Private health insurance ‘carrot and stick’ reforms have failed – here’s why

The relationship between private health insurance and Medicare has been a problem since the Whitlam government introduced universal health care. Hadrian/Shutterstock

If your workplace is anything like mine, this week’s private health insurance premium increases might prompt conversations that go something like this:

Can you believe our private health insurance costs $421 a month – and we are all really healthy!

Some people baulk at the cost of private insurance – especially the relatively young and healthy – because they don’t see the value of it when they are already covered under Medicare.

Others see a struggling public hospital system and wonder whether private health insurance is alleviating much of the burden.

The challenge of sustaining a viable private insurance sector alongside Medicare is not a new one. Successive governments have largely ignored the issue, vainly hoping that strengthening either Medicare or private health insurance will be enough to solve the problem. It won’t be.

Howard’s ‘carrot and stick’ reforms

The last major attempt to address the role of private health insurance in the context of Medicare occurred during the Howard years.

When John Howard was elected prime minister in 1996, private health insurance membership rates had fallen to a low of 34%, down from 48% in 1985, the year after Medicare was introduced. The government quickly embarked upon a series of reforms designed to boost flailing membership rates.

It began in 1997 by introducing the Private Health Insurance Incentive Scheme and the Medicare Levy Surcharge. The incentive scheme encouraged people earning below a threshold amount to purchase private health insurance. The surcharge penalised people earning above a threshold amount if they chose not to purchase a plan.

Because these initiatives did not have the desired impact on membership, in 1999 the government introduced a 30% subsidy for which all Australians were eligible, regardless of income.

Admitting doctors often prefer to use public hospitals for more complex procedures. U.S. Pacific Fleet/Flickr

This too failed to boost membership to the desired level, so in 2000 the government introduced its Lifetime Health Cover scheme. Under it, funds were required to set different premium levels according to the age at which enrolees first took out cover. Higher premiums were charged for each year insurance cover was not held beyond the age of 30 years.

The intention was to discourage “hit and run” behaviour and improve the stability of the industry by restraining pressures for premium increases.

Assessing Howard’s reforms

If private health insurance membership rates are used as the measure of success, the Howard government’s reforms achieved what they set out to do. Membership rates rose to 46% by September 2000 after the Lifetime Health Cover scheme came into operation, and stabilised around this level.

However, the Coalition’s reforms also aimed to restore the “balance” between Medicare and private health insurance. In 1997, for example, the health minister at the time, Michael Wooldridge, said:

A strong public and private health sector standing side by side is vital to the future of the health system for all Australians. I want to keep Medicare in place as it is today… This can only be done if the drop-out rate from health insurance is stopped, and the balance between the public and private systems is restored.

The rhetoric is strikingly similar to that used by the current government.

Assessing the balance between the public and private sectors in Australia is a more complex task.

Activity in the private hospital sector has definitely increased alongside increases in private health insurance rates. Between 2000-01 and 2004-05, for example, the growth in separations from private hospitals outpaced that in public hospitals (4.8% versus 2.4%). This trend continued to 2012-13, the latest available data.

Howard’s reforms eventually increased private health insurance membership to 46%. Dean Lewins/AAP

But has the extra activity in the private sector reduced pressure on the public system?

A report from researchers at the Melbourne Institute in 2004 found that the increase in private health insurance membership during the Howard years was matched by an increase in hospital use overall, rather than a substitution of private for public care.

The authors noted one of the reasons was that admitting doctors often prefer to use public hospitals for more complex procedures and private hospitals for non-urgent elective surgery and other low-intensity interventions. As a result, waiting times for urgent cases in the public sector increased rather than decreased in response to the Coalition’s reforms.

In 2005, health economist Stephen Duckett, former secretary of the federal Department of Health, published a study that confirmed these results. He found that increasing activity in the private sector led to increases in waiting times in public hospitals in some medical areas.

Waiting times in the public sector, however, cannot simply be correlated with private health insurance membership rates and private hospital activity. Investment in public hospitals also helps reduce waiting times, regardless of what is happening in the private sector.

To complicate the analysis even further, in states such as Queensland, there has been a growing trend towards “outsourcing” or contracting public hospital care to the private sector, in the elective surgery area in particular.

Although the Howard government succeeded in reviving the private health insurance sector by boosting membership, it failed to find a sustainable way of balancing the private health insurance system and Medicare. The cost of private health insurance rebates ballooned to A$5.5 billion by 2012-13, prompting Labor, under Gillard, to means-test the rebate.

Time to reconceptualise the debate

The uneasy relationship between private health insurance and Medicare has been an ongoing stimulus for reform ever since the Whitlam government introduced Medibank (the precursor to Medibank) in 1975, while also leaving the existing private health insurance scheme in place.

The Hawke-Keating government progressively withdrew subsidies to the private insurance industry during the late 1980s, which contributed to a 30% increase in the costs of premiums during that period.

Successive governments have largely ignored the issue, vainly hoping that strengthening either Medicare, or private health insurance, will be enough to solve the problem. Peter Boyle/AAP

So, what are the possible solutions?

Various options for reform of Australia’s health insurance arrangements have been proposed over the years, including:

  • setting private and public insurance up in competition with one another
  • restricting the role of private health insurance to providing top-up or supplementary coverage
  • moving away from the insurance model to one where individuals self-manage funds set aside for purchasing health care.

Each of these options requires fairly large-scale reform of the health system, which might be achievable over time through incremental reform or, alternatively, through a concerted “big-bang” reform effort.

Filling the policy gap

Because both sides of politics have for so long been studiously avoiding the big issue in health insurance – the challenging of operating a mixed insurance system where private health insurance sometimes functions as a top-up to Medicare and sometimes as a substitute – the private health insurance sector has begun to take the policy lead.

Private health insurance funds, such as Medibank Private and BUPA, have been experimenting with reforms in primary care that, if implemented on a large scale, will have a major bearing on the equity and efficiency of our health system.

While private sector innovation is a good thing, it is the responsibility of governments, and oppositions, to shape the direction of reform and ensure that they lead to better health outcomes for all Australians.

At the moment, neither major party seems to have a clear vision for a sustainable and equitable health system that includes both Medicare and private health insurance.


Click on the links below to read the other instalments of Private Health Insurance in Australia:

Can private health insurers justify a 6.2% premium increase?

INFOGRAPHIC: A snapshot of private health insurance in Australia

Explainer: why do Australians have private health insurance?

If the government wants price signals, it should stop supporting health insurance

Allow Aussies to opt out of Medicare and rely on private health insurance

The debate we’re yet to have about private health insurance