John Menadue on how private health insurance escalates health costs

With Federal Health Minister Tanya Plibersek due to appear on the ABC’s Q and A program tonight, perhaps we might finally see health policy matters enter the federal election debate.

And for those interested in some of the important structural concerns – such as the impact of private health insurance on health costs – here is some background reading from John Menadue, who has had a long career in the private sector and in public service and policy.

In the article below, cross-posted from his blog, Pearls and Irritations, Menadue argues that private health insurance is undermining the ability of Medicare to exercise market power and to control health costs.

John Menadue writes:

Health Minister Tanya Plibersek recently approved an average increase of 5.6% in private health insurance premiums from April this year. It is the same story year after year with health insurance premiums increasing at 2% to 3% ahead of the rate of inflation.

There are two main reasons for these increases.

The first and least important reason is that the administrative costs of private health insurance companies run at about 15% to 16% of premiums. Medicare, including the cost of tax collection, costs about 6% per year. Broadly speaking private health insurance administrative costs, including profit margin, run at about three times the administration costs of Medicare.

The second and most important reason for the steady increases in premiums is that private health insurance funds are largely unable to control the price, quality and utilisation of services provided by doctors and hospitals.

This is a problem for all insurers, both private and public, when services are provided free at the point of delivery. There is little incentive or opportunity for consumers to exercise power either over the cost of the service or whether the service is necessary.

The power is with the provider, not the consumer. Economists call this ‘moral hazard’.

But when a country has a single payer or a single national insurer, as in the UK or Scandinavian countries, the national insurers can and do exercise market power.

That is why health services in those countries are invariably delivered efficiently and at low cost.

Private health insurance has practically no power to control prices and demand for health services. What is worse, private health insurance in Australia undermines the ability of Medicare to exercise market power.

Evidence on the failure of private health insurance is clear. First, the standard example of private health insurance failure is the high cost and inequity of the US health service. That service provides the worst value for money of any health ‘system’ in the world.

Secondly, The Economist, in an article on February 18, 2010, said ‘The biggest factor behind the cost conundrum is that insurers lack market power. Health care providers hold all the cards.’

Thirdly, our Productivity Commission said in 2005 ‘increased levels of private health insurance membership have been associated with a marked increase in the number of services performed and reimbursement for those services”.

Fourthly, in a review in 2003 of private health insurance in Australia, the OECD commented ‘Private (insurance) funds have not effectively engaged in cost controls. They seem to have limited tools and few incentives to promote cost efficient care … Private health insurance appears to have led to an overall increase in health utilisation in Australia …’

Increases in private health insurance premiums ahead of the inflation rate are not surprising. Private health insurance is badly serving Australians and undermines the power of Medicare as a single payer.

This is not to say that Medicare should not be improved. It is a very efficient payments vehicle.

But it is much too passive. It was launched and still carries in its name, the ‘Health Insurance Commission’.

If it were a proactive public health insurer, it could significantly reduce the malign influence of private health insurance in Australia.