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.