A mega industry subsidy to private health insurance companies. John Menadue

Nov 19, 2013


Many business economists continue to criticise the previous government and possibly the current one over the government subsidy of $10 billion over seven years for the auto industry. But that subsidy is small beer.

The government subsidy to the private health insurance industry (PHI) has been $30 billion plus, over seven years. This year the government will provide $7 billion for the private health insurance industry. $5.6 billion will be in a direct subsidy to the industry. There will be another $1.4 billion in income tax foregone by the Commonwealth Government.

That $30 billion is a mega-subsidy which the rent-seekers in the PHI industry defend against all comers. Unlike the auto industry PHI does not provide any product at all. PHI is made up of financial intermediaries that shuffle money from one place to another.

Australia is paying an enormous price for these high cost financial intermediaries whose major attraction is to help provide wealthier people an opportunity to jump the hospital queue.

PHI is inefficient with administrative costs about three times higher than Medicare. The subsidy has not taken pressure off public hospitals. Private gap insurance has facilitated enormous increases in specialist fees. Most importantly, the expansion of PHI progressively weakens the ability of Medicare to control costs. The evidence world-wide is clear that countries with significant PHI have high costs. The stand-out example is the US.  President Obama may have substantially achieved universal coverage, but private health insurance in the US with its lack of cost control will ultimately cripple and finally destroy his reforms. Warren Buffett has described private health insurance companies as the “tape worm” in the US health sector. Yet the Australian Government generously subsidises this industry in Australia.

The Commonwealth already has a sound model of a single payer operated through the Department of Veterans Affairs – a model which retains the strong control of a single payer accountable to the community whilst allowing private practise involvement in service delivery.

These enormous subsidies to PHI escape real examination. If the Australian Government wants to subsidise private hospitals it would be much more efficient to provide money directly to private hospitals as occurred in the past rather than churning the money through these high-cost financial intermediaries.

At least the auto industry does provide broad benefits to the general manufacturing sector and the community. That could not be said of the subsidy to PHI in the health field. Worse still this subsidy undermines Medicare in the same graphic way that Warren Buffett describes.

The subsidy to the private health insurance companies also has the same pernicious effects as government subsidies to wealthy private schools. Middle-class and articulate professional people opt out of the public school system and as a result we lose key supporters of a comprehensive public education system of high quality and available to all. The mega-subsidy to PHI not only distorts the health system but it is the wedge to divide the public from the private health systems.

But this mega subsidy to PHI is largely ignored. Our business economists reveal their true agenda by attacking the much smaller subsidies to the auto industry.

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