Research impact Are health insurance mandates and rebates good policy?

The challenge

Since the inception of Medicare in 1984, free public hospital care has been available for all Australian citizens: yet around 45% of the population has private health insurance. Funding healthcare in a way that is efficient, fair and equitable is a major ongoing issue in Australia – with the government using various financial incentives (carrots) and penalties (sticks) to encourage private hospital insurance to reduce pressure on the public healthcare system.

While private hospitals are important, there are concerns that the financial incentives for private health insurance are impacting the complexity and equity of the healthcare system. This research aims to uncover how effective these ‘carrots’ and ‘sticks’ are. 

Solution

Undertaken in collaboration with the University of Melbourne, this project aims to evaluate the influence of financial incentives on the demand for private hospital insurance. Using administrative data from the ATO (a 10% random sample of tax-filers) the team compared individuals affected by the incentives with comparable individuals not affected.

Specifically, the team explored the combined effect of the lifetime health cover loading (an age-based penalty for those who privately insure after age 31); the Medicare levy surcharge (a tax penalty for higher income earners without private cover); and the private health insurance rebate (a subsidy for the cost of cover). 

Outcome and impact

This project provides a timely evidence base to support any policy reforms around insurance incentives/penalties. The research found that while policy incentives do increase demand for private hospital insurance, their effects are likely to be fairly modest. For example, findings showed: 

• At the singles threshold where the Medicare levy surcharge (MLS) first kicks in, demand for private insurance increased from about 70 to 73% - compared to 90 to 91% at the family threshold. 
• With only around 16% of people with an income above the MLS threshold, and most would insure even without the penalty, the MLS is unlikely to greatly contribute to overall demand. The research also found no evidence that the rebate withdrawal leads high-income earners to purchase lower quality insurance plans.
• Lifetime health cover loading increases demand for private hospital insurance by about 6% for people turning 31.

In 2023, The Department of Health and Ageing released a report for consultation which included options to reform private health insurance incentives. In articles for the Conversation, the research team have argued against further expansion of private health insurance incentives; suggesting instead the reduction or even elimination of the private health insurance rebate for higher-income earners, with savings redirected to higher rebates for those on lower incomes or to directly fund the public healthcare system.

Transcript

So obviously, health is pretty important to our wellbeing. And we want a health care system that delivers health outcomes that are high quality, but also in a way that's fair and equitable, and financially sustainable.

Where I think economists, have a lot of value to add is we understand incentives and trade-offs. Economists are very good at understanding whether a program is offering good value for money. They're good at predicting how physicians might respond to different regimes of regulation and pricing and so forth.

When you buy health insurance in Australia, typically what people will do is they'll buy insurance for extras, which are things like dental, glasses, physiotherapy… And they will buy insurance for private hospital expenses. And that's usually your elective surgeries like hip replacement and other joint replacements and so forth. 

However, if you actually go through the details of the plans that the people are purchasing, it can be really hard to actually get back more than you're likely to put in. Now, why do we have insurance in the first place? It's normally to avoid catastrophic risk. This extras insurance doesn't really address that fundamental component of insurance.

I’ve worked with colleagues at the Melbourne Institute to write opinion pieces that we publish in The Conversation, summarising our research.

Recently, there has been a review by the Department of Health and Ageing into the incentives that exist for private health insurance. Now that review was released for consultation, and during this year me and colleagues at the Melbourne Institute were able to send a submission to that review. We were able to meet and discuss the recommendations from that review with policy analysts at the Department of Health. 

And again, through our public media engagement, we were able to put our opinions out there for debate.

Dr Nathan Kettlewell

Senior Lecturer
Economics Department

Explore Dr Kettlewell’s research

 

This research included collaboration with external partners.

• Professor Yuting Zhang, Professor of Health Economics, The University of Melbourne