The Age reports this morning that the Government has been urged to scrap the 30% private health insurance rebate and to, instead, spend the money on public hospitals. One can argue about the scale of this rebate but the subsidy makes sense in terms of standard economic theory.
Health markets in Australia are distorted by the existence of a public health scheme that provides health cover at low cost and without the need for health insurance. If this public scheme is taken as a given - to be clear I definitely support it - then this will lead to a less than socially optimal level of private health insurance and private medical care. A standard 'second-best' argument is that a subsidy should be provided to encourage private health insurance and use of private health services.
Eliminating this distortion by means of subsidies promotes the social advantage by providing consumers with more health care choices. More importantly than that it takes pressure off the public health care system thereby enabling more resources to be spent per patient in that system.
(This is the same argument as for providing subsidies to private schools given free public education. We don't want to live in a totalitarian society where the government entirely manages the education of our children. But, more importantly than that, encouraging people to join the private system by subsidies lower than those paid per student to public schools reduces the pressure on public schools).
The contrary argument by opponents of the health insurance subsidy that the money would be better spent on the public system seems wrong. The increased supply of public hospitals will be swamped by increased numbers of formerly privately insured patients who will ship towards them.