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Health Insurance in Australia: time for a new debate?


  In July 2011 the Government re-introduced its Fairer Private Health Insurance Incentives legislation into the House of Representatives; for an overview of the history of this legislation, see here. The Bills have not yet been debated. The key changes proposed by this legislation are: a means-test on tax-funded rebates for private health insurance (PHI) for those on incomes above a specified threshold, and; a higher Medicare Levy Surcharge for people on high incomes who choose not to purchase PHI.

If passed, the legislation will mean that higher income earners will receive a lower or no tax-funded subsidy when they purchase PHI, and, if they choose not to purchase PHI, they will face higher tax penalties.

Much of the debate so far on the legislation has been about the potential impact of the changes on PHI membership and activity levels in public and private hospitals. See this Bills Digest for a summary of these debates.

Private health insurance representatives such as the Australian Health Insurance Association argue that over the next 5 years the proposed changes would:

• cause large numbers of people to drop or downgrade their insurance cover (they quote a Deloitte report predicting that 1.6 million people will drop their cover and 4.7 million will downgrade it);
• lead to premium rises for those who keep it (the Deloitte report predicts an additional 10 per cent increase), and;
• substantially increase admissions to public hospitals as people opt out of the private system (the Deloitte report predicts an extra 845,000).

Some public health advocates dispute these claims arguing that the impact on PHI membership, and consequently public hospital activity, will be relatively minor. In a position paper prepared for the Australian Healthcare and Hospitals Association, Professor John Deeble, one of the architects of Medicare, claims that only about 31,000 out of the 1.53 million people likely to be affected by the changes would drop their cover. The Commonwealth Treasury has also predicted membership declines of a similar order.

While debate about the impact of these bills on PHI membership and hospitals is important, there is another serious underlying issue with Australia’s health insurance arrangements that warrants discussion. Ever since 1975 when Australia’s first universal public insurance scheme, Medibank, was introduced, governments have struggled to find a way of balancing public and private insurance. Despite many reform attempts, none appears to have found a fiscally and politically sustainable way of balancing the two insurance schemes (see here for an overview of historical reforms).

One of the main reasons that achieving balance has been so hard is that public insurance in Australia (first Medibank, and later Medicare) was layered on top of a well-established private health insurance scheme. In the context of a compulsory, tax-funded public insurance scheme that covers most basic health care services, the role of private insurance is not clear. It doesn’t help that, as the Industry Commission (the Productivity Commission’s precursor) pointed out back in 1997, PHI in Australia sometimes functions as top-up funding, providing additional services and amenities to members. However, at other times it functions as a complement or replacement for public insurance.

The ambiguous role that private insurance has in Australia means that the sector has relied on government subsidies, such as tax concessions or premium subsidies, to remain viable. While some object to the idea of handing out corporate welfare to prop up an ‘insurance industry that nobody asked for and nobody wants’, the experiences of past governments suggests that removing public subsidies for PHI is easier said than done. When the Hawke-Keating Governments progressively removed subsides for PHI, membership plummeted. In an attempt to restore balance and make PHI more attractive again, the government tried to reduce the costs of private health care by introducing contracts between PHI funds and hospitals, and between PHI funds and doctors. Its efforts came a little too late though as it lost power to the Howard Government the following year.

In an effort to boost PHI membership, the Howard Government introduced the rebate on PHI, increased the Medicare Levy for high income earners, and introduced Lifetime Health Cover, which financially penalises people who delay purchasing PHI after the age of 30. PHI membership rose from a low of 31 per cent in 1999, to a high of 45 per cent in 2000, just after Lifetime Health Cover was introduced. Membership rates have fluctuated around this level ever since (see here for long-term trends). According to the Rudd and Gillard Governments, however, the budgetary expenditure needed to achieve these membership levels is unsustainable; between 2001-02 and 2010-11 the cost of the PHI rebate grew from $2.1 billion in to $4.7 billion. While the changes proposed under the Fairer Private Health Insurance Incentives legislation might make the PHI rebate more sustainable, the real question is will they make Australia’s insurance arrangements more sustainable? Past experience suggests it's unlikely.

As the Industry Commission has previously explained, piecemeal reform to private insurance can be hazardous because it is a component of an interdependent system. It suggested in 1997 that what was really needed was a broad public inquiry into Australia’s health system, one that looked for ways of better integrating the public and private health systems. There have been several inquiries into the health system since then, but none attempted to fully address this issue. The terms of reference for the House of Representatives inquiry into health funding (2006) and the Rudd Government’s National Health and Hospitals Reform Commission inquiry (2010) both precluded any detailed consideration of the relationship between public and private insurance in Australia.

With the current round of health reforms still underway, there is unlikely to be much of an appetite for another review of the health system any time soon. However, the introduction of the Fairer Private Health Insurance legislation does create an opportunity to start asking key questions about the role of PHI in Australia. Should it, for example, be restricted to providing top-up cover for services not funded under Medicare? Or, should its role be expanded so that it becomes a true competitor to Medicare? Although a significant re-structure of Australia’s health system is likely to be some time away, it is hard to argue that, after more than 40 years of operating a mixed public-private insurance system, debate on these fundamental questions should be put off.