Thinking of ditching private health insurance in the pandemic? Here’s how to calculate if it’s worth it for you


Yuting Zhang, University of Melbourne

Almost all private health insurers increased their premiums in October, and have scheduled another price rise for April 2021. As many people struggle financially amid the pandemic, you may be wondering whether you should drop your private health insurance altogether.

Before you do, bear in mind some government policies affect the cost of your insurance, and sometimes dropping it may even cost you more.

Here’s the bottom line

For singles with an income above A$105,000, and for families with an income above $180,000, it’s worth buying private hospital cover even if you don’t think you’ll use it. I’ll explain why in a moment.

People with incomes below these levels need to compare value and costs. The decision varies a lot depending on your age.

Three key polices affect your premium costs: the Medicare levy surcharge, government rebates, and discounts for younger people.

Throughout this article, we’re talking about hospital cover, not “extras” like dental, optical or physio, which aren’t affected by these policies. You can buy extras cover separately without hospital cover. Extras cover is much cheaper than hospital cover, and an easier decision overall — you can readily compare how much you stand to gain from extras cover (based on how often you’re expecting to visit a physiotherapist, for instance) and then weigh that against how much it will cost you.

Here are the main things you should factor in when deciding on hospital cover.

There’s the Medicare levy, and then there’s the surcharge

Almost all Australians pay 2% of their taxable income as the Medicare levy. This money goes towards funding parts of the public health-care system. It pays for Australians to get free (or much cheaper) GP visits and care in public hospitals.

If you earn above a certain income and don’t have private hospital cover (extras cover does not apply), you have to pay an extra 1-1.5% of your taxable income, called the Medicare levy surcharge.

For example, if John Citizen has a total taxable income of $150,000, he must pay $2,250 in additional tax (the Medicare levy surcharge), on top of the $3,000 he already pays as the Medicare levy. If he buys an appropriate level of private hospital cover, he can waive this extra tax and just pay the $3,000.

Keep an eye on government rebates

Singles with an income below $140,000, and families with an income below $280,000, can get government rebates on their private health insurance — that is, a partial refund. The level of this rebate varies by income and age.

Discounts for the young

Since April 2019, people aged 18–29 have been able to get discounts of up to 10% of their private hospital premiums. The allowable discounts are 2% for people aged 29, 4% for 28, 6% for 27, 8% for 26, and 10% for 18-25. People will retain that discount until they turn 41, then the discount gradually decreases by 2% per year.

Factoring the above policies in, for singles with an income above $105,000 and families with an income above $180,000, it makes sense to buy private hospital insurance even if you won’t use it. That’s because you can find hospital cover cheaper than the Medicare levy surcharge.

For those with an income below these levels, you need to compare whether the value is more than the cost. Value consists of two components: protection from unexpected catastrophic risk, and your expected use of private hospital care.

First, value from risk protection is highly subjective, depending on your level of tolerance for potentially catastrophic uncertainties. Some people might naturally be more anxious about risks, but others less so. For example, people buy home and contents insurance to cover unexpected natural or accidental catastrophes, or burglary. But arguably, this component of value is small in the health insurance market because all Australians are insured by Medicare to cover their health needs in public hospitals, and are therefore protected from the financial risk of catastrophic health problems.

Second, there is value in buying private health insurance if you anticipate using private care, which can reduce your waiting time for certain elective surgeries, or give you a choice of doctors. This goes to the second part of value: expected use.

Take a look at the table below for the national averages for your age regarding your expected use of private hospital care. Basically, the older you are, the more you’re likely to use it, and the greater the expected benefit.

Here’s an example. If you are single, 24 years old, are comfortable taking risks, have an income below $90,000, and your expected use of private hospital care is in line with the national average, your value from buying private hospital insurance is about $550 a year. As per the above graph, for people 20-24 years old, $550 was the national average of benefits actually paid by private insurance companies between July 2019 and June 2020.

Meanwhile, your median premium cost is $1,457 after rebates and discounts, and you are exempt from the Medicare levy surcharge. So it may not be worth buying private hospital insurance in this set of circumstances.

When comparing value and costs, you are most likely better off buying private hospital insurance given the current government policies for the following scenarios:

  • family cover: family income above $180,000; family income below $180,000 if older than 44 or with special needs for private hospital care (such as childbirth in private hospitals).

