As the Government mounts its case for means testing of private health insurance rebates, a new report urges the Government to withdraw all support for private health insurance, on equity and efficiency grounds.

The report says private health insurance should be viewed as a form of industry assistance which subsidises queue jumping. It “is administratively expensive (technically inefficient in economists’ terms), distorts incentives and choices (allocatively inefficient), and does not satisfy any reasonable criteria of equity.”

Published by the Centre for Policy Development, the discussion paper, titled Private health insurance: high in cost and low in equity, is by John Menadue AO, a former Secretary of the Commonwealth Department of Prime Minister and Cabinet, and Ian McAuley, an Adjunct Lecturer in Public Sector Finance at the University of Canberra.

They say it is strange for a government with a stated policy of “social inclusion” to provide incentives for the well-off to opt out of sharing their hospital costs with other Australians.

They call for wider health reform, and greater sophistication in public debate about health policy.

“Rather than meaningless political rhetoric about private/public options – rhetoric which does not distinguish between funding and provision, and which suggests that without private insurance there would be no private sector in health care – the public debate should be about the division between use of market mechanisms and community sharing,” they say.

“Private health insurance is not a market mechanism. We have pointed out that when it comes to sharing health care costs a single national insurer has the capacity to control prices and usage, and to ensure that a health care system allocates resources equitably and efficiently. That is not to suggest that Medicare, as it exists at present, would perform that role well. It has drifted in function, to become a mechanism for providing some support for medical costs, with haphazard outcomes: some services are fully funded, while for others consumers are left paying high out-of-pocket costs. It has failed to achieve integration of health care services around consumer lines. Health care programs remain fragmented between Commonwealth and state governments, and even the Commonwealth’s main programs, relating to medical and pharmaceutical services, operate separately.

“Ideally, the Commonwealth should embark on a comprehensive program of reform, as it has done with other sectors of the economy. Health care is too important to be insulated from the economic reform process. And such reform should involve engagement with the community on basic questions of sharing versus individual responsibility. The research, consultation, exploration of ideas, costing and analysis should be undertaken by a body with some detachment from our present systems – inquiries by “insiders” tend to produce timid recommendations, often designed more to appease vested interests rather than genuine reform. Among important issues to be covered is to find a way of bringing private and public hospitals into the same funding streams.”

The paper covers:

 • How private health insurance has escaped scrutiny

 • The costs of private insurance, including administrative costs

It says that in 2010-11 PHI funds received $16.0 billion in premium income and paid $13.2 billion in benefits. The balance, $2.8 billion, was split equally between administrative costs of $1.4 billion and $1.4 billion profit before tax. Of that 1.4 billion profit, $0.3 billion came back to the community as taxes. That means Australians paid $2.5 billion, or 16 percent of PHI premiums, in administration and profits.

But the paper says that administrative costs, while easily identified, are not the main problem. This, they say, is the impact of private health insurance on health costs generally, both in terms of utilization and prices.

• The “vastly overstated” benefits claimed for private health insurance

The subsidies for private health insruance which are mainly passed through private hospitals, have allowed those private hospitals to attract professional staff away from public hospitals. This has been facilitated by gap insurance, which has facilitated the largest increase in specialist fees in Australia in the last 25 years. This has resulted in remuneration paid to specialists, particularly orthopaedics in private hospitals, being four to five times higher than orthopaedics in public hospitals.

While 64 percent of Australians live in state and territory capital cities, 74 percent of private hospital beds are in those capital cities. By contrast, the supply of public hospital beds is skewed away from capital cities. Because people in country and remote regions are generally not as well-off as city dwellers, this regional imbalance amplifies inequities already in PHI subsidies. Prosperous urban dwellers are being subsidized by less well-off people in rural and outback Australia.

Below is the paper’s summary.


Planned reforms of private health insurance subsidies do not go far enough

John Menadue and Ian McAuley write:

Government proposals to apply a means test to private health insurance subsidies have re-ignited the debate about the role of private insurance.

The proposals have the benefit of removing a glaring inequity in our present arrangements which direct subsidies disproportionately to the well-off. The worst such inequity relates to dental care.

They would alleviate the inequities imposed on country people who, while being poorly provided with private hospitals, subsidize high-income metropolitan dwellers who have access to private hospitals.

The proposals have shortcomings, however, because they don’t go far enough.

They would have hardly any impact on membership of private insurance, they would sustain a separation of private and public hospitals, and they would sustain a social division with one hospital network for the well-off, and another for the other 45 percent of Australians. This division is at odds with the Government’s social inclusion policy.

Private health insurance is an expensive and clumsy way to do what the tax system and Medicare do so much better – that is to distribute funds to those who need health care.

In itself it is an expensive financial overhead – a $3 billion annual burden on the health care system. Its even greater economic impost is its general impact on the cost of health care. International experience shows that private health insurance buys more expensive health care than tax-funded health insurance, but it doesn’t buy better health care.

Nor has the increased uptake of private insurance succeeded in its claimed purpose of easing pressure on private hospitals. That was an impossible task, because while demand has indeed shifted to private hospitals, so too have health care staff.

The main result has simply been a re-shuffling of the queues for limited resources, and that re-shuffling has put private insurance membership ahead of clinical needs.

In our criticism of private insurance we are not accusing the insurers of inefficiency, greed or profiteering. Rather, their failure is an inevitable feature of private insurance.

We are not advocating what some may call “socialised medicine”. Private hospitals serve an important function: they should be funded by means other than through private insurance.

Nor are we calling for universal “free” health care – there are many sound arguments in favour of those with means paying more from their own resources, without private or public insurance.

Our main message is that to the extent we choose to share our health care costs, a single national insurer provides the most efficient and equitable means of doing so.



(Visited 15 times, 1 visits today)