Efficiency Improvements to Australian Health Insurance

Successive Australian governments have rested on their laurels regarding reforming health insurance. However, Stephen King and I have always maintained that there was more to be done to ensure welfare gains at the margin. This is why we re-released our book, Finishing the Job, this year ($1 at Amazon and free on iBooks). Our theory (published in the Economic Record in 2003) was that Australia could gain from moving from a system where private treatments were paid for at full cost to one where they were a ‘top up’ over public treatments.

Liran Einav, Amy Finkelstein and Heidi Williams have just released a paper that provides support for this. Here is the abstract.

We present a simple framework to illustrate the welfare consequences of a “top up” health insurance policy that allows patients to pay the incremental price for more expensive treatment options. We contrast it with common alternative policies that require essentially no incremental payments for more expensive treatments (as in the United States), or require patients to pay the full costs of more expensive treatments (as in the United Kingdom). We provide an empirical illustration of this welfare analysis in the context of treatment choices among breast cancer patients, where lumpectomy with radiation therapy is a more expensive treatment than mastectomy, with similar average health benefits. We use variation in distance to the nearest radiation facility to estimate the relative demand for lumpectomy and mastectomy. Extrapolating the resultant demand curve (grossly) out of sample, our estimates suggest that the “top-up” policy, which achieves the efficient treatment decision, increases total welfare by $700-2,500 per patient relative to the current US “full coverage” policy, and by $700-1,800 per patient relative to the UK “no top up” policy. While we caution against putting much weight on our specific estimates, the analysis illustrates the potential welfare gains from more efficient reimbursement policies for medical treatments. We also briefly discuss additional tradeoffs that arise from the top-up and UK-style policies, which both lead to additional (ex-ante) risk exposure.

These are quite large estimates for just a single treatment type. It provides strong support that health insurance reform should still be on the Australian policy agenda.