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why subsidise private health insurance « Previous | |Next »
May 22, 2008

One washup of the Swan budget is the health debate arising out of the changes to the Medicare Levy surcharge, which in effect reduced the tax on citizens that was then used to prop up the private health insurance industry. The Liberal Party's rhetoric is that reducing this tax is being done because the ALP hates private health insurance in the same deep way that they hate private education.

As pointed out in an "earlier post this debate is being framed by the vested interests of private health insurance as an issue about the public health system to avoid the question of subsidy of the private health funds. It also carefully avoids the significance of primary health care outside hospitals and the issue of whether the way we fund and organise primary care needs a major overhaul.

In his second post on changes to the Medicare levy threshold Tim Dunlop at Blogocracy says that he is very interested to hear some fact-based discussion about why the system of subsidy for private cover should—as the AMA, the Opposition and the health industry argue—remain pretty much unchanged. Facts are in short supply at this stage in the debate, but we can look at the arguments for why the private health industry needs to subsidised so heavily when a neo-liberal mode of governance is deeply opposed to government intervention in the market, celebrates lower taxes, and opposes subsidies and protection.

As Tim Dunlop says this is an industry that calls on the public purse in order to maintain their own profitability. Mike Steketee concurs in his op-ed in The Australian. The health funds, he says are propped up by so many government supports that their product is more accurately described as semi-private health insurance:

No other industry receives a 30 per cent government subsidy on the prices it charges: make that 35 per cent for premiums for members between 65 and 69 and 40 per cent for those 70 and over. The tax surcharge continues for income earners above the higher thresholds set in the budget, with the aim of pushing them into private insurance. There is the government-mandated 2 per cent a year increase in premiums for every year people delay taking out insurance after they turn 30. Then there is the discounted payment the health funds make for private patients treated in public hospitals. Finally, a tight web of regulation means competition between the funds is limited.

He then asks the right question: 'why in the name of rational economics should we be pouring vast amounts of taxpayers' money into an industry that is uncompetitive and provides a more expensive service?'

Steketee then lists the arguments in support of the subsidies. The first argument that he mentions is this

The argument goes that we need a vibrant private health sector because it offers choice to patients and keeps the public sector on its toes. But who is to say the ideal level of private health insurance is about 45 per cent of the population, as at present, rather than the 30 per cent it might fall to without enormous government subsidies?

The reason is that at 30 per cent the private health industry is not viable. It needs a certain mass and that is around 40%. So why do need to keep the industry viable? Shouldn't that be about offering good health products to attract consumers to buy the product in the marketplace. Why is this exception made to the way the market works?

This is where the second argument cuts in, and it is not an infant industry argument. Steketee says:

Private health insurance, say its supporters, takes pressure off public hospitals. But to the extent that is true, it comes at a cost. Doctors charge higher fees for private patients, who also are more likely to undergo more procedures and more expensive ones. This would not necessarily matter if the quality of medical care was better but the evidence on this is ambiguous. Nor would it matter if it did not involve large buckets of government money to private insurance. The 30 to 40 per cent rebate alone cost the federal budget $3.5 billion last financial year. In terms of its impact on health, much of it is wasted because it goes to people who had private health cover before the rebate was introduced and would keep it whether or not it was subsidised.

Steketee says that a much better use of the money would be to spend it on public hospitals or, for that matter, private hospitals. Steketee, like the other commentators, ignores the better option of investing money into revamping primary health care to keep people well and out of hospital. They debate is being conducted as if the network of diverse (medical and non-medical) primary care practices don't exist. It is this absence that gives an air of unreality to the debate about health care.

These are the only two arguments that Steketee mentions. The other argument is competition: the private health industry provides competition to the public health system and keeps the latter on its toes as well as offering choice. The problem here, as Alan Mitchell pointed out in yesterdays AFR, cost containment is the weak spot of Australia's private health insurance and fee-for-service medicine, and little is done to strengthen the discipline on costs. Inflation is actually built into the private health care system.

Steketee rightly points out that a major explanation for why the private funds struggle to keep their members is because they offer a poor product:

Out-of-pocket costs are the main reason people cite for giving up their membership. Understandably, they resent being rewarded for buying insurance by having to fork out extra money when they actually claim benefits. There has been a reduction in the number of private patients facing gap payments but after at least 15 years of trying to sort out this issue, more than 15 per cent of hospital services still involve a gap payment and one that is increasing.

