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 recently claiming many Australians would 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 noted 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.
In an attempt to avert the ‘death spiral’, young Australians are now being targeted with premium discounts in a bid to arrest falling memberships and ensure the overall financial viability of the system. From The ABC:
The ABC can reveal the Federal Government plans a raft of transparency and affordability measures to help take the pressure off health insurance premiums, which have increased by an average 5.6 per cent a year since 2010.
Central to the strategy will be encouraging more young people to take up private health insurance, with discounts of up to 10 per cent for the under-30s…
To entice young people to take out health insurance, funds will offer discounts of 2 per cent a year for a maximum of five years for people aged between 19 and 29.
For example, a 19-year-old who takes out health insurance would be offered a 2 per cent discount on his or her premium, building to a 10 per cent discount by the time they are 24.
That discounted rate would remain until they are 40, after which it would be phased out.
Attracting more young people into private health insurance is critical to keeping the sector sustainable in an ageing population…
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.
The above reforms could, therefore, help to arrest the death spiral.