Tuesday, February 24, 2009

Scrapping private health insurance rebates a poor proposal

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.


Anonymous said...

It's a tax hike by another name. The net effect is that pushes more people on he public system.

Anonymous said...

"The increased supply of public hospitals will be swamped by increased numbers of formerly privately insured patients who will ship towards them."

Surely this is a purely empiric question, dependent on a number of different elasticities - the theory of the second best can give us no guide on the correct size of the subsidy. The same goes, incidentally, for subsidising private schools.

hc said...

Derrida, You are right as I noted in my second sentence.

But adjusting the exemption level was reputed to cause a flood of people from private insurance.

It is reasonable to suppose demands are relatively price elastic. If your health costs 30% more then many will leave private insurance.

Tipsy McStagger said...

It's very simple Harry: why should the tax payer pay for an individual to have "choice"? if the public system is unacceptable to an individual, they should have to pay the full price that their "choice" entails. There is more than adequate choice available, should one wish to pay for it. The same goes for schools. To say otherwise is simply advocating middle and upper class welfare.

hc said...

Tipsy, Your comment is frustrating since I was at pains to point out the illogic of this type of argument. Maybe I can make it clear with a numerical example.

Healthtopia is a city with 1 million residents which has a purely 'free' public health system on which it spends $1 billion per year. $1000 per head.

Healthtopic introduces a private system where people can spend $2000 per head (think of this as an insurance cost) on better quality health but noone uses it since they can get public health for free.

Healthtopia therefore subsidises by 1/4 the cost of private heath insurance so the net premium is reduced to $1500. At this price 100,000 people go private and get the better quality treatment.

The cost of this subsidy to Healthtopia is 500*100,000 = $50 million. But now Healthtopia has $950 million left to spend on 900,000 public patients so each public patient now gets 950/0.9 = $1050.

Even after paying the subsidy to the private patient each public patient gets another $50 devoted to their health care (it goes from $1000 to $1050) and the private patients are better off because they choose to go public.

Everyone is better-off. I ignore here the fact of overservicing in a purely public system which imposes extra costs. Eliminating 1/10th of this overservicing provides extra gains.

Anonymous said...

"It is reasonable to suppose demands are relatively price elastic. If your health costs 30% more then many will leave private insurance."
For lots people, it's very inelastic because you either cough up or pay the extra tax. For me, it's simply cheaper to cough up -- even without the rebate it would be close.

Anonymous said...

Scrapping the rebate will cause some people to drop private insurance. But it won't cause a "flood" of people into the public system. The majority who drop insurance will be the young and fit who don't use it much anyway.

If you go to your GP, which is where most australians primary care is carried out - private insurance or not makes no difference to demand or quality of care.

If you were badly burnt in the recent fires you'll go to The Alfred burns unit (or the Royal Melb) because they are the specialist burns units. If you are privately insured you can elect to be admitted as a public patient or a private patient. The care is the same, the hospital is the same, the staff are the same.

It's much the same if you are in a bad road crash, even if you are a wealthy university lecturer with top private insurance, the ambulance won't take you to Warringal Private - no you'll be rushed to the Austin.

Private health insurance provides more choice of times when it comes to elective surgery but no better care. There are some surgeons who work in private only but almost all surgeons who work in public work in private.

As for the cost argument. Hospital procedures are paid for on a standard unit cost basis called casemix (Diagnostic Related Grouping).

Private hospitals cannot deliver most services at the allocated rate yet public hospitals do all the time.

The removal of the rebate will just result in a % of people self insuring - that is paying from their pockets for the convenience of private health treatment when they feel it's justified.

Anonymous said...

Harry, I think Francis X Holden has nailed some of the weaknesses in your position. I found your argument to be simplistic and weak.

For a start, in your Healthtopia example you blithely assert that the subsidy-induced lowering of the private system premiums is all it takes to move a guessed 100,000 over. But in real life the cheapening was insufficient; the government had to force people into choice (yes, astoundingly and ironically - so much for 'choice') by increasing the Medicare levy! The true cause of people's purchase of exorbitant private insurance (which most of them would not need over several decades) was not its alleged superiority, but that it was made literally cheaper for them than the Medicare system! On top of this the government induced fear into young people by progressively lifting premium rates as they delayed taking out insurance. So much for your 'health market'. People did not 'abandon' the public system in the same way that they are 'abandoning' the public education system; in fact most will still be obliged to use that system for many medical procedures and emergencies. They will encounter there substantially the same cohort of doctors and surgeons who provide the same level of care as they do in the private system.

