IAN McAULEY. Has Labor lost its nerve on private health insurance?

Feb 6, 2018

In his Press Club address last week Bill Shorten made some unflattering remarks about private health insurance. But every indication is that an incoming Labor government will maintain, or perhaps even strengthen, support for private health insurance. An opportunity to reform health care by phasing out private health insurance and by redirecting its $10 billion annual subsidy will be wasted.

“I’m fed up with the Private Health Insurance industry treating Australians like mugs, gouging people on the basis of a con.”

That’s an extract from Bill Shorten’s Press Club speech last Tuesday.

There was a time when such a statement from a Labor opposition, enjoying a sustained lead in opinion polls within a year of an election, would have raised fear among health insurers, but the insurers’ response was tame. Mark Fitzgibbon, CEO of NIB, said he would welcome “a bipartisan approach”, and suggested that PHI perhaps could be permitted to expand its tentacles into out-of-hospital care.

The day after Shorten’s speech, while the share market overall was flat (rising only 0.18 per cent), shares in NIB and Medibank Private both rose by more than one per cent. They weren’t worried. Two days later, however, Australian health insurance shares fell sharply (Medibank Private by 3.3 per cent), against the market trend. This coincided with Amazon, JP Morgan and Berkshire Hathaway (Warren Buffett) announcing their plans to set up a new not-for-profit health care company. They described the costs of health care as “a hungry tapeworm on the American economy”. Financial markets are globally linked, and health care’s function as a cash cow was being questioned. It appears that the leaders of American capitalism can instil more fear into Australian health insurers than the Australian Labor Party.

Admittedly the USA has a worse problem than Australia. Its health care costs are now 17 per cent of GDP, compared with Australia’s 9 per cent. The driver of America’s ballooning cost has been private insurance, which has operated in a permissive policy environment for 75 years. We were on a similar path until the Whitlam Government introduced universal taxpayer-funded health insurance in 1974, and while successive governments have tried to weaken it, Medicare has been able to keep the greed of PHI at bay. Private insurance, however, is still one of the forces pushing up our health care costs.

As John Menadue and I have clearly demonstrated, the more a country depends on PHI to fund health care, the more it spends on health care, without any improvement in health outcomes. (In fact America’s health outcomes are quite poor for a “developed” country.) PHI buys more expensive health care, but not better health care.

As if to assuage fears among the health insurers, the day after his Press Club speech Shorten assured radio listeners that when elected Labor would keep the rebate for PHI. That is the 25.9 per cent budgetary subsidy for PHI (with higher rates for some policies).

Considering the struggles Labor endured to introduce universal health care in 1974 (it risked a double dissolution election to pass enabling legislation), and the later work by the Hawke Government to re-establish it after the Fraser Government essentially demolished it, it’s hard at first sight to understand Labor’s present weak stance. Shorten’s attack was strong, but it was more about an industry that wasn’t performing well, rather than an industry that cannot perform well. Why didn’t Shorten use a term such as “a hungry tapeworm” – a term that recognises PHI as essentially parasitic rather than a value-adding industry?

There are two possible explanations for Shorten’s caution.

One is the supposed immutable link between PHI and private hospitals. Whenever there is a suggestion that we should do without PHI, defenders of PHI frame it as an attack on the “private system”, with images of closed private hospitals, longer queues for elective procedures, and a 1960s model of “socialised medicine” with people sitting on wooden benches in cold white-tiled waiting rooms to see “comrade doctor”.

But there is no policy reason why private hospitals should link their fortunes to those of private insurers. Private hospitals should be financed in the same way as public hospitals, on a diagnostic-related-group basis. In other words they should be brought into the Medicare system. One result would be a more equitable and therapeutically effective allocation of resources, as private hospitals would no longer be involved in depriving the “public system” of access to specialists, and lengthening waiting times for public patients seeking elective surgery.

Labor should be outlining policies to break the link between private health care and PHI. It should also be incorporating into Medicare some of the features that presently attract people to private hospitals (and therefore to PHI). There are good therapeutic reasons for providing all patients with private rooms, and in cases where continuity of care is important (maternity in particular), choice of doctor could be incorporated into Medicare. People should never feel they have to have PHI.

The other explanation for Shorten’s caution is public opinion . An Essential poll published last week shows that although a clear majority of people believe “health insurance isn’t worth the money you pay for it”, 83 per cent of people believe that “the government should do more to keep private health insurance affordable”.

Such polling always reveals the absurdity of everyone believing they should be helped to get to the front of the queue, but it also reflects a fear in the community that there is something inadequate in our public hospitals.

When the Howard Government re-introduced subsidies for PHI its “Run for Cover” campaign gave the impression that without PHI one was left without any health cover. Similarly the operation of the Medicare Levy Surcharge (MLS), giving strong financial incentives for people with high incomes to hold PHI, conveys the impression that the public hospital system, rather than being a shared public good, is a residual or charity system for the poor or “indigent”.

An incoming Labor government should be no less assertive in defending Medicare and our public hospital system than Coalition governments have been in devaluing them. A more concrete measure should be to remove high income exemptions from the MLS, thus making the surcharge an established part of our progressive income tax system. According to my conservative calculations that would add another $2.5 billion a year to public revenue. (I have seen higher estimates of $4.0 billion.)

Because the MLS takes the form of a tax concession – i.e. forgone revenue – rather than a budgetary outlay, it is one of the worst forms of industry subsidy, because it is hidden from public scrutiny. Government and media attention to fiscal measures of revenue and expenditure  – the “deficit” obsession – has distracted us from seeing off-budget distortions such as the MLS. In his Press Club speech Shorten dramatically understated the level of subsidies to PHI. He mentioned the $6.4 billion annual direct budgetary outlay, but he didn’t mention the additional $1.5 billion income-tax relief identified in the government’s tax expenditure statement, or the $2.5 billion cost of the MLS exemption. That all comes to more than $10 billion. Possibly Shorten has some reason to understate the level of subsidy, or possibly the researchers in the Labor Party are not familiar with budget documents and methods of measuring subsidies.

In the 2016 election Labor, to its discredit, promised to freeze the income threshold for the MLS until 2026, by which stage anyone with an income above about $66 000 (in today’s terms) would be classified as a “high income earner” and virtually forced to hold private health insurance. In a reversal of history, and a surrender to economic populism, Labor was promising to be more generous to private insurers than the Coalition.

Shorten didn’t mention the MLS income exemption, but that’s a subsidy an incoming Labor government should immediately remove. It could keep the 25.9 per cent budgetary subsidy, because it is linked by a formula to the insurers’ prices: to the extent that their prices exceed inflation, the subsidy falls. Just as the Hawke-Keating Government allowed tariff protection for high-cost manufacturing industries to phase out, so could the diminishing subsidy be used as a phasing-out mechanism, allowing the insurers to make an orderly departure, or to turn their businesses into doing something more useful than taking a commission from our health expenditure.

But in a further indication of a yield to populism, on Sunday Shorten promised to cap PHI premiums for two years. He promised a Productivity Commission review, but we have been let down by an incoming Labor government once before: before the 2007 election Rudd promised a major review of health care, but when implemented it specifically excluded PHI from scrutiny.

Shorten’s promise of a two-year freeze would inevitably require additional costly budget or regulatory support for PHI, and would forgo the opportunity for this high-cost and parasitic industry to remove itself from the landscape through a death spiral of rising premiums and falling membership.


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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