  • single cover: income above $105,001; income below $90,000 and older than 54; income between $90,000 and $105,001 and older than 24.

And don’t forget

There are a few final things you should keep in mind. When you use your insurance for a stay in hospital, there will be out-of-pocket, or “gap”, costs. So you’ll still have to pay extra even with private hospital insurance.

Then there is the Lifetime Health Cover loading, which adds 2% to your insurance premiums for every year you are over 30 if you don’t have hospital cover by 1 July following your 31st birthday.

For example, if you wait until you’re 40 to buy private hospital insurance for the first time, you could pay an extra 20% on hospital premiums. The loading is removed once you’ve held appropriate private hospital cover for ten consecutive years.

More generous coverage requires higher premiums. What’s more, even for the same coverage, premiums may vary substantially across insurers. So, shop around and use free resources to compare health insurance policies.

Finally, it’s a good idea to re-evaluate your options every year or every other year as your situation or government policy changes.The Conversation

Yuting Zhang, Professor of Health Economics, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Private health insurance premiums are going up this week. But the reasons why just don’t stack up


Yuting Zhang, University of Melbourne

Private health insurance premiums are set to rise on October 1, an increase companies have delayed for six months due to the COVID-19 pandemic.

But 2020 has been a year like no other. And some of the reasons insurance companies are using to justify this price rise don’t stack up.

These include increasing costs of hospital and health care, more claims, an increase in chronic health conditions, and an ageing population.

At a time when many policy-holders are facing financial stress and many elective surgeries or treatments suspended or delayed, this week’s price rise isn’t justified. With a further price rise already set for April 2021, it would be fairer to delay any fee hike until then.

1. Increasing costs of hospital and health care — false

Costs of hospital and health care paid by private insurers have reduced substantially in 2020, not increased, according to the latest figures from the Australian Prudential Regulation Authority. That’s because many elective surgeries and routine extra care (such as dental check-ups) were suspended.

Private insurers paid reduced hospital treatment benefits in two consecutive quarters. They dropped 7.9% in dollar terms in the March 2020 quarter, compared with the December 2019 quarter. They fell another
12.9% in the June 2020 quarter, compared with the March 2020 quarter.

Man lying down in hospital bed signing papers
Insurance companies paid less for hospital treatments earlier this year, not more.

Private insurers’ payments for general treatment (also known as ancillary or extras) benefits dropped even more. They fell 32.9% in the June 2020 quarter, compared with the March 2020 quarter.

Some may argue the reduction in benefits paid is because substantially fewer people had private insurance in 2020. But this is not true.

While there was a small drop in the number of people with private health insurance in the first half of 2020, this was by less than a percentage point: the number of hospital memberships fell by only 0.4 percentage points. There was a similar drop in the number of people with extras cover.

2. Increase in claim frequency — false

Another reason for the price rise is there have been more claims over a given time, or an increase in claim frequency. This, again, is not true this year.

Private insurers paid for 16.7% fewer hospital treatments in the June 2020 quarter compared with the March 2020 quarter. That’s a 4.1% reduction in the 12 months to June 2020.

Private insurers paid out 28.4% fewer extras claims in the June 2020 quarter, compared to the March 2020 quarter. This was a 9.8% fall over the 12 months to June 2020.

Read more:
How to clear Victoria’s backlog of elective surgeries after a 6-month slowdown? We need to rethink the system

In Victoria, services are only gradually returning to full capacity from November. So it will be a long while before claims return to pre-pandemic levels.

People have also been avoiding seeking needed health care because they are afraid of contracting the coronavirus, or cannot afford out-of-pocket costs due to increased financial stress. This would be another reason for the numbers of claims decreasing, not increasing.

Read more:
Should I drop my private health insurance during the pandemic?

3. More chronic disease, an ageing population — no data supporting this for the next 6 months

In the long run, these claims are correct and premiums should increase gradually over the coming years because of the ageing population and growing incidence of chronic conditions.

However, they’re not likely to change enough in the next six months to justify a premium increase now.

Read more:
FactCheck: do one in two Australians suffer from a chronic disease?

Here’s what should happen

Some insurers are already providing discounts for families in financial hardship, such as people receiving JobSeeker or JobKeeper. Others offer discounts or waive price rises to people who pre-pay their policies for up to 12 months. More insurers should do this.

