One of the extended battles of the Labor years was over private health insurance. The then-government wanted to curb the cost of the private health insurance rebate, which, since it had been introduced by the Howard government, had become the fastest-growing item in the healthcare budget.

In 2011, just before Labor succeeded in imposing a means test on the subsidy, which was disproportionately used by high-income earners, the subsidy was costing $5 billion a year, having doubled since 2005. Labor also reduced indexation of the rebate to CPI to further curb growth.

Having secured passage of a means test for the rebate, Labor managed to bring the cost down — but it has still continued to grow since then; by 2020 it is forecast to hit $6.8 billion.

Needless to say, the private health insurance industry was unhappy with Labor reducing, even by a small amount, the flow of taxpayer dollars into their coffers, and they were backed up by the then-opposition. “Private health insurance is in our DNA,” Tony Abbott declared in 2012, promising to abolish the means test. Like that other genetic Liberal trait, surpluses, the abolition would prove a recessive gene during Abbott’s time in government.

But the industry and the Coalition made significant claims about the impact of the means test. It would, the industry insisted, lead to tens of thousands of Australians dropping their private health cover and switching to public hospitals. “An extra 845,000 people would be admitted to public hospitals,” the CEO of the then-industry lobby group warned. The opposition’s shadow health minister at the time, Peter Dutton, rounded that claim up, saying “our public hospitals will be swamped with close to an additional million admissions above normal growth over the next five years.”

The passage of time gives us an opportunity to assess that claim, which is central to the private health insurance industry’s demand for taxpayer support — that without it, the public health system would be swamped by former private health insurance holders. But according to the most recent data from the Australian Institute of Health and Welfare on hospital “separations”, there’s been no swamping — indeed, the proportion of private hospital separations to overall hospital separations has actually risen very slightly, from 40% to 41%. And there’s certainly no sign of those million extra admissions on top of normal growth that Peter Dutton confidently predicted. Between 2012 and 2015, separations in public hospitals increased by 470,000.

Separations AIHW

And data on patient days shows private hospital care growing faster than public hospital care. This is in accord with the prediction of modelling from 2013 by Terence Cheng of the Melbourne Institute of Applied Economic and Social Research, which suggested reductions in the private health insurance rebate would lead to only a modest impact on public hospital spending. Indeed, the bigger the reduction, the bigger the net benefit for taxpayers as the gains from reduced subsidies outweighed the cost of additional public hospital admissions. That suggests getting rid of the rebate entirely might produce quite a substantial net benefit for taxpayers — but that’s beyond Cheng’s simulations.

Nonetheless, recent figures showing the first fall in the overall proportion of Australians with private health insurance for many years have sparked talk of a “crisis” and industry demands for “urgent reform”, with the cost of prostheses a particular target of the industry which has been pushing premiums up much higher than CPI.

But there are two problems with that. One is that private health insurance is rotten value for money: many products are, in the words of Choice, “junk”; there’s been a surge in consumer complaints about the industry; anecdotes are routine about users dropping their policies when they discover they’re not covered. Even Health Minister Sussan Ley noted the complexity of the products on offer from the industry and the widespread perception that consumers weren’t getting value for money, and promised to force providers to simplify and improve the transparency of products, as well as getting rid of “junk” policies. Reducing prosthesis costs isn’t going to fix those problems.

The other problem is that, despite talk of a crisis in the industry, it’s actually doing very well indeed, thank you. The now-privatised Medibank Private, which just edges BUPA as the biggest company in the industry, recently unveiled a $417 million profit. In its statement for the half year to June this year, BUPA reported both revenue and underlying profit up strongly in Australia, “mainly due to higher customer numbers, higher premiums and a stable loss ratio” with its overall improved result “driven mainly by the health insurance business”, although it identified affordability issues and “public policy headwinds”. NIB also reported a big profit lift; non-profit HCF last year announced a doubling of its surplus to $156 million.

Given the rude health of private health insurers despite the apparent existential threat posed by the 2012 means test, it’s time to revisit the basic issue of why we’re wasting $5 billion a year — and rising — on subsidising private health insurance when the numbers suggest cutting that substantially will be a net gain for taxpayers.

Peter Fray

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