One nice thing about not being Dean is that I am getting time to catch up on some reading. So, in the ‘better late than never’ category, Agenda had an interesting set of articles about Australian health insurance in a special edition last year. It is accessible here

The fourth piece (Paolucci, Butler and Wynand – PBW) looks at the duplication involved in the current mix of Medicare and private health insurance in Australia. Basically, when you buy private health insurance you still get Medicare coverage, so essentially you pay twice for the same insurance product. This can have undesirable welfare effects. As the article notes:

The current public/private mix in healthcare financing in Australia appears to leave unsolved several problems such as over-insurance, high transaction costs, cost-shifting and perverse incentives with respect to waiting times. It also does not seem to be able to achieve a number of policy goals such as to decrease the financial pressure on the public scheme and to increase the affordability and fairness in access to healthcare services for everyone.

PBW support an opt out system to avoid duplication. This is not a new idea but, as the authors note, has been floating around for some 20 years. It is good to see it getting real debate.

That said, the alternative is to have the Medicare scheme as a universal basic insurance scheme and to have private insurance as a ‘top up’. This also avoids duplication. Joshua and I tended to favour that outcome in our earlier work (which all seems to be behind paywalls except for this rather technical working paper!).

The key thing is that there is debate about Australia’s health insurance system. Too often, health insurance is put in the political ‘too hard’ basket. But it is an important area where economics can have a major impact on the welfare of Australians – and where there are some relatively simple improvements that can be made to our existing system.



12 Responses to Reforming health insurance in Australia

  1. Trevor Kerr says:

    Please let us know when this debate begins, Stephen, and whether the Private Health Insurance Administration Council may be brought into it.

  2. Mark Hanna says:

    No doubt this is a worthwhile discussion, but it is so complex and open to politicised confusion that I cannot see how we could have any sensible national discussion in the Julia vs Tony, Yes vs No environment. Then again, maybe a finely balanced parliament could find a sensible future? In any event, our health system is so much better than the yanks’ that surely we just need to simply avoid doing anything that takes us closer to theirs?

  3. Bradley says:

    I’d just like to get dental/eye covered by my health fund without also paying for homeopathy and iridology…..

  4. Peter Whiteford says:

    “Basically, when you buy private health insurance you still get Medicare coverage, so essentially you pay twice for the same insurance product.”

    I’ve always assumed that the price of private health insurance is lower because of Medicare coverage – and of course you cannot take out private health insurance to cover GP consultations or the gap between the medicare rebate and what doctor’s actually charge.

    So I think this observation is simply wrong.

    Bradley – I suspect – but it would be interesting to check if possible – that people wanting iridology and homeopathy may well be cross-subsidising those of us using dental and eye-care services.

  5. Peter Sivey says:

    Stephen, you might be interested in this paper from a colleague looking at the effects of removing subsidies for health insurance in Australia:

    He finds removing the subsidies for pricate health insurance would lead to cost savings for the governement.  I’m not sure of the welfare implications..

  6. Stephen King says:

    Peter S – thanks for the reference. It looks interesting. 

    Peter W – to see why you pay twice, take the simple example of a hip operation. If I needed such an operation I could get it for no payment in a public hospital under medicare – in six months or more. Or I could pay for a private hospital and get it done next week. If I go the private option I would pay many thousands of dollars and would save the tax payer the cost of the public operation. As I have private health insurance, I would get most of my payment refunded by the insurer.
    But note that I have saved the taxpayer funds by not using the public insurance that I pay for (via my taxes). I do not get a rebate for the saved public hospital cost. So I have effectively paid for the public operation via my taxes and then paid again for the private operation. I have paid twice for the duplicated part of the service.
    Why would I do that? The private service is higher quality (i.e. no waiting period with the pain and suffering that goes with the wait). If I value that quality differential highly then I am more likely to privately insure. For example, if I am more likely to need medical attention (like hip surgery) I will be more likely to take out private health insurance. 
    So our current system effectively takes those most likely to be sick and gets them to pay for BOTH public and private health insurance. That is why Joshua and I called it anti-insurance. From the perspective of welfare, it is bizarre.
    The current system also creates incentives for the government to reduce the quality of public health services – as this pushes people onto the private system. So from a revenue perspective the government likes longer public hospital queues, more crowded wards, etc. Again, a bizarre incentive if the aim is to help all Australians get good health care.

  7. DP says:

    @Stephen, Perhaps I’m missing something about your argument, RE: Govt liking longer queues, crowded wards, etc. Given the discussion thus far, one would conclude the private system has plenty of capacity to provide specialist surgery and the public system doesn’t. If – for argument’s sake – the Govt decides to nationalize the private health system and takeover do you think/believe that increased capacity will provide the supply of specialist surgery places for everybody thus ensuring good and timely health care for all?

  8. Trevor Kerr says:

    You need to get out more, Stephen. :)
    The private service is higher quality (i.e. no waiting period with the pain and suffering that goes with the wait).
    It could be that the better determinants of quality are pain & suffering after the hip replacement. 
    If you can’t find numbers for those stats, then take (please!) a simpler situation for which there are dollars assigned.
    When I had a serious infection (documented in the Letters of AFR) I  went to the nearest public hospital. They asked me on Day 0 if I had PHI. If I’d said No, I’d have had zero out-of-pocket. I said Yes, got the same (excellent) care and zero o-o-p. The costs were passed on to HBA, somehow, and without me knowing what they were. I could guess, though, and am pretty sure I’d have been thousands o-o-p. 
    That’s a cost comparison that can be made and would put some meat around your “most of my payment refunded by the insurer”.
    However, for the cataracts, I went straight to private, knowing that the o-o-p ($1K) was well worth it for the convenience and immediacy. 

  9. Peter Whiteford says:

    you say “But note that I have saved the taxpayer funds by not using the public insurance that I pay for (via my taxes). I do not get a rebate for the saved public hospital cost. So I have effectively paid for the public operation via my taxes and then paid again for the private operation. I have paid twice for the duplicated part of the service.”

    Your taxes pay for insurance, so your individual taxes pay for a tiny part of any individual operation at a point in time, so I would see the duplication as miniscule.  Now if everyone used only the public system the increase in taxes would clearly be more substantial, but is this what you are thinking of.
    Also paying privately you are also getting something that the public system does not provide (no waiting period), so there is a tangible benefit as well as acost to you.

  10. fxh says:

    In a Private Hospital professional service fees like surgeon, anesthetist etc are paid for @75% of scheduled fee by Medicare (the public insurer your hard earned taxes pay for). Your PHI pays the 25% plus a bit of any (usually substantial) extra the professionals charge – because they can. Your PHI rarely pays the complete gap, so you end up paying for many months after random bills arriving for strange amounts anywhere from $300- to $65.97 direct to your professional.
    PHI does not pay all of the professional service fees by any reckoning in Private Hospitals – Medicare pays most, PHI pays the next most and you pay the next most.
    The other part of Private Hospital costs is the hotel costs, accommodation, cable TV, internet access, meals, glass of Pinot for yourself and visitors, etc. It includes nursing – which is sometimes relatively specialized and skilled but many times is just version of  expensive room service.
    The PHI negotiates with PHs to set this amount – but it varies between different places and relates to brand, luxury (or perceptions of luxury) and what the market will bear.
    It surprises many people to discover that you don’t alway get a room to yourself in a private hospital .
    One advantage with private hospitals not mentioned, besides a shorter waiting list for non life threatening illnesses, is that you can choose your own admission time. That is, instead of having your cataract done on Tuesday and having say, Monday Tuesday, Wednesday off work , you can have it on a Friday and have two days on weekend to recuperate.
    Private Hospitals are expensive, they are after all charged with making $ not breaking even, and its no surprise that in times of crisis of waiting lists (mostly media manufactured) none of them have ever been able to offer relief at the price public hospitals can and do perform at per unit. Even at average price let alone marginal which is where the cost should be.
    Keeping in mind one of the significant constraints is that it is largely the same professionals, surgeons etc who operate in public and private. If PH are to be paid above the marginal (and even above the average) cost to clear waiting lists then Public services are capable for extra monies to open extra theatre sessions.
    Keep in mind that talk of “beds” is misleading and anachronistic. Take cataracts for instance, thousands and thousands  performed each year, yet no beds used in public hospitals. Each patient in and out in less than 4 or 5 hours. No beds.

  11. fxh says:

    As noted above by Trevor I think, there is no debate in Australia about our health system and insurance. I’m no conspiracy theorist but it seems to be in no ones interest to have an INFORMED debate. Certainly not the existing PHI industry which benefits hugely by current taxpayer subsidies.   The almost forgotten National Health Reform Reports also had an excellent recommendation (perhaps only suggested?)  of Medicare Choice – based largely along the lines of the Netherlands system. To mention the concept in most circles is to risk exclusion from future meetings and round tables and  being “marked”.

  12. These kind of debates are spreading as a viral on NET from the day Obama care has been got into the market and now lets see how this topic would go on NET !

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