The private health insurance industry has predicted dire consequences from the Government’s expected changes to the Medicare Levy Surcharge (MLS). They say 400,000 people will drop their cover, public hospital waiting lists will grow and premiums will go up for everyone else because the young, healthy members will drop out.

This is all a bit dramatic. The Australian Health Insurance Association seems to have based their 400,000 estimate on a survey which found that 200,000 people would drop their cover if the individual MLS threshold was increased from $50,000 to $75,000. Doubling this figure is not logical. The 2005-06 tax statistics showed over 2 million people earning $50-75,000 and only about 400,000 earning $75-100,000. It seems unlikely that about half these people will drop their cover.

But ignoring the actual number, what is the AHIA saying? Basically they are admitting that many people see no value in having private health cover beyond avoiding tax. Their heated response also shows just how dependent their business is on government policy. Like all insurance they rely on low-risk people who don’t make claims to subsidise those who do. If they are totally relying on a penalty imposed by the government to get those healthy members in, how sustainable is their business?

A lot of private health insurance products have exclusions which consumers often don’t find out about until they come to use their insurance. Common exclusions are cardiac surgery and knee reconstructions. If consumers want these procedures they will have to pay themselves, serve a further waiting period or use the public system. Consumers also often find they must pay large out-of-pocket costs when they go to private hospital despite their cover. When treatment in a public hospital is effectively free, it is hardly surprising that people want to give up their private health insurance.

Will the people who drop out be a burden on the public health system? It’s not like they will all suddenly join a public hospital queue. What happens here depends in part on what other measures the Government puts in place. Reports this morning suggest the government will put more money into the public system. This shift in resources from subsidising private health insurance to investing in the public system is welcome.

It is also not true to say that everyone who ‘relies’ on the public system will be treated in a public hospital. The government has already shown a willingness to purchase services directly from the private hospitals to reduce public hospital waiting lists. This is a sensible and effective use of the health resources we have available. The private hospital sector seems to be expecting more of this and doesn’t seem too concerned about the changes to the MLS.

Will premiums go up? Without a doubt but it will be for many reasons other than members dropping out. It will be a result of increasing health costs and utilisation by members, neither of which the funds have much control over. They will also be affected by declining investment returns on their spare cash. Minister Roxon is right to warn them not to use the MLS threshold change as an excuse for higher premiums (notwithstanding the fact that there is very little she can do about premium growth). Let’s not forget funds had a surplus of $1.2 billion last financial year.

The MLS threshold has not changed since it was introduced in 1997 – it’s probably time it was adjusted to take account of income growth. Ultimately, the world is not going to end and probably not much will change despite the industry’s protestations.

However, this change won’t improve private health insurance as a product for consumers or make the uncapped 30% rebate on premiums – a more than generous subsidy to the private health insurance industry – equitable and efficient. Hopefully, it’s a first step to reforming the PHI incentives and the interaction between the private and public health sectors. We will have to wait and see what else the government comes up with tonight and in the coming reform process.

Peter Fray

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Peter Fray
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