Private health insurance facing “death spiral” as young’uns exit

The Grattan Institute has released a new working paper, entitled The history and purposes of private health insurance, which forecasts an ‘exodus’ of young and healthy people from the private health system leaving private health insurers struggling to cope with older, sicker patients. This leaves the industry in need of desperate reform:

Australia’s private health insurance industry fears it is in a death spiral, and politicians need to rethink whether or to what extent taxpayers should continue to subsidise the industry.

Australians are increasingly dissatisfied with private health insurance, and policy reform is urgent.

Premiums are rising much faster than wages or inflation.

People are dropping their cover, especially the young and the healthy. Those who are left are more likely to get sick and go to hospital, driving insurance costs up further.

Meanwhile, taxpayers subside the industry to the tune of about $9 billion every year: $6 billion for the private health insurance rebate, and $3 billion on private medical services for inpatients.

It’s inevitable that government will have to make tough decisions about whether more subsidies are the answer to the impending crisis.

Governments have failed to clearly define the role of private health insurance since Medicare was introduced in the 1980s. The upshot is we have a muddled health care system that is riddled with inconsistencies and perverse incentives.

Australia needs to confront a fundamental question: what is the purpose of private hospital care?

If its purpose is to complement Medicare, offering people choice of specialists and a wider range of services, then the argument for taxpayer subsidies is weak. But if its purpose is to substitute for public hospital care, then the argument for subsidies is stronger.

Policy makers must grapple with two further questions:

  • Do the current design features of the private health insurance system, including incentives, penalties and regulation, support its desired role (as a complement or substitute or both) in the overall health system? And if not, what other mechanisms or combination of arrangements are needed?
  • Does government support for private health insurance and private hospital care promote overall economic efficiency and the most effective and equitable use of government and community resources? And in the long run, are there better ways of providing support to the sector?

The question then becomes whether government should support private health care directly, or via public health insurance – or not at all.

Future Grattan Institute work will tackle these questions and propose solutions to Australia’s private health insurance woes.

That’s right. The overarching question of whether the private health system is worth supporting needs to be thoroughly examined.

Every year, the Australian Competition and Consumer Commission (ACCC) releases its report to the Australian Senate on competition and consumer issues in the private health insurance industry. And every year, the ACCC finds that Australia’s private health insurance industry is characterised by market failures due to asymmetric and imperfect information, as well as significant complexity.

Premiums continue to rise every year, which comes at a direct cost to the federal budget of some $9 billion. Whereas the list of policy exclusions has also surged:

Accordingly, consumers are viewing private health insurance as poor value for money.

Still, successive governments – both Coalition and Labor – fail to articulate why Australians need a duplicate health care system, or why the federal government subsidies to private health insurance should be so substantial.

There is no evidence that private health insurance buys patients extra quality and safety. The Productivity Commission (PC) found that the larger, most comparable public and private hospitals had similar adjusted premature death ratios. Further, the PC found that the team-based care in large public hospitals also leads itself to better coordination of care.

International evidence also does not support the contention that private health insurance keeps medical costs down:

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In fact, in Australia’s case, private health insurance might even raise overall health costs. This is because the high financial overhead of private insurance means that only 84 cents in every dollar collected by private insurers is returned as benefits, with 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.

A single national insurer, like Medicare, also has the monopsony buying power to control prices demanded by powerful service providers.

So, where is the evidence to show that spending taxpayer money to subsidise private health insurance is superior to expanding funding to the public system?

Australia needs a national debate about the efficacy of the private health insurance system and whether we should shift towards a single national insurer.

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Leith van Onselen
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