic in the US. There, unlike in Australia, large private insurers such as Kaiser Permanente in California and Blue Cross, that insure millions of enrollees, have attempted to control costs through techniques such as managed care. This is a complex arrangement whereby the insurer assumes responsibility for the health care of their enrollees and contracts prices for care with doctors and hospitals. These arrangements flourished for some years, but their popularity has waned as the balance of power has moved back to the health service providers and prices have continued to climb.

In Australia, for the moment, things are different. Here, access to public hospitals, general practitioners, and specialists to whom they refer patients, together with necessary medications, are largely covered by Medicare. The government has used this public funding arrangement to supply essential services and to control health costs, although not always with sufficient attention to efficiency, safety, capital investment and other elements of good management.

However, with Medicare increasingly portrayed as a safety net, and strong incentives to the public to take out private health insurance – to run for cover as the advertisement has it – private health care and private insurance have been brought into greater prominence in Australia. The Commonwealth government has put no safeguards in place (ones that would ensure continuity of its relative control over health service costs) to prevent these arrangements heading in the direction of the US experience.

What is surprising about Australia’s shift toward a private health insurance system is that we have already tried it and abandoned it in favour of a public one. During the 1950s and 1960s, a voluntary system of private health insurance operated in Australia. By the late 1960s, problems with the system were becoming obvious. A government inquiry into the operation of the system (conducted by Justice Nimmo in 1969) found that the scheme was ‘beyond the capacity of some members of the community’ and caused ‘considerable hardship for others’. The system became unmanageable as neither the government nor contributors could keep pace with rising medical and hospital fees, which had increased by 44 per cent and 26 per cent (respectively) over the previous decades. Contributors were faced with fees between 30-38 per cent higher than benefits, which not surprisingly, forced up to 17 per cent of the population to forgo private health insurance and up to 53 per cent under-insured to under-insure. It was clear the scheme was unsustainable.

There is nothing simple about health care financing, public or private. Every country with an advanced economy is facing questions about how to control health costs and distribute health services in a way that enables all of their citizens to have optimal health care. In this international setting, it is important to observe and learn what we can from others as well as from our own experience. We do know that countries in which there is one payer for health care and where there is a strong and effective system of general practice do best. There is ample research to support this assertion. In Australia, through Medicare we have had a dominant single payer. To move government funds out of that arrangement and into the open-ended private insurance system relinquishes that effective governance. The further we proceed down that path, the further we move towards the US arrangement. It is an excellent one for those with lots of money, and for a nation where equity and fairness in relation to access to health care are not politically important.

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