Health Insurance in The Age

I have an opinion piece in today’s Age on the recent changes to the Medicare Levy surcharge (it was somewhat edited before getting to press but the point has not been lost). Bottom line: as reflected in a previous post, I think that everyone has got it wrong and any migration from the private health system will probably save the government money.

Budget move the beginning of a health care cure

Joshua Gans, The Age, 28th May, 2008.

Despite the protests, new income thresholds are a fix, not a failure, in health care.

ONE of the most widely discussed aspects of the federal budget was the Government’s decision to raise the income thresholds for the Medicare levy surcharge, the additional amount that those who have high incomes but no private health cover have to pay.

Not surprisingly, the threat of an additional payment of 1% of income at tax time was enough to move many into private health cover. Combined with the 30% rebate, for some households, this made having private insurance cheaper than not. Indeed, for an annual $1000 premium, those earning more than $70,000 would want private insurance even if it was worthless to them.

The decision to raise the thresholds from $50,000 to $100,000 for singles and $100,000 to $150,000 for couples and families changes this.

Since the announcement, analysts and policymakers have been trying to predict just how many will drop their private health cover as a result. Estimates of 400,000 to 1 million people have been thrown about, but no one has asked: “Do we care?”

Let’s consider an individual who was only buying private health cover because it was cheaper than paying the surcharge. That individual, most likely, is relatively healthy and relatively young. That means that they did not really expect to incur hospital costs. So for every dollar they previously spent on private cover, the Government gave them back 30¢. The remaining 70¢ went to support private health care.

After the change, should that individual drop their cover, the Government would get back the 30¢ but the private system would lose $1. That dollar, private health insurers argue, was covering the costs of treating private patients. For those costs to still be covered, the dollar will have to come from those who remain in the private system and that means higher premiums.

Not surprisingly, they expect more people to be driven from the private system as a result of that flow-on — hence the range of estimates as to attrition.

But what does this mean for the Government? First, it saves the 30¢ rebate on dollars spent by those leaving the private system, but second, it has to pay 30¢ on each additional dollar of premium for the rest.

But for every 30¢ the Government saves, it will pay 30¢ in rebates for those remaining. Mathematically, it is a one-to-one relationship and there is no net saving or cost for the Government. So all the back and forth on how many will leave is irrelevant (at least in terms of alleged budget black holes).

Of course, as with all such things, there are caveats. First, there were many who were paying the surcharge so the Government will end up with less revenue there. Second, for some patients, the Government will be paying for the health-care costs. The point is, they are likely to be the relatively healthy. So long as it is no more expensive to treat those patients in the public system, there will be a net saving for the Government.

Finally, the Government may not permit the private health insurers to raise premiums by as much as they expect.

What is new about this move is that the Government has shown itself willing to take on the private health insurers. They are not happy about this and this is not surprising. Their industry has been supported by a variety of temporary measures that try to keep households from bleeding away and those measures look like being removed.

This is a welcome move. For too long, individuals have been forced to “opt out” of the public system.

There is an alternative. We can recognise a public role for basic hospital services and fund all procedures to a certain level, regardless of where they are performed.

Private health care will still cost more (for private rooms, etc) and so there will still be demand for private insurance. But it will be marginalised and its rationale transparent.

This will extend competition and allow governments to invest in the public system without fear that it will unravel the private one. Our system needs a cure, not more temporary solutions.

Joshua Gans is an economics professor at Melbourne Business School. His 2004 book, Finishing the Job, outlined this proposal.

2 thoughts on “Health Insurance in The Age”

  1. The whole approach of funding of the medical system is around the wrong way and is the same problem as the Universities with HECS. You get efficiencies when consumers have choices and suppliers have the freedom to meet those choices.

    You get inefficiencies when a “planner” decides what services to provide and consumers get little choice because there is none or they do not have a way to exercise choice (they do not have enough money).

    Give the health money to the population and let them decide where and on what to spend it on health matters. It is all so simple.

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