Providing financial relief and delaying the October premium increase will not only help customers but also help private insurers in the long run.

Increasing premiums twice in six months (October 2020 and April 2021) during an unprecedentedly difficult time can backfire, especially if the reasons to support the increase do not stack up.

Read more:
Young people dropping private health hurts insurers most, not public hospitals

When premiums increase, young people are more likely to drop private health insurance. This will drive up premiums further for everyone. This in turn will lead to more young and healthy people dropping their cover.

Consequently, it may cause a “death spiral”, driving private health insurance out of business.The Conversation

Yuting Zhang, Professor of Health Economics, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Should I drop my private health insurance during the pandemic?


Sophie Lewis, UNSW and Karen Willis, La Trobe University

Many Australians, especially those experiencing financial hardship due to COVID-19, are asking whether they can afford to keep their private health insurance.

Others don’t know if they should drop or downgrade their cover, especially if they cannot or don’t want to access services they’ve paid for.

Now consumer group Choice is recommending people think about dropping extras cover, dropping or downgrading hospital cover and asking their insurance company for hardship considerations, which include waiving premiums or suspending their policy.

What options do you have? And what are the implications of dropping or downgrading your cover?

Read more:
Do you really need private health insurance? Here’s what you need to know before deciding

What services can I use?

Our research shows people take out private health insurance because of shorter waiting times for elective surgery, choice of doctor or hospital, access to a private hospital room, and extras like dental and physiotherapy services.

Although some elective surgeries are due to resume this week, it’s unclear how long it will take hospitals to clear the backlog, which surgeries will be performed and where. This raises questions about whether consumers will be able to access the benefits they value in having private health insurance.

Read more:
What elective surgery will be allowed now the coronavirus situation has improved? It’s up to your surgeon or hospital

While a key reason for taking out private health insurance is to avoid waiting times, people may now have to wait while hospitals and health care providers resume a staged approach to resuming elective surgery and general treatments impacted by the pandemic.

People may also be worried about whether they will receive the care they need if they have COVID-19. However, they should be assured that emergency treatment will be provided through the public system. Many private health insurance companies will also now cover COVID-19 related treatments.

How are private insurers responding?

Modelling by the Australia Institute shows private health insurers could make considerable savings due to a reduction in claims paid to, or on behalf of, consumers during the pandemic.

This is because services, such as elective surgery, and general treatments, such as dental services, are not available or are limited. And it recommends some of these savings should be passed on to policy holders.

Private health insurance companies have assured consumers that any increase in premiums will be delayed by at least six months.

They have also said that some funds resulting from the cancellation of elective surgery or allied health services will be returned to customers. It isn’t clear, though, how this will be done and over what period.

What options do I have?

It’s not surprising if you’re confused about whether to keep, drop or downgrade your private health insurance.

Our research consistently shows consumers find changing private health cover confusing. Increasing costs of premiums, value for money and difficulties understanding policies are common concerns. People aren’t certain what they need cover for, what is a reasonable price to pay, and how much difference there is between the public and private systems.

Read more:
Confused about your private health insurance coverage? You’re not alone

If you are thinking about downgrading your hospital cover or stopping extras cover, think about what services you may need in the future.

Remember that if you downgrade your hospital cover to a lower level of cover some services may be excluded (for instance, pregnancy). If you decide to increase your level of hospital cover in the future you may also need to re-serve waiting periods for those services excluded at the lower level of cover.

Lower levels of cover may exclude some services, such as pregnancy care, which may be relevant in the future.

If you drop your hospital cover and take it up again in the future, you may pay more due to the Lifetime health cover loading (if you do not take private health insurance up again within 1,094 days of dropping your cover).

Choice is also recommending people drop their extras cover. But your decision about this will depend on the types of services you typically use.

If you decide to drop your extras cover, you may also be required to re-serve waiting periods if you take up extras again in the future.

This means you may need to wait two months for general dental services or physiotherapy, but 12 months for major dental procedures. However these waiting periods vary according to procedure and insurer. So to find out what waiting periods apply, ask your health fund.

If you are experiencing financial hardship you may be able to ask your fund to temporarily waive your premiums or suspend your policy. However, you won’t be covered while your health insurance is suspended.

What happens after the coronavirus?

The pandemic highlights issues with Australia’s health-care system, and how private health insurance operates and is funded.

