Private health insurers need to stop seeking handouts

Stephen Duckett – the director of the health program at Grattan Institute – has lashed calls from the private health insurance industry for the government to lift funding by another $1.2 billion:

Last week’s call by Private Healthcare Australia, the private health insurance industry lobby group, for another $1.2bn handout shows the message has not been heard.

Private healthcare is currently subsidised to the tune of $9bn each year – $6bn through a government rebate that reduces the cost of private health insurance premiums, and a further $3bn for rebates against the cost of medical bills for private inpatients. The latest ask from the industry is on top of that.

The problems the industry faces are real. Young people don’t think the premiums they are being asked to pay – even after the rebate – are worth it. And they are right. The current premium for a 25-year-old is almost double what an actuarially fair premium would be.

The latest proposal put forward by the private health insurance industry involves an increased rebate subsidy for young people, as well as a tax break to encourage employers to offer private health insurance to younger employees. The design of the proposed handout – a reduction in fringe benefits tax payments – is an attempt to reduce the apparent cost to government, pretending that a reduction in future government revenue is somehow not a real cost.

The proposal is bad policy for three reasons.

Firstly, it encourages industry dependence on government to fix its problems, contrary to good industry practice and the advice from the regulator that the industry should stand on its own two feet.

Secondly, at a cost of $1.2bn, the bid is not affordable at a time when the government is committed to a return to budget surpluses.

Thirdly, by linking private health insurance to employment, the proposal would reduce labour market flexibility, as people who had signed up for private health insurance under their employer’s scheme might feel trapped and not able to move to other job opportunities. This is what happens in the US, where private health insurance is generally an employee benefit.
The solution to the Australian industry’s woes is not more taxpayer largesse, but a concerted effort to tackle underlying industry dynamics…

Private hospitals accounted for about two thirds of the after-inflation increases in health insurance benefit payouts over the past decade (see figure). Improving private hospital efficiency has to be on the agenda. Yet in a media release last week, the private hospitals’ lobby group showed it is still in denial mode, rejecting claims that private hospital costs are going up rapidly…

The industry is fiddling while its platform is burning. Every part of the sector is spouting the lie that it has no responsibility for confronting the industry’s woes.

These problems will continue to get worse unless there is policy action. Surely it is time for the industry to grow up and tackle its problems itself.

With private health insurance premiums rising inexorably and young people exit:

And the list of policy exclusions rising:

Australia’s private health insurance industry is clearly on an unsustainable footing and is facing eventual collapse.

For mine, a broader public debate over whether the private health insurance rebate should be scrapped altogether is needed.

After all, there is no conclusive evidence that private health insurance delivers 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:

ScreenHunter_1766 Mar. 20 14.45

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.

Diverting the $9 billion of private health subsidies into the public system may well prove a better use of scarce taxpayer funds.

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