(Apologies Croakey readers – there is a gremlin in the system creating havoc with punctuation marks).
Michael Roff, CEO of the Australian Private Hospitals Association, wrote strongly in support of the private health insurance rebate in Crikey recently, in response to a statement from public health leaders supporting the Government’s plans to means-test the rebate.
Many of the subsequent comments on his article post highlight the inequities of a two-tier system, as well as concerns about medical costs. The PHI rebate has undoubtedly contributed to rising medical costs/incomes (two sides of the same coin, after all). It’s not surprising that it tends to be supported by the medical lobby – and not by those organisations with a wider concern for population health.
Below are two articles, first published in Crikey last week, responding to Roff’s piece, from public health and public policy perspectives. They argue the rebate is “shocking” health policy, and a “clumsy”, expensive way to fund healthcare.
Rebate is shocking health policy and shocking financial policy
Helen Keleher, Peter Sainsbury, Stephen Leeder, Fran Baum and Michael Moore write:
Michael Roff has responded to our piece, Time to support changes to private health insurance subsidy, in a partisan position that lacks both credibility and the level of analysis which he assets is lacking in our article. We respond with references!
1. Roff has no evidence that the means-testing of PHI is a “big lie”. The Minister has not committed to how the funds that would be freed-up will be spent, as Roff admits.
2. Roff is wrong to claim that the Productivity Commission found that private hospitals are 30% more efficient than public hospitals. What they found is a 3% difference in costs and caution that once these data are weighted against casemix differences, the cost differences between private and public hospitals are not significant.
3. Roff is correct that we do not have a publicly funded dental scheme and we share his regret about that. We do however, have public dental programs which are essential for people who otherwise cannot afford the cost of dental care in the private sector. The majority of Australians do not have dental insurance. Perhaps that is because the amount rebatable by PHI “extras” schemes for dental care is a fraction of its cost and is therefore, not a particularly attractive product.
More importantly, what the ancillary cover means is that the less-well off majority of Australians who do not have PHI pay full price for dental and other ancillary cover, while the better-off are subsidised. This is an even more regressive effect than the financial support for PHI.
4. Roff claims that “the proportion of PHI policies that are excluding one or more types of treatment jumped from 13% to 24% and this has resulted in an 11% increase in insured patients being treated in public hospitals in the last six months”. The growth in private hospital activity was well established prior to the increases in PHI coverage between 1999 and 2001 and the introduction of the subsidy. Since July 2000, PHI coverage has been relatively stable at between 43% and 45% . The rebate has had very little effect on PHI coverage, and effectively redistributed public funds away from the area of greatest need towards those who were already members of PHI funds, generally the most well to do in the community, 94% of whom were already members of PHI funds anyway. Allocating that money to public hospitals would represent a 50% increase in the level of Commonwealth hospital funding, which is a significant investment.
5. Roff makes the point that “private hospital admissions have grown at more than twice that rate or 5.5% and that if the rebate hadn’t been in place, then 8 million additional episodes of care would have had to be undertaken in public hospitals over the last 10 years at a cost of around 26 billion dollars to the taxpayer”. There does appear to be an association between rates of PHI cover and separations per 100,000 population in private hospitals. Whether this has reduced the load on public hospitals is a debatable. Certainly increasing the rate of private health insurance (PHI) coverage is likely to increase activity, giving rise to a situation known as “moral hazard”: the likelihood that people paying for insurance will be likely to use private hospitals services, and make claims.
6. Roff then asserts that “no pressure has been taken off the public system”. With population increases, an ageing population, increases in chronic disease and inequalities in health, this is not surprising.
7. Further, we add that because PHI cover is largely the province of the relatively well off, they are more likely to make the decision to take out PHI. The price of PHI is relatively “price inelastic” (relatively unresponsive to changes in price) whilst also being “income elastic” (relatively responsive to relative income levels), so changes in the price of PHI tend to have little effect on decisions by people on whether they will take out PHI cover.
8. We also make the point that the relatively affluent benefit most from both private health insurance and the Medicare plus safety net. The per capita distribution of Medicare safety net payments for 2006, using federal electoral districts (usually referred to as electorates) ranked according to the Australian Bureau of Statistics SEIFA index of comparative disadvantage shows that those electorates with high SEIFA scores received a disproportionate amount of the safety net rebates, whereas the most disadvantaged electorates (those with low SEIFA scores) tend to receive much lower average payment.
9. And finally, there is a finite supply of health care practitioners able to provide services in hospital, so if the incentives are arranged to make private practice more rewarding and less onerous then doctors in particular will prefer to perform more of their work in the private system, reducing their availability to the public sector. This is unremarkable butis the opposite of what is claimed as a benefit by those who argue for continued subsidies for PHI.
As a postscript to our original article, we reiterate the point that the rebate is a poor strategy for supporting private health care if that’s what government wants to do. The government would be better subsidising private health care providers in return for contracted outcomes in volume and quality. Seldom is the point made that the subsidy costs the government money but they are not actually putting public money into total PHI premiums. This is illustrated in the simplified case below:
Before the rebate was introduced: X people paid $Y each in PHI premiums. Total premiums = $XY
After the introduction of the subsidy and lifetime rating: 1.5X people (ie 45% of pop vs 30% of pop) paid $0.7Y each in premiums. Total premiums = 1.5X x $0.7Y = $1.05XY
So, all that happened after the introduction of subsidies and lifetime rating, was that more people paid lower premiums (with the overall public contribution staying the same) while the govt gave an uncapped handout to the PHI funds with no strings attached. The subsidies did nothing; the jump in membership came with the “run for cover” campaign and lifetime rating, which occurred at the same time. This is shocking health policy and shocking financial policy.
