Beware a shift to private health insurance

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Cross-posted from The Conversation

Ahead of the May budget, health minister Peter Dutton has said he wants to start “a national conversation about modernising and strengthening Medicare”.

A national conversation would be welcome, but is that what the government really intends? Or are we simply being softened up for an expansion of private health insurance?

If so, the government needs to be reminded of Australian and international evidence showing that the more private health insurance is used to fund health care, the more expensive the health system becomes, without any improvement in the quality of care.

Modernising and strengthening Medicare

A conversation about public policy has to start with an understanding of the problems to be addressed, and in health care there are two distinct issues.

One is about whether we get value for money from the A$170 billion we spend each year on health care: can we reduce bureaucratic overheads? Is our health workforce deployed where the needs are greatest? Should we direct more resources to prevention? Are we over-using medications or are medications helping keep people out of hospital?

Opinions range on these and many other questions. But almost all reasonable people, regardless of their value systems, would agree that it is desirable to get the same or improved outcomes from existing resources.

However, even if we eliminate waste and inefficiency from health care, we need to address the inevitability that health-care costs will rise over time. Therefore, the second – and more basic question – is how we share those costs between consumers, governments and the private sector.

The answer depends on the extent to which we treat health care as a normal market good (financed by out-of-pocket outlays) and share that burden with others (through private or public insurance).

This question also challenges us to confront our values and long-held beliefs – some of which stem from earlier times, when we had shorter lives, when there were fewer therapies available, and when we were much poorer, an era when even the cost of a GP visit could be a burden.

But framing the issue as merely a problem of unaffordable demands on public budgets, as Dutton seems to be doing, is not helpful because shifting costs off-budget, particularly through use of private health insurance, can result in those costs being much higher than they need be.

International cost-sharing

The graph below shows how other high-income OECD countries with per-capita gross domestic product (GDP) of $US35,000 or more divide health costs between consumers, governments and the private sector. In general, these countries opt for sharing, but not entirely: there are no “free” systems in the list.

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Australia is among the countries with a comparatively low call on government (only the United States is significantly lower) and with a comparatively high call on out-of-pocket expenses (only Switzerland is higher).

These countries differ in their use of private insurance as their way to share expenses, ranging from negligible dependence in the Nordic countries, up to 35% in the United States.

Single national insurers keep costs down

As many economists have pointed out, private health insurance is a high-cost mechanism for achieving what taxes and national insurers (such as Medicare) do much more efficiently and equitably, while delivering no improvement in outcomes.

One may believe that competition between insurers can keep prices in check, and that they do a better job than a monopoly government insurer, but there are three reasons why this does not hold in the case of health insurance.

First, is the high financial overhead of private insurance. In Australia only 84 cents in every dollar collected by private insurers is returned as benefits, the rest going to administrative costs and corporate profits. By contrast Medicare returns 94 cents in the dollar, even after the cost of tax collection is taken into account.

In the United States, which is so highly dependent on private insurance, only 69 cents in the dollar comes back as payment for health services.

Second, and more important, competing private insurers have little ability to control prices demanded by powerful service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals simply choose to do business with another insurer.

By contrast a single national insurer, usually a government agency, has the market power to put some discipline into prices and utilisation.

Third, insurance by its very nature removes the most important aspect of markets, which is the discipline of prices.

The insurance premium is a “sunk cost” and when the time comes for consumers to make a claim, the service is free or heavily subsidised. There is no difference between the thinking “Medicare will pay for it” and “NIB/Medibank Private/BUPA will pay for it”.

International health costs

The graph below, drawn from OECD data for the same 18 high-income countries, shows the relationship between their dependence on private insurance and their total health-care costs as a percentage of GDP.

All these countries have good health outcomes. As a basic indicator, life expectancies at birth range from 82.8 years in Switzerland to 78.7 years in the US.

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The US is the standout example of the loss of cost containment when the task of sharing is left to private insurance. Its health-care costs are 18% of GDP, well above the OECD average of 9%, and are bound to rise under the new regime of compulsory private insurance (“Obamacare”).

In fact the US government, because it has yielded control of the market to private insurance, now spends around 9% of GDP on its limited government programs – Medicare and Medicaid – more than most European countries are paying for universal or public insurance.

The lesson from overseas experience is that the conversation we should be having about health-care costs concerns what we pay from our pockets and what we share. Unless we are to have a truly unaffordable health care system, that sharing should be through Medicare.

