Private Health Insurance: Where are we now and where should we be going?

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Any analysis of private health insurance (PHI) in Australia must begin with an acknowledgement that its role (and who should pay) is disputed. Given the existence of a tax-based universal health care system (Medicare), some believe that that the cost of PHI should be met entirely by individuals because PHI only funds ‘optional extras’ such as choice of doctor, more timely elective surgery and a private room. Others believe that PHI deserves government support because use of the private health sector reduces the need for public funding of Medicare.

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Regardless of these ideological beliefs, by 1997 this ‘mixed’ system was in trouble. An Industry Commission report noted that PHI premiums were rising rapidly, fund membership was progressively falling (from 50 per cent in 1984 to 31 per cent in 1997) and the public hospital system was also under strain. PHI was not only becoming less affordable; it was also less attractive because an uncoordinated proliferation of doctors’ bills caused unpredictable ‘out-of-pocket’ expenses. This created a vicious circle in which rising premiums led to the lower risk (younger) members dropping out, shrinking the pool of insured but also raising its overall risk, leading to higher pay outs and higher premiums yet again.

Sequential policy initiatives by the Coalition government included:

  • Taxation ‘incentives’ to encourage PHI (such as the 1 per cent Medicare levy for high income earners without PHI);
  • A 30 per cent government PHI rebate (from April 2005 increased to 35 per cent for those aged between 65 and 69, and to 40 per cent for those aged 70 or older);
  • Legislation requiring ‘no gaps’ or ‘known gaps’ policies to be offered by all health insurers, and
  • ‘Lifetime Health Cover’ allowing health funds to offer lower premium rates to people entering insurance early in their lives and higher premiums for people joining later supported by a massive advertising campaign.

In response, the coverage of PHI peaked at 45 per cent in late 2000 and more younger people joined the funds. Subsequently, these figures have slowly declined. As at the end of 2005, 43 per cent of the population was covered by PHI and the average age of policy holders was slowly increasing. The main cause of increased coverage appeared to be ‘LifetimeHealth Cover’ probably aided by the 30 per cent rebate which made PHI more affordable. The 30 per cent rebate costs about $2.5 billion annually while the 2005 increase in rebates for the aged has added $111.3 million per year.

The Prime Minister argues that these policy measures have provided ‘private health choice for most Australians’. The government notes that private hospital beds are increasing and that more than 50 per cent of surgery is now done in private hospitals. They quote research (sponsored by Medibank Private) that argues that for every dollar the government spends on the private health insurance rebate, the state and federal governments would otherwise have to spend $2 providing these services via the public system.

These opinions are disputed. The only objective justification for spending public money on private health care would be if this approach was more cost-effective than expanding the public sector. However, when controlled for case type, a number of surgical procedures cost considerably more in private hospitals than in public hospitals and some, for example operative interventions during childbirth delivery, appear to be performed excessively. There is also wide variation in the cost of the same procedure on similar patients in comparable private hospitals. Less cost controls are imposed on private hospitals by health insurers than are demanded of public hospitals by State Health Departments. For example, the use of diagnostic related grouping (DRG) case payment, volume-outcome purchasing and pay for performance are common in the public sector but rare in the private sector. In addition, even the health minister recently acknowledged that many patients still face ‘nasty surprises’ when their bills arrive despite the introduction of ‘no-gap’ PHI policies. It can be argued that providing public subsidy for PHI without demanding that the funds purchase services more efficiently is simply rewarding laziness.

Another concern with subsidising PHI with public money is equity. The lower a person’s income the less likely it is that they will have PHI yet poorer people tend to have greater health needs than those with higher socioeconomic status. While there are about a million Australians over 65 who are privately insured there is another 1.5 million, mostly age pension recipients, who rely on the public system. In addition, there are far fewer private hospitals in the country compared to the cities so that people in rural areas (who also have lower income) also miss out. Furthermore, people with PHI (often with less health care needs) make more use of health services, probably because of capacity to pay and consumer and supplier-induced demand. Given constraints on health services supply, such as the number of surgeons available, it is likely that services provided for patients with PHI come at the expense those without PHI (but whose needs are greater). Finally, the PHI rebate is regressive, reducing the contribution gap between the rich and the poor.

In short, given the inefficiencies and inequity outlined above, it is not surprising that many believe the PHI rebate would have been better spent funding more public hospital beds for the chronically ill, decreasing public elective surgery waiting times, and improving services in hospital accident and emergency centres. The 2004 National Platform and Constitution of the Australian Labor Party says, ‘Labor believes that the private health insurance industry needs to be reviewed, including the operation of the private health insurance rebate’.

Policy options for an alternative government include:

1. Immediately eliminating the PHI rebate and transferring the money saved to expand the public health sector. While ideologically sound this option is likely to be politically unpalatable.
2. Over time, slowly reducing the PHI rebate (and the regulatory constraints on funds) in order to allow market forces to ultimately determine the health services insured against and the premium levels. Once again, the money saved would be invested in the public sector.
3. Progressively linking the PHI rebate to specific performance indicators that funds would have to meet in order to continue to have their premiums subsidised with public money.
4. A combination of 2 & 3 above.
5. Doing nothing until such time as the inexorable cycle of rising health care costs, rising PHI premiums and falling fund membership produces the next unavoidable crisis.

Further debate on these options (and additional policy suggestions) are welcomed.

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