You state in your reply to tipsy that there is 'overservicing' in the public system. Logic suggests to me that 'overservicing' must be also be a problem in the private system; I am at a loss to see why it should not, given the profit motive underlying the whole private system.

Another thing you have failed to address is the cost of the multiplicity of profit-making entities and their various bureaucracies, cohorts of shareholders etc. It is absurd and wrong to subsidise these entities and their activities.

Most people know the private insurance system stinks. The rebate was to lead to lower premiums, the government promised. This never happened; indeed the premiums continued to rise without a hiccup. Without the rebate, many would indeed drop out, but as FXH suggests, this would not lead to what you assert, a flooding of the public facilities.

With the continuing rise in premiums, the private health insurance scam will become too costly for many, even WITH the rebate, especially in these times when unemployment is sure to rise substantially and more and more older people will find themselves living on smaller super payments. By your logic the rebate will have to be increased to keep the public system afloat.

The private insurance system should be left for those who are well enough off to pay for it, and who believe it to be a better option than saving for that rainy day, so to speak (ie. self-insurance), assuming of course that they will always believe the private health system per se to be superior. And is that not a big assumption? It underlies everything you have said.

You might call it economics, but most people, and the Treasury apparently, know that the present stick and carrot system is not economical, and a grand waste of revenue in maintaining the private health insurance bubble.

hc said...

Your comment Macondo confirms to me the value of a bit of training in economics and a basic appreciation of logic.

You argue that I am wrong to assert that subsidies in reducing the cost of private health insurance created a switch to private insurance but that increasing the cost of Medicare achieved this!

Reducing the cost of apples will not make you buy more apples but increasing the price of oranges will!!!!!!!

We want to give people choices in relation to their health and not have politicians making all the choices.

If you don't like this then stick to your grubby public health clinics and your 2.5 minute consultations. But others see things differently. If you want to subsidise public health and give no subsidy to private health services you will then make yourself worse off than when you give optimal subsidies to the private system.

Anonymous said...

If my memory serves me well, the rebate came in first, with lack of success. The 'stick' was needed to push people across to the private health insurance. Perhaps, though they came in simultaneously. Either way, the one would not have worked without the other.

My point to you is, why buy willingly a Mercedes (ALLEGED to be a very fine motor car, although I haven't been able to test this view) even if the government is offering you a $50,000 discount if you:
1. Still can't afford it
2. Have no desire to own it as it will still only get you from A to B?

You simply ignored in your piece the importance of the 'stick' which took the form of the Medicare levy increase. Without this there would not have been the significant movement towards private insurance. You did so, of course, because you believe in the inherent and self-evident superiority of 'private' health.

'We want to give people choices in relation to their health and not have politicians making all the choices'
is humbug. Is it the real reason you support private health insurance subsidies? Can this ideological position justify the taxpayers' supporting the private insurance funds? What kind of 'choice' is it when insurance is forced upon you by a punitive financial imperative? Or it is denied you by personal circumstances which obviate the penalty but don't allow you to take advantage of the subsidy your own taxes are providing for some?
Do you want 'choices' for ALL, or are you happy with tinkering at the margins?

The last last paragraph of your reply doesn't become you; what arrogant and arrant nonsense: 'your grubby public health clinics and your 2.5 minute consultations'! It truly reveals your prejudices. That, Harry, is what you were apparently defending when you said ' If this public scheme is taken as a given - to be clear I definitely support it'. One can only conclude that you support it for the masses but you wouldn't touch it yourself with a barge pole. A definite second-best, eh. What the nature of a GP's surgery or his professional habits have to do with the issue anyway, is beyond me.

I cannot see that you have sufficient evidence to prove that we will be worse off without the subsidy. And I say this as a private health fund 'customer' myself. I think we would all be better off if much more were spent on public hospitals and health care, leaving the private system to all those who can afford it and/or are convinced of its desirability.

hc said...

Macondo, I give up.

Tipsy McStagger said...

"If you don't like this then stick to your grubby public health clinics and your 2.5 minute consultations". Now now Harry.Now, you're argument may be logical, but it doesn't reflect reality now does it? The people who are currently in private health are to a large extent the young and fit who have no need of either form at the moment. So cutting the subsidy simply means they don't spend on private health premiums. It doesn't really mean that they would be greater users of the public system now does it?

Anonymous said...

Why are you giving up, Harry?
Do I detect a contrived note of condescending exasperation, the sort that seeks to imply that if you have failed it must be the other person's problem?

Tipsy's right. Your simple arithmetic might be 'logical', or seem so, but it doesn't match the reality. The Treasury told Wayne Swan in 2007 that the rebate was 'poor policy'. None of your assertions are correct. If you can be bothered, read this:
There's plenty more analysis on the net.