Taxpayers spend about $13 billion a year supporting private health insurance, yet there is little evidence it relieves pressure on public hospitals or delivers fair value.

It favours the wealthy, is inefficient and has not taken the pressure off public hospitals. It takes us down the disastrous road of US health. It’s a con.

In the recent budget, Private Health Insurance (PHI) benefits for some older Australians were scheduled to be marginally reduced. It will remove the age-based bonus which is desirable considering the benefits enjoyed by most senior Australians. But Private Healthcare Australia (PHA), complained as usual and produced some dubious modelling.

Professor Yuting Zhang and colleagues commented in The Conversation, “this reform won’t cause a mass exodus from PHI and definitely won’t overwhelm public hospitals as some states predict”.

A recent study by health economists at the University of Melbourne found that the government changes will have little impact on PHI participation. They commented that PHI uptake is driven by health needs and habits, with many maintaining insurance because they have always had it.

They also added that there is little evidence that subsidising PHI materially relieves pressure on public hospitals, since both draw on the same clinical workforce, not every private procedure would otherwise occur in a public hospital, and PHI generally does not cover emergency department attendance.

It is time to carefully bring this taxpayer subsidy to an end. This minor scale-back of the PHI subsidy should be followed by a steady phasing out entirely of the subsidy. The billions spent annually could be better spent on mental health, the funding of specialist services in public hospitals to counter very high fees by some private specialists, and the inclusion of dental in Medicare.

If Australians want PHI, they should pay for it and not expect taxpayers to subsidise them. There is a universal system available to all. It’s called Medicare.

Public discussion about PHI often refers only to the direct government rebate of $7.9 billion per annum. But there are a lot of hidden subsidies. A broader estimate of the fiscal cost associated with PHI is nearer $13 billion per annum. These costs include:

– The $7.9 billion rebate funded by all taxpayers. It is a public subsidy flowing disproportionately to upper- and middle-income households who can afford PHI. About 55 per cent of Australians, mainly lower-income persons who have no hospital insurance, are denied access to this $7.5 billion annual rebate. This rebate was introduced in 1999 by the Howard government to encourage PHI. It mainly assisted higher-income groups. Lifetime Health Cover, added in 2000, was designed to encourage people to take out PHI cover earlier in life. It adds a 2 per cent premium per year for people who wait past age 31 to take out PHI.

– Then there is the Medicare Levy Surcharge (MLS) revenue foregone. People earning above the MLS threshold who hold private hospital cover are exempt from the MLS. The current MLS revenue foregone is approximately $2.5 billion annually, a conservative estimate derived from Tax Office figures.

– In addition, there is about $1.7 billion of revenue foregone through the rebate not being taxable.

– Many patients in public hospitals are PHI holders who receive benefits in public hospitals. When a privately insured patient elects to be treated as a private patient in a public hospital, Medicare covers 75 per cent of medical costs listed on the Medicare benefits schedule. The estimated cost to the taxpayer is over $1 billion per annum.

PHI is propped up with around $13 billion of taxpayers’ money. As Ross Gittins has said: “it is a con”. It does not deliver any health services. At great cost it churns money, including taxpayers’ money, for the benefit of private hospitals, private specialists and higher-income people.

In addition to high costs and inequity, the parasitic PHI system has other damaging consequences and risks:

• In 2017, then CEO of PHA Dr Rachel David told the Sydney Morning Herald that: “Health funds have no control over input costs …”

• PHI premium increases frequently run ahead of CPI increases. This is often accompanied, quietly of course, by more and more procedure exclusions.

• We have seen the enormous damage PHI has wrought in the US. The US has high-quality care for a few. In the Commonwealth Fund’s 2024 health system comparison of ten wealthy countries, the US ranked last overall. And Trump is making it worse. In value for money, the Cuban health system is far better than the US ‘system’. Australian healthcare costs about 10 per cent of GDP. American healthcare cost is almost double that.

• PHI favours the wealthy who can jump the public hospital queue by going to private hospitals.

• PHI penalises people living in the country where there are few private hospitals. I have yet to hear any National Party member draw attention to this unfairness.

• PHI has high bureaucratic costs. Their management expense ratio before profit is 11 per cent. For Medicare it is 3–4 per cent. The higher management costs in PHI are the result of marketing to retain and add new members, product design and complexity. Private health insurers return only about 84 per cent of premiums to patients. The CEO of Medibank Private was paid $4.72 million per annum, NIB $1.99 million and HBF $1.63 million. Bupa hides the CEO figure by lumping all directors into a single figure of $7.5 million. The three ‘for profit’ PHIs, Bupa, Medibank Private and NIB, recently recorded near record profits.

PHI apologists tell us that PHI has taken pressure off public hospitals. There is little or no evidence to justify that claim. In fact, salaries paid to specialists in private hospitals are much higher than salaries paid to specialists in public hospitals. Not surprisingly, it is hard for public hospitals to retain specialists, particularly younger specialists.

PHI does not deliver any health services. At great cost it churns public money for the benefit of private hospitals, private specialists and better-off people. It is a highly regressive system.

Hopefully the tightening of the means test for older PHI members will continue and the savings transferred to the public sector, where it will be more efficiently and fairly spent.

Along with gambling interests, the fossil fuel industry and clubs, PHA is a powerful lobby group. And it goes back a long way. In the lead-up to the federal election in 2007, the PHI industry made a secret arrangement with Kevin Rudd to maintain taxpayer support for PHI. We did not learn of this until many years later.

For several decades the ALP has been living off the Medicare legacy of Whitlam and Hawke. It opts out of serious reform.