Health insurance: paying to boost specialists' incomes

I think I could probably get to the end of the year just writing once a week about the many problems Scott Morrison faces, but doesn’t seem to be making any progress on. And that’s before you get to climate change.

Take private health insurance. The public is terribly dissatisfied with it because it gets so much more expensive every year and because, when you make a claim, you’re often faced with huge out-of-pocket costs you weren't expecting.

The scheme has such internal contradictions it’s in terminal decline, getting weaker every year. Neither side of politics is game to put it out of its misery for fear of the powerful interests that would lose income – the health funds, the owners of private hospitals and myriad surgeons and other medical specialists – not to mention the anger of the better-off elderly who have convinced themselves they couldn’t live without it.

But neither is either side able to come up with any way of giving private health insurance a new lease on life. Anything governments could do – and probably will do – to keep the scheme going a bit longer involves slugging the taxpayer or forcing more people to pay the premiums.

I’ll be taking most of my information from the latest report on the subject by the nation’s leading health economist, Dr Stephen Duckett, of the Grattan Institute, but drawing my own conclusions.

Private health insurance is caught in a “death spiral” for two reasons. First, because the cost of the hospital stays and procedures it covers is rising much faster than wages are. Duckett calculates that, since 2011, average weekly wages have risen 8 per cent faster than general inflation, whereas health insurance premiums have rise 30 per cent faster.

Why? At bottom, because the health funds have done so little to prevent specialists raising their fees by a lot more than is reasonable. Federal governments have gone for years meekly approving excessive annual price increases.

Second, as with all insurance schemes, those policy holders who don’t claim cover the cost of those who do. The government’s long-standing policy of “community rating” means all singles pay the same premium, and all couples pay about twice that, regardless of their likelihood of making a claim.

This means the young and healthy subsidise the old and ill. Which would work if health insurance was compulsory, but to a large extent it’s voluntary. So the old and ill stay insured if they can possibly afford to, while the young and healthy are increasingly giving up their insurance.

The Howard government spent the whole of its 11 years trying to prop up health insurance with carrots and sticks. These measures stopped coverage from falling for a while but, with premiums continuing to soar, have lost their effectiveness.

Over the year to last December, the number of people under 65 with insurance fell by 125,000 (particularly those aged 25 to 34), while the number with insurance who were over 65 increased by 63,000.

So here’s the bind the funds are in: the more healthy young people drop out, the greater the increase in premiums for those remaining. But the more premiums increase, the more youngsters drop out.

The funds’ talk of being in a death spiral is intend to alarm the public into insisting the government bail them out by imposing more of the cost on taxpayers or, ideally, on young people. But before we panic, we should ask why we need the continued existence of private insurance.

After all, our real insurance is Medicare and being treated without direct charge in any public hospital. If the taxpayer-funded public system is less than ideal, it could be a lot better if the $9 billion a year the federal government tips into private insurance and private hospitals was redirected.

To some people, the big attraction of private insurance is “choice of doctor”. But this can be illusory. It’s usually your GP who does the choosing – to send you to one of their mates or their old professor. In any case, if people want choice, why shouldn’t they be asked to pay for it without a subsidy from the rest of us?

Ah, but the real reason I must have private insurance, many oldies say, is to avoid the public hospitals’ terrible waiting lists for elective surgery. That’s a reasonable argument for an individual, who can do nothing to change the system.

But it’s not a logical argument for politicians, who do have the power to change the system. And when the health funds claim that, without them, the waiting lists would be far longer, they’re trying to hoodwink us.

Most specialists work in both the public and private systems, but do all they can to direct their patients to private, where their piece rate is much higher. Were the health funds allowed to die, many fewer patients would be able to afford private operations and would join the public hospital waiting list.

But what would the specialists do to counter the huge drop in their incomes? They’d do far more of their operations in the public system, probably doing more operations in total than they did before. It’s even possible the queues would end up shorter than they are now.

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Private health insurance is a con job

You won't believe it, but my birthday was on Tuesday and I got a present from the federal government. I also got a card from my state member, sending his "very best wishes" for reaching such an "important milestone" in my life.

