The broken private health insurance system
A new report from the Grattan Institute says Australians, in particular the young and healthy, are dropping their private health insurance (PHI) cover, causing the sector to enter a “death spiral”.
This should surprise no one. Taxpayers provide an $11 billion subsidy to the PHI sector, but consumers – both young and old – have never been less satisfied with their health funds, according to the record numbers of complaints received by the industry ombudsman during the past two years and damning reports from consumer bodies.
Some are finding premiums are rising faster than their wages, while insurers such as Bupa and Medibank Private secure record profits. Others may have listened to the financial experts, such as Scott Pape, the Barefoot Investor, who advises people that private health insurance is “probably screwing you over”. Pape tells readers of his best-selling personal finance books that private health insurance isn’t worthwhile for anyone under 31 or anyone earning less than $90,000 a year.
After years of paying monthly premiums, some have come to the realisation they would have been far better off if they had saved their money and used it to pay for their healthcare directly. Or found, when they needed healthcare, that the gap payment required was greater than the PHI benefit they received. Then there is the frustration felt by those who have paid for private care, only to be told they could have received the same service in the public system, with no co-payment.
There has also been negative media surrounding the conduct of some health funds, including Australia’s largest insurer, Bupa. Currently, 11 of its aged-care homes are under sanction for not meeting government standards. The insurance giant’s facility in Eden, New South Wales, had its accreditation and opportunity for Commonwealth funding revoked last month after meeting only 14 of 44 benchmarks. Early this year, one resident at the facility was admitted to hospital with maggots in a head wound.
About the same time, after a decade-long dispute, Bupa agreed to pay back $157 million to the Australian Tax Office, having come under scrutiny during a senate inquiry last year for alleged “aggressive tax minimisation”. Michael West, an associate professor at the University of Sydney, has described the insurer as “the local offshoot of a shadowy global enterprise with a slew of tax haven connections … [whose] financial disclosures are murky to the point of deception”.
In courting controversy, though, Bupa is not alone. Documents leaked to Guardian Australia earlier this month showed Australia’s biggest private health insurers had rejected claims from thousands of members, falsely telling them this was due to a review by a medical practitioner. “I believe this was plainly illegal corporate wrongdoing and the authorities should have taken it seriously,” the whistleblower said.
To blame millennials for the crisis facing Australia’s private health sector ignores the fact that consumer dissatisfaction with PHI is not a new problem. “It’s not a tsunami, it’s a glacier,” the Grattan report’s co-author Stephen Duckett told The Sydney Morning Herald. “It gets worse day by day.”
In fact, the PHI “death spiral” started on February 1, 1984, when a new public insurer – Medicare – was introduced over the top of the existing PHI system, without any planning from politicians and policymakers about how the two could co-exist. As the Grattan report notes, “Labor gave little thought to the interaction of the public and private sectors, or the role of PHI.”
From a health systems perspective this makes no sense. But the major motivation for the Hawke government in reintroducing Medicare, after the Fraser government abolished its earlier incarnation as Medibank, was securing union support for the accord, an agreement on wage restraint needed to meet its budgetary objectives.
The health funds, which were much less organised and politically sophisticated than they are today, were not focused on how Medicare would impact their sector long-term. Rather than lobby to entrench their role in the health system, they were happy to be relieved of the requirement for them to provide cover for GP services, which had been traditionally unprofitable for them.
Once a compulsory public health insurance system was up and running, however, the optional private system with dubious benefits and an unclear role proved less popular. Propped up at great expense by a series of subsidies and policies by successive governments, PHI has limped along ever since. Never quite dying but always one step from terminal.
Undoubtedly, the efforts of governments to breathe life into a moribund PHI system have had a negative impact on both the efficiency and equity of the Australian health system. PHI is inefficient in two main ways: its administrative costs are three times higher than those of Medicare and – more importantly – it is unable to control providers’ fees. In Australia, there is no constraint on what doctors in private practice can charge.
Experts and commentators have been warning successive governments for years that PHI is a policy disaster area. In 2012, economics writer Ross Gittins stated that “subsidising private health insurance doesn’t only advantage the better-off (including yours truly), it makes healthcare more expensive than it needs to be”. He put it even more succinctly in 2018: “Private health insurance is a con job.”
Those within the sector have warned consumers as well, including Shaun Gath, former chief executive of the Private Health Insurance Administration Council, who in 2015 said extras cover was an “irrational” purchase for most people. He added: “In a world of fiscal purity [buying extras insurance] probably doesn’t make sense.”
More recently, Terry Barnes, former Coalition health adviser, offered his two cents, commenting that “PHI is as popular as a fart in a lift”.
Health Minister Greg Hunt and the Morrison government have inherited, rather than created, the PHI “death spiral”. But the problem they face is that the situation is now at such a crisis point there are few options left to government that don’t involve risky reforms.
Professor Duckett says there are no policy Band-Aids left to address declining PHI membership numbers. He says time may be against a new government attempting to delay controversial but necessary reforms.
“While there is probably a tipping point where the system will become unsustainable, we don’t know when this point will be reached. However, what we do know is that every day the government fails to act, the situation deteriorates further.”
Continuing with the “carrot and stick” approach favoured by previous Coalition governments is problematic. The 30 per cent rebate and tax exemption “carrot” already costs about $11 billion a year. In the current economic and political environment, increasing the size of the rebate is likely not possible, given the government has locked itself into delivering both a budget surplus and tax cuts.
Bolstering the “stick” is also risky, politically and electorally. Consumers have already made it clear they do not like PHI; coercing people into purchasing a product they already know they don’t want will not play well with the electorate. It also risks losing the value of the tax cuts just delivered by the Morrison government.
Removing some of the regulatory restraints that inflate the cost of PHI, such as community rating, would increase membership among the young and healthy but make it unaffordable for those who need it most.
Predictions of a “death spiral” may sound grim; our health system can survive – or even thrive – without private health insurance. As industry expert Ian McAuley has commented, there isn’t anything PHI can do that isn’t done more efficiently and more equitably by Medicare.
It’s important to separate private healthcare delivery – the actual provision of care – from private health insurance, which acts only as a financial intermediary. But out of Australia’s $160 billion health budget, PHI contributes about only 9 per cent. Even if this industry collapsed tomorrow, 91 per cent of the health budget would remain intact.
Rather than trying to reverse the “death spiral”, Greg Hunt could let it die a natural death and think about how he can put the current $11 billion PHI subsidy to better use.
There is some evidence that the community would prefer this money to be used to directly fund healthcare. A poll by Ipsos in 2018 found that 48 per cent of Australians favoured redirecting to establish a Medicare dental scheme. This compared with 32 per cent who were opposed to such a change and 20 per cent who did not have a view.
Another option would be to use the subsidy to directly fund hospital care, paying a fixed rebate to the hospital of a consumer’s choice, whether public or private. This option is worth consideration, according to Dr Tim Woodruff, president of the Doctors Reform Society, who supports a gradual reduction in the PHI rebate with a corresponding increase in resources for the public hospital system and primary healthcare.
In fact, without the expensive and inefficient PHI system, healthcare in Australia could deliver better value to consumers with far greater transparency, equity and accountability. The PHI “death spiral” should be celebrated rather than mourned.
This article was first published in the print edition of The Saturday Paper on Jul 20, 2019 as "A terminal system". Subscribe here.