Health Insurance – here we go again!

Last week Health Minister Plibersek approved an average increase of 5.6% in private health insurance premiums from April this year. It is the same story year after year with health insurance premiums increasing at 2% to 3% ahead of the rate of inflation.

There are two main reasons for these increases.

The first and least important reason is that the administrative costs of private health insurance companies run at about 15% to 16% of premiums. Medicare, including the cost of tax collection, costs about 6% per year. Broadly speaking private health insurance administrative costs, including profit margin, run at about three times the administration costs of Medicare.

The second and most important reason for the steady increases in premiums is that private health insurance funds are largely unable to control the price, quality and utilisation of services provided by doctors and hospitals. This is a problem for all insurers, both private and public, when services are provided free at the point of delivery. There is little incentive or opportunity for consumers to exercise power either over  the cost of the service or whether the service is  necessary. The power is with the provider, not the consumer. Economists call this ‘moral hazard’.

But when a country has a single payer or a single national insurer, as in the UK or Scandinavian countries, the national insurers can and do exercise market power. That is why health services in those countries is invariably delivered efficiently and at low cost. . Private health insurance has practically no power to control prices and demand for health services. What is worse, private health insurance in Australia undermines the ability of Medicare to exercise market power.

Evidence on the failure of private health insurance is clear. First, the standard example of private health insurance failure is the high cost and inequity of the US health service. That service provides the worst value for money of any health ‘system’ in the world. Secondly, The Economist, in an article on February 18, 2010, said ‘The biggest factor behind the cost conundrum is that insurers lack market power. Health care providers hold all the cards.’  Thirdly, our Productivity Commission said in 2005 ‘increased levels of private health insurance membership have been associated with a marked increase in the number of services performed and reimbursement for those services”.  Fourthly, in a review in 2003 of private health insurance in Australia, the OECD commented ‘Private (insurance) funds have not effectively engaged in cost controls. They seem to have limited tools and few incentives to promote cost efficient care … Private health insurance appears to have led to an overall increase in health utilisation in Australia …’

Increases in private health insurance premiums ahead of the inflation rate are not surprising. Private health insurance is badly serving Australians and undermines the power of Medicare as a single payer.

This is not to say that Medicare should not be improved. It is a very efficient payments vehicle. But it is much too passive. It was launched and still carries in its name, the ‘Health Insurance Commission’. If it were a proactive public health insurer, it could significantly reduce the malign influence of private health insurance in Australia.

John Menadue

See also article by John Menadue and Ian McAuley ‘Private Health Insurance: high in cost and low in equity’ at johnmenadue.com.