IAN McAULEY. A Royal Commission into banking and the private health insurance industry.

Jun 16, 2016

In this election campaign the issue that triggered a double dissolution – restoration of the Australian Building and Construction Commission – has hardly scored a mention.

That contrasts with the 1974 double dissolution election, called by the Whitlam Government in response to the Coalition’s use of its Senate power to thwart the government’s most important pieces of legislation.

The establishment of Medibank – the forerunner of Medicare – was the main issue in that election. Labor’s vision was for a publicly-funded single health insurer, while the Coalition fought tooth and nail to defend the privileged position of private health insurance (PHI).

The struggle continued in subsequent elections. Between 1975 and 1983 the Fraser Government gutted Medibank, but the Hawke Government resurrected it as Medicare, and over the years of the Hawke-Keating Government, as Medicare grew in popularity, membership of PHI steadily fell to around 30 percent of the population. Then in 1986 the newly-elected Howard Government introduced a set of generous subsidies for PHI, resulting in its coverage rising back to a little over 50 per cent of the population.

Since then there has been the occasional skirmish over PHI, most notably the Gillard Government’s struggle to subject the PHI rebate, then at 30 per cent, to a means test. But like two war-weary armies the two main parties seem to have called a truce. The Coalition has grudgingly accepted the political popularity of Medicare (while chipping away at the edges) , while the Labor Party seems to have accepted PHI as part of the health funding landscape.

In a political environment where fiscal policy (the containment of public expenditure to meet deficit targets) has displaced economic policy, the main concern of both parties in recent times seems to be to control outlays on PHI premium rebates, which have been one of the fastest growing areas of Commonwealth expenditure, now costing  $8.1 billion a year – $6.5 billion in direct subsidies, and $1.6 billion in terms of forgone revenue because the rebate is tax free.

Besides eventually succeeding in means-testing the rebate, the Gillard Government introduced legislation to reduce the rebate to compensate for the rise in PHI premiums. The rebate now stands at 26.8 per cent (for those under 65), and unless insurers can contain their price increases, it will go on falling – I estimate that based on established trends the rebate will fall to about 20 per cent by 2026.

While, at the time, the Coalition protested loudly about the Gillard Government’s modest budgetary reforms, in office it has not reversed them. Although Tony Abbott said “private insurance is in our DNA” and promised to abolish the means test, pragmatically the Coalition has put fiscal restraint first, and if Minister Sussan Ley could find any spare funds it appears that her priority would be to unfreeze Medicare payments to doctors – an issue where the Coalition is vulnerable in the current election campaign.

It’s fairly clear that Minister Ley is annoyed by the private insurers for taking up so much of her budget. In fact, for a time, it looked like the Government was entertaining the idea of bypassing private insurers and funding private hospitals directly, similar to the way the Commonwealth funds public hospitals (as a percentage of the “efficient price” for diagnostic related groups) – as I outlined on this blog earlier this year.

Politically that would have been a brave move for the Coalition, but it would have been an economically responsible one, because it would have avoided the administrative overheads and profits of PHI ($2.6 billion in 2014-15) and, more importantly, it would have given the Commonwealth more control over expenditure for hospital care. In the interactions between hospitals, private insurers, patients and medical specialists, all the incentives make for higher prices and higher utilisation.

John Menadue, Jennifer Doggett, I and many health economists have written about this failure of PHI. To the extent that we want to share our health costs with one another, the most economically efficient and equitable means is through a single national insurer such as Medicare.

Yet the Coalition cannot get PHI out of its DNA, and its latest move, in response to consumer frustration with PHI, has been to propose clearer disclosure of PHI product offerings, simplification of billing, and policies more tailored to people in rural areas (where there are few private hospitals). She has hinted at “gold, silver and bronze” categories for PHI – gold giving complete “no gaps” coverage, with lower classifications for policies with higher co-payments and restrictions.

In itself such clarification has virtue – it’s in line with best practice consumer regulation. But it avoids the key policy issue – that this is an industry that contributes little, if any, public value. PHI is a product that consumers shouldn’t need at all. A combination of a single national insurer, covering high expenses and the needs of those who cannot afford care, and a well-structured set of price signals and co-payments to bring some market discipline, would do a far better job.

It seems that fiscal pressure has brought Labor and the Coalition to much the same position on the rebate. But there is a much larger and growing subsidy to PHI, which, like the manufacturing tariff protection of times past, goes unnoticed because it does not pass through the budget. That is the Medicare Levy Surcharge, which now kicks in at an income of $90 000 ($180 000 for a family), just 11 per cent above average adult earnings The higher one’s income, the stronger is the incentive to hold PHI.

The levy is presented as a penalty for not having PHI, but it would be more economically responsible to frame is as a subsidy for holding PHI. Then we would realise, for example, that someone with an income of $500 000 is actually paid $7500 to hold PHI – way higher than the most expensive PHI product on the market, with thousands of dollars of change left over. (Not in the days of high tariff protection were the well-off actually given a free Holden with change left over.) I have conservatively calculated that exempting holders of PHI from the surcharge costs at least $2.5 billion a year in terms of revenue forgone.

Yet the surcharge, being off-budget and out of mind, remains in place. Labor in its pre-election promises has proposed freezing the threshold for PHI rebates for ten years – a move it has estimated would make the modest saving of $2.3 billion over that period. But the PHI rebate threshold is also the Medicare Levy Surcharge threshold. If, over the next ten years nominal wages rise by three per cent a year, under Labor’s proposal by 2026 the surcharge would be kicking in at the equivalent of $67 000 in today’s terms.

Labor is proposing a royal commission into the banking sector. It would be a simple matter to include the PHI industry under the same umbrella. It’s a high-cost financial intermediary, with much less (if any) value-added than the banks. That would pave the way for keeping the Medicare Levy Surcharge, but removing its exemption for those who hold PHI – contributing to public revenue, and making for a more efficient and equitable way to fund health care.


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