It took a little while but my earlier post on health insurance premiums (from 25th February) was published in The Age today. I argue that current regulations of health insurance premiums are, to say the least, poor and highlight the problems with our current health insurance system.
The Age today published an opinion piece I wrote on credit cards. You saw it first here earlier in the week.
An article in The Age today reports on a Conference on Payment Systems held at Melbourne Business School, yesterday. Here is a link to the conference site. From the article, one would get the impression that the Reserve Bank was under fire over those reforms with hard hitting criticism coming from all quarters.
I was there and spoke at the conference and that wasn’t my impression at all. In 2003, Australia enacted a set of reforms to the credit card system that from a regulatory standpoint, were dramatic. Prohibitions on surcharges for credit card transactions were removed, access to card schemes opened up and, most critically, the interchange fee — the fee that banks pay each other to settle card transactions — was cut by one half. The last change was significant. Not only was this industry now subject to price regulation but a sharp change in a key price. Now central banks enact sharp changes all of the time in interest rates but for regulatory price setting (e.g., by the ACCC) this kind of thing is unheard of.
The article gives the impression that the predicted massive disruption to industry actually ensued. But that is hardly the case. Dramatic reform has appeared to add up to dramatic non-reaction. Without going into too much detail but according to the Reserve Bank’s own figures, credit card usage (by value or number) has continued to grow at historic rates, credit card debt has grown along with it and the share of credit card use to EFTPOS use has remained roughly constant. Take a look at this graph:
This last point is significant as The Age article suggested that in fact EFTPOS was rising at the expense of credit cards. But this has only occurred in the last quarter; 3 years after the reforms. For all we know it is just a statistical blip.
The most that might be said for dramatic change is that it is still to come. Professor Jean-Charles Rochet (speaking at the conference and one of the most influential academics in this area) raised this possibility; especially considering the long-run effects on investment. What the reforms have potentially done is shifted profits from card issuers (who deal with cardholders) to card acquirers (who deal with merchants). In this case, issuers will have a reduced incentive to invest in the system while acquirers will have a greater incentive. Rochet’s point is that we don’t know if this is a good thing or not and so should have been more cautious about regulatory intervention.
In my opinion, there is less to be concerned about in the long-run than industry participants are making out. Specifically, the interchange fee is but one means that banks might use to share costs of mutually beneficial investments. They need not use this at all and simply agree to alternative funding arrangements. Moreover, these would not be built into the cost of each transaction and would be instead based on forecast profits and the like; just as normal businesses do everyday. That should not deter investment that would assist the credit card system.
It seems to me that the main risk comes from taking the regulatory interventions here too seriously. There are some many other alternatives that this one price just doesn’t really matter. What matters is regulatory uncertainty. Everytime that price is changed, there are consequences and costs on market participants. So uncertainty about whether it is going to change or not will have a ‘chilling’ effect on activity and arriving at mutually beneficial arrangements. Some of this uncertainty comes from continuing RBA reviews. Other uncertainty comes from legal action lauched in relation to those reviews. It would be better if regulators and participants could regulate the interchange fee and just move on.
Indeed, for 20 years, the banks themselves practiced this. At the beginning of the establishment of the BankCard system, the banks set the interchange fee at a nice round number. They then didn’t do anything more until the RBA and ACCC started sniffing around. The very rigidity tells me that the fee is not important as an instrument for changing circumstances; large scale change occurred anyway over this period. What we want to do is return to rigidity.
There are rumours today that the forthcoming media reforms will permit multi-channelling on digital television. However, there is said to be a condition: only after a sufficient number of households have bought digital set-top boxes.
Talk about getting your chickens and eggs mixed up! Surely, it is multi-channelling that will encourage consumers to adopt digital television. To require adoption first is a receipe for failure.
In the FT this week, Tim Harford writes about health insurance. He starts with the public case of a woman denied a new breast cancer treatment and the difficulties of trading-off problems in a public health care system. He then proposes that the best insurance for health concerns would be simply to give patients a check if they are diagnosed with an illness (according to some scale) and let them choose what treatment to spend it on.