They have no incentive for cost containment as they can keep increasing their premiums year by year above the inflation rate. Steketee says that The funds are not to blame: they are well aware of the damage gap payments cause to their business. But they often lack the clout to force doctors [specialists?] into agreements that guarantee no gaps and when they do succeed, the doctors [specialists?] can extract a hefty price.

Surely the larger funds with market power could extract more favourable deals from private hospitals and specialists? Secondly, the Rudd Government can put pressure on the private health funds by increasing the competitiveness of the public system by ensuring a cut in queues and increasing the quality of services. Thirdly, rather than providing ever more subsidies the Rudd Government should require the private health funds demand performance by cost containment by the use of case-mix funding by the services they private hospitals provide. This would put pressure on private hospitals with above average costs and encourage the private hospitals to specialize where they have cost advantage.

| Posted by Gary Sauer-Thompson at 7:43 AM | | Comments (6)


The Australian's editorial on the health debate makes little sense. The key passage:

While generally favouring market mechanisms being allowed to work without interference or subsidy, healthcare, as an essential service, is more than a market commodity and commands detailed government oversight. In market terms, the health sector is distorted by the 1.5 per cent Medicare levy giving all Australians access, theoretically, to "free" hospital care, which is heavily subsidised by taxpayers. Internationally, Australia's system is the envy of many. The US system heavily disadvantages the poor, while Britain's overstretched national system often fails to keep pace with demand and suffers for lack of affordable private alternatives.

Huh. Why not say that the health sector is heavily distorted by the huge subsidies to private health insurance? You can discern the position of private is best hidden below the surface here.

The editorial continues:

The Australian has recognised previously, difficult choices lie for those with pressing needs must remain the priority. Policies that enable independent choices are preferable to enfeebling an already overburdened public sector.

Surely reducing the threshold of Medicare levy surcharge puts more money in consumer's pockets and allows them to make more independent choices. That is what The Australian usually says. Why the difference on this issue?

Given that few private hospitals are capable of dealing with critically ill patients, or have emergency facilities, it is hard to see public hospitals being inundated as a result of the changes in the Medicare levy surcharge. Especially since those most likely to drop out of the health funds are younger and therefore healthier people.

This is a debate about the public private divide in health care.

the days of funds getting a leg up from government are probably over. What is needed now is for the industry to demonstrate that it can offer its customers value for moneyrather than wait for governments to deliver up members.

the conservatives want to move beyond the "public versus private divide" in health care by putting money into the private and reducing the public to a minimal safety net for the poor. That's their ideological starting point.

"Given that few private hospitals are capable of dealing with critically ill patients, or have emergency facilities, it is hard to see public hospitals being inundated as a result of the changes in the Medicare levy surcharge."

There's a major rub right there. What does private medicine as a whole actually do? What do they spend more time on, accident victims or breast implants? What role could private medicine play in a major catastrophe? Are they even equipped for something like a big earthquake or terrorist attack? These things need to be taken into account when we're working out the value of private versus public health.

How much should we be ploughing into a system that may prove useless when we really need it?

Disclosure: I have major problems with private medicine and insurance since my Mum's supposedly routine eye operation resulted in a series of failed operations, a lot of pain for what is ultimately a socket full of mincemeat and a bank loan to cover out of pocket expenses she can't repay on the pension.

They also couldn't stop my Dad from dying which wasn't their fault at all, and he did have a nice garden view. Still, it would have been nice to go through the process without the occasional appearance of large, negative numbers in the equation.

I work in a Private Adelaide Emergency Department and nursing staff have received instructions to divert patients to other hospitals that require medical assistance that is not of a surgical nature. The other patients that are to be discouraged are those that will require more extensive nursing care. Part of the problem is that these patients take up beds that could be occupied by pts requiring surgery thus the hospital will make more money from the theatre fees . The health funds are also to blame by not providing the hospitals with enough money to properly care for these patients. This leaves the patients often elderly and in need of nursing care turned away to the already stressed public hospital system and the government who has already paid 30% to the private health funds to care for these patients, often then has to pay yet again for them to be cared for in the public system. The patients most at risk who have in many cases paid all of their lives into private health funds miss out on help when they need it the most. The private helth funds have everyone over a barrel including the Government, and the public who pay them very high insurance premiums need to know that just because they pay these premiums, this doesn't guarantee them a bed in a private hospital, especially if they are elderly and/or have multiple medical problems.