Article by Ian McAuley, Lecturer, Public Sector Finance at University of Canberra

Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. If Abbot introduces the US system here, he must pay in blood as he would be spilling a lot of it.

    Hopefully though, it will be about refining the current system. I doubt any government would be able to change our current system too much. It would be as big as Industrial Relations under Howard.

    • drsmithyMEMBER

      Hopefully though, it will be about refining the current system.

      No chance. They’re already testing the waters of privatised, user-pays healthcare with this co-pay idea.

    • Strange Economics

      Rent Seeking private medical insurers your sunny time is coming. Give your CEO’s a large bonus (surely they should be equal with the banks).
      And in Australia – high income earner subsidy for health insurance (not a low income earner subsidy – they can’t afford it). So premiums can easily be increased, as just happened.
      Which private insurer shares should I buy? Where can I apply for a nice protected job.

  2. The US system is a debacle.

    The pretty graphs don’t show those who miss out on treatment and die earlier or suffer disability from insufficient treatment or who face bankruptcy or other major wealth effects from treatment if un/under insured for the particular treatment.

    Note the lower age expectancy in the US and know also that US life expectancy is falling, not rising.

  3. On another thread earlier today, Jake89 made the most awesomely, accidentally, complete summary of political economy ever:

    “The economic problems exist, the question is who pays.”

    That should be the first question asked whenever publicly funded, operated and/or owned systems are critiqued; from electricity and water supply networks to roads, rail and ports to health and education.

  4. 1. Could someone re-do the regression on the second chart with the USA omitted?

    2. When I was in Thailand having surgery, and again when accompanying a friend, it was surprising how many people from European nations where that surgery is covered chose to reach into their own pockets and pay for surgery themselves. A major factor in their decision was the quality of the work in Thailand, with waiting lists and jumping through hoops also featuring. Sometimes, it pays to look into the details.

    3. The main reason for having health insurance is get treatment quickly, rather than languish on a waiting list. Governments treat it as a cost, and hence ration it. Imagine if all engineering or hairdressing were done by government. Oh no, economic recovery, better make sure not too much engineering is done? Perhaps we need to bust what amounts to the medical union in the form of the specialist colleges etc. and open up the profession, so it behaves like other industries.

    • Tassie TomMEMBER

      Two clarifications of points in this comment, followed by one comment stemming from the original article.

      And conflict of interest declaration – I’m a doctor.

      Most importantly, regarding specialist colleges, most colleges do NOT ration training positions, hence specialist numbers. (A minority still do, and the ACCC is watching closely). In most circumstances, the hospital or practise creates a position, and the if the college accredits the position then it is an accredited training position that counts toward specialist qualification. There are clear guidelines about what standards need to be met for accreditation – it does not depend on how the accreditor feels on the day whatsoever.

      Second clarification – another reason for private health insurance – the specialist does your operation.

      And regarding the point in the original article “By contrast a single national insurer, usually a government agency, has the market power to put some discipline into prices and utilisation.”

      This is true – especially regarding the “Schedule Fee”, which since it was (almost) scientifically calculated in the 1970s, have generally risen by about half what inflation has and a third what the wages index has. This is why some doctors charge “gaps” – they charge closer to what they are worth.

      My fees are greater than the “schedule” and include a “gap”, although they are not so great as to actually charge what my services are worth. I think that in most circumstances, doctors whose fees do not include a “gap” are either underselling themselves or providing a reduced service – logically it cannot be neither.

      • I must take issue with you when you say “to actually charge what my services are worth”.

        What something is worthy is what someone will pay for it.

        My view on healthcare is as follows:
        * We over-consume healthcare because we have found ways to make someone else pay for it. Were we to pay for it with our own money, we would not pay nearly so much (and the true market value of medical care would surprise a great many people).

        * The majority of the increase in human life spans comes from vaccinations (medicine’s greatest accomplishment) and from the fruits of engineering and its peers (potable water, sewerage systems, food growing and storage, transportation).

        * The constant references to the amount of money as a % of GDP the US spends on health is a sign of a generally over-regulated system and also a large pool of wealthy people who regard cosmetic surgery and anything else they can buy as no big drama. In a sense, their spending is about medicine as a status enhancer.

