Inside Story

The weakest link

Private health insurance is a drain on the federal budget with no clear benefits. So why is Labor only quietly tinkering?

Lesley Russell 30 August 2023 2181 words

Caught in “the jaws of death”? Health minister Mark Butler (left) with his Coalition predecessor Greg Hunt. Stefan Postles/AAP Image

“Private health insurance is in our DNA,” Tony Abbott declared back in 2012 when the Gillard government legislated to means test the private health insurance rebate, the government subsidy to encourage the purchase of private health insurance. As opposition leader at the time, he promised the Coalition would scrap the measure “as soon as we can.”

In government just a year later and in power for almost a decade, the Coalition made frequent promises to lift the uptake of private health insurance even as doubts intensified about its value and cost. Along the way, private hospitals labelled private insurance as the health system’s “weakest link” and the private health funds themselves worried about an exodus of customers.

With analysts increasingly predicting a health insurance industry “death spiral,” the Morrison government made moves over several years to — as officials described it — “improve the value proposition of private health insurance for all Australians.” In reality, that was code for the government’s efforts to rescue the funds from what industry insiders have called “the jaws of death.” (Together these concerns raise the question, to which we’ll return, of whether the funds have any useful role to play.)

The changes enacted by the Coalition were mostly ineffective. Efforts to make health insurance policies easier to understand were undermined by industry lobbying, leaving the system as confusing as it ever was. Discounts for younger members appear not to have lifted the participation rate for hospital cover.

A deal to keep premiums lower was undermined by the failure to achieve savings on the prostheses list, a government-maintained register of medical devices for which insurers are required to pay a benefit. A costs-finder website designed to reveal out-of-pocket costs for specialist medical services has done nothing to increase the affordability and uptake of private insurance.

Through those years the means-tested rebate remained untouched. Never a government to take on difficult issues, the Coalition was confronted with the reality that meaningful options were risky, controversial or both.

Labor’s current consultations on private health insurance had their genesis in Coalition health minister Greg Hunt’s review of the sector, which he launched in July 2019. “I’ve already been meeting with private hospitals, insurers and medical leaders on the next stage in terms of private health insurance reforms,” he said at the time. A few months later he reported that he was working on ways to enable health funds to cover hospital-in-the-home and specialist treatment delivered outside hospitals at a lower cost, starting with mental health and orthopaedics.

This work appears to have stalled. The 2020–21 budget papers announced that the Morrison government would begin consulting the private funds about expanding community-based mental health and rehabilitative care in October 2020, with the changes to take effect on 1 April the following year. I can find no evidence that progress was made towards this goal.

The following year’s budget papers proposed a review of the Medicare levy surcharge (a penalty payable by higher earners who don’t have hospital health cover) and the private health insurance rebate (the means-tested government subsidy to help offset the cost of private insurance). They said that the prostheses list needed modernising and its administration improved, and foreshadowed scrutiny of private hospital default benefit arrangements (the benefits insurers pay to private hospitals if they have no standing financial agreement).

The need for reform has only intensified since Labor took office. Housing and cost-of-living pressures mean that many people, especially if they’re young, can’t afford an expensive discretionary purchase like private insurance. Out-of-pocket costs for private healthcare services continue to rise. The ageing of private fund members is threatening the funds’ sustainability. The cost to government of the private insurance rebate is expected to be around $28 billion over the four years from 2021–22.

But private insurance reform is not a topic health minister Mark Butler is talking about, at least in public. In his media releases and statements this year I can find only one passing reference to the government’s reform program: a mention of reducing private health prostheses prices and enhancing the Medical Costs Finder. The work on major reforms appears to be happening under the radar.

Given the impact any changes could have on all Australians, it’s surprising the health minister isn’t keeping the public informed. We can be sure the other stakeholders — the health insurance industry, the private hospitals and the doctors’ groups — are being kept in the loop.

Labor’s work draws on commitments made by the Coalition in recent years, and reports commissioned by its last health minister, Greg Hunt. But tracking the efforts of both governments is hindered by a lack of transparency and a dearth of publicly accessible documents. Complicating the task is the fact that many of the proposals currently up for analysis and discussion are highly technical, demanding expertise in insurance, taxation and risk management that most health policy experts — let alone the general public — lack.

An online search for official information on private insurance reform reveals a single page on the health department’s website — and despite being dated July 2023 it is clearly a relic of the Morrison era. An invitation to find out more about the reforms it mentions takes the visitor to a budget 2021–2022 fact sheet.

The government’s consultation hub is more forthcoming. It includes a report from consultancy firm EY on hospital default benefits and reports from Finity Consulting on lifetime health cover (May 2022), risk equalisation (September 2022) and a mix of other insurance issues (2023).

This is where the story gets complicated. The latest Finity report recommends retaining the Medicare levy surcharge, the insurance rebate and lifetime health cover (no surprises there), and offers options for optimising both the surcharge and the rebate by targeting incentives more effectively. It offers no options for reforming lifetime cover, with the implication that this is inextricably linked to changes in the surcharge and the rebate.

In its earlier lifetime cover report, Finity found evidence that the penalties for delaying the purchase of private insurance, or for purchasing it only when it was felt to be needed, were having a weaker effect and/or becoming less relevant for younger Australians faced with financial constraints.

