Ian McAuley: Private health insurance and public policy

Today CPD Fellow Ian McAuley delivered a presentation to the 2016 Health Insurance Summit on the subject of private health insurance and its impact on broader public health and policy outcomes in Australia.

In a paper to accompany the presentation, Ian argues that the rising costs to individuals and the public associated with private health insurance should be attracting much greater scrutiny:

Private health insurance has generally been quarantined from the economic scrutiny that successive governments have applied to other sectors of the economy. Rather than being based on any firm economic model, financial support for private health insurance has been based on partisan preferences, with Coalition governments notably more enthusiastic than Labor governments to support it…

In the absence of economic analysis of the costs and benefits of private insurance, governments, particularly Coalition governments, have argued to defend its privileged position – relieving pressure on public hospitals, providing choice, protecting the “private system” – and have suggested that publicly-funded health should be re-defined as distributive welfare for the needy rather than as a shared universal service.

But as a means of sharing health care costs, private insurance is a high-cost and inequitable mechanism to achieve what the tax system and a single insurer can do far better. Its administrative overheads are high, and it lacks the incentives or capacity to control moral hazard and to contain health care costs.

Australia needs exposure of the cost of support for private health insurance (PHI), and, an open debate about health care funding – not the emotive “private” vs “public” rhetoric that often takes place, but rather the basic question about how much we should take personal responsibility for paying for our own health care, without insurance, and how much we should share through Medicare. If the options are explained clearly Australians may accept a reasonable regime of co-payments, so long as they are not seen as a wedge to allow private insurance to destroy Medicare.

Figure 3 McAuley


Ian concludes that there is “a pressing need for a thorough consideration of the way we fund health care.”

The fundamental question isn’t about “public” or “private” – delivery of health care will always be predominately through the private sector.

Rather, it should be about the extent we pay from our own pockets and the extent we share the funding of health care through Medicare or a similar tax-funded single insurer.

There is also a need to bring PHI under thorough economic scrutiny, as has been the case for most other industry sectors. A starting point should be to expose the full cost of public support for PHI, including the subsidies built into the MLS arrangements, the transfers from young to old in the “lifetime rating” system, and any government-communicated impressions that those with means have a moral obligation to hold PHI, or that without PHI people will not be covered for health care expenses.

For many reasons – ageing, the availability of new technologies, rising expectations – the cost of health care will almost certainly go on rising in the foreseeable future. That should not be of concern. Even a modest rate of economic growth would still see areas of expenditure other than health care – education, housing, recreation and so on – growing…

Many will make the claim that because of that rising cost we cannot afford a tax-funded insurer, but that is to confuse the meaning of “affordability”. Cost-shifting does not make a function more affordable. If, as evidence shows, a single national insurer can fund health care more efficiently than a multiplicity of private insurers, then it is a more affordable alternative. That’s the most assured way of keeping health care costs under control.”

Read the full paper, and recent coverage of Ian’s analysis, below:

Private health insurance and public policy – Ian McAuley, July 2016

How average earners will be pushed into private health insurance by 2020  Caitlin Fitzsimmons, SMH, 23 July 2016.


For more on the potential pitfalls of Australia’s approach to private health insurance, see earlier work by Ian in conjunction with other CPD fellows Jennifer Doggett and John Menadue:

Submission to private health insurance consultations – Ian McAuley and Jennifer Doggett, December 2015

No wonder we’re wasting money in health care – we got the incentives wrong – Ian McAuley, Jennifer Doggett and John Menadue, October 2015