JOHN MENADUE. A updated post: A Commonwealth Hospital Benefit similar to the existing Medical Benefit to replace the $11b private health insurance subsidy.

Sep 25, 2019

The wasteful and unfair $ 11b  per annum cost to taxpayers of the subsidy to Private Health Insurance should be abolished and the savings used in three possible ways – part funding a Medicare dental scheme, additional funding for public hospitals and/or part  funding private hospital care through a Hospital Benefit Scheme. This third option may be more politically possible given the power of private providers who have an effective veto on reform. In that Hospital Benefit Scheme, individuals could choose to access either a public or a private hospital in the same way that veterans do today.

We are now seeing again another futile attempt to tinker and prop up the private insurance funds. It will achieve little for members and will not address the fundamental flaws in PHI. Private health  insurance funds are a scam subsidised by taxpayers.

We face the same wasteful and confused situation  today which lead to the creation of Medicare. Referring to ‘voluntary health insurance’ Gough Whitlam in 1969 said.’

Voluntary health insurance was condemned in the Nimmo Report for having become complex to the point of incomprehensibility, charging contributions beyond the means of many members in the community, paying less in benefits than the cost of medical and hospital services, causing serious and widespread hardship through the application of ‘special accounts’ regulations, appropriating too much of its own contributors income for operating expenses and accumulating excessive reserves’

To cripple Medicare in 2019 the PHI lobby want to take us back to the dire situation that Gough Whitlam described almost 50 years ago. Will we ever learn? See my earlier article ‘The unfairness and wast of private health insurance and the threat to Medicare‘.

We have been told many times by the PHI lobby that our health system is unsustainable. I don’t accept that but I am sure that substantial cost savings are possible, whilst improving the quality of care. Amongst other things we need to better integrate public and private hospitals. The main obstacle to that reform is powerful vested interests.

A major barrier to health reform is the divided responsibility between the Commonwealth and state governments.An important way to reduce costs and improve the quality of care is to improve health care in the community and particularly in general practice to keep people out of emergency departments of public hospitals. But with divided responsibility there is no incentive for the Commonwealth Government to do that by improving non hospital care.

Given the historical commonwealth/state rivalries, the defence of territory and political differences between the states, I am certain that a major adjustment of powers and responsibilities in the health field, although desirable, is unlikely to happen. I am persuaded that what is called cooperative federalism offers the only realistic way forward.

The COAG Reform Council set up by Kevin Rudd, offered the possibility of greater cooperation. Some good work was done by the Reform Council but unfortunately the Council was abolished by Tony Abbott.

Several years ago, a secretariat based in the Department of Prime Minister and Cabinet issued discussion papers on federalism. A draft discussion paper had some options, two of which particularly interested me. Unfortunately, P M & C have removed the discussion paper from its website.

Option 2 suggested that ‘The commonwealth establish a HOSPITAL BENEFIT.  Under this option ‘the PHI rebate would be discontinued and funding directed to the new hospital benefit ‘. To support this option the discussion paper said:

“The Commonwealth would establish a hospital benefit for all hospital treatments and procedures, regardless of whether they are performed in a public or private setting or whether individuals elect to be treated as private or public patients. Similar to the operation of the MBS, funding would follow individuals. The Commonwealth would fund a proportion of the cost of each procedure, with the price determined by an independent body.

The States and Territories would be asked to cover the difference between the Commonwealth benefit and the cost of the service for public patients to ensure they continue to receive free treatment in a public hospital in line with the Medicare principles and international agreements. This would be the public hospital equivalent of bulk-billing in general practice. People choosing to be treated as private patients could take out private health insurance to cover the difference, or choose to pay the gap themselves.

The States and Territories would remain system managers of public hospitals and would be free to make decisions about the delivery of public hospital services and would have the flexibility to commission services from the private sector. They would continue to be responsible for the regulation and delivery of public hospital services. The Commonwealth would have no role in setting operational targets for public hospitals.

The Commonwealth hospital benefit would replace current Commonwealth funding for public hospitals through transfers to the States and Territories and for private in-hospital procedures through the MBS. The private health insurance rebate would be discontinued and funding redirected to the new hospital benefit. Funding for other services would remain the same. It is essential that we have a single funder for both the public and private health sectors as is the case for veterans. It works well. A Commonwealth hospital benefit would increase consumer choice for patients and competition for hospital services, where there are sufficient markets and alternative viable providers of hospital services. Increased competition should drive down costs and improve efficiency, and could lead to reduced waiting times for hospital services. As it would reward activity, rather than outcomes, the risk of over-servicing would need to be addressed in implementation.

This option does not address the fragmentation between primary and specialist care and hospital services, and does not provide an incentive for prevention and early intervention. Additional reforms to support connections between different elements of the health system may need to be considered.

This option could reduce incentives for cost shifting between the Commonwealth and the States and Territories by alining funding between public and private settings. The Commonwealth’s  funding of hospital services would remain the same, but would be more transparently and directly linked to the cost of procedures.(It would not be channeled through inefficient PHI but directly to the hospital of choice JM)

This option is likely to improve the durability of hospital funding. Alternate mechanisms(for example block funding) would be required to address thin or non-existent markets(for example in regional or remote areas).The impact on the private health insurance market would also need to be considered, including the impact on consumers through changes to premiums.

This option improves the accountability and fairness of funding of hospital services. It would be consistent with other Commonwealth benefit payments to individuals.”


I have been concerned for many years about the expensive and destructive nature of the $11 b. per annum commonwealth government subsidy to the private insurance industry. This $11 b. consists of $6.3 b. in direct rebate subsidies; $3 b. foregone by the commonwealth through tax exemption from the Medicare Levy Surcharge and a $1.7 b. cost through the PHI rebate being exempt from tax in the hands of individuals.

The key feature of option 2 is that ‘The PHI rebate would be discontinued and funding redirected to the new hospital benefit.’

This option makes good sense to me. It would in practice be following the system that we have established for veterans whereby they can use their veterans’ hospital benefit for treatment in either a public or private hospital.

A private hospital benefit scheme would also have the advantage of providing the opportunity for better coordination of care between public and private hospitals.

It would also make much more sense for the commonwealth government to directly pay a private hospital benefit rather than churning money through wasteful and high cost private health insurance. PHI as in the US is a stark reminder of the fate that awaits our health system if we allow government subsidised PHI to continue.

Getting the detail right would of course be very important. The main obstacle to this proposal for a commonwealth hospital benefit would be the power of the vested interests – PHI and the private hospital lobby that have very close links to the Liberal Party.

It must surely be only a matter of when and how this $11 b per annum feather bedding of PHI by the commonwealth government is brought to a decent end and where private and public hospitals can work cooperatively.

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