Rich profit from a sick system

John Watson

June 17, 2009

It's time to end the wasteful private health rebate, which has not eased the burden on public hospitals.

THE private health rebate is one of the worst rorts in Australian public policy. The uncapped cost has risen to $3.5 billion a year, a subsidy to an industry that mostly caters to the better-off half of the population, and does precious little to ease the load on public hospitals.

The rebate would appear to be a natural target for anyone who professes to be concerned about wasteful spending and debt — the Coalition, for instance. Awkwardly, its constituents have become addicted to the middle-class welfare that the rebate epitomises. Last week, Coalition senators initially boycotted a Senate economics committee hearing into legislation to reduce the level of subsidy to holders of private health insurance. The bills came before the Senate again on Monday and were referred to the Community Affairs Legislation Committee for further inquiry.

It's about time something was done. Since the election of the Rudd Government in 2007, the Treasury has made repeated submissions to the effect that the rebate is "very poor policy" and should be dumped. A 2007 briefing to the Treasurer summed up the argument: "There is no doubt that its $3 billion annual cost to revenue could deliver far better health outcomes if directed to additional capacity in public hospitals." No other industry in Australia enjoys such a high level of assistance.

Treasury would appear to have had a modest victory, with the bills before the house reducing the rebate to high-income singles and couples/families: to 20 per cent for those aged under 65 and earning more than $75,000 and $150,000 respectively, with the Medicare surcharge levy remaining at 1 per cent for those without cover; to 10 per cent for earnings above $90,000 and $180,000, with the surcharge increasing by 0.25 percentage points; and cutting out the rebate altogether for incomes of more than $120,000 and $240,000, with a 0.5 percentage point increase in the surcharge.

The Treasury expects savings of $1.9 billion over four years, plus $150 million from the surcharge. It predicts that, faced with the stick of a surcharge increase, only about 25,000 adults will drop out. Last year, despite a rise in the income thresholds at which the surcharge applies, private health membership rose to 48.8 per cent of Australians.

Predictably, the health funds are warning of a much more disastrous impact, arguing that "supporting private health frees up public beds for those who need them most", in the words of Catholic Health Australia chief executive Martin Laverty. He cites an Access Economics report that predicts 100,000 will drop out of private health — others claim as many as 250,000 — forcing up premiums and swelling public hospital queues by 36,000 patients. (Treasury's estimate is 8000 over two years.)

There are several assumptions here: that private cover greatly eases the burden on public hospitals; that the rebate is a strong driver of membership; and that private health is equally cost-efficient. These claims were also made earlier this year in a letter to The Age by Australian Health Services Alliance CEO David King, who cited Ipsos Australia as his authority.

None of these claims is supported by the evidence collected in the decade that various "carrot and stick" measures to support private health were introduced. The rebate is a sop to people paying for private cover, but did very little to boost membership.

It was the policy "sticks" of the surcharge and lifetime health cover (which lifts premiums for every year that people over the age of 30 stay out of private cover) that did the trick. Health funds openly promote products that minimise coverage — the public system covers the gaps — while offering a way to "reduce tax". In the past, some people could even be better off financially for taking out health cover.

Consider what Ipsos, which surveys the health market for the industry, had to tell a Australian Health Industry Association national conference before the current rearguard action against the Rudd Government reforms began.

Message 1 was that private cover was far from being seen as a "must have", and the sticks far outweighed the rebate carrot in their effect. Hence Message 2, "A lot of 'stick … not much carrot" and Message 3: "If the 'stick' works … look for a bigger stick!".

To reinforce the point, an Ipsos graph, for the period 1997 to 2005, showed 12 per cent of inquiries were "converted" into sales in 1999, when the rebate took effect. In its first year, only 0.8 per cent of the population joined up. After lifetime health cover came in, the "sales conversion" rate jumped to 49 per cent (labelled on the graph as the LHC Effect) and membership rose from 32.2 per cent...

Consider what Ipsos, which surveys the health market for the industry, had to tell a Australian Health Industry Association national conference before the current rearguard action against the Rudd Government reforms began.

Message 1 was that private cover was far from being seen as a "must have", and the sticks far outweighed the rebate carrot in their effect. Hence Message 2, "A lot of 'stick … not much carrot" and Message 3: "If the 'stick' works … look for a bigger stick!".

To reinforce the point, an Ipsos graph, for the period 1997 to 2005, showed 12 per cent of inquiries were "converted" into sales in 1999, when the rebate took effect. In its first year, only 0.8 per cent of the population joined up.

After lifetime health cover came in, the "sales conversion" rate jumped to 49 per cent (labelled on the graph as the LHC Effect) and membership rose from 32.2 per cent of the population in March 2000 to 45.8 per cent in September 2000.

Surely, the public hospitals' load was eased as a result? The Australian Healthcare and Hospitals Association says the past decade's policies had "no effect in taking the burden off the public hospital system".

Data published by the Australian Institute of Health and Welfare shows no discernible decline in the use of public hospitals in the years 2001-02 to 2003-04, the period immediately following the 42 per cent increase in private hospital coverage.

Government spending on public hospitals grew annually by 8.9 per cent, up from 8.1 per cent in the period 1996-7 to 1998-9. Health fund finances have improved, though. Gross industry margins were up from about 10 per cent in 2001-02 to 15 per cent in 2006-07.

Meanwhile, increasing numbers of private patients are admitted to public hospitals — about one in 10 admissions — as public hospitals seek extra revenue. Each private patient in a public hospital is denying a patient on a public waiting list a bed.

The cost per procedure is significantly higher for private patients than public patients and fund members are more likely to seek non-essential treatment to justify the cost of their premiums. Health fund administration costs are also three times higher than those of Medicare.

Taxpayers get much more bang for their buck from public health funding, by some estimates 20 per cent more, than from private health subsidies.

If people can afford it, let them take out private cover — as I have — to avoid waiting lists and jump the queue, which is really the main attraction. But they should not expect to be subsidised by the taxpayers who don't have private cover, still a majority, and who don't see any benefits flowing to the public hospital system.

John Watson is a senior writer.

I think the GALP think if they can change policy, they can change society, keep our birth rate low, allowing for more immigrants and their progeny to arrive , work for peanuts and allow foreign investors to buy up what's left of our artificially inflated housing market.
If you are a Meterosexual 'unmarried gay couple' who declare themselves mere flat-mates, you could really cash in here....take a look at it, it's more affordable to declare yourself single, than pay the duel-income rate.


A great rambling, but WTF has it to do with the topic of this thread?
Sure leaves the traditional family disadvantaged, when saying "I do" just became so much more of a burden.

I might be wrong here, but this is what it looks like to me.

Thanks GALP...  when being a single gay with an adopted child (and a flat-mate) becomes the more viable alternative to a nuclear Australian family.

We live comfortably on 60k. We are not poor. I guess to those who earn 20k we are well off. We have private health insurance. Without the rebate we probably could still afford it. But why shouldn't we get it?

Deborahmac09 wrote on Sep 14^th, 2010 at 7:13pm:


Do we presume that you meant $200K?

The issue, Deborah, is that the non-means-tested rebate is not only inefficient but it is actually counter-productive - especially when we consider the opportunity costs!

What's worse: the rebate was unnecessary because the associated sticks have proven to work far better than the carrot!

Since we now have this wasteful carrot, it is difficult to remove it without backlash - so means-testing of the rebate is probably the best way forward!