IAN McAULEY. Labor’s love affair with private health insurers

There was a recent flurry of media excitement about a supposed “secret hospital funding plan”, which turned out to be no more than an option under consideration by a think-tank. But the real (and overlooked) issue in health funding is a high and growing hidden subsidy to private health insurance, where, contrary to traditional political alignments, Labor is proving to be more generous to private insurers than the Coalition.   

Earlier this week, while half the media were jostling to photograph Schapelle Corby, the other half seized upon a study by the consulting firm Global Access Partners, canvassing the idea of budgetary support for private health insurance (PHI) being replaced by direct support for private hospitals. Such a change, towards a universal hospital benefit, would put private and public hospitals on the same funding footing.

Because the study was supported by a modest grant from the Commonwealth, it became a “secret hospital funding plan” – a status the government was quick to deny.

The government’s denial is plausible. Governments don’t develop new policy proposals straight after bringing down a budget, particularly when they have put so much energy into neutralising health funding as a political issue.

Also, the idea isn’t new. As John Menadue explains, it emerged from Tony Abbott’s proposal for a White Paper on Federation. In late 2015, when the Commonwealth Health Department was holding consultations on hospital funding, Jennifer Doggett and I gained the strong impression that, at an official level at least, the Commonwealth was quite keen on the idea of a universal hospital benefit, bypassing private health insurance.

The idea is explained more fully in our submission to those consultations, and like John Menadue, we saw a great deal of merit in making support for private hospitals more direct, rather than passing it through the expensive bureaucracy of PHI.

PHI is a high-cost and inequitable way to fund health care. Only 85 cents in the dollar passing through PHI makes its way to paying for health care, compared with 95 cents when health care is funded through taxation and Medicare. Also, as demonstrated by Australian and overseas experience, private insurers lack the capacity to counter the market power of service providers’ charges and their tendency for over-servicing. (Think of America’s problems in controlling health care costs in a market dominated by PHI.)

But the government has been quick to hose down any notion that it will withdraw support for private health insurance.

The widely-accepted political story around health funding is that Labor is Medicare’s champion, while the Coalition is firmly wedded to private insurance. Remember that Tony Abbott said support for PHI, “is an article of faith for the Coalition. Private health insurance is in our DNA”.

The Whitlam Government went through a huge struggle, including a double dissolution election, to establish Medibank (the forerunner of Medicare). And in last year’s election Medicare was one of the defining points of difference between Labor and the Coalition.

But the reality is that over six years in office between 2007 and 2013 Labor went out of its way to support PHI, and its current policies are actually more supportive of PHI than the Coalition’s.

Until 2012, there had been a medical expenses tax offset of 20 per cent for health care costs above a threshold (around $2000 and indexed annually).This provided some relief for people who were funding private hospitalisation from their own savings rather than using PHI. In other words it went some way towards equal treatment for people who used private hospitals with and without the support of PHI. But in a move that received little publicity the Gillard Government announced that this provision was to be means-tested and phased out by 2019. (The subsequent Coalition government, while adhering to the phase-out and means-test, has restricted its eligibility to certain aged care and disability expenses.)

Admittedly the Labor Government did introduce means-testing for the private health insurance rebate, but (notwithstanding vague promises by Tony Abbott), the present Coalition Government has shown no enthusiasm to abolish means-testing. Also in its last year in office Labor introduced a “rebate adjustment” mechanism, whereby the rebate, which had been set at a base rate of 30.0 per cent, would be reduced as PHI premiums rose faster than inflation. The base rate now stands at 25.9 per cent, and the Coalition, mindful of its budgetary constraints, shows no inclination to stop this steady erosion of budgetary support. On these measures at least Labor and the Coalition seem to be on a unity ticket.

But it’s on the Medicare Levy Surcharge provisions where Labor is showing more generosity than the Coalition.

Early in its term of office the Howard Government had introduced the Medicare Levy Surcharge, at the rate of one per cent of income for high income earners who declined to hold PHI. In its 2009-10 budget the Rudd Government added new steps to the surcharge: 1.00 per cent as a base rate, 1.25 per cent as an intermediate rate, and 1.50 per cent for the highest income earners. This was a major increase in the incentive for the well-off to hold PHI, thus reinforcing a “two tier” system of hospital care..

The threshold for application of the Medicare Levy Surcharge has been frozen at $90 000 since 2014-15, when average incomes (average full-time adult total earnings) were $80 000.

In last year’s election, and reaffirmed in budget documents, the Coalition has extended the freeze on the threshold at $90 000 until 2020-21, by which stage average incomes will be around $93 000 (using projections published in budget papers). That means the surcharge, ostensibly applying to “high income earners”, will cut in just below average incomes.

Not to be outdone in largesse for PHI, in last year’s election campaign Labor promised to maintain the $90 000 freeze until 2025-26, by which stage, using the same projections, average incomes will be around $108 000. It would cut in at 17 per cent below average income.

Because the Coalition has framed the Medicare Surcharge Levy as a penalty for not having PHI, rather than as a subsidy to those who hold PHI, its cost does not appear in budget statements or in any other official statement. It’s a hidden subsidy.

By my conservative calculations, exempting those with PHI from the Medicare Levy Surcharge is costing at least $2.7 billion a year in revenue forgone. (ACOSS estimates the revenue forgone at $4.0 billion a year). In other words, if the levy simply applied to every “high income earner”, regardless of whether they hold PHI, there would be an annual budgetary saving of between $3 billion and $4 billion.

The Hawke-Keating Labor Government oversaw two fundamental economic reforms. One was to abolish support for high-cost and inefficient industries, including PHI, and to restore universal public health insurance in the form of Medicare. The other was to make hitherto hidden industry subsidies, such as tax exemptions, more visible and accountable.

The Labor Party of this century, in government and opposition, has gone back on both those reforms. And while making much of its displeasure with banks, Labor is unrestrained in its support for another much-disliked and consumer-unfriendly part of the finance sector – private health insurance.

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development.  

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One Response to IAN McAULEY. Labor’s love affair with private health insurers

  1. Kathy Heyne says:

    ” … it emerged from Tony Abbott’s proposal for a White Paper on Federation.” This explains so much, like Sir Prince Phillip. Note to Tony Abbott: you’re too late. Federation happened.

    Silliness aside, this article was an enlightening and worrying read. Thanks for the heads up, Ian McAuley.

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