Health insurance system crumbling

The health-insurance system (public and private) is slowly parting at the seams and the Government’s “reforms” due in April are more likely to make patients angrier rather than mollify them.

High specialists’ gap fees; the GP squeeze; health insurers’ profiteering and inefficiency; and the flight of people from private health insurance are the key problems, and they are all related.

Government policy, of course, must bear a lot of the blame. Interestingly, one policy – Lifetime Health Cover – which was designed to bolster private insurance, now appears to be having the opposite effect.

The policy was introduced by the Howard Government in 2000. In theory, it rewarded people under 30 who took out private insurance by requiring insurers not to charge them a 2 percent a year age penalty while they continued renewing their insurance.

In theory, lots of 30-somethings would flock to private insurance and people already in would stay in to avoid the penalty.

But in practice, it is not working. The latest Australian Competition and Consumer Commission report suggests that 1 per cent of the population per year are dropping out of private insurance. Presumably, most are over 30. 

They are never coming back because the Lifetime Health Cover means that if they try to return they will pay 2 per cent extra on their premium for every year that they are older than 30. A 60-year-old would be faced with a 60 per cent penalty.

So if they left private insurance because of cost, they will never be able to rejoin unless their financial circumstances improved dramatically.

Lifetime Health Cover is like a valve. People can leave private cover, but they cannot get back – the exact opposite of the Government’s intention.

And the ACCC report suggests than more people have been leaving private cover in the past few years after years of the Howard Government’s blackmailing and bribing had arrested the fall in private cover from about 53 per cent to 37 per cent between the introduction of Medicare in 1983 and the time Howard assumed office in 1996.

It bribed people with the tax rebate for premiums and blackmailed people earning more than $100,000 a year with a Medicare surcharge if they did not have private cover.

Private insurance rates went up to about 46 per cent of the population and remained there until the past few years.

This artificial boosting of the private system has been wasteful and inefficient.

Australians paid $24 billion in premiums in 2017-18. Fifteen per cent of that went in profits and administration. Medicare, at $23.2 billion, pays out a similar amount as private insurers, at $20.3 billion, yet its administration costs are only about 3 percent.

Medicare is just more efficient, and it is not a case of economies of scale.

The trouble is, it is not properly funded. The levy raises less than half the benefits paid out.

As a consequence, Medicare rebates are not realistic. Specialists make up the shortfall by charging their privately insured patients a gap fee – a fee in addition to the Medicare and private-insurance rebates. Specialists can do that because there little competition in most specialties and patients are desperate.

Quite a few specialists are gouging the system, hitting vulnerable patients with large gaps. 

In the past six months a couple of good websites have helped competition by inviting specialists to state their gap fee and other information, such as complication rates, to help patients.

However, specialists will always have the upper hand.

GPs on the other hand are not in the same position. There are more of them. The greater competition means many can only bulk-bill and charge no extra fee beyond what they are getting from Medicare.

The GP squeeze is lowering the quality of medicine, especially preventative medicine. There is simply not enough time to see enough patients to make a decent living.

GPs’ costs are forever rising above CPI while the Medicare rebate has either been frozen in some years or increased by just the CPI in the others.

The specialists’ gap fees and increasing premiums are the main reason for the drop in private insurance. In the long run that may not be a bad thing, provided the Government does a commensurate increase in public funding. Otherwise it is money lost to the health system.

In each of the past seven years, private premiums have increased between 4 and 6 per cent (usually 6), whereas CPI has gone up between just 1.6 and 2.9 per cent and wages between 1.8 and 3.8 per cent.

Further, insurers are also putting more limits on cover, especially dental cover.

Indeed, the cost of dental cover is so high, with benefits so limited, that any sensible person would self-insure.

Small wonder people are either downgrading or abandoning their cover, especially as on the medial and hospital side they can fall back on Medicare.

The Government has devised a new star-rating system – Gold, Silver, Bronze and Basic – in an attempt to introduce more competition by giving patients more information.

However, the star system, which will come into force in April, just before the election, is riddled with complexity rather than simplicity.

The insurers will be allowed to add a “Plus” category to all but Gold. They will also be allowed to exclude up to 38 treatments, and the definition of those treatments are not clear.

It is bizarre that any genuine medical treatment can be excluded at all. 

Every insured person will have to move to one of these categories. It will either be a confusing nightmare or a bitter disappointment for patients to find that after paying premiums for years that they will not be covered for the treatment they need and will have to join the Medicare queue. They will obviously ask why they bothered with private insurance in the first place.

The seeds of this systemic stress were sown by the Howard Government.

The answer is to move government money away from the inefficient private system and put it into Medicare; to raise the Medicare levy so it covers the costs; and the raise Medicare benefits so they more realistically relate to the costs of providing medical services.

A smart political party would offer root and branch reform of health insurance at the up-coming election.


This article first appeared in The Canberra Times and other Nine mastheads on 12 January 2019.

5 thoughts on “Health insurance system crumbling”

  1. I agree with the comment from Elly …. another great article from Crispin. There are, however, a couple of points which bear further clarification.

    The article asserts that the Howard government’s “blackmailing and bribing” with tax rebates (or more correctly a subsidy on premiums which could be claimed through the tax system or directly from the insurer) and a tax surcharge on high income earners lead to an increase in the private health insurance participation rate. This is not really true. These measures only reduced the rate of decline of PHI coverage from about 2 percentage points per annum to almost zero. The policy which caused the increase to “about 46%” (Crispin’s figure) was lifetime health cover. While LHC my have been more effective because the other measures, in was in response to the introduction of LHC that significant numbers of people took out insurance.

    The article also repeats the common complaint that the Medicare Levy does not cover the cost of Medicare. This is true but it is a red herring. The Medicare Levy never did, and was never intended to cover the full cost of medicare. The government already had substantial outlays in the related areas (eg, support for private medical (as distinct from hospital) insurance through the tax system) so the levy only needed to coved the INCREASE in costs that resulted from the introduction of medicare. The balance of costs were already funded from government revenue generally. The funding squeeze on Medicare benefits which Crispin rightly identifies is the result of inadequate indexation of the Medicare Benefits Schedule over a long period by governments of both political persuasions.

    The Howard government also substantially cut the rate of growth of Commonwealth funding for the public hospital system.

  2. Glad to see comments are working again. As I have said before, private health insurance compared to investing the equivalent of the premiums doesn’t make an atom of sense. Failing to increase the medicare levy in line with increased costs has failed to provide the “market signal” to encourage preventative health care.

  3. Great article Crispin, giving all the salient history of the gradual breakdown of the health system. Howard showed that he was more interested in propping up his mates in the private health companies than in providing a decent level of healthcare for all Australians. Due to high premiums and an ever-widening gap, we gave up our “extras” insurance for optical and dental treatment. A few years ago we opted to give up private health insurance altogether. We know we’ll be treated if we’re admitted to public hospitals and thank goodness there are a lot of committed doctors working there. The cost of specialist treatment can still be eye-watering but the real scandal is the exorbitant cost of basic dental treatment which has never been covered by Medicare. We’re in a regional area but a brief check-up and clean at our local dentist costs over $200. A periodontist (we have to travel three hours to our closest city to see one) charges over $400 for just ten minutes of treatment; inevitably numerous treatments will be needed. No wonder people are just opting to let their teeth fall out. It is scandalous in a wealthy country like Australia.

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