My earlier blog post on private health insurance was followed by a flurry of activity in the media. See here and here. This had nothing to do with my post but rather meant that the Private Health Insurance Administration Council had released its annual report showing both an increase in revenue for private health insurance companies and that those private insurers had paid for an increased number of procedures in public hospitals. Of course, private insurance still covers far more private proceedures. As noted in the Australian:
The number of public hospital cases covered by health insurance (494,819) increased by six per cent, whereas the number of private hospital cases (2,319,400) increased only 1.5 per cent.
The PHIAC report led to the usual debate about whether or not the current private health insurance rebate should be means tested. However, to answer that question it is important to begin by thinking about what private health insurance actually does.When you buy private health insurance then, broadly speaking, there are two forms of benefits. Firat you can be treated in a private hospital or as a private patient in a public hospital receiving care faster or of different quality to the care you would receive purely under the public system. For example you might be eligible for a private room rather than having a bed in a shared ward.
Second, you may receive public treatment exactly the same as a public patient. But if you declare that you are privately insured, your private health insurance picks up the bill rather than the Australian taxpayer.
It is pretty easy to see that no one would buy private health insurance just for the second “benefit”. Why would you buy private insurance to pay for something already covered by the public insurance system Medicare?
So the key thing that private health insurance is selling is insurance coverage for the ‘extras’, most obviously reduced waiting times.
All Australians pay for public health insurance through our taxes. Finding information about the value of this insurance can be difficult. Public hospitals in Australia are funded by both federal and state governments. While I am sure there are more recent figures, the best I could find from the Department of Health and Ageing were about 10 years old at approximately $400 per person. So as a rough conservative guess each person in Australia receives about $800 of public health insurance through Medicare in today’s dollars. Of course taxpayers pay for this insurance whether or not they actually need an operation in any given year. Just like any other insurance, just because you do not claim in any year does not mean you get your premium back.
Those who purchase and use private health insurance still pay the public insurance premium. In other words, in the absence of any rebate a privately insured taxpayer pays for the government insurance, Medicare, and for overlapping insurance through their private insurance premium. This is most obvious where a privately insured patient receives the same services as if they were a public patient. But every operation paid for by private insurance, even if it is in a private hospital, takes pressure off the public system.
Is this a good thing?
The private health insurance system can be seen as a backdoor form of taxation. High wealth individuals are more likely to take out private health insurance so getting them to pay twice by not refunding the full value of the Medicare insurance that they avoid means the government makes more revenue. This may be a nice little money earner for the government but I have concerns that such hidden taxes are likely to be economically inefficient.
Of course the other group who are likely to buy private health insurance of those more likely to need healthcare. Thus the elderly, those with chronic health problems and those with young families are also more likely to pay the hidden tax associated with private health insurance. This is the main point that Joshua and I were making in our earlier research. The Australian mix of public and private insurance can make those most likely to be unhealthy even worse off through double charging.
What then is the solution?
Well we could do nothing. Looking around the world, the Australian health insurance system actually seems to do pretty well. So we could conclude that while out health insurance system is not perfect it is better than most of the alternatives.
An alternative would be to provide those who buy private health insurance with a full rebate on their Medicare insurance premium. This would avoid double taxation. It would cost the government money, but would make any taxation to fill the gap transparent. It would help both the ill and the rich, although the government would presumably tax the wealthier to fill the public expenditure shortfall.
A third alternative is to eliminate the double payment by reducing the scope of private health insurance. Make Medicare fully universal, with individuals able to buy private health insurance for extra services. For example, if I needed a hip operation I would receive the basic operation, with the associated waiting time and shared ward, under Medicare. If I wanted to have the operation sooner or to have a private room I could pay for the privilege. If I had private insurance then the private insurer would reimburse me for such additional payments. The operation could occur in a private or public hospital, with the hospital receiving the basic payment from the government and any extra service payments from me or my insurer.
This third alternative would also cost the government money so it would also need increased general taxation. Reform is not free, particularly when the reform is removing a hidden tax.
This third option also separates out insurance and provision of healthcare. There is no reason why a public patient cannot be treated in a private hospital or vice versa, and indeed many of our public hospitals currently have private operations. The ‘top up’ insurance proposal means that the basic Medicare funding follows the patient. The hospital performing the operation for the patient receives that payment, regardless of who owns the hospital.
In my opinion there needs to be debate on these alternatives, and probably other alternatives that I have not thought of. Maybe the debate will conclude that our current system, despite its flaws, works pretty well. But having an uneducated debate based on the size of the private insurance rebate without focusing on either the insurance properties of the healthcare system or the optimal way to provide tax revenue for that system is simply a copout by the government.