There has been much critique of government policy encouraging Australians to take out private health insurance, and in particular the subsidising of premiums through the private health insurance rebate.

Read more:
Elective surgery’s due to restart next week so now’s the time to fix waiting lists once and for all

At a time when more consumers are experiencing financial hardship they will question the value of their private health insurance even more than before.

There may be other ways of providing health-care, including fixing waiting lists, that meet the needs of all Australians, while retaining the best aspects of both public and private care.

As decisions about whether to change your private health insurance depend on your personal circumstances, please discuss your options and their implications with your health fund or read the fine print on policy documents.

For independent advice and consumer resources, see the government’s private health insurance website, health department website or consumer organisation websites such as Consumers Health Forum of Australia or Choice.The Conversation

Sophie Lewis, Senior Research Fellow, Centre for Social Research in Health, UNSW and Karen Willis, Professor, Allied Health Research, Melbourne Health, La Trobe University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Private health premium increases might be the lowest in years, but that doesn’t mean they’re justified

Those facing large price increases might drop or downgrade their cover.
Wayhome studio/Shutterstock

Nathan Kettlewell, University of Technology Sydney

Every year private health insurers raise premiums and every year we rue the hit to our hip pocket. This cycle is heavily regulated: insurers apply to the health minister who must approve premium hikes unless deemed contrary to the public interest. Premiums then change on April 1.

This time the federal health minister, Greg Hunt, has managed to keep average premium growth to 2.92% – the lowest in 19 years. This news comes two weeks after he rejected an industry proposal to increase premiums by 3.5%.

While the government celebrates this apparently modest price rise, consumers are right to point out that premium growth continues to outstrip inflation and wage growth. How do insurers justify this?

Read more:
Premiums up, rebates down, and a new tiered system – what the private health insurance changes mean

The case for higher premiums

Australians have come to expect that come April 1 each year, their private health insurance costs will go up – often by a lot.

These increases have been substantially more than wage growth or inflation. Between 2011 and 2019, the cumulative growth in nominal premiums (before rebates) was 49%. Over the same period wages grew by 21% and CPI by 16%.

Insurers have justified the growth in premiums by pointing out that benefits – the money private health insurers pay out when we go to hospital or have treatment – have also grown substantially.

Benefits grew on average 5.3% per year between 2014-2019. However, while earlier this decade benefit growth consistently outpaced premiums, this is no longer the case.

Growth in benefits is due to both higher medical costs and more claims. In fact, benefits per service have hardly changed since 2014 and have actually fallen for prostheses (such as hip and knee replacements), which highlights the importance of growth in number of claims.

Insurers are also facing growing cost pressure due to the exodus of young people from insurance and an ageing insurance pool.

Traditionally young people have cross-subsidised the higher expenses of older people, but increasingly they are deciding that private insurance is a bad deal. In the past 12 months, the number of people aged 20-34 with private hospital cover has declined by almost 50,000.

Read more:
How do you stop the youth exodus from private health insurance? Cut premiums for under-55s

Are insurers’ profits too high?

Insurers can point out that their profit margins are not unusually high compared to other forms of insurance. Figures from the Australian Prudential Regulation Authority show that in 2019 after-tax profits were 9.5% of premium revenue for general insurers. Meanwhile, after-tax profits for private health insurers were 5.6% (6.4% for for-profit funds).

Insurers can also point out that their net margins and benefits-to-premiums revenue ratios have been relatively stable over the past decade. Against this, growth in premiums has mostly acted to sustain profit margins rather than extend them.

But does this really matter for assessing price hikes? While shareholders would like to maintain the margins they’re accustomed to, there’s nothing intrinsically meaningful about historical figures.

The profits in one sector also don’t entitle insurers to the same profit in a different sector.

Ultimately, it’s hard to know what the “right” level of profit is. For now, private health insurance remains a relatively profitable industry.

What will the price increase mean for you?

Forty-four percent of Australians have private hospital cover and 53% have general treatment cover for things like dental and optical. For these Australians, the health minister estimates singles will pay an average of A$35 more per year (A$0.68 per week) and families A$103 more per year (A$1.99 per week).

It’s important to recognise that the 2.92% figure is a weighted industry average. Some policies will increase by more (and less) than 2.92%. You will find out by how much your plan is increasing early next year.

Those facing large price increases might downgrade their cover and some may drop it altogether. If healthier people drop out of insurance, that will put upward pressure on premiums in the future.

