The federal government’s battle to cut back subsidies for private health insurance hit its first obstacle in 2009, when the Senate rejected a means test on the health insurance rebate introduced by the Coalition 12 years earlier. Only in 2012, when it faced a less obstructive Senate (but a more difficult House of Representatives), did the government get its legislation through parliament. The rebate now starts to cut out at a single income of $84,000 and cuts out fully at $130,000 (the family thresholds are double).

Opposition to this modest reform ranged from the angry to the hysterical. A typical reaction came from “bruce”, posting on The Australian‘s website: “Yet another attack on resourceful people who pay their way. Punishing achievers to reward non-achievers.” A report by Deloitte prepared for the health insurers warned that 1.6 million people would abandon hospital cover and premiums would rise “10% above what would otherwise be expected” — a suitably untestable prediction. Once the legislation was passed, the Coalition promised to restore the rebate should it win office. According to Tony Abbott, the rebate “is an article of faith for the Coalition. Private health insurance is in our DNA.” The Coalition has since backed off from its promise.

Along with several independent analysts, health minister Tanya Plibersek pointed out that any small reduction in membership resulting from withdrawing the subsidy would be more than offset by normal membership growth and by the impact of a higher Medicare levy surcharge for people on high incomes who do not have private hospital insurance. The surcharge’s phase-in points are the same as those for the withdrawal of the 30% rebate.

In fact, far from falling, membership of hospital insurance schemes rose in the quarter after the legislation was passed. Some of this increase resulted from people pre-paying premiums before the changes took effect in July 2012, but that doesn’t explain why membership kept on growing. So strong was the rise that the government was caught out. When it prepared the 2012–13 budget, it estimated the rebate for that year would cost $4.5 billion; the revised estimate in this year’s Budget was $5.6 billion, with fall to $5.4 billion predicted for the coming financial year.

The government tried to turn this outcome to political advantage. Plibersek boasted that “almost 1.4 million additional people have taken out hospital cover since the government took office”. Private health insurance is now in Labor’s DNA, too, it seems — a strange turnaround in view of the party’s struggle in the 1970s and 1980s to establish Medibank and its successor Medicare.

Rather than reflecting the commitment to social insurance that drove these earlier reforms (and which underpins national disability insurance), the government’s modest private health insurance reforms seem to have been driven by a desire to reduce the fiscal deficit and wind back “middle-class welfare”.

“Policy-makers need to ask not only whether private insurance adds value to healthcare … but also whether it could serve a useful role under any circumstances.”

Nor are they designed to reduce government assistance to the health insurance industry, although this subsidy, now costing $7.0 billion a year once forgone income tax is taken into account, dwarfs the amounts proposed for the automobile and other industries, which are rightly the subject of public debate.

Is there an economic justification for health insurance to be given such a privileged position, without having to explain its raison d’être or to justify its subsidies? Why have we used subsidies and penalties to encourage a financial intermediary that costs $2.4 billion a year (the difference between premiums received and benefits paid) to interpose itself between healthcare consumers and providers?

John Kenneth Galbraith once said that if you want to feed oats to a sparrow, don’t do it by feeding a horse and expecting the sparrow to get some of what passes out the other end. If the function of private health insurance is to fund private hospitals, there are better ways of doing that than churning money through the finance sector. The Hawke government, for instance, paid a 30% subsidy direct to private hospitals.

If the rebate was designed to relieve pressure on public hospitals, it has failed. Some patients have certainly shifted from public to private hospitals, but funding has shifted with them. And where the money has gone, so too have the surgeons and other specialists. The result has been a reshuffling of the queues for limited resources.

If the purpose of the subsidy is to compensate those who don’t draw on publicly funded programs, it is indirect and unfair. It leaves unsupported those who pay for private hospital care and dental care without relying on private insurance — people who have been further disadvantaged by the government’s decision to abolish the medical expenses tax offset, which gave up to 20% support for those who funded their own health expenditure. Contrary to partisan rhetoric, taking out private insurance goes against self-reliance. To use the language of libertarians, it substitutes the “nanny corporation” (the health insurer) for the “nanny state”.

If it’s to save budgetary outlays, it may do so in the short term, but in reality it simply adds to official taxes (with their safeguards of accountability, equity and cost control) the more opaque privatised taxes collected by health insurers. Research shows countries that rely on private insurance to fund healthcare get no better health outcomes but spend much more than the countries that use the power of a single national insurer and market competition by providers.

*Read the rest of this article at Inside Story