Harford has a point: this would result in real insurance. To see this, notice that health insurance currently works to restore health but whether it be private or public treatment, patients have few options. For instance, a patient does not internalise the cost of the treatment at all. When a claim comes in they may as well take treatment because it is free to them. However, for all we know, a patient factoring in all of the risks (including that the treatment might not work), even if they had the money, would not choose it. If that is the case, there appears to be an inefficiency. When we are talking about expenditures in the 100s of thousands, this inefficiency is hardly trivial.
Harford’s solution breaks through this by giving the patient the money instead of the treatment. At the very least, they will spend that money on the treatment. But they could do something else. They might choose not to spend it (telling us that is probably the efficient thing) or they might put the money towards a more expensive treatment that is currently denied them by their insurance provider. Again, a more efficient outcome has occured because the patient has signaled their willingness to pay for the additional cost.
While theoretically sound as a base idea, as usual practical issues abound as always happen when you give people money they might look for ways to get their hands on it (other than being truely ill). But, nonetheless, it is certainly worthy of closer examination.
Today, Pay-TV operators lobbied for changes in broadcasting rules in response to the threat from the Internet. In particular, they were concerned about anti-siphoning lists that prevented Pay-TV operators from television sports events. The example of only 3 live events shown in teh recent Winter Olympics is a case in point.
But it is hard to see what this has to do with the Internet. The Internet may attract attention and also compete with television but restrictions that protect free-to-air TV have little to do with that. Instead, it is those restrictions that are the problem. Put simply, those laws give broadcast TV operators veto power. They could television a few hours of Olympics a night and block Pay-TV from televising the rest. Moreover, on-line options such as Google TV were not available to Australian viewers. So much for the threat from the Internet.
So forget basing arguments on potential threats, the argument resonates now: restrictions that give broadcast TV a leg up are not a good idea and have real costs if abused. If programming is not available as a result of them, then those rules are hardly working to provide free options for consumers.
Of course, another possibility would be for Pay-TV operators to offer free channels themselves. They could install boxes for free across Australia and then become a new free broadcasting choice. I guess, however, that the investment costs for that would be prohibitive. But if they are really threatened perhaps it is worth considering.
As is the case every year, the Federal Government has announced how much it will allow private health insurance companies to increase their premiums. One might wonder why the Government should play a role in setting private health insurance premiums. And the answer is simple: it is paying for 30 percent of them and so has an interest in what they are.
But why, you might ask, can’t competition between insurers ‘regulate’ the price? And the answer again is: the Government is paying a 30 percent premium. That means that if individual households search around for lower premiums, in effect, they only keep 70 percent of the savings. Not surprisingly, the Government distrusts that households will use their powers of consumer choice so as to allow competition to work. Add to that the possibility that consumers aren’t necessarily so shrewd and rational when it comes to such things and the fact that it is hard to compare health insurance offerings anyway (it is a good example of a ‘confusopoly’) and we can’t expect competition to be effective.
What we are left with, in contrast, is a terrible regulatory regime whereby the health insurers petition the Government for a fee rise based on their own cost increases and usually get it (or most of it). This reduces their incentives to contain costs and lo and behold we are footing the bill. Not just the average $150 rise in premiums but an additional $45 in public expenditures. This is not the sort of regulatory deal we put up with in other sectors such as energy and even telecommunications. (Boy, would Telstra love the health insurance deal!)
What is more is that there are several simple options at the Government’s disposal to change this situation. One option is to change the health insurance rebate. As Stephen King and I have demonstrated a lump sum (or dollar) payment rather than a percentage would remove many distortions: including that to the incentives of consumers to search for lower premiums.
Another option would be to move to a modern system of price regulation. Incentive regulation sets the caps on prices (or in this case premiums) independently of short-run changes in the costs of individual firms. This is usually done by referencing some benchmark. While the choice of benchmark can often be contentious, in health care, benchmarking for the Government is easy: it could base the annual rise in private health insurance costs on the increase (if any) in Government expenditures on relevant public health services. Something it not only observes but can control.
Better still, if Government could get rid of the rebate entirely and subsidise private hospitals and medical expenses directly based on the same cost benchmarks as the public system. The would eliminate the need for regulation altogether and put the annual round of increases into the past. Indeed, this is only one of the benefits that might come from this more major type of reform.
Only by doing something like this can we, as health consumers, get some real insurance — over premiums as well as health expenditures.