        I should also mention another reason why I and others sought out some work overseas, apart from quality: the ability to discuss in mailing lists &c the merits and results of the various surgeons without fear of massive lawsuits. From the medical blogs I look at occasionally, I am struck by the fear Australian medical service providers have of anyone talking about them.

        One of the things taking control of my care (in a particular context years ago, but attitude has stuck) is that I regard myself as a client for whom I seek a doctor to things for me, on my terms. I will only agree to being referred to as a patient if I am brought unconscious and bleeding to a hospital in an ambulance, but once I am conscious I am, once again, a client for whom things are done, not a patient to whom things are done. (I did well enough to study medicine, but chose to study engineering, so the all ‘patients’ are retarded untermensch attitude of too many Australian doctors really pisses me off.)

        In essence, the market for medical services is utterly distorted by the success of emotional arguments in blackmailing governments to overpay and to pay for too much. Most of our health an longevity is driven by non-doctor things and most of the rest is up to us and our lifestyle choices. Were people to pay for their own medical care, at least in a meaningful co-contribution, we would soon find that the amount they are prepared to pay isn’t so high as that which emotionally and electorally blackmailed governments currently pay.

      • Tassie TomMEMBER

        Responding to Moody Cow – you have some very good points that I thoroughly agree with.

        I too regard my patients as clients that I am providing a service for – in a way they are my employer since they are the ones that pay me (and are partially reimbursed by whatever the government decides to reimburse them).

        Trying to work out the value of our service and what we should be charging is difficult, especially in such a distorted market. The AMA probably makes the best effort to work it out – they compare other professions whose fees are more market based (lawyers, dentists, accountants etc) to doctors, taking into account their qualifications and training time, their risk, the stability of their work, their overheads, etc.

        However, the AMA is conflicted because they are doctors making recommendations to doctors (although it is my opinion that, despite this conflict, they do make a genuine effort to give impartial advice).

        The government is certainly conflicted – the more they value the services at, the more they have to pay out. That’s why last November they decided to just not index Medicare – give all bulk-billing doctors a 2.5% pay cut in real terms and increase the “gaps” for the patients of everyone else (like my patients).

        Where our opinions do differ is what would happen if Medicare fell through and it became a true market again. My opinion is that if Medicare disappeared, fees would go up (not down), because the fees would now be dissociated from this mythical “Schedule Fee” and the market price (which is higher) would prevail again (depending on regional supply-demand and other factors).

  5. “Ahead of the May budget, health minister Peter Dutton has said he wants to start “a national conversation about modernising and strengthening Medicare”.

    ie, “We talk and you listen.”

  6. Hopefully it is a conversation to improve the system and not just some code words for weakening Medicare and forcing more people to take private health insurance. Specially when we can see what a mess that creates in countries like the US.

    Why does everything has to be private and for profit in a modern economy?

    I mean to me the whole reason we have governments to begin with was because we recognised the need to have some central organisation that provides services to the citizens, specially the ones that provide a benefit to society as a whole even if they dont return a profit. That is why we pay taxes .

    Governments used to provide
    Public transportation,Roads,Highways

    It seems like except for the first one, everything else is always pushed to be privatised…. Cant we accept that some social benefits are just worth it no matter the cost ?

    I understand that there are cost blow outs in providing modern health care to an increasingly ageing population that is living longer than ever. But I am sure that the money can always be found if we are willing to accept it and have an adult conversation about it. Even if it means raising taxes to pay for it I am willing to accept it as the cost of living in a first world society rather than knowing someone is going to be denied care because of lack of coverage.

  7. If you receive most of your income from the state, as doctors do in the form of Medicare payments, then you are owned by the state and you give up the right to talk about market value. (This, by the way, is reason enough to save like a maniac and avoid ever dealing with Centrelink.) Since they are in that situation, maybe we should pay them a mid-level public service salary and be done with it. I mean, it’s mostly paid for by the government, so let’s do it properly.

    I don’t think there’s too much rationality in government decisions in what the pay for medical care. Really, anyone who suggested a serious reduction on the basis that it has a low return compared to vaccination and the fruits of engineering would find itself out of office. It’s an emotionally driven, irrational choice that is imposed on us all.

    • Tassie TomMEMBER

      Hawke & co. tried to do this (first paragraph) in 1984-85. The constitution doesn’t allow “civil conscription”.

