Private Health Insurance Incentives in Australia: The Effects of Recent Changes to Price Carrots and Income Sticks

Abstract

Three major policy tools govern the demand for private health insurance (PHI) in Australia: premium-related subsidies (i.e. PHI-rebate); income tax surcharges (i.e. the Medicare Levy Surcharge (MLS)); and lifetime community-rating (i.e. Lifetime Health Cover). The first two provide a system of "carrots and sticks" to create incentives for increasing the demand for PHI. The third creates incentives for consumers to purchase PHI earlier than they otherwise would have, and to maintain this coverage over time even when prices rise. This paper makes a number of contributions to the existing literature. We develop a diagrammatic model that incorporates income heterogeneity and use it to consider two important policy issues: the effect of policy changes on consumer price responsiveness, and the effect of policy changes on the PHI take-up rates. The model suggests that recent changes to the income tax surcharge are likely to reduce the price elasticity of demand for insurance, which could have further consequences for outcomes in the PHI market and the health system more generally. Increases in premiums will reduce take-up, but could worsen the government's budget position, even if tax revenues were to rise. Finally, we conduct numerical simulations to examine the possible effects of recent policy changes, which are aimed at further means-testing the PHI rebate and the MLS. The simulation results suggest that these recently adopted policy changes are likely to reduce the take-up of PHI as well as consumers' responsiveness to future premium increases. The Geneva Papers (2012) 37, 725-744. doi:10.1057/gpp.2012.38 Keywords: private health insurance in Australia; regulation of health insurance markets; efficiency and affordability in health insurance markets; personal income taxation; premium and risk-related cross-subsidies; regulated competition Article submitted 10 February 2012; accepted 26 July 2012; published October 2012 IntroductionThe Australian health-care system features a public-private mix in health-care services financing and provision. Medicare is a universal tax-financed national health insurance scheme covering residents for the full costs of being treated as a public patient in a public hospital, and partly for medical and pharmaceutical costs. For private hospital charges, which are not covered by Medicare, individuals may The Geneva Papers, 2012, 37, (725-744) The public-private mix in health-care financing in Australia and the regulatory framework in the PHI market influence significantly the performance of PHI markets. For example, community rating and open enrolment regulations for PHI, which operate as legal restrictions to prevent risk-rating and selective underwriting by insurers, create incentives for (potentially significant) risk selection, which in the Australian context manifests itself mainly through the design of insurance products, for example premium differentiation via product differentiation.

Declining rates of sterilization procedures in Western Australian women from 1990 to 2008: the relationship with age, hospital type, and government policy changes

“…Since 2000, the Lifetime Health Cover initiative has penalized deferral of purchasing private health insurance, with an incremental cost loading (2% per year of age over 30 at the time of policy commencement). Although it is not possible to infer causality directly from these observational data, a substantial increase in uptake of private health insurance among women of reproductive age after the year 2000 likely resulted in a higher proportion of women eligible to have their FS procedure performed in a private facility (12).…”

“…Currently there is limited information about trends and impact of government policy changes on FS rates in Australia, with no peer-reviewed research published since 1995 (11). Health care in Australia is characterized by a dual funding system: many individuals have private insurance policies that complement universally accessible government subsidization of pharmaceuticals (the Pharmaceutical Benefits Scheme [PBS]) as well as many outpatient and inpatient services (12). Higher income is a very strong determinant of possessing private health insurance and of being admitted to a private hospital (13).…”

Declining rates of sterilisation reversal procedures in western Australian women from 1990 to 2008: the relationship with age, hospital type and government policy changes

“…In addition, many Australians purchase personal or family private health insurance (PHI). In the last two decades, the Federal Government has introduced a number of policies to encourage the uptake of PHI [ 15 , 16 ], with the intention of reducing the taxpayer burden on funding the public system.…”

“…Since the withdrawal of the Medicare subsidy for SR procedures in 1997, the choice has been to either self-fund SR operations or to undergo Medicare-funded IVF [ 8 ]. In 1997 the Medicare Levy Surcharge, a tax penalty of 1% of taxable income payable by individuals in higher income brackets without PHI (taxable incomes in excess of $70,000 per year for single individuals and $140,000 per year for couples) [ 16 , 17 ] was introduced, which increased PHI uptake nationally [ 16 ]. In addition, in 2000, a Lifetime Health Cover (an incremental age-based penalty imposed on individuals who first purchase PHI after age 30 years) was introduced to increase PHI uptake rates [ 16 ].…”

UQ eSpace

“…Despite this, the policy has not changed significantly since 1999. The only changes have been increases in the rebate rates for elderly people in 2005 (Kettlewell, Stavrunova & Yerokhin 2018) and the reintroduction of means testing in 2012 (Robson & Paolucci 2012).…”