Private health rebates should be means tested – and here’s why

A private health insurance means test is unlikely to affect insurance uptake. Flickr/mahr

The government’s bill to means test private health insurance rebates for high-income earners is scheduled for debate on Thursday in the House of Representatives. The package would deliver around $2.4bn per year to the public coffers and help get the budget back to surplus. But the government needs the support of three of the six cross-benchers for the bill to pass.

Associate Professor of Public Health Peter Sainsbury explains why the proposals deserve the cross-benchers’ support, but argues that rather than taking out private health insurance, consumers would be better off paying for private care out of their own pockets:

Currently, anyone who takes out private health insurance receives a 30% government refund on their premiums.

Under the proposed scheme, singles with health insurance earning more than $80,000 and couples earning more than $160,000 would receive a rebate of 10% to 20%. Singles earning $124,000 and couples on $248,000 would no longer be eligible.

The bill includes a penalty for higher income earners who don’t take out private health insurance – the Medicare levy surcharge.

Some of the Independents are concerned about the impact on regional areas, some of which have a shortage of doctors. If the bill passes, are we likely to see many people drop their private health insurance?

The simple answer is no. The evidence shows that most of the people who have private health insurance are higher income earners and they have indicated they would probably stay in private health insurance if a means test was introduced.

But when you consider consumer responses to price increases, you can’t always judge the potential fallout just by asking consumers what they will do – you also need to look at what’s happened historically.

If we look back to the introduction of the private health insurance rebate, we see that despite the offer of a 30% rebate on premiums, it didn’t influence people’s decision to take out private health insurance. Hardly any new people joined a private health insurance fund in the year after the rebate was introduced.

If this didn’t influence people’s uptake, and we project this attitude to the current proposals, removing the rebate is highly unlikely to cause people to leave a health fund. This is particularly likely, given that it’s the higher income brackets – the people who are most likely to take up private health insurance anyway – who will lose the refund.

The Greens support means testing the private health insurance rebate but oppose the exemption of high-income earners who take out private health insurance from the Medicare levy surcharge. What would be the likely flow-on effects of such a proposal?

The government argues that imposing a Medicare levy surcharge on higher income earners who don’t have private health insurance encourages them to retain their health insurance and hence limits any exodus from the funds. And the surcharge raises a bit of additional taxation, although the amount is almost trivial compared with the savings from means testing the refund.

The Greens argue that it’s inappropriate to use a financial stick to encourage wealthier people to hold private health insurance – it’s better to have them paying and fighting for a better public system for everyone.

I agree with the Greens but this is all just posturing. If the government can get the numbers in the House, the Greens are unlikely to sink the proposal to means test the refund for the sake of getting their way on the levy.

Abolishing the private health insurance rebates is unlikely to increase pressure on the public hospital system. Diane Cordell

In the past, you’ve supported the means testing bill as a short-term improvement but said the rebate should be removed in the long term. Would abolishing the rebate increase pressure on public hospitals?

There’s very little, if any, evidence to indicate that abolishing the rebate completely – not just means testing it – would put any greater pressure on public hospital emergency departments, wards, or elective surgery.

The sorts of services that are provided in private hospitals are often quite different to the services that public hospitals provide. Most private hospitals offer a very limited range of services, particularly as you move away from inner metropolitan areas. The outer-metropolitan, regional and rural hospitals cherry-pick the services they provide, based on simplicity (procedures that require the least specialised care and the least specialised equipment) and profit.

It’s important to note that private health insurance uptake doesn’t necessarily affect private hospitals. People can still have private health care – and many people do – without private health insurance.

Studies show that if you’re disciplined enough to save, you’re likely to be financially better off paying for the private health care you need out of your own pocket. Look at the people who pay $2,000 or $3,000 a year for ten or twenty years – very few get their money back. They might have a hip replacement that costs $2,000 to $10,000 but overall they would be better off keeping their premiums and then paying for private hospital treatment out of their own pocket.

So would you like to see private health insurance phased out in the longer term?

Private health insurance is the parasite of the health system. In an ideal world, self-funded private health care would be an optional extra on top of a well-funded, comprehensive public health-care system.

The likelihood of abolishing private health insurance in Australia is remote. But we could reform the private health insurance industry. A more sensible approach would be to have far fewer funds, with much lower administration fees and less choice of policies. What we currently see isn’t real choice because consumers are so confused by the various options.

If the government wants to promote private health care, it should bypass the insurers and negotiate directly with the private health care providers (the private hospitals and medical specialists). This would give the government some control over the quantity and quality of the care that’s provided.