Private health insurance means test passes – what now?

Predictions that people will leave private health insurance are unlikely to come true. AAP

The government finally got its bill on means-testing private health insurance rebates for high-income households through the House of Representatives this morning. Fortunately, the dire predictions about the consequences of the bill will not eventuate – here’s why.

Much of the negative commentary in the lead-up to the bill’s passage was about people dropping private health insurance once it passed. History might provide some insights into whether this was a plausible argument and if it’s something we should expect now that rebates are being scrapped.

When the 30% private health insurance rebate was introduced by the Howard government in 1999, it had almost no impact on the proportion of people with private health insurance. So for starters, for such a big subsidy to have a negligible impact suggests Australians aren’t very responsive to price when it comes to health insurance.

The next incentive for taking out private health insurance was introduced in 2000. The Lifetime Health Cover (LHC), another Howard government initiative, had a much bigger effect.

Under LHC, people between the ages of 31 and 65 taking out private health insurance would pay a premium loading of 2% for each year of age beyond 30. This means that if a 35-year-old took out private health insurance, she will pay an extra 10% – originally for as long as she held continuous cover but this was changed later because it was thought to keep people from taking out insurance. The premium loading was capped at 70%.

Irrespective of age, people already insured before the policy was implemented were exempt from this one-off increase, as were all individuals aged 65 at the deadline.

The insured population went from just above 30% to close to 45% (a 50% increase) in a matter of weeks. Even though the cost of delaying cover was deferred and this cost was much smaller than 30% for most of the population, it still had a massive impact.

My research shows that the impact on coverage was caused by the deadline (initially 30 June 2000, but extended to 15 July because of congestion on insurer websites) and the government’s advertising blitz – not by price considerations.

Deluge of public health system

The stated goals of the Howard government’s insurance incentives were to give people the choice to take the private option and to relieve pressure on the public hospital system. But one aspect of the rebate that wasn’t talked about in the run-up to the bill’s passage was that it applied to what the industry calls “extras” cover (optical, dental and complementary medicines such as acupuncture), as well as to hospital cover.

Subsidising glasses and alternative health treatments was unlikely to contribute to the government’s goals, and there was some early criticism of rebates for “extras”. The government responded by removing subsidies for gym memberships and runners.

But why subsidise extras policies at 30% at all? Perhaps it was just simpler to have a blanket approach because the vast majority of people taking out hospital cover through private health insurance also take extras cover.

Subsidising extras cover also made private health insurance much more attractive to young people who don’t use the hospital system very much, but see value in subsidies for a new pair of glasses each year or assistance with cosmetic dental work or chiropractic services. Even if people in this group now drop private health insurance, they are unlikely to create a sudden pressure on the public hospital system.

After the big jump in coverage in 2000, nothing much has happened to the proportion of the population with private health coverage.

Steady as she goes

The Medicare Levy Surcharge is a tax penalty for higher income individuals and families without private health insurance. When it was introduced, uninsured singles with incomes over $50,000 and families with incomes over $100,000 paid a tax surcharge of 1% of their taxable income.

For many high-income earners, the combined effect of the subsidy and the Medicare Levy Surcharge meant that they were financially better off purchasing insurance even without using the private health system. And even when the Medicare Levy Surcharge thresholds were relaxed and fewer people had a financial incentive to buy insurance, the predicted rate of people dropping health insurance didn’t eventuate.

Insurance company profits are up but, more significantly, there’s no evidence of reduced pressure on public hospitals. And the cost of the rebate has continued to grow – it now costs close to $5 billion a year.

One of the reasons this figure is so high is that it wasn’t just a subsidy for new insurees but was given to people who already had private health cover. Everyone, including the huge number of people responding to the Lifetime Health Cover deadline and advertising campaign, received the subsidy.

So what can we expect now that the rebate will be means tested? I expect very little will happen to the level of private health coverage or to the cost of premiums. That’s because the financial motives for taking out private health insurance for people in high-income households remain. What’s more, there’s good evidence that this group is strongly motivated by security more than health.

Distractions around the countryside

So why all the fuss and the opposition to means-testing rebates for private health insurance? From the perspective of the insurance industry, the motives are pretty straightforward – higher profits.

From those in regional areas, the motives are less clear. There are few private hospitals outside of metropolitan areas, so it’s relatively difficult to use private insurance. Instead of fighting a measure that ultimately favoured high-income households in metropolitan areas, it would’ve been more worthwhile to lobby for more money to be spent on improving public health-care services in remote areas.

Clearly the struggle to get the means testing of the rebate passed shows how difficult it is to remove what many people now see as an entitlement. Means testing reduces inequity in the health system and makes funds that would be better spent on the public hospital system available for this purpose.