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Means testing passes but do we even need health insurance?

When the government finally succeeded in its third attempt to remove the 30% subsidy for high-income earners holding private health insurance, the opposition’s response was a promise to restore it should…

We now need to ask whether the government should subsidise private health insurance at all. AAP

When the government finally succeeded in its third attempt to remove the 30% subsidy for high-income earners holding private health insurance, the opposition’s response was a promise to restore it should the coalition be voted into office. Tony Abbott said the rebate “is an article of faith for the Coalition. Private health insurance is in our DNA."

He was speaking for his own party, but there was the same sentiment in the government’s defence of its initiative.

Health Minister Tanya Plibersek was at pains to point out, correctly in the view of independent analysts, that any small reduction in membership resulting from withdrawing the subsidy would be more than offset by normal membership growth and by the penalties set by the higher Medicare Levy Surcharge. Private health insurance seems now to be an article of faith for the Labor Party as well.

The changes will save the government about A$0.7 billion a year. But even after the subsidies for private health insurance are trimmed, they will still take A$3.8 billion a year out of the health budget. This subsidy dwarfs the amounts being discussed for the automobile and aluminium industries, which have rightly been the subject of public debate. There has been no such debate about the virtues of private health insurance.

The government’s modest private health insurance reforms were driven by its fiscal objectives of a 2012-13 balanced budget and its desire to wind back what many call “middle class welfare”. The reforms were certainly not about withdrawing industry assistance.

So, what is the economic justification for health insurance to be put in such a privileged position, without having to explain its raison d’etre, or to justify its subsidies?

And why have we used subsidies and penalties to encourage the private health insurance industry – a financial intermediary that costs A$2.8 billion a year – to interpose itself between health-care consumers and providers?

The US spends twice as much as other developed countries on health care but has poorer patient outcomes. Flickr/foshydog

Why subsidise the private health insurance industry?

If the function of private health insurance is to fund private hospitals, there are better ways of doing so without churning funds through the finance sector – there was a time when the Hawke Government paid a 30% subsidy direct to private hospitals.

If it’s about relieving pressure on public hospitals, it has failed abysmally. While some patient load has shifted from public to private hospitals, there has been a corresponding shift in resources from public to private hospitals. The result has been a re-shuffling of the queues for limited resources.

If the purpose of the subsidy is to compensate those who don’t draw on publicly-funded programs, it is very indirect. And it leaves unsupported those who pay for private hospital care and dental care without relying on private insurance. Contrary to partisan rhetoric, taking out private insurance does not ensure self-reliance.

If it’s to save budgetary outlays, it may do so in the short term, but in reality it simply substitutes official taxes (with their safeguards of accountability, equity and cost-control) with more opaque privatised taxes collected by health insurers.

Research shows countries that rely on private insurance to fund health care get no better health outcomes – but they spend much more than the countries that rely on the power of a single national insurer and market competition.

The stand-out example is the United States, where, as a proportion of GDP, health-care costs are almost twice the level of those in other developed countries, while by most indicators their health outcomes are worse.

If it’s to help patients choose their doctor in hospital, there are less costly ways to provide choice, particularly in cases where continuity of care is important, such as maternity services. There is little benefit in the choice of look-alike private health policies.

Support for private health insurance hasn’t alleviated pressure on the public hospital system. Jason L. Parks

A fairer health system

These shortcomings in private insurance, particularly the clumsy way it is supported in Australia, are explained in more depth in a paper John Menadue and I wrote last month and which is published by the Centre for Policy Development.

Contrary to some emotive claims, we are not calling for some form of “socialised medicine”. Private hospitals are an important part of our health services, and they should not be separated by financial barriers from public hospitals. Nor are we calling for “free” health care.

Rather, our point is that to the extent we wish share our health-care costs with one another, a strong single national insurer is the most efficient and fair means of doing so. Individual payments from those with the means to contribute, without the backing of private insurance, have an important role to play in allocating health-care resources and in relieving pressure on public budgets.

Almost a half-century has lapsed since the Commonwealth last subjected this industry to policy scrutiny, in the 1969 Nimmo Report. There was an Industry Commission Inquiry in 1996, but that was only about how to support private insurance, not whether it should be supported.