� Professor Helen Keleher is president of the Public Health Association of Australia (PHAA), Associate Professor Peter Sainsbury is a public health specialist in NSW, Stephen Leeder is professor of public health at the University of Sydney, Fran Baum is professor of public health at Flinders University and Michael Moore is CEO of the PHAA
� For references, see the bottom of post
Private health insurance is a clumsy, expensive way to fund healthcare
Ian McAuley, a lecturer in public sector finance at the University of Canberra, writes:
Michael Roff’s defence of private health insurance (PHI) is an extraordinary statement.
For a start, it is hard to understand why he is so concerned to defend the insurance industry. His interests surely relate to private hospitals; why is he defending a financial services industry which takes $1.9 billion a year in management overheads and profits – $1.9 billion which could be spent on health care in private or public hospitals?
More extraordinary is his claim that the Productivity Commission found that costs in private hospitals were 30 percent lower than public hospitals on a casemix-adjusted separation. The Commission has produced two major reports dealing with such comparisons. Their 2009 Report Public and Private Hospitals found only a three percent difference in costs – $4302 per separation in public hospitals and $4172 in private hospitals. In the larger states, NSW and Victoria, public hospitals had lower costs than private hospitals. A later study by the Commission Public and Private Hospitals: Multivariate Analysis found similar small differences. The general conclusion of these studies is that once casemix is considered, there is no evidence of significant cost differences between private and public hospitals.
Even if one mistrusts the Commission’s analysis, if private hospitals had lower costs than public hospitals we would expect state governments to be rushing to buy services from private hospitals. This is not happening.
Roff uses figures on admissions to support the notion that private hospitals are indeed taking pressure off public hospitals – after all this was a major justification for the PHI subsidies when they were introduced by the Coalition Government.
This is a one-sided argument. If patients shift from the public to the private sector, then resources do too. Public and private hospitals compete for the same limited supply of nurses and doctors. It is just as plausible to argue that the extra support for private hospitals, channelled through PHI, by drawing those scarce resources away from the public sector has increased pressure on public hospitals. If, as is possible, those extra services in private hospitals are for patients with lesser needs than those on public hospital waiting lists, then the subsidies for PHI have seriously misallocated scarce health resources. What public policy has delivered us is a perverse incentive to encourage queue jumping, and, given the way the Medicare Levy Surcharge is applied, the higher one’s income the stronger is that incentive.
PHI is a clumsy and expensive way to fund health care. When one analyses the health expenditures of OECD countries a clear relationship stands out – the greater the proportion of health funding which passes through PHI, the higher is that nation’s total health care costs, even though that higher expenditure produces no benefits in terms of morbidity or mortality. The USA is the outstanding example with health care costs now at about 17 percent of GDP.
Those countries which control their costs do so by a mix of a single insurer (usually a government insurer) and uninsurable out-of-pocket co-payments. Countries like the UK have very low patient co-payments, while Taiwan and Korea, countries with high savings, rely on high co-payments; universal insurance kicks in only once people have paid from their own pockets.
The trouble with PHI is that it carries all the moral hazard of public insurance but without the cost discipline that can be exercised by a strong single insurer. The notion HCF/BUPA/HBF can pay for it is the same as the notion Medicare can pay for it. Because insurance of all types suppresses price signals, PHI is not a market solution; rather it is simply an expensive way of doing what the taxation system does more equitably and efficiently – essentially a privatized tax. (In view of the recent recovery in Australia’s household savings there is a strong case for encouraging people, particularly the well-off, to pay more from their own pockets each time they need health care rather than being subsidized to buy insurance. Before the subsidies for PHI were introduced, about 25 percent of private hospital admissions were self-funded without insurance; that proportion has fallen to about 15 percent.)
Implicit in Roff’s arguments is the idea that without PHI we would have no private hospitals. But that is not so. Given the evidence that public and private hospitals have much the same cost structures, they should be able to compete for the same funding pool. In fact, on a small scale, such a model exists with the arrangements for war veterans: the Department of Veterans’ Affairs acts as the single funder, but purchases about 70 percent of its services from the private sector.
In fairness to Roff, he is not alone in thinking that private hospitals are necessarily dependent on PHI. It’s a way of thinking that has developed its own inertia among policymakers and advocates, and is standing in the way of health reform.
References to article by Keleher et al
 Productivity Commission, 2009. Public and Private Hospitals. Productivity Commission Research Report, Canberra, Commonwealth of Australia.
 Private Health Insurance Administration Council 2011. http://www.phiac.gov.au/
 Segal L. 2003. Why support private health insurance in Australia? New Doctor, no 79, Winter, 10. ?Available: http://www.drs.org.au/new_doctor/79/index79.htm
 Smith J 2007. How fair is health spending? The distribution of tax subsidies for health in Australia. Discussion Paper no 43, The Australia Institute, Canberra; Deeble J. 2003. The Private Health Insurance Rebate, Report to State and Territory Health Ministers, National Centre for Epidemiology and Population Health, The Australian National University, Canberra.
 Department of Health and Ageing 2007 cited Livingstone 2011.
 Richardson J. 2003 Economics and health system reform. Presentation to Australian Health Care Summit, Canberra, 17-19 August; Duckett S. Private care and public waiting. Australian Health Review, 29 (1): 587-9.