Ian McAuley Private health insurance – does the lady protest too much?

Sussan Ley, the Commonwealth Health Minister, has hit out at private health insurers’ bid for a six per cent price increase.

In view of the strong support the Coalition has always given private health insurers, such public criticism from a Liberal Party minister may surprise us. As one-time Prime Minister Tony Abbott said “private health insurance is in our DNA”.

It would be reassuring to believe that the Sussan Ley has come to recognise private health insurance (PHI) for what it is – a high-cost financial intermediary that does nothing to take pressure off public hospitals and that has been largely responsible for diverting scarce health care resources away from areas of need.

As John Menadue, Jennifer Doggett and I have pointed out in conference papers, submissions to enquiries and a major study published by the Centre for Policy Development, PHI is an expensive, inequitable and inefficient way to share health costs. It does at high cost what Medicare and the Australian Tax Office (collecting taxes to fund Medicare) can do far better.

Its bureaucratic overheads are high: only 86 cents in the dollar of insurers’ premiums are returned as benefits, compared with 95 cents for Medicare.

It fails in its main avowed purpose to relieve pressure off public hospitals, because in channelling funds to private hospitals it has attracted resources – nurses and specialists – away from public hospitals. All it has done is to shuffle queues for access to limited resources, bringing insured patients to the front of the queue and pushing everyone else back.

It fails to keep providers’ costs and patients’ usage under control. That’s because of what economists know as “moral hazard” – the tendency for people to over-use a service when it is free at the point of delivery. A single funder such as Medicare can control moral hazard through use of well-structured co-payments to impose some pricing discipline and through hospital staff allocating services on the basis of need. By contrast, when there are multiple insurers they necessarily have to be permissive in meeting the demands of service providers, particularly highly-paid medical specialists.

That’s why PHI premiums have been rising at an average of 5.5 per cent a year since 2000, while general inflation has averaged only 2.9 per cent. Insurers claim that they are simply passing on costs incurred in hospitals, without acknowledging their own role in driving price inflation and over-usage in health care.

Insurers may claim that in marshalling private funds for health care they have kept demands on the Commonwealth budget and therefore taxes in check, but even if this is the case, there is no virtue by any economic criterion, “right” or “left”, in substituting what is essentially a privatised tax (PHI) for an official tax. It’s a weird ideology that would find benefit in saving taxpayers $1.00 in official tax at the cost of their having to pay $1.10 or even $1.50 for the same or inferior service, because for most people the incentives for holding PHI come near to compulsion.

Young people are cajoled into PHI through the penalties in “lifetime community rating”, and people with moderate and higher incomes are cajoled into PHI through exemption from the Medicare Levy Surcharge. While official taxes can incorporate progressivity, PHI, in its regulations designed to achieve “community rating”, builds in many injustices. For example, those who rely on PHI for private hospitalisation or dentistry are subsidised by the taxpayer up to 40 per cent, while those who pay from their own resources get no support.

We don’t know the reasons for Susan Ley’s criticism of health insurers. Maybe it’s just clever politics, to distance herself and the government from another round of premium increases. Maybe it’s about her own constrained budget: because of the direct subsidies to PHI every one per cent premium rise means there is $60 million less for other health priorities. (In fact the total fiscal cost of supporting PHI, often reported at $6 billion a year, is more like $11 billion a year once tax expenditures (revenue forgone) are taken into account.)

Or perhaps she realises that there are better ways to support private hospitals than channelling funds through PHI, and that scarce funds for health care are best directed at primary care and prevention, rather than subsidising the lifestyles of medical specialists and the well-off to jump the queue.

(On my website are several papers on PHI. Those wishing to go further into the issues, or to find sources for the points covered in this article, will find a major study John Menadue and I conducted for the Centre for Policy Development in 2012. Late last year Jennifer Doggett and I made a submission, incorporating updated costing and other data, to a Departmental inquiry into health insurance.)

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