Where is premium insurance?

Here is the idea of health insurance: you pay a premium and then, if you need it, you make a claim. This pools everyone’s risk of poor health together; a welfare gain as it smooths what might otherwise be some very big bumps in health payments.

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But, in Australia, private health premiums are regulated. They have to be because of limited competition and because of the private health insurance rebate making the government a big customer. Yesterday, the Health Minister Nicola Roxon announced that health funds could increase premiums by 6 percent. In a failing economy, how could health care costs be rising that much? The answer was that claims had risen but also that the health funds had taken a hit on investment funds — you know, where your premiums go until they are needed by someone.

But think about what that means. The amount of health expenditure insurance you get is tied to the health of the economy. That isn’t insurance, it is something else. These funds are selling relief from uncertainty with uncertainty. What is more, the ability to pass on investment losses like this is, wait for it … running the risk of moral hazard. Not this time, on potential claimants (that is always an issue). No by the funds themselves who have less incentive to manage investments properly. (Actually, it is a little hard to tell. I can’t recall ever hearing when investments were doing well, health funds put in a claim for reduced health insurance premiums).

What the Government needs to do is overall the health insurance system to provide real insurance. What Stephen King and I outlined in Finishing the Job was a plan to have the government cover all procedures at a standard level whether public or private. Private health insurance would then be for the extras and marginalised and not directly regulated. (Here is a summary). It is time for this Government to act.

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2 thoughts on “Where is premium insurance?”

  1. I suggest that everyone read the attached article – it’s really enlightening.  However, the most important quote is this one:

    “For an economist, the improvement in transparency amounts to an empowerment to consumers. However, for a politician, something that was previously not called a tax would now be one—the political fear appears to be calling it one.”

    However, you miss one thing that economists always fail to address when talking about health – the difference between hospital cover and preventative health (also known as public health, but this makes it confusing when talking about public and private).  Everyone knows that preventative health could lead to better dollar for dollar outcomes than expensive treatment.

    However, I don’t know how private health benefits from promoting this?  Governments don’t get political gain from it as, when compared to hospital beds, prevention is ‘invisable’ and likely to go past the term of current government.s

    I’d love to see a paper addressing preventiative health in association with this ‘top-up’ system that is proposed.

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  2. Joshua,

    I don’t see your problem although I do see Tristan’s. All general insurers invest their premium income so as to get market returns until they need to pay out on a proportion of the risks insured. Looking at the seesaws we have seen in the last few years in builders’ insurance and in professional’s indemnity insurance following collapse of HIH and a few other nasty events, I can’t get too worked up about health funds passing the hat around because their investment income has dropped.

    But I do get worked up about the point that Tristan makes. They are not health insurers. They are medical cost insurers, and pretty pathetic ones at that.

    If I require a non-urgent surgical procedure, such as a diagnostic colonoscopy or cataract surgery, I can get it slightly quicker on private insurance but it costs me money, sometimes a whole lot. If I get it on the public system it costs me nothing.

    One of the touted benefits of the private system is that you get the surgeon of your choice, but given the opacity surrounding the whole area, there is no basis other than rumour on which to make that choice.

    Think of it this way. If bushfire insurance worked the way that health insurance did, if you were uninsured and your house burned down, it would be rebuilt for free after a few months. If you were insured, it would be rebuilt a little sooner but you would be up for thousands of dollars in architect’s fees, surveyor’s fees, building inspector fees, the fees that the builder charged over the fund’s scheduled per square metre rate, et cetera, et cetera.

    I know of no other type of insurance in the history of Western civilisation that ever worked this way.

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