Hard habit to break: means testing isn’t a deal breaker for private health

Means testing will not necessarily increase pressure on the public health system. AAP

Could it be a case of third time lucky for the Gillard Government’s plan for means testing of private health insurance? Any legislation will require the support of four of the six cross-benchers. The Government is courting them in the hope its third attempt to reform private health insurance rebates will finally succeed.

Under the tiered measure, the current 30% rebate for singles earning more than $80,000 a year or couples earning more than $160,000 will fall to 20%; singles earning more than $93,000 and couples earning $186,00 will receive a 10% rebate; and singles earning more than $124,000 and couples $248,000 will no longer receive a rebate.

The Government claims the rejection of the measure will leave a gap of about $3.4 billion over four years in its budget. It is purportedly preparing information about the impact of the means test on the cross-benchers’ electorates as a way to secure their support.

A Government spokesman has told the country independents that “the vast majority of people with private health insurance in regional Australia are below the thresholds at which the means test will come into effect - and therefore they won’t be affected.”

Of the six MP’s at the heart of this attempt:

  • Greens MP Adam Bandt had previously said he would vote for the reform but is now expressing reservations about voting for a watered-down version of the reform;

  • West Australian Tony Crook has yet to declare his intention;

  • Independent Rob Oakeshott has voted both for and against the previous two attempts;

  • New South Wales MP Tony Windsor has said he will not vote for the proposal if it remains in its previous form;

  • Tasmanian Independent Andrew Wilkie has expressed reservations, saying he was waiting for information about private health care uptake in his seat and Government modelling on its effect on the public system; and

  • Queensland Independent Bob Katter has also expressed reservations about the legislation’s impact on the latter.

But concerns about the impact of the proposed legislation on the public health care system are unfounded for two reasons.

Firstly, it is unlikely that people who might “drop” private health insurance are all going to suddenly get ill; it has long been recognised that a person who drops private health insurance cover does not suddenly join a waiting list for public hospital treatment.

The most likely people to drop their cover are younger individuals and families for whom the benefits of private health insurance without financial incentives are unclear. In fact, those who have dropped insurance cover since 2001 tend to be relatively young and usually motivated by financial difficulties.

And second, the assumption that people will drop their cover is belied by the fact that there is considerable evidence of habit or persistence in this sector, so behaviour is most likely to remain the same despite the change in incentives.

In fact, the people who took out private health insurance in response to the Howard Government’s attempts – between 1997 and 2000 – at increasing the number of private health insurance holders by providing financial incentives don’t use the private hospital system as much as people who had private health insurance before the incentives were introduced.

So, people who took out private health insurance for financial reasons continue to use the public hospital system.

After all, the stated policy intention was to provide consumers with choice rather than push people into private hospitals and away from the public health care system.

Between 1984, when universal public health insurance was established and the late 1990s, the percentage of Australians with private health insurance declined steadily.The Government responded by introducing the private health insurance incentives.

The Howard governments’ original carrot and stick policy – with the 30% rebate for public health insurance being the carrot and a tax surcharge (Medicare levy) for high-income earners being the stick - was intended to encourage more people into private insurance, lower premiums and reduce pressure in the public system.

The incentives increased private health insurance coverage by around 50% (from 31% to 45%), but they achieved far less in terms of changing the mix of public and private utilisation.

The main driver of people taking out private health insurance in response to Lifetime Health Cover (LHC) was the deadline and advertising blitz rather than the price change.

The advertising campaign gave the impression that something bad might happen if people didn’t take out private health insurance.

But research shows the higher coverge had a very modest impact on relieving pressure in the public system and despite people taking out insurance after 2000 being younger and healthier, premiums increased.

The insurance incentives in Australia are a relatively ineffective and extremely costly way of reducing pressure on the public hospital system.

The Australian private health insurance incentives cost much more (between 5 and 10 times more) than directly funding the equivalent number of public patient admissions.

What’s more, the equity of the current policy is questionable as well: the insured pool in Australia is relatively high income, with better health status than the uninsured. There is evidence that this trend – known as favourable selection – even preceded the insurance incentives.

So providing subsidies to private health insurance effectively provides subsidies to upper income, relatively healthier groups.

Premium subsidies have been generally been recognised to be quite a poor way to provide assistance and to promote efficiency and equity in the health system.

A more sophisticated approach to private health insurance is one in which the funding follows the consumer – so the amount of subsidy you get will depend on your expected needs and everything follows from there.

But we provide subsidies in a more haphazard manner.

All medical consultations and hospital procedures for private patients and most pharmaceuticals are subsidised by the federal government with open-ended budgets.

In contrast, public hospitals have much more constrained budgets. This is why the pressure on public hospitals is a major health policy issue.

So, the idea that financial incentives for private health insurance have taken pressure off the public system is unfounded.

And the claim that means testing the private health insurance rebate will increase pressure on the public hospital system is equally unfounded.