Australia’s private health insurance system relies on young people who don’t use their insurance to subsidise older Australians who do.

So, is the 2020 premium increase justified?

With the information at hand, 2.92% seems reasonable by historical standards. Growth in benefits has been declining since 2017 and this should flow to premiums.

Going forward, the government will need to do more than crack down on premium-setting if it wants to arrest growing costs. The biggest pressures are from rising hospital and medical fees and an ageing insurance pool.

Read more:
Greedy doctors make private health insurance more painful – here’s a way to end bill shock

Recent attempts to reduce costs by negotiating a better deal with medical device manufacturers was a good move, although insurers claim it failed to meaningfully lower their costs because manufacturers increased the volume of devices sold.

Higher premium rebates for young people are more dubious since rebates are only cost-effective if they cause lots of people to take up insurance who wouldn’t otherwise.

It’s been 21 years since the last Productivity Commission inquiry into the private health insurance industry. Perhaps it’s time for another one.The Conversation

Nathan Kettlewell, Chancellor’s Postdoctoral Research Fellow, Economics Discipline Group, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Premiums up, rebates down, and a new tiered system – what the private health insurance changes mean

File 20190327 139377 12fjpz7.jpg?ixlib=rb 1.1
This year’s premium increase is small in comparison to previous years – but it still outweighs wage inflation.

Peter Sivey, RMIT University and Terence Cheng, University of Adelaide

If you have private health insurance, or are considering getting it, a series of changes coming into effect on April 1 are worth knowing about.

These include the annual premium increase, a small decrease in rebates, the introduction of a new tiered system designed to simplify things for consumers, and some premium discounts for young people.

This year’s premium increase is quite small compared to recent years, and the reforms are generally sensible. But cost pressures and confusion in private health insurance cannot be fixed overnight.

Read more:
Is it time to ditch the private health insurance rebate? It’s a question Labor can’t ignore

A modest increase in premiums

Private health insurance premiums will increase by an average of 3.25% in 2019. These increases are relatively modest, as premiums have been rising at between 4% and 6% per annum for more than 10 years.

However, compared to consumer price index inflation of 1.8% and wage inflation of 2.3%, premiums are still rising substantially in real terms for Australians.

But in the current environment, above-inflation premium rises are not unexpected.

For comparison, consider the public health system, where spending increased at nearly 7% per year in the decade to 2017.

Out-of-pocket spending by patients also had an above-inflation trend of 5.1% per year over the past decade.

So both public and private expenditure on health are increasing substantially. Driving this is the increased usage and price of health care. Hospital visits are growing at 4% a year, and health price inflation is a further 2% per year.

Many hospital procedures such as cardiothoracic surgery, colonoscopies, hip and knee replacements, are increasing in volume by over 5% a year. So as patients use their health insurance more, it’s reasonable for the price to rise.

Read more:
Here’s what’s actually driving up health insurance premiums (hint: it’s not young people dropping off)

Rebates continue to decrease slowly

Most Australians with private health insurance receive a rebate from the Australian government to help cover the cost of premiums.

Means testing of rebates along income tiers was introduced in 2012. This sees individuals and households with higher incomes receive lower subsidies.

From 2014, the government began indexing rebates every year, using a formula that is calculated as a difference between the consumer price index, and the industry weighted average increase in premiums.

As a result of indexation, rebate entitlements have been gradually falling.

Government rebates for private health insurance go down a small amount each year.

For example, this means in 2013/14, a person aged 65 or below earning less than $88,000 (base tier) would have received a 30% rebate. Today, a person of the same age in the base tier would receive a rebate of just over 25%.

From April 1, rebates will decrease between 0.1% to 0.5% from their levels in 2018/19, depending on the income tiers that people fall into.

For a typical family policy that covers both hospital and extras (with premiums approximately A$140 a fortnight), the decrease in the rebate translates to a very small rise in premiums of A$1 a fortnight.

Basic, bronze, silver or gold?

One key initiative starting on April 1 is the introduction of four tiers of private health insurance coverage: basic, bronze, silver, and gold. This is distinct to the income tiers we talked about above.

In this case, each tier mandates the minimum set of treatments (defined by clinical categories) that insurers must cover.

Read more:
If you’ve got private health insurance, the choice to use it in a public hospital is your own

For instance, policies in the “basic” tier are required to cover rehabilitation services, hospital psychiatric services, and palliative care.