Policy makers need to ask not only whether private insurance adds value to health care – and our analysis finds it does not – but also whether it could serve a useful role under any circumstances.

Just as other sectors have had to do, the private health insurance industry should be required to show that in return for budgetary and regulatory support, it can achieve outcomes that could not be gained through other, less expensive means.

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9 Comments sorted by

  1. Michael Bode

    logged in via Facebook

    Interesting article. Two questions:

    (1) "Research shows countries that rely on private insurance to fund health care get no better health outcomes – but they spend much more than the countries that rely on the power of a single national insurer and market competition."

    Does this relationship hold if you remove the US from the dataset?

    (2) How can there have been no inquiries into the system since the late 60s?

  2. Ian McAuley

    Lecturer, Public Sector Finance at University of Canberra

    Thank you Michael -- a very relevant question.

    On your first question, the data is available from the OECD public website, in Excel format. The scatter diagram on our paper shows that data.

    Using all countries in the OECD dataset (it misses Iceland and Turkey) the coefficient of correlation (R squared) is 0.47. Simply leaving out the USA reduces it to 0.10. But the other outlier is Chile, a country recently admitted to the OECD and with a very poorly developed health system and strong use of…

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  3. Michael Brown

    Professional & academic

    Your facts seem correct, except that the Dutch have researched this and come to a slightly different conclusion. It would be interesting to know why.
    I note you refer to "single national insurer and market competition", but of course the current public system is not an insurance scheme and is funded directly from taxes. The bill is likely to increase dramatically in coming decades, so where will the extra cash come from? Monster new taxes?
    Interestingly, the new disability scheme is also referred to as an insurance scheme. Let's hope the politicians are not really talking about a government run and funded self insurance scheme. Or something like the workers compensation schemes, which get raided whenever they accumulate any cash...

  4. Chris O'Neill

    Retired Way Before 70

    The reason why insurance is seen as being necessary in Australia is because so many Australians, including middle class Australians, are such poor savers that they cannot face having to deal with a substantial medical bill. The vast majority of people would be better off saving and investing their health insurance premiums and using those savings to pay for medical bills if and when they arrive. Of course we all know that most Australians are not capable of saving diligently like this, including…

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  5. Ian McAuley

    Lecturer, Public Sector Finance at University of Canberra


    You're quite right. We could be far more self-reliant, less dependent on private or public insurance. Most Australians, most of the time, could pay for all of their health care needs without dependence on any third party.

    From around 2002 Australian households have been saving. Our household debt levels are still high, but are declining. In particular, older people, who draw heavily on health care, have quite substantial liquid savings on average.

    That's why we are wary of schemes…

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    1. Chris O'Neill

      Retired Way Before 70

      In reply to Ian McAuley

      "In this regard it is surprising that the Liberal Party, .. is so enthusiastic about subsidizing people to take PHI, thus .. being subject to the moral hazard .."

      You have to ask why does the Liberal Party contradict its principles in this case?

  6. Sue Ieraci

    Public hospital clinician

    Perhaps the question is not whether we NEED private health insurance but why we desire it. It's not just about raw health outcomes, it's about whether everyone who has the means to pay is prepared to wait in line for what they want - rather than access care in the place they want, as quickly as possible, and at a convenient time.

  7. Ian McAuley

    Lecturer, Public Sector Finance at University of Canberra

    Some very pertinent comments from Sue.

    The reasons people buy insurance of any kind are quite complex, and generally not consistent with the "rational" models of economic behavior -- which would predict that those who are well-off could afford to self-insure to a large extent. In fact the well-off tend to take very comprehensive cover without deductibles. The best recent analysis of such behavior is in Daniel Kahneman's "Thinking Fast and Slow", Penguin 2011.

    Regarding waiting in line, clearly…

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    1. Sue Ieraci

      Public hospital clinician

      In reply to Ian McAuley

      "...there is no justification in allowing priority for treatment to be based on financial means rather than clinical needs."

      Coming back to my original point, Ian, that is why we have a two-tiered system. The public system - which provides universal access - does prioritise clinically rather than financially. The private system runs in parallel, so that people opting to pay for faster access are in a different queue. Ideally, the two systems would not compete for resources. It certainly would be unethical if the person paying for earlier access displaced a sicker person on the same queue.