A single-page departmental consultation paper requests feedback on these studies’ recommendations and how they might be implemented. It also seeks views on a number of policy and regulatory issues not canvassed in the consultants’ reports and wants to hear back about “the readiness of participants in the private health sector to work constructively together to the benefit of policyholders and the performance of Australia’s private healthcare system, and whole of sector mechanisms that can facilitate this outcome.”

The consultation period was open from 6 June to 15 August. The consultation paper had mysteriously disappeared from the consultation hub when I looked for it on 20 August but was reposted after my email enquiry. No submissions have yet been posted on the website. While we can assume that Private Healthcare Australia (the industry’s peak representative body), the Australian Private Hospitals Association, medical organisations and, it’s to be hoped, consumer and patient groups are keenly interested in the outcomes, to date only the Australian Medical Association and the Australian Private Hospitals Association have made their submissions public.

A separate consultation process on EY’s recommended changes to hospital default benefits arrangements took place in August–September 2022, but despite the release of a consultation strategy the recommendations appear to have gone no further. Without changes to the current default policy, patients using smaller hospitals and hospitals in under-serviced areas will be increasingly out-of-pocket, or those hospitals will receive increasingly inadequate compensation.

Thankfully, a paper by several academics who worked with Finity Consulting helps navigate through this welter of studies. According to its authors, the studies have produced three key findings: that financial incentives for consumers to purchase private health insurance are effective overall but inefficient in achieving their desired objectives, including reducing pressure on public spending; that options for reforming those incentives have been designed only as short-term solutions; and that price changes have little effect on insurance uptake.

Reduced to these three key points, the consultants’ work can justly be regarded as unnecessary. A succession of recent analyses and reports from universities and elsewhere have shown how incentives to take out private insurance do and don’t work and what might be done to improve its value for those who purchase it.

A 2021 paper from ANU’s Tax and Transfer Policy Institute looked at the effectiveness of various sticks and carrots used to encourage private insurance, in particular the changes made by the Gillard government in 2012. It found that the Medicare levy surcharge had a greater bearing than the premium rebate on decisions to purchase insurance.

Research by economists Yuting Zhang and Nathan Kettlewell, on the other hand, showed that increasing the levy surcharge wouldn’t meaningfully increase take-up of private insurance because higher-income people who aren’t already buying insurance appear to be highly resistant to financial incentives and disincentives.

A four-step plan to fix the private health insurance system released by the Grattan Institute called for restraints on price-gouging specialists, measures to stop insurers increasing premiums if they can’t demonstrate value for money, and market competition to control the costs of prostheses.

Amid these reports, what messages have the insurers and providers of private healthcare been pushing in their communications with government, the media and the public?

Private Healthcare Australia, the funds’ lobby group, is strongly focused on two issues: restoring the full private insurance rebate — removing the means test, in other words — and cutting back the costs of medical devices, which are much more expensive in private hospitals than in public hospitals. It recently called for a review of the Morrison government’s prostheses changes, which it described as an “inflationary medical device deal.” Tackling both these issues, says the group, will lower premium costs and increase the uptake of private insurance. (Mark Butler announced a series of changes to the prostheses list in January 2023, but they won’t be fully implemented until July next year.)

The Australian Private Hospitals Association argues that the appeal of private insurance will decline if private hospitals aren’t viable. It accuses the funds of profit-taking at the expense of the long-term viability of private hospitals. The association objects in particular to the default funding arrangements for the treatment of private patients in public hospitals.

The Australian Medical Association deserves some credit for recognising the impact of high-priced health insurance premiums on patients. Its submission to the consultation pushes reforms the AMA first put forward in 2020, including the creation of a Private Health System Authority charged with protecting patients, instilling confidence in this highly complex system and driving reform. The AMA has also called for the private health sector to adopt (and fund) more innovative and efficient models of care, including home- and community-based care.

The loud voices of these well-resourced organisations are not easily ignored by governments. The needs, concerns and growing dissatisfaction of the general public, meanwhile, aren’t readily marshalled, presented and heard. While the biggest concern in the community is that insurance should deliver value for money and be accessible when needed, the evidence shows that many Australians value public hospitals more, especially in a crisis. One in four patients who hold private insurance choose to use public hospitals.

What’s glaringly absent from the current consultations are several basic questions that deserve to be taken seriously. Chief among these is whether the government should withdraw its financial support for private insurance altogether and invest the billions of dollars it would save in Medicare and public hospitals (or cut out the funds and directly support private healthcare).

Which of course raises the question of whether private insurance actually does reduce the burden on public hospitals — a belief challenged by recent research from the Melbourne Institute (summarised in the Conversation) that found it doesn’t make much difference to hospital admissions and waiting-list times.

In debating the public–private divide, it’s important to separate the delivery of private healthcare from private insurers, which are simply financial intermediaries — and surprisingly small ones at that. Australia’s total health budget in 2020–21 was $220.9 billion, of which governments contributed $156 billion, individuals $33.2 billion and private insurance $18 billion. Moreover, to quote insurance industry expert Ian McAuley, there isn’t any aspect of private insurance that isn’t done more efficiently and more equitably by Medicare.

The debate on these issues has always been hindered by the fact that Medicare was introduced without planning for how two health insurance systems, Medicare and private insurance, would coexist. Now might be the time to face the problem squarely.

I have yet to see any response from health stakeholders to the government’s plea for signs of a willingness to cooperate constructively for the benefit of health consumers — but that is surely what is needed if the necessary reforms are to be made. A new openness with the public about the existing consultations would be a good place for both the health minister and his department to start. •