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

The government is effectively undermining the power of Medicare as a single payer and the role of Medicare as a universal provider. Peter Boyle/AAP

In the final instalment of our series Private health insurance in Australia, Lesley Russell asks whether Australians need private health insurance, and what a two-tiered system means for quality, access and equity.


The six previous papers in this series highlight the poorly defined role private health insurance plays in the funding and delivery of Australian health care, and how the Abbott government might allow this role to expand.

But major changes to Australia’s iconic Medicare system should not happen by stealth. They require full analysis and debate about whether a more integrated public-private system is a feasible option that fits with Australian values and can improve efficiency in health care financing.

Successive governments of both persuasions have failed to convincingly articulate why Australians need what is increasingly a duplicate health care system – with duplicate costs for many – and why the federal financial contribution to private health insurance should be so substantial. The 2014-15 Budget Papers show the cost of the private health insurance rebate will grow from A$5.997 billion in 2013-14 to A$7.187 billion by 2017-18.

Private health insurance is variously seen as an essential feature of a “balanced” health care system comprising both publicly and privately funded and provided health care, or as an instrument of patient choice and responsibility that relieves the pressures in increasingly strained public services.

Most recently, the National Commission of Audit (NOCA) has raised the possibility of requiring higher-income earners to take out private health insurance for basic health services in place of Medicare. Both the NCOA and the Harper Competition Policy Review advocate an expanded role and less regulation for the private health insurance sector.


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


These are ideological arguments and much of the dilemma facing those who would work to implement effective policy in this area is the dearth of information about what drives people to purchase health insurance and to use it.

Since 1999 a raft of government initiatives – financial carrots and sticks – have aimed to encourage more Australians, especially those who are better off, to purchase private health insurance.

For the most part, these were not evidence-based and consequently have had little or no impact. Only the Lifetime Health Cover Loading and the “run for cover” campaign had an impact and this has been interpreted as a response to a deadline and an advertising blitz, rather than a pure price response.


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


University of Adelaide economist Terence Cheng has estimated the price elasticity of demand and found that a 10% increase in premiums would result in a reduction in private health insurance coverage of less than 2%. So most Australians who have private health insurance would retain it even if the rebate was completely dropped.

The prevailing wisdom is that people purchase private health insurance to have their choice of doctor and hospital facilities, but as researcher Sophie Lewis and her colleagues at the University of Sydney have found, it is really more about shorter wait times for hospital procedures, perceived quality of care and “peace of mind”.

Having private health insurance provides the ability to “jump the queue” to access a range of elective procedures in private hospitals. But this comes at a price for all patients.

People with private health insurance are likely getting services ahead of people without insurance but with greater need. The private patient who gets their orthopedic or cataract surgery within weeks rather than months will very often end up with substantial, unexpected out-of-pocket costs.


Read more: Explainer: why do Australians have private health insurance?


Contrary to government claims, the increase in services delivered in private hospitals has done nothing to ease the pressure on public hospitals and in fact waiting times for urgent procedures in public hospitals has increased.

Private health insurance does not buy extra quality and safety either. The Productivity Commission found that the larger, most comparable public and private hospitals have similar adjusted premature death ratios. And team-based care in large public hospitals means better care coordination.

The peace of mind that private health insurance is supposed to bring is very often illusionary. Sometimes it’s the realisation that certain procedures or prostheses are not covered; more often it’s the shock of unexpected out-of-pocket costs. More than 20% of private care is paid for by patients’ out-of-pocket costs, which in 2014 averaged A$285 per hospital episode.

Successive governments of both persuasions have failed to convincingly articulate why Australians need a duplicate health care system. Joel Carrett/AAP

The mix of levies, surcharges and rebates – and funds that constantly change their policies – make it difficult for even astute consumers to judge the true cost and value of their private health insurance.

In fact, many people know little about the policy they purchase – what it covers, how much it covers, whether it is good value and suited to their needs.

The Commonwealth government’s decision to subsidise private health insurance means it has a substantial financial stake in the private sector alongside its existing stake in the public sector. However, while there are incentives to encourage the purchase of private health insurance, there is no requirement for it to be used.

About a quarter of people with private health insurance choose to use the public system. Therefore, a significant proportion of the private health insurance rebate is effectively wasted as people purchase cover for financial rather than health reasons.

Public policy experts Ian McAuley and John Menadue have made the case that private health insurance is an expensive and clumsy way to do what the tax system and Medicare does better: distribute funds to those who need health care and the effective management of health care costs.


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


International evidence shows that private health insurance decreases cost controls and it has been argued that gap insurance has underwritten the dramatic growth in specialist fees. Further, pushing higher income earners (who generally have better health) to take out private health insurance, and then increasingly prejudicing access to services in their favour ensures a widening of existing health disparities.

In the absence of a clearly stated and managed role for private health insurance – either as competitor or collaborator – it is effectively undermining the power of Medicare as a single payer and the role of Medicare as a universal provider. This situation is predicted to unravel further, as the Abbott government signaled its agenda to allow private health insurance to play an expanded role in primary care.

Current laws preclude private health insurers from paying for primary care. Dan Himbrechts/AAP

Some of larger funds are already expanding their activities in this sector, but with little oversight.

Last year Medibank Private began a program in Queensland that guarantees Medibank members same day GP appointments, fee-free care, after-hours GP visits and a range of health assessments. Medibank claims the trial is operating within the bounds of the law because it pays only for administrative costs, as opposed to funding the doctors directly.

The concerns this raises about the generation of a two-tiered health system are further fuelled by the possibility that private health insurance funds were eligible to tender to run the new Primary Health Networks.

It’s an indictment of the passivity of federal government policymakers that private health insurance funds are more willing to kick start the innovative initiatives that are needed to deliver more proactive preventive care, better care coordination and a greater focus in health outcomes.

It’s more troubling that these initiatives are currently occurring in a policy vacuum with a narrow focus on solutions led by the funds for the benefit of their members. This will not assist the millions of Australians who don’t have private health insurance and could have a major impact on the equity and efficiency of the health care system and the budget bottom line.


If you missed any Private Health insurance in Australia articles or our infographic, visit the series page.

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