There is a detailed academic debate surrounding health care funding and provision in Australia (as there is globally).
But the debate is clouded by observer bias – by the relatively wealthy senior academics, government officials, and consultants, who provide the analysis in the policy-making environment. If everyone involved feels burdened by their own choice to send their children to private school, or irrationally choose private health insurance, because of a culture of social class bias, what type of policy recommendations can you expect?
Consider the King-Gans argument, based on a theoretical micro-economic model of health insurance developed in this paper. The model assumes individuals with perfect knowledge of future health care needs, which leads to a massive adverse selection problem for the private health insurance market. After a few pages of mathematical labyrinths, the conclusion follows that:
…those in society who are most likely to be ill will ‘opt out’ of public insurance and purchase private insurance. The public health insurance will only be used by those in society who are healthiest (i.e. least likely to become ill). The high-risk individuals are made worse off by the public insurance because they are required to cross-subsidise the public insurance of the low-risk individuals through the tax system (my emphasis).
This conclusion completely contradicts the current reality in Australian health care, whereby the public system typically deals with the most serious cases of trauma and chronic illness. While the model conclusions are laughable, the policy implications that follow from this model outcome are actually being taken seriously.
As far as the details of the model are concerned, we all know the best measure of a model’s usefulness is how well it predicts outcomes. The King-Gans model requires the following assumptions to come to the conclusion that a mix of private and public insurance will result in higher cost to the most ill people, because only the most ill will choose private health insurance:
- Adverse selection of private health insurance by a set of people who happen to know in advance their future health care needs and probability of illness
- People value actuarial fair insurance. That is to say that they value insurance only as a tool for spreading health costs over their lifetime.
- They assume a perfectly competitive private insurance market. While the market is good, I would be hesitant to got that far, but it is probably okay.
- They assume there are not ‘too few’ people with a high risk of being ill who know their risk in advance.
- They assume identical income for all individuals at a level that justifies PHI for those individuals who know their risk of illness, and subsequently their expected future health costs, in advance.
- The ignore all externalities associated with health care.
For me, apart from the above-list of unrealistic assumptions, the analysis ignores the critical fact that risk averse wealthy people will both choose private health insurance (PHI) AND preventative health care through healthy living choices. PHI is a complement to better voluntary health choices, so we should expect that private patients are typically the healthier members of society, and the publicly funded public hospitals will be treating the most ill patients.
This paper, by Buchmueller et al., finds empirical evidence that contradicts the result of the King-Gans theoretical model. They find that there is beneficial selection of PHI in Australia, meaning that the healthiest people tend to be privately insured. May I suggest this conflict between empirical ‘reality’ and theoretical abstraction is the result of the above ignore concept of complementarity of PHI and healthy lifestyle choices.
The conflicting result is also a product of ignoring the relationship between income, health, and PHI. Higher income people both typically value health more highly (since the can, even though it may not be as high as a proportion of their income of many not-so-wealthy individuals), and are incentivised to be covered by PHI through tax rebates.
The second major shortcoming of the King-Gans model, and the analysis of health care funding and insurance more generally, is that it ignores the fact that end of life health costs are unavoidable. Death is usually a costly process. Thus, there is no way to adversely select health insurance for these ‘death costs’ in advance.
Third, many PHI covers are incomplete covers. That is, that when a health service is claimed against the insurance cover, the reimbursement is a fraction of the total cost, and there are still out-of-pocket costs for the patient. Thus, for anyone expecting to require a lot of non-elected medical care, public health provision may be the rational choice, given the risk-adjusted premiums for the most comprehensive PHI cover.
Fourth, PHI is incomplete in terms of scope of medical coverage. Emergency departments, for example, are typically the domain of public hospitals, treating public and privately insured patients at public cost.
In all, these overlooked considerations render the theoretical outcomes of the King-Gans model inaccurate, and the policy implications that follow from it to be counterproductive. The reality of beneficial selection of PHI means that wealthy sick individuals are provided a premium health insurance service, because their insurance funds are pooled with a selection of healthy people, to offer an attractive way of making elective health services more affordable.
While King and Gans acknowledge some of these shortcomings, they stand by the conclusions of their model, which feed into their policy recommendations. Given their academic reputations in the policy-making community, this is dangerous territory.
Finally, my personal gripe with the paper, and the policy agenda being pushed of a result of this (and similar) analysis, is that it ignores the social agreement that has evolved to the current provision of a pooled national health insurance program. When PHI coverage was over 70% in the 1970s, reforms were aimed at generating a more equitable and broader system of public health coverage. The very nature of a mostly private health care system is that the unhealthy poor have both the highest need, and the least ability to pay for health services.
That basic philosophy of public health care is that national insurance, funded in a progressive manner through the tax system rather than through actuarial risk-reflective premiums, is provided by publicly run enterprises to fulfill equity considerations (for example, geographically equitable access to health care) and provide broad external community benefits by having a healthier population.
It is also easier to evolve a publicly run system of hospitals and health services to become a platform for implementing auxiliary health policy goals, such as vaccination programs, education programs, doctor training programs, and research. The current system provides, on the whole, quite a reasonable combination of the benefits of both a private and public system, even if it does perpetuate notions of social class in Australia.
All things considered, the legislation currently being proposed to remove the income tax rebate for individuals covered by PHI may actually promote a more effective market for PHI to offer simple top-up coverage at reduced cost, and generate a welfare shift from the wealthy insured to the poor uninsured. Back in 2004, Dawkins et al. noted that the implementation of the 30% rebate for PHI in 1999 (following more subtle incentives in 1997 and the implementation of ‘lifetime’ health cover) made those on high incomes better off –
There is strong evidence that not only a larger number of households of higher income and socio-economic standings responded to the policy changes, but also they were more likely to have PHI even without the policy changes. These latter households enjoyed “deadweight benefits,” in the sense they needed no such benefits to purchase PHI to begin with. Given that households who took up PHI ought, by their revealed preference, to be better off, we can reasonably conclude that households with high income and socio-economic standings are the main beneficiaries of the policy changes.
As we have seen above, the idea that the ill rich are paying twice for health care is surely not at all representative of the present situation in the Australian health care system, and furthermore, policy advice derived from a bizarre theoretical model whose results oppose the empirical evidence should be carefully scrutinized with a dose of old-fashioned commonsense.