Leonie Segal is Deputy Director of the Health Economics Unit, Monash University.

Return to issue 79 index

The role of private health insurance (PHI) in Australia has not been reassessed since the introduction of Medicare in 1984 signalled bipartisan support for universal health cover reflecting widespread community support. The prospect of an uninsured person, unable to afford urgently needed hospital care was a reality prior to the introduction of Medicare and provided a clear justification for public support for private health insurance. However, with the adoption of a publicly funded universal health scheme, ensuring free access to public hospitals and free or subsidized access to medical and pharmaceutical services, the rationale for public support for PHI was no longer self-evident. But we find a series of ad hoc policy adjustments to support private health insurance. Why? - given public support for Medicare and the associated principle of access to health care on the basis of need.

The policies to support private health insurance are costly. The total cost of the package is over $3,600 million per year; including $1,100m in taxation revenue forgone through exemption of the Medicare levy surcharge, (Smith, Australia Institute), $2,200m in funding the 30% rebate (Australian Institute of Health and Welfare), ~$400m in extra Medicare payments for medical and pharmaceutical services associated with higher private hospital use, and the cost of a tax-payer funded advertising campaign to promote PHI membership.

If this subsidy had been allocated directly to public hospitals, the Commonwealth contribution to public hospitals would have increased by 50%.

What has been the impact of directing these funds to the PHI rebate and tax exemptions? The suite of policies has undoubtedly raised private health insurance membership - from 30.1% of the population in December 1998 to 44.2% in December 2002, with a vast improvement in risk profile - 98% of new members being under 65 years. Most of the increase followed the adoption of life time rating which penalised new membership after 30 years of age and an associated aggressive media campaign encouraging take-up of PHI.

However, the promised fall in PHI premiums has not occurred, with premiums continuing to rise. The young age profile of new members partly explains the absence of any major reduction in demand for public hospital services. Persons under 65 are not big users of public hospitals - occupying only 1/6 of the public hospital bed-days/head as persons over 65. And in any case, those with PHI have an incentive to continue to use the public hospital system to avoid the out-of-pocket costs associated with a private hospital stay. Especially as 50% of all PHI policies now carry front- end deductibles. The potential impact on public hospital demand is diluted by the allocation of over two thirds of the rebate and surcharge exemption to persons who already had PHI prior to the introduction of these subsidies, providing an income transfer to these persons from the tax payer, with no prospect of a change in service use. Furthermore, less than 50% of the rebate is for hospital use, with the rest for medical gap payments (an income transfer to doctors), other health services (through ancillary cover) and administration and profit of health insurers.

Has the policy brought more private funds into the health system? In fact the opposite has been the case. As PHI cover was falling between 1990/1 and 1996/7, the Commonwealth share of the health budget rose only slightly from 42.2% to 43.8%. But following the dramatic rise in PHI membership, it has increased more sharply to 47.5% of the health budget in 2000-01, matched by a severe fall in the PHI share of the health budget from 10.4% in1996/7 to 7.1% in 2000/01.

Have the policies supported a more equitable health system? The evidence suggests not. Exemption from the 1% Medicare levy surcharge only benefits high-income households and, being more likely to take out PHI, they also receive a disproportionate share of the taxpayer-funded rebate. The tax-payer through the subsidy on ancillary cover contributed $578m in 2002 to those with PHI - largely those on higher incomes - towards the cost of community-based private health services. The major item was $290m to support private dental care, far exceeding the Commonwealth contribution to public dental services ($70 m in 1999-00). It is interesting to note that a $22 m subsidy went on fitness and lifestyle equipment, while only 1.3 million went to support dietetic services and similarly occupational therapy.

It can only be concluded from the evidence that the policies to promote PHI are undermining the efficiency and equity of the Australian health care system - a conclusion reached by many health services researchers. The evidence provides a compelling case for a total overhaul of policies relating to private health insurance.

The role for PHI must be re-evaluated in the context of a system of universal health cover, a system underpinned by the principle of access to health services on the basis of need and payment according to capacity to pay - a principle that enjoys widespread community support.

References: Duckett and Jackson, MJA 2000; Smith, Australia Institute 2000, 2001; Willcox, Health Affairs 2001; Deeble 2003; Butler, Australian Health Review 2002; Hall et al, Health Economics 1999.

Return to issue 79 index

[ Doctors Reform Society of Australia home page]
[ About DRS ] [ Search ] [ What's New ]
[ Policies ] [ Media Releases ] [ Published Letters ]
[ Online articles ]
[ New Doctor: Journal of the DRS ]
[ Discussion Board ] [ Contacting DRS ] [ Joining DRS ] [ Links ]