The change in the thresholds for the Medicare Surcharge has generated much discussion over what it will cost and who will pay (see Tim Dunlop’s useful summary and follow-up here). What I think is that all of this highlights why our health insurance and funding system needs and overhaul. To demonstrate this, let’s follow a dollar around the system.
Imagine a certain individual who is currently paying for private health insurance because it is ‘free.’ That is, because if they did not they would pay the same amount in tax Medicare surcharge. Suppose also that when the threshold changes, for that person, private insurance will no longer be free and they will drop their cover.
So previously, for each dollar that that individual spent on private insurance, they would get 30 cents back in the form of a rebate while 70 cents would go to their insurer. So the government was paying 30 cents while there was additional 70 cents in funding for the private system. Following the change, however, the government saves 30 cents, the private system loses 70 cents while the public sector has to foot the bill for the individual’s health costs.
Now, chances are the individual has very few health costs. That means two things. First, the public sector bill wont rise by much. Second, their previous contribution to the private system is a complete loss in surplus for them. As that system will have to fund the same level of health expenses with lower revenue, there will be pressure on premiums to rise. Third, that premium rise means two things: (i) more individuals may drop private cover — although chances are that they will still be on the more healthy end of the spectrum and (ii) the government will have to pay more in rebates for private insurance.
So in terms of what this might cost the government, it looks hard to say. But that is only because we are not targeting fundamentals. If an individual decides to spend $1 less on private health insurance and that individual creates no health care costs, then, so long as the private health sector (insurance and all) is perfectly competitive, then it will have to recover that $1 in costs from its subscribers. So the government saves 30 cents on the rebate from the individual dropping cover and has to spend 30 cents on the rebate for the increased premiums to remaining subscribers. Put simply, by following the dollar we see that there can be no net saving for the government. And the reason is simple: this does not change the real costs associated with health care.
But that is an ideal situation. First, to the extent that it was receiving the surcharge from some in the threshold window, the government will lose that revenue. Why? Because it is a tax cut (amounting to $660m over 5 years). Second, to the extent that individuals and households dropping private health cover drive some health care costs (you know, get hospitalised), then the savings to the government will depend upon the relative cost associated with providing health care in the public and private system. If the public sector is cheaper at the margin, then the government will save money.
Finally, suppose that the private health sector was not perfectly competitive. In this case, things other than health care costs drive pricing. In this situation, the government might end up paying more in rebates because of the super-competitive premiums being charged in the private sector.
So everyone seems to be wrong here: Treasury, Access Economics, Alan Wood, AMA and whomever. At a baseline, this is a tax cut and so there is no welfare loss and, to the extent that there are some efficiencies in the public sector, it is a net gain. At its core, all of this back and forth is a result of not being willing to look at fundamentals. That said, the structure of our system really makes it easy to look away.