      • Then the only logical alternative, which may one day be forced upon us by a deteriorating budget, is for doctors to realise that they are in business, just like every other professional and business operator in the land, and see what people will pay from their own pockets.

        Law and medicine are last two holdouts in this regard. Perhaps the time has come to strip them of their long-hold mystique and confront the reality that they are just another couple of occupations. Turning medical care into a fetish prevents people from thinking about them clearly, rather than with emotion and entitlement. Food is rather important to life, but we seem to eat plenty (and more) without the government and people making a fetish of the industry.

        I find it remarkable that people on MB have no trouble in realising that the ‘first home buyer’s grant’ is little more than a price support, yet cannot join the dots to realise that government involvement in health spending is a price support and an inducement to over-consume. It’s really rather simple.

        From memory of how it was described by a friend who lived there for a while, and someone might know more, most doctors in Israel are more or less on the salaried payroll of one of the insurers (insurance being a must have). Apparently the care is very good.

    • Doctors (particularly specialists) are some of Australia’s biggest rorters.
      They should be forced to face some real competition throughout all areas.
      What upsets me the most about their rorting is that it not only costs money, but it must also be costing lives.
      I’d like to see their closed-shop criminalised. When someone dies on a waiting list, charge a few doctors and their union with causing the death.

  8. To Tassie Tom’s observation that ” The AMA probably makes the best effort to work it [value of our service] out – they compare other professions whose fees are more market based (lawyers, dentists, accountants etc) to doctors, taking into account their qualifications and training time, their risk, the stability of their work, their overheads, etc.”

    Does the AMA also take into account that fact that all the professions listed earn significant economic rents due to the market power that they posses by virtue of the barriers to entry into the markets they service?

    Doctors charge what they can, not what they are worth (in a social, society-wide sense) and what they can charge reflects, in part, the monopoly power they enjoy. A public health insurance scheme offers some countervailing power and so reduces the wasteful economic rents by reducing what doctors charge.

    • GunnamattaMEMBER

      …..then there is the not inconsiderable issue that, as any industrial relations practitioner will tell you, the AMA and sundry offshoots, certainly represent Australia’s most powerful union.

  9. Moody et all
    How many decisions do you make in your professional career that have a direct and immediate impact on the continued existence of another humans life ??

    Doctors run businesses; employ staff, pay outrageous indemnity insurance and fund premises from their fees.

    Twice the knowledge and skill of a doctor has saved my life. We receive far more than they cost or we could ever pay.
    You will learn – eventually

    I am not a doctor

    • “Twice the knowledge and skill of a doctor has saved my life.”

      Pardon me, what a load a rot!

      You have eaten: do you have the same sentiments about farmers?
      You have drunk clean water and flushed a toilet, thus preventing you from contracting cholera or other diseases: do you have the same sentiment about engineers?
      You have not been overrun by rats: do you have the same sentiments about the people who collect your garbage?

      What doctors have done, as study after study after study has shown, is kill their clients in vast numbers. Even the official estimates are scary, but those with inside knowledge are quite open about the fact that doctors kill many of their clients (victims) and that hospitals are very dangerous places to be.

      The simple fact is that doctors have irrationally good press that is not supported by the facts.

      Then let’s consider the industry as a whole its development and promotion of drugs that are just plain harmful.

      The mutilation of intersex infants is an ongoing crime against humanity that is still practised in Australian hospitals. If you’re one of the half they get wrong, and of those one of the one who doesn’t commit suicide, then you have to jump through hoops, get labelled with an illness in the DSM, and pay for your own surgery to fix their fuckup.

      Dare I mention the eugenics movement and horrors it brought? They can repeat the Hippocratic Oath as often they want, but some stains cannot be erased.

      Then there are the everyday examples we see around us of friends, co-workers and loved ones injured by the malpractice of medicine. Not to worry, suing is a hassle and if you so much as mention your experience, you’ll be had for defamation.

      No, the entire medical industry needs a clean out and the doctors need to be on the receiving end of some major union busting and a general attitude re-adjustment. For too long they have sheltered beneath ill-deserved goodwill: this must change.

      As for government funding, if that is to continue, they should be brought to heel and treated like the welfare queens at Centrelink – controlled and paid whatever the state decides. If they want the six figure income, they can hang out their sandwich board and see how many people will pay their current fees, although I suspect they will be disappointed with the results. Even if they think they’re worth it well, many people have ideas about their worth, but their clients have other ideas.