Michael Roff’s defence of private health insurance (PHI) in Friday’s Crikey is an extraordinary statement.

For a start, it is hard to understand why he is so concerned to defend the insurance industry. His interests surely relate to private hospitals; why is he defending a financial services industry that takes $1.9 billion a year in management overheads and profits — $1.9 billion that could be spent on health care in private or public hospitals?

More extraordinary is his claim that the Productivity Commission found that costs in private hospitals were 30% lower than public hospitals on a casemix-adjusted separation. The commission has produced two major reports dealing with such comparisons. Their 2009 Report Public and Private Hospitals found only a 3% difference in costs — $4302 per separation in public hospitals and $4172 in private hospitals.

In the larger states, NSW and Victoria, public hospitals had lower costs than private hospitals.  A later study by the Commission Public and Private Hospitals: Multivariate Analysis found similar small differences.

The general conclusion of these studies is that once casemix is considered, there is no evidence of significant cost differences between private and public hospitals.

Even if one mistrusts the commission’s analysis, if private hospitals had lower costs than public hospitals we would expect state governments to be rushing to buy services from private hospitals. This is not happening.

Roff uses figures on admissions to support the notion that private hospitals are indeed taking pressure off public hospitals — after all this was a major justification for the PHI subsidies when they were introduced by the Coalition government.

This is a one-sided argument. If patients shift from the public to the private sector, then resources do too. Public and private hospitals compete for the same limited supply of nurses and doctors. It is just as plausible to argue that the extra support for private hospitals, channelled through PHI, by drawing those scarce resources away from the public sector has increased pressure on public hospitals. If, as is possible, those extra services in private hospitals are for patients with lesser needs than those on public hospital waiting lists, then the subsidies for PHI have seriously misallocated scarce health resources.

What public policy has delivered us is a perverse incentive to encourage queue jumping, and, given the way the Medicare Levy Surcharge is applied, the higher one’s income the stronger is that incentive.

PHI is a clumsy and expensive way to fund health care. When one analyses the health expenditures of OECD countries a clear relationship stands out — the greater the proportion of health funding that passes through PHI, the higher is that nation’s total health-care costs, even though that higher expenditure produces no benefits in terms of morbidity or mortality. The US is the outstanding example with health-care costs now at about 17% of GDP.

Those countries that control their costs do so by a mix of a single insurer (usually a government insurer) and uninsurable out-of-pocket co-payments. Countries such as Britain have very low patient co-payments, while Taiwan and Korea, countries with high savings, rely on high co-payments; universal insurance kicks in only once people have paid from their own pockets.

The trouble with PHI is that it carries all the moral hazard of public insurance but without the cost discipline that can be exercised by a strong single insurer. The notion “HCF/BUPA/HBF can pay for it” is the same as the notion “Medicare can pay for it”. Because insurance of all types suppresses price signals, PHI is not a market solution; rather it is simply an expensive way of doing what the taxation system does more equitably and efficiently — essentially a privatised tax. (In view of the recent recovery in Australia’s household savings there is a strong case for encouraging people, particularly the well-off, to pay more from their own pockets each time they need health care rather than being subsidised to buy insurance. Before the subsidies for PHI were introduced, about 25% of private hospital admissions were self-funded without insurance; that proportion has fallen to about 15%.)

Implicit in Roff’s arguments is the idea that without PHI we would have no private hospitals. But that is not so. Given the evidence that public and private hospitals have much the same cost structures, they should be able to compete for the same funding pool. In fact, on a small scale, such a model exists with the arrangements for war veterans: the Department of Veterans’ Affairs acts as the single funder, but purchases about 70% of its services from the private sector.

In fairness to Roff, he is not alone in thinking that private hospitals are necessarily dependent on PHI. It’s a way of thinking that has developed its own inertia among policy makers and advocates, and is standing in the way of health reform.

Peter Fray

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