Private health insurance and the public good

Private health insurance (PHI) has been the most significant feature of the Howard government’s approach to health policy. It continues to arouse strong opinions from both sides of politics, academia, the medical profession and health industry lobbyists. Despite regular flare-ups in the media and Federal Parliament, it seems likely that its central PHI policy planks: the 30 per cent Rebate, and Lifetime Health Cover (LHC), will remain for the foreseeable future. The challenge for government is to make it work better.

In 1996 the Howard Government found the PHI industry in a parlous state. Everybody wanted solutions, and fast. The states blamed dwindling PHI membership for the pressure facing their public hospitals. They succeeded in getting a public hospital funding deal from the Commonwealth (the 1998-2003 Australian Health Care Agreements – AHCAs) that ensured that if PHI membership continued to fall, they would get more money. This clause, known as “claw back” also worked in reverse, whereby the Commonwealth could withdraw funds from public hospitals if PHI membership levels increased. More on this later.

Consumers did not like PHI much either. The old and the unwell retained their PHI cover, while the young, the healthy and the better off voted with their feet. The price of PHI cover continued to soar, compounding the well-entrenched consumer boycott of the troubled product.

The PHI funds were struggling. Between 1992 and 1998 the percentage of the population covered for PHI fell from 41 per cent to 30 per cent. The PHI industry faced dwindling membership, with a higher risk profile than the uninsured. The predictable result in 1996 was an operating loss of $81.3m for the industry. In 1998, four of the 44 PHI funds were operating below their statutory liquidity requirement of two months contribution income held as reserves. The prospect of a collapse in the industry was real. The consequences would have been disastrous for government, industry and consumers.

The private hospital sector was also not travelling well. PHI funds tightened up their payments to hospital providers. The hospitals suffered a textbook case of margin squeeze, with many of them making more money from their car parks and leased office suites, than from their core business. The long-term viability of the industry was under threat – an industry that provides over 50 per cent of all elective hospital admissions and at that time more than 30 per cent of total hospital activity.

The medical profession, with no price controls on its services, charged consumers whatever the market would bear, irrespective of what the PHI funds would pay.

Less than half of medical services delivered in hospitals were fully covered by Medicare and PHI payments. Gap payments became the predictable reward for faithful PHI fund members.

On top of this overall annual growth in health expenditure continued to outstrip annual growth in GDP, with around 70 per cent of this funded by government.

The government introduced a raft of policy reforms, with the 30 per cent Rebate carrot (1999) and Lifetime Health Cover stick (2000) the most prominent. The results were dramatic, and successful in many of the targeted areas. PHI fund membership soared to 44 per cent. The cost of PHI to consumers immediately fell by 30 per cent, and they experienced a temporary reprieve from inflation, with minimal premium increases in the two years following introduction of the rebate. The percentage of medical claims not incurring a gap payment rose to 79 per cent. Private hospital activity jumped by 21 per cent between 1998/99 and 2000/2001, while at the same time public hospital activity increased by only 0.2 per cent. The government can rightly claim credit for achieving many of its policy objectives – increased choice through private health care, affordability, reduced gaps, saving the PHI industry and boosting the private hospital sector.

Naturally, the reforms attracted criticisms for other outcomes, including a new funding commitment of $2.2bn a year for the 30 per cent rebate. This is not means-tested, and is calculated on the annual cost of premiums, which are effectively guaranteed to increase annually by the CPI since the government relinquished price controls to this level. There are also additional costs to the Medicare and Pharmaceutical Benefits Schemes. These programs cover part of the medical and drug costs associated with private hospital admissions, which grew by 21 per cent over the past two years. Per-capita utilisation of private hospital care also grew by 5.8 per cent and 10.1 per cent a year respectively over this period. Having played the game for many years the private hospital sector is also seeking a better deal in payment rates from the funds. All up, the Commonwealth inherited new risk, with no effective controls over annual price and utilisation growth, which drive this risk.

The positive impacts of the PHI program on the public hospital sector are less clear-cut, and look increasingly temporary. The best estimate, based on reduced public hospital admissions in 2000/2001, is that approximately two years’ worth of average annual growth in the sector did not occur. However there are three important riders. Firstly, in 2000/2001 there was a dramatic 9.5 per cent increase in the other workload of public hospitals, not covered by PHI. This is non-admitted hospital activity, and includes emergency department attendances, outpatients etc. Secondly, a national survey of public hospitals conducted by the Australian Healthcare Association showed that the slowdown in growth in 2000/2001 was followed by a 1.5 per cent increase in 2001/2002, indicating that the sector may be returning to its normal growth pattern. Thirdly, waiting times for elective public hospital admissions showed no decrease whatsoever in 2000/2001 despite the massive increase in private hospital activity.

The greatest risk facing the public hospital sector and its users relates to the “claw back” provision in its funding agreement with the Commonwealth. Based on the increased numbers of people with PHI, the Commonwealth is entitled to withdraw $1bn a year from public hospitals. They have stated that they will not do this in the current agreement, which expires in June 2003. However there is no commitment to do so in the 2003-2008 agreement currently being negotiated. Implementing any form of claw back in the next agreement would simply erase the net benefits to the sector that the PHI program sought to achieve.