Private health insurance enters the death spiral

By Leith van Onselen

Commentators often talk about the electricity “death spiral”, which arises when demand for power declines, due in part to customers taking up solar, leading to higher prices to cover fixed network costs. That is, the more people that take-up solar power, the faster decline in electricity demand, and the more fixed costs must be spread over a smaller volume of electricity, raising costs for everyone else.

A similar phenomenon seems to be in play with Australia’s private health insurance system, with actuary Jamie Reid claiming many Australians may soon find it cheaper to pay the Medicare Levy Surcharge than to have private health insurance. The surcharge is meant to penalise high-income earners who do not have health insurance, but Reid notes that the combination of higher insurance premiums and a reduction in the impact of the health insurance rebate is making paying the surcharge an increasingly attractive alternative. As a result, more people may opt out of health insurance, placing more pressure on the public health system. From The Australian:

Since the measure [the Medicare Levy Surcharge] was introduced by the Howard government, insurance has remained cheaper than the potential tax hit, but that equation is starting to change. Actuary Jamie Reid, the principal of Finity Consulting, yesterday said affordability had been undermined by rising premiums and the erosion of the ­rebate.

Premiums rose by a weighted average of 4.84 per cent in April, while changes made under Labor, and yet to be reversed by the Coalition, continue to reduce the savings impact of the rebate.

Mr Reid considered the minimum tax penalty of $900 and could find only two hospital cover policies in Victoria costing less than that, compared with six last year, and only six in NSW; previously there were 12.

He said a form of bracket creep was at play and “over time this pushes more people into the lower rebate, higher Medicare Levy Surcharge tiers”.
It is believed tens of thousands of Australians could be nearing the tipping point where it would be cheaper for them to pay the tax surcharge rather than the private health cover.

“While there are many good reasons to take out private health insurance, the pure tax benefit of insurance is becoming smaller, and will reduce each year due to changes to the rebate and premium increases,” Mr Reid said.

The inherent issue with all universal private healthcare systems (including Australia’s) is that they can only remain solvent if enough young and healthy people (the so-called “invincibles”) agree to sign-up. They are the ones who are likely to pay more into the system than they take out. And in the absence of risk-based pricing, the only incentive for the invincibles to sign up is to avoid penalty (i.e. the medicare levy and the lifetime health cover surcharges).

The risk is that healthy invincibles may perceive that it is cheaper to simply pay the penalties than hold private health insurance, which could see an exodus from the system. Thus, the private health system would be left with a larger proportional of unhealthier, older, expensive users of the system, forcing premiums up and leading to a further exodus of the invicibles, and so on.

Australia’s private health insurance system looks to be entering the death spiral.

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  1. migtronixMEMBER

    It’s not insurance if you’re already broken *cough* boomers, like everything else that giant arsehole Howard did, this was another gift to boomers. No wonder he managed to destroy Australia democracy, pandered to boomers extreme self interest…

    • Nasty cough you’ve got there mate. Hope you’re covered. I mean you’ll still end up going to a public hospital but they’ll give you a nicer room or something.

      • migtronixMEMBER

        Nano silver – yep covered, and I’ll never have to set foot in a death camp. Errr hospital.

  2. I wonder if the impact of the geriatric visas are being factored into it. Given that premiums are essentially not aged based, this will mean that younger people will be subsidising older non-PRs. I would expect premiums still to be shooting up faster than inflation (which is faster than wage growth) and hence not being a value for money proposition.

    As an aside, I have noticed that my extras (you need this for dental) is going up faster than hospital cover. How long before it is cheaper just to pay a dentist than pay for extras?

    • It is already cheaper – you have to really make use of all options in your policy to see value beyond not paying the levy.

  3. I had private for years and after being admitted to hospital twice in twelve months I realised my private cover was essentially useless. My son broke his leg soon after and I had another experience of how little private offers especially theses so called extras . So now I save $350pm and can afford to take better care of my condition. You pay all this money in case something goes wrong then it does and they give you $20 back out of a $100 Pysio bill.
    Waste of

    • If you look there is top cover which is good. Anything less is practically useless. Premiums in that bracket have barely changed for the last 5 years at least. The benefits are worth it for my circumstances as long as I can afford the premium.

    • Private cover extras are a really, really bad deal.

      Proper insurance is risk transfer for events that are too big to take the hit on. I.e. with an incident that takes out all your teeth, costing many thousands of dollars to fix.

      Extras cover dentistry up to $1,000ish annually? I.e. useless.

    • I have a boy with Low grade Cerebral palsy. Physio, chiro, accupunture, speech path, paed specialist – get almost nothing back, NOTHING.

  4. HadronCollision

    What Rod said

    And lifetime health loading has entirely the opposite effect.

    It has no material effect on my choice to have PHI. What affected that was my income.

    So I dropped PHI and now will not re-establish it due to LHCL. If they dropped that, I might.

    In any case, the PHI subsidy would be better spent in the public system

    • Jumping jack flash

      Completely correct. And the public system still burns. The greatest public health system in the world.

      But, the doctors wanted PHI in return for implementing Howard’s economic miracle of getting unemployment down from 11% to 5% and only a handful of jobs created.

      This part was actually very easy – redefine “unemployed” to exclude DSP recipients, loosen DSP requirements, then push all long term unemployed to the DSP for whatever reason that could be found, or made up, by the GP.

      Under Howard, DSP recipients jumped massively. He also pork barrelled it like mad so it was far more attractive to jump from dole to DSP, like $1000 a f/n more attractive.

      GPs were instrumental in doing this. My brother had the DSP forms handed to him by his GP. Signed. No questions asked. Didn’t even need to walk into Centrelink for them.

      Their reward for this was compulsory PHI.

      • migtronixMEMBER

        Worse PM ever, once the boomers are gone who will speak well of him, history? History will find him a war criminal and more besides…

  5. This is why I REFUSE to get private health care.
    Because this is the long term plan:
    1) Incentivise people with bullshit like massages.
    2) Punish people with levies
    3) Hit critical mass
    4) Cancel Medicare
    5) Premiums to the moon
    6) Extras disappear
    7) Electives disappear
    8) Barely covers you in an emergency
    9) Clauses and exceptions deny coverage
    10) Bankruptcies for medical bills
    We only have to look to the USA to realise this is the neoconservative wet dream for healthcare.

    3yrs ago

  6. Jumping jack flash

    + many.

    In my opinion this started some time ago after the first round of ridiculous price rises.
    It always starts slowly at first, they test the water with a large price rise, find out that everyone just pays it because they have to, and then they apply price rises faster and faster.

    Then, sometime after it becomes completely obvious what is happening, people begin catching on to the true price of privatisation (ie, government laziness/Thatcherism).

    The overseas based PHI companies who set up branches here in Australia do not want to run these at a loss.
    Neither do the domestic insurance companies want their PHI arms losing money.

    Add in the fact that our population is too small to offer any kind of real market, or support too much competition.
    Add in the fact that we often have large compliance barriers to allow smaller operators to set up PHI provision.

    Therefore, we get a few large multinationals/domestic providers to form an oligopoly, and as with any essential service or resource, prices can and will be adjusted to harvest profit.

  7. Hill Billy 55MEMBER

    We have been banking the difference between the cost of health insurance and our actual medical bills for years. Nothing like money in the bank! Cannot believe sane people maintain PHI!

  8. pyjamasbeforechristMEMBER

    Which country gets the best bang for thier healthcare bucks?

    And why aren’t we copying them?