Insurers can include other types of treatments which are not mandatory under the basic tier, if they choose to do so. Each additional tier covers a wider range of treatments, in addition to services mandated in lower tiers.

The Conversation/Australian Government, CC BY-ND

This simplified categorisation of policies is designed to help consumers understand how comprehensive their cover is, and enable them to more easily compare products offered by different health funds.

While this initiative provides consumers with greater clarity on the types of services covered by each type of health insurance product, it still does not standardise care completely.

Read more:
Private health insurance premium increases explained in 14 charts

Health funds can offer to cover, in lower tier products, treatments that are mandated only in higher tiered policies (such as providing coverage for pregnancy in a basic policy).

This may confuse patients if they assume their policy covering pregnancy will also cover other costly private procedures such as joint reconstructions (bronze), or back, neck and spinal surgery (silver).

Young people

From April 1, health funds will be able to offer discounts on premiums of 2% for each year a person is under the age of 30 when he or she takes up private health insurance. Premium discounts are capped at a maximum of 10%. The discount is retained until the person reaches the age of 41, after which it will be gradually phased out.

This initiative is being introduced to encourage young Australians to purchase private health cover and to stem the decline in private health insurance ownership among younger people. From September to December 2018, the largest net decrease in insured persons was recorded in people aged 25 to 29.

These discounts on premiums for young people complement the Lifetime Health Cover policy introduced in 2000, which was designed to encourage Australians to take up private hospital insurance earlier, and also to maintain cover.

Under the Lifetime Health Cover policy, which is still in force, people above the age of 30 without private cover are required to pay a 2% loading on premiums for each year they are over 30, if they choose to take up private cover later on.

Other changes

Another key change is that health funds are permitted to offer private hospital policies with a higher excess, in return for lower premiums. The maximum permitted excess is increasing from A$500 to A$750 for singles, and A$1,000 to A$1,500 for families.

Travel and accommodation benefits will be allowed to be included in hospital insurance plans for customers living in regional and rural parts of Australia. This will assist patients and their carers to meet the additional costs of having to travel to urban centres or capital cities to receive specialised treatment.

Natural therapies such as yoga, naturopathy, pilates and reflexology will no longer be covered under a general treatment policy. A total of 16 natural therapies are excluded. A review undertaken by the National Health and Medical Research Council concluded there is no clear evidence of the efficacy of these therapies.

Finally, to strengthen consumer protection, the role of the private health insurance ombudsman will be expanded, giving the agency new powers and greater capabilities to address issues and complaints.The Conversation

Peter Sivey, Associate Professor, School of Economics, Finance and Marketing, RMIT University and Terence Cheng, Senior Lecturer, School of Economics, University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Is it time to ditch the private health insurance rebate? It’s a question Labor can’t ignore

File 20190212 174864 1jiaqn9.jpg?ixlib=rb 1.1
Premium subsidies encourage Australians to take out and keep private health insurance.

Stephen Duckett, Grattan Institute

This is part of a major series called Advancing Australia, in which leading academics examine the key issues facing Australia in the lead-up to the 2019 federal election and beyond. Read the other pieces in the series here.

This election campaign, Labor’s health focus is expected to be on Medicare, which it regards as one of its defining achievements. But with almost half the population covered by private health insurance, Labor needs to tread carefully on this vexed topic.

Government subsidies for private health insurance premiums cost over A$6 billion a year. Is it time to scrap the rebate and redirect these funds elsewhere in the health system?

If Labor sees private health insurance as a system that provides unnecessary extravagances that Medicare won’t cover, it can’t justify this type of subsidy.

But picking a fight with the private health insurance industry would be politically foolhardy. And families have factored the subsidies into their budgets, so cutting or eliminating the subsidies would put further pressure on family finances at a time of wage stagnation.

Read more:
Do you really need private health insurance? Here’s what you need to know before deciding

We’re unlikely to see much of a discussion about private health insurance during the election campaign. But the party that wins government must commit to reforming the ailing private health insurance system.

How did we get here?

Private health insurance has been a contested policy zone for more than 50 years.

Gough Whitlam prompted a bitter debate over whether government health insurance should be for everyone (universal) or just for the poor (residual), when in 1968 he committed Labor to a universal scheme to replace the then residual model. The new universal model eventually became Medibank in 1975, then Medicare in 1984.