I almost wrote back asking him to alert the Queen to be standing by in 30 years' time. Instead, my ever-sceptical mind told me the pollies have awarded themselves privileged access to the private information we're obliged to give the electoral commission.

So, what was my fabulous federal birthday present? Apparently, I'm now so ancient and infirm I get a bigger private health insurance tax rebate.

I never tire of pointing out that, contrary to what people say, our cost of living, overall, has not been rising strongly, unless you regard 2 per cent a year as "soaring".

It is true, however, that a few, easily noticed prices have risen a lot – including the government-regulated price of private health insurance.

My "important milestone" reminds me that people have been complaining about – and I've been writing about – the high cost of private health insurance for as long as I've been an economic journalist.

And the opposition leader of the day – Bill Shorten, as it happens – hasn't resisted the temptation to exploit people's disaffection by putting it firmly on the agenda for this maybe-there'll-be-an-election year.

The popular view is that everyone needs private insurance – if only they could afford it. Which about half of us can't.

Opinion polling by Essential has found that, although a clear majority of people believe "health insurance isn't worth the money you pay for it", 83 per cent of people believe that "the government should do more to keep private health insurance affordable".

The former opinion is right; the latter is delusional. Governments have been trying to keep health insurance affordable on and off for decades, while its cost just keeps climbing.

Why? Because it's a self-defeating process. The more you do to make insurance affordable, the easier you make it for the people running the health funds, the owners of private hospitals and the surgeons and other procedural specialists who work in hospitals, to raise their prices and fatten their profits.

Which the pollies fully understand.

In the old days, health funds were owned by their members, except for the government-owned Medibank Private. These days, three of the biggest funds – Medibank Private, Bupa and NIB – are for-profit providers, thus increasing the pressure on the government to allow big price rises and reducing the chance of getting value for money.

As Ian McAuley, of Canberra University, has written, from a policy perspective health insurance is a high-cost and inequitable way to fund healthcare.

Only 85 cents of every dollar passing through private insurance makes its way to paying for healthcare. And only if you can afford it do you share in the government subsidies taxpayers provide.

From the customers' perspective, it's a con job. Most people under 60 get back only a fraction of what they pay. Often when you do claim you don't get what you expected, because you don't get choice of doctor or a private room, you're caught by ever-changing exclusions from your policy, or because no one warned you about a huge gap payment.

Many buy insurance to avoid waiting times for elective surgery. But if private insurance didn't exist, surgeons would have to earn more of their income from public hospitals and waiting times would be shorter. It creates the problem it purports to solve.

Health insurance is such bad value that, when John Howard sought to prop up the private system, he had to make it subject to a tax rebate. When that didn't work he imposed a Medicare levy surcharge on better-off people who don't have insurance, and imposed escalating prices for people who aren't in a fund by the time they're 31 (which is a con trick on the innumerate).

When the Hawke government reintroduced Medicare, it intended that the universal, taxpayer-funded provision of high quality hospital and medical care would make private insurance unnecessary. Those who preferred the snob status of private care could pay for it from their own pocket.

This is why Labor long opposed public support for private insurance. Shorten, however, has taken a populist line, carrying on about the big increases in premiums and promising to cap them at 2 per cent a year for two years.

Another con. The profit-driven funds would respond either by excluding more procedures from coverage, or by demanding catch-up increases once the cap was lifted (as happened last time).

Private insurance is so counter-productive and so unfair that the best thing would be to end the subsidies and use the saving to improve the performance of the public system. (Howard's claim that his tax rebate would reduce the pressure on public hospitals was always just a fig-leaf to hide his attempt to prop up the two-class system.)

A less politically controversial alternative was first proposed in an Abbott government federalism discussion paper: use the saving to introduce a commonwealth hospital benefit, where the same amount would be paid to the hospital someone chose to go to, whether public or private.

Private hospital beds would stay in the system – at a price fixed by the government – but the parasitic private funds would be out on their own.

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