Government proposals to apply a means test to private health insurance subsidies have re-ignited the debate about the role of private insurance.

The proposals have the benefit of removing a glaring inequity in our present arrangements, which direct subsidies disproportionately to the well-off. The worst such inequity relates to dental care.

They would alleviate the inequities imposed on country people who, while being poorly provided with private hospitals, subsidise high-income metropolitan dwellers who have access to private hospitals.

The proposals have shortcomings, however, because they don’t go far enough.

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They would have hardly any impact on membership of private insurance, they would sustain a separation of private and public hospitals, and they would sustain a social division with one hospital network for the well-off, and another for the other 45% of Australians. This division is at odds with the government’s social inclusion policy.

Private health insurance is an expensive and clumsy way to do what the tax system and Medicare do so much better — that is to distribute funds to those who need health care.

In itself it is an expensive financial overhead — a $3 billion annual burden on the health care system. Its even greater economic impost is its general impact on the cost of health care. International experience shows that private health insurance buys more expensive health care than tax-funded health insurance, but it doesn’t buy better health care.

Nor has the increased uptake of private insurance succeeded in its claimed purpose of easing pressure on private hospitals. That was an impossible task, because while demand has indeed shifted to private hospitals, so too have health care staff. The main result has simply been a reshuffling of the queues for limited resources, and that reshuffling has put private insurance membership ahead of clinical needs.

In our criticism of private insurance we are not accusing the insurers of inefficiency, greed or profiteering. Rather, their failure is an inevitable feature of private insurance.

We are not advocating what some may call “socialised medicine”. Private hospitals serve an important function: they should be funded by means other than through private Insurance.

Nor are we calling for universal “free” health care — there are many sound arguments in favour of those with means paying more from their own resources, without private or public insurance.

Our main message is that to the extent we choose to share our health care costs, a single national insurer provides the most efficient and equitable means of doing so.

*John Menadue is the former secretary of the Commonwealth Department of Prime Minister and Cabinet and a member of the Board of the Centre for Policy Development. Ian McAuley is an adjunct lecturer in public sector finance at the University of Canberra and a fellow of the Centre for Policy Development. This is a summary of their 18-page report Private health insurance: high in cost and low in equity.