It wasn’t until the 1996 election that then opposition leader John Howard formally conceded defeat on this issue, acknowledging that Medicare should be for all. However, Liberal governments keep returning to “residual” rhetoric, arguing wealthy people should pay directly for health care rather than use the universal scheme, Medicare.

After winning the 1996 election, Howard opened a second front in the health-care war by reinstituting government subsidies for private health insurance.

The cost of the first subsidy scheme – known as the Private Health Insurance Incentive Scheme – was estimated at A$600 million a year. Two decades later, the private health insurance subsidy has increased ten-fold to more than A$6 billion a year.

Getting people to sign up and stay

Liberal governments offer carrots to encourage people to take out insurance – subsidies for premiums – but also use two sticks to penalise people for not taking out insurance. The sticks have proved to be more effective than the carrots in increasing insurance enrolment.

The first stick penalises the rich if they don’t have private health insurance. It is based on the “residual” ideology, that those who can afford to pay their own way should take out private health insurance and not use public hospitals. This stick takes the form of a Medicare Levy surcharge, starting at 1% of income to be paid by singles who earn more than A$90,000 a year, or families on more than A$180,000 a year. People who have private health insurance are exempt from the surcharge.

Read more:
Private health insurance premium increases explained in 14 charts

The second stick penalises people who do not take out private health insurance before turning 31. They have to pay higher premiums if they join later in life. When introduced in 2000 this scheme – known as Lifetime Healthcover – increased coverage from about 30% to around 45% of the population.

What is private health for?

Neither side of politics has confronted the fundamental question: what is the role of private health care and private health insurance, given we have universal health coverage?

Private health insurance can complement universal health insurance, providing insurance for services not covered by Medicare. Dental insurance is a good example.

Private health insurance can also be a substitute, where it overlaps with or replaces the public scheme, such as insurance for private hospital care for hip replacements. More than half of all hip replacements are done in private hospitals.

The Liberal approach is simple: private health insurance is both an essential substitute for the universal public hospital system (“it takes pressure off the public hospital system”) and a complement (“it gives people choice of doctor”).

Labor approaches private health insurance a bit like one might approach a dead cat on the table – as an issue that has to be dealt with, but that everybody wishes would just go away.

But private health insurance won’t go away. If Labor sees it solely as a complement, providing unnecessary extravagances not covered by Medicare, then the argument for any public subsidy is weak.

But if Labor sees private care primarily as a substitute, then the A$6 billion of subsidy to private care through the rebate may be better value for money than further support for public hospitals. If that is the case, Labor will have to confront the issue of whether to continue some combination of carrots and sticks, and what can be done to make the industry more efficient.

Time for real reform

Private health insurance premiums have risen dramatically, faster than average weekly earnings, as have consumer complaints.

Labor is seeking to exploit public outrage at high private health insurance premiums by promising to establish a Productivity Commission review into the sector.

In the meantime, Labor would freeze private health insurance premium increases – in effect, kicking the policy can two years down the road.

Whichever party wins the election, it ought to revisit our nation’s history with failing industries. Over recent decades we have learnt that propping up industries in the face of consumers turning away from their products is not a long-term proposition.

Private health insurance is no car industry, but it’s not a sunrise industry either. Yet it receives a greater subsidy than manufacturing at its subsidised peak at the end of the 1960s.

The government has to decide why it’s subsidising the private health care industry. If it decides it doesn’t want to in future, it needs a carefully managed transition.

Read more:
Private health insurance rebates don’t serve their purpose. Let’s talk about scrapping them

Even if private care is seen primarily as a substitute for the public sector – and a way to take some demand off – subsidies for private care may be counter-productive.

Doctors earn more for each hour worked in the private sector, which makes it harder for public hospitals to attract staff. So subsidies may end up undermining access to care in the public system.

Australians feel pressured to take out private health insurance because of the sticks, but the product is only sustainable with its current level of coverage because of the carrots: the hefty public subsidies. Without the carrots and sticks, coverage would probably return to the pre-1996 levels of around one-third of the population.

The incoming government should look at the effectiveness and efficiency of the carrots and sticks, whether consumers and taxpayers get value for money from private health insurance, and how to address rising out-of-pocket costs.The Conversation

Stephen Duckett, Director, Health Program, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.