The Grattan Institute's Stephen Duckett and Kristina Nemet presented a helpful framework last month for assessing private health insurance's future role in Australia's universal healthcare system, Medicare, and whether government support for it is justified. They will follow up their preliminary paper with more detailed analysis.
Neither side of politics in Australia has presented a coherent view of the role of private health insurance. They have left us with a hotchpotch of subsidies and regulations that are confusing, distorting, costly and inequitable.
The core point in the Grattan paper is that the case for subsidising private insurance rests entirely on its specific role vis-a-vis Medicare:
- If private insurance complements Medicare, by allowing members to access non-Medicare services, earlier access, the doctor of choice or better amenity, there is no case for taxpayer subsidy.
- If, however, it substitutes for part or all of Medicare by funding services otherwise paid for by Medicare, then a subsidy may be justified to the extent of the substitution involved.
There's little doubt about Duckett's preference (from his earlier writings and because, in this paper, he criticises Labor policies more gently than Coalition ones), even if he doesn't declare it. I'm sure he would prefer that the government direct all taxpayer support to universal health insurance through the public insurer (the combination of Commonwealth and state authorities), leaving private health insurance to play a complementary role for those who want more and pay for the extra benefits themselves. This approach is entirely coherent and avoids the risk of government promoting a two-tiered system while still allowing people, at their own expense, to gain extra or faster services.
But there is an equally coherent alternative, which the paper makes clear without spelling it out. It's this approach that the Morrison government (and perhaps the Labor opposition) should examine seriously, given the importance they attach publicly to private health insurance. It involves identifying clearly the risks that private funds are or should be managing, which would otherwise lie with Medicare, and ensuring that any subsidy is linked directly to those risks.
There's no doubt that private insurance bears some costs that would otherwise be met by Medicare. But the subsidies bear no relationship to those risks, nor does the government require that the funds be used to manage them. As Duckett and Nemet say, we have "a muddled system". I would go further and call it an incoherent mess:
- The tax benefits (the Medicare surcharge exemption) for higher-income groups bear no relationship to private premiums, let alone the component that might substitute for Medicare; indeed, the tax benefits may even exceed the premiums that funds charge. There is still no obstacle to privately insured patients presenting as public patients in public hospitals funded entirely by Medicare.
- The means-tested private insurance rebate subsidises services not available under Medicare, some of which might not even have any clear health benefit.
- Privately insured patients presenting at public hospital emergency departments face the immediate question of whether to "go public" or "go private", rarely with a clear understanding of the implications.
- Public hospitals have an incentive to encourage such patients to "go private" to gain extra revenues. Private health funds have an incentive to encourage members to "go public" to limit their expenses. And private hospitals complain about public hospitals competing unfairly for services for both public and private patients.
These problems combine with other challenges facing private health funds, such as mounting out-of-pocket expenses - because many doctors refuse to enter into contracts with funds - and increasing pressures on premiums, as the community rating (which ensures that everyone pays the same premium) leads to fewer young people becoming members (despite lifetime cover).
The alternative approach, which the Grattan Institute alluded to, could operate without compromising Medicare principles in any way, including universality. Current subsidies would be replaced by transparent payments to private funds that equal the "premiums" Medicare effectively receives from taxpayers for managing the risks that the funds would manage on Medicare's behalf for their members. In effect, funds would compete with each other and with the public insurer to manage these risks, the funds (and their members) having access to exactly the same taxpayer-funded premiums. Funds would also be able to offer complementary benefits, such as earlier access and wider services, with these extras paid for fully by members.
The insurance rebate and the tax benefit must both be replaced with a transparent payment that reflects the hospital-care costs that Medicare would otherwise pay.
A pure model of such a scheme was outlined by one of Medicare's architects, Dick Scotton, in the early 1990s and described as "managed competition". In the early 2000s, the Productivity Commission also said this model was worth exploring. The National Health and Hospitals Reform Commission, which Kevin Rudd established, presented a similar model in 2009 as an option for serious consideration, describing it as "Medicare Select".
The potential advantages of this approach are the increased emphasis on choice and competition, and reduced risk of government failure. The potential disadvantages include increased market failure (particularly if the funds can't manage the moral hazards of insurance, including doctors' fees, or ensure the cost-effectiveness of the services they fund).
A significant step towards this approach would be to require health funds to meet their members' hospital costs, including if they present as public patients in public hospitals. This would truly take pressure off public hospitals, remove the confusion that insured people face about whether to go public or private, and ensure an even playing field for competition between public and private hospitals for both public and private patients; current distorting incentives would disappear. Privately insured people would know what benefits they were entitled to from the product they bought if they needed hospital care.
Of course, this is the opposite direction that the federal government is pursuing in pressing the states to stop encouraging privately insured patients in public hospitals to go private; the states want to reduce their costs and the Commonwealth wants to reduce upward pressure on insurance premiums.
To work, this would require a restructure of subsidies, replacing both the means-tested insurance rebate and the tax benefit with a transparent payment that reflects the hospital-care costs that Medicare would otherwise pay for through public hospitals. In the long term, this would best be achieved by a payment reflecting carefully measured, risk-rated Medicare premiums for each member of each fund.
In the short term, while health funds are subject to the community rating, a broad-brush approach to the subsidy might work reasonably, such as through a universal payment for each fund member, reflecting the average risks the funds manage on behalf of Medicare. Commonwealth-state funding would also need to be adjusted, given the extra revenues from the health funds to public hospitals and any extra cost to the Commonwealth from the new subsidy arrangement.
Other steps could include allowing the funds to support out-of-hospital and primary healthcare, extending their capacity to explore cost-effective ways to support their members' health (particularly the increasing number of people with chronic conditions), and extending Medicare itself to cover dental care, with privately covered patients receiving aid via a subsidy through their fund (perhaps justifying the current subsidy provided by the rebate). Under this approach, every Australian, privately insured or not, could have a single insurance fund to support their health that has an incentive to find the most cost-effective mix of services.
Reform in either direction would improve the current arrangements: not just through simpler and clearer policy but in removing distortions, promoting efficiency and ensuring more equity. Many commentators and critics of private health insurance express a strong preference for the first approach.
But there's a good case for the second. Notwithstanding the fact, highlighted by the Grattan paper, that private health insurance "has been a contested policy zone for 70 years", this approach seems more consistent with the philosophy underlining the insurance subsidies that Australian governments on both sides of politics have supported for most of the period since Medicare was introduced. It would be difficult to implement, and there would be serious dangers involved should the health funds prove unable to properly manage the risks transferred to them from Medicare.
A government inclined to move in this direction should look closely at the Netherlands, where such an approach operates, and conduct some trials, on paper and via experiments, to test how something similar might be introduced here. Perhaps the Grattan Institute can also provide further useful assistance as it explores the issues and options.
- Andrew Podger, a former head of the federal Health Department, is an honorary professor of public policy at the Australian National University.