aged care Private health insurance
(Image: Unsplash/Marcelo Leal)

The debate over private health insurance has been stuck in a Kabuki-like ritual for the last few years.

PHI premiums inevitably rise much faster than inflation and wages, more young people inevitably abandon PHI or drop to a lower level of cover, PHI companies inevitably lament the rapidly rising costs they have to bear in health, and the government inevitably talks about how it has got premium increases down to their lowest level in x years, despite them still growing at a multiple of CPI. Rinse, repeat.

The Grattan Institute’s Stephen Duckett, the country’s best health economist, has valiantly tried to break the debate out of this rut with a new working paper that tries to return to first principles about PHI and why we support it with billions of taxpayer dollars and strict regulation.

The paper, written with Kristina Nemet, argues that we need to determine what the purpose of PHI is. If it’s to complement the public health system, there’s little rationale for supporting it — if people want health insurance, they should be free to have it, but it’s not a worthwhile use of taxpayer funding to support it. But if it’s a substitute for parts of the public system:

The substitution-based argument for a subsidy is stronger if: it results in a cost saving for government; or private provision is economically more efficient than services that are provided universally through the public system.

The paper argues that those conditions don’t seem to apply. The evidence that it delivers cost savings for the government is mixed at best, with different studies suggesting both private and public hospitals were less efficient than the other, or about the same. But worse, it encourages over-servicing.

“It is unlikely that PHI reduces total spending on health,” the paper concludes. “It pays for some services that would not meet thresholds of ‘clinical need’ in the public system.” Moreover, “[s]ome of the additional activity funded by PHI may not improve patient outcomes. And in some cases it appears that private health care is adding cost but not improving outcomes.”

And even if there was a case for subsidising private health care, PHI subsidies may not be the best way to deliver it — it might be more efficient simply to give money direct to private hospitals.

Public policy under successive governments and incremental tinkering has confused the purpose of PHI subsidies to an extent that only some sort of root-and-branch review is going to help. The last serious intervention on PHI was when the Gillard government changed access to PHI subsidies to constrain their relentless growth, which had seen them reach nearly $6 billion a year in 2012. The Coalition vaguely promised at the time that it would remove the shackles, but has never got around to it.

While the purpose and efficiency of spending on private health insurance is an issue for governments, it’s also one for younger people, who are abandoning PHI, and are right to do so. PHI for younger people isn’t merely a scam, it’s another front in our society’s widespread economic war on younger people.

Whether it’s our refusal to address climate change, housing affordability, the degradation of our higher education system and the imposition of student debt or the franking credit rort, our political system prioritises the economic interests of older generations, like my own and Baby Boomers, and punishes young people.

PHI is a direct transfer of wealth from young, healthy people who rarely claim benefits, to older people who are heavy users of the health system. And while PHI is voluntary (though people in their 30s face punitive premiums if they don’t join a health fund by the time they are 30), young taxpayers who sensibly choose not be a victim of the rort still have to contribute to it via their taxes.

Just this week there was yet further evidence of the way the political system is skewed to reflexively serve the interests of older voters. Interest rate cuts designed to stimulate employment and lift wages for Australian workers have unleashed a torrent of complaints from retirees about the impact on their savings and demands that the government do something.

Within two months of an election partly fought and won on preserving the franking credits rort, the government again responded quickly and adjusted deeming rates to boost pensions for savings-rich retirees.

If young people continue to abandon PHI, expect similar pressure on the government to provide yet more taxpayer support for a system ever more skewed toward Gen X and Baby Boomer policyholders and our increasing health needs. And don’t expect any attempt to establish a coherent policy framework for it — beyond generational interest.

What should be done about private health insurance in Australia? Write to [email protected] and let us know your thoughts.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey