Health insurance rebate is very poor medicine

The Australian Financial Review,
28 April 2006, p. 83

The Medibank Private sale is a good start, writes Jongsay Yong.

At long last the government is going to remove an anomaly in the health system: government ownership of a private health insurer. But the plan, worth up to $2 billion to Canberra, only serves to highlight so many other glaring inconsistencies in the way health is managed in this country, not the least of which is the inequitable subsidy to people taking private insurance.

This year private health insurance premiums rose by an average of 5.7 per cent, relatively low compared with the past few years: 6.9 per cent in 2005 and 7.4 per cent in 2004. These rises, compared with the inflation rate of less than 3 per cent, are more than a little rich. It is little wonder that health funds are feeling comfortable financially.

The premium rises are more than a private matter. For every additional dollar of premiums that health funds collect, 30 is paid by the government in the form of the private health insurance rebate. This rebate, introduced in 1999, was initially estimated t cost the government $1.09 billion.

The rebate was part of a policy package that includes the Medicare levy surcharge and lifetime health cover, introduced during 1997-2000, with the intention of arresting the then falling trend of private health insurance coverage.

Lets be generous and say the coverage would have been lowered by 20 percentage points in 2001 if nothing were done. This translates to about 3.9 million people who brought insurance because of the policy initiatives. How much can we attribute these 3.9 million additional insured persons to the 30 per cent rebate?

Our research suggests that, even by the most optimistic estimate, at most 50 per cent, or about 1.9 million, can be attributed to the rebate. So, the bottom line is the government paid about $2.5 billion in the form of premium rebates to health funds and brought an additional 1.9 million persons under private health cover.

This translates to a cost for the government of $1300 per additional insured person per year.

Keeping in mind that the average premium pre person covered is a little over $1000 in 2005, this means the government could have saved almost $300 per person, or about $570 million in total, by giving each of the targeted 1.9 million persons free private health insurance cover. The government saves money, the targeted individuals pay nothing for the cover, and everyone is a winner!

But theres a problem. The 30 per cent rebate applies to everyone, regardless of whether you need the inducement or not. Therefore, those who would have brought private health insurance in any case, regardless of whether there is a rebate or nor, are the real winners. Using a very conservative estimate, we show in our research paper that almost $900 million of the rebate in 2001 went to people who didnt need the inducement. The figure would be higher in recent years due to the increases in premiums.

Who are these lucky people? Our research shows that high-income households were far more likely to have private health insurance. More than 80 per cent of the people living in areas with the highest socio-economic index (by the Social Economic Index for Areas, or SEIFA in short, compiled by the Australian Bureau of Statistics) would have brought private health insurance even if there were no rebate at all. At the other end of the scale, only abut 10 per cent of people in the lowest SEIFA areas would have done the same. The rich-poor ratio is a staggering 8 to 1.

But it gets better. Those who dont buy private health insurance dont get the rebate, but they still have to pay taxes from which the rebate is funded. Not only that. The uninsured who use the public hospital system also suffer in at least two more ways. First, they face a reduced level of services at public hospitals due to underfunding. The amount spent on the rebate could have been used to provide much needed funds for public hospitals. Second, private health insurance is likely to increase demand for care as it allows the insured to have better and speedier access to care at little cost to themselves.

The 30 per cent premium rebate is a poorly conceived policy. It is horrendously costly, in terms of the number of additional insured persons it brought about. It is regressive, since it redistributes resources away from the poor to the rich. It also encourages inefficiency, since for every dollar health funds asked from members, the government pays 30. Members do not have the full incentive in containing health insurance costs. It is time to look at alternatives to the 30 per cent rebate.

Jongsay Yong is a researcher at the Melbourne Institute of Applied Economic & Social Research. His work, with Alfons Palangkaraya appeared in The Economic Record (2005) and Applied Economics (2006).