The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia

Transcription

1 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia Olena Stavrunova (UTS) Oleg Yerokhin (University of Wollongong) February 2012 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 1 / 37

2 Background: Health care system in Australia Mixed public-private health care system All residents are entitled to free public hospital treatment Private patients can bypass waiting lists and choose a doctor Private patients have to pay fee for doctor services plus costs of hospital accommodation, drugs, diagnostics, etc. Health insurance can be purchased to (partially) cover cost of private treatment 43% are insured, 40% of elective surgery hospital admissions are private The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 2 / 37

3 Policies to Increase Private Health Insurance Coverage Since the end of 1990s several policies to increase PHI coverage were implemented: Medicare Levy Surcharge (MLS) - supplemental 1% income tax on high income uninsured % insurance premium rebate ($2.5 billion per year) Life Time Health Cover (LHC)- a system of entry-age ratings: premium surcharge of 2 percent for every year that the initial purchase is delayed after age 30. After the introduction of Medicare in 1984, PHI coverage has been in decline. These policies increased PHI coverage from 31% to 45% (45% increase) In 2008 threshold increased Currently proposed changes (FPHII Bill): means-testing PHI subsidy and increasing MLS rate (three tier structure: 1%, 1.25% and 1.5%) The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 3 / 37

4 Trend in Private Health Insurance Coverage Hospital Treatment Coverage (insured persons as a percentage of the population) 90% 80% 70% 60% Commonwealth medical benefits at 30% flat rate restricted to those with at least basic medical cover from September 1981 Introduction of Medicare from 1 February 1984 Introduction of Life Time Health Cover from 1 July 2000 Higher rebates for older persons from 1 April % 40% 30% 20% 10% Medibank began on 1 July A program of universal, non contributory, health insurance; it replaced a system of government subsidised voluntary health insurance. 1 July A Medicare Levy Surcharge (MLS) of 1% of taxable income is introduced for higher income earners who do not take out private health insurance. 31 October Increase in MLS income thresholds, subject to annual adjustment. Introduction of 30% Rebate from 1 January % Produced by the Private Health Insurance Administration Council, 2011 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 4 / 37

5 Literature Because the timing of these policies overlap, is difficult to isolate their contributions to the total increase in PHI coverage in 2000 Consensus in the literature: LHC had the strongest effect Butler (2002) and Frech et al. (2003): time series analysis on aggregate PHI coverage, attribute 11% increase to 30% premium rebate, the rest (34%) to LHC Palangkaraya and Yong (2007): individual-level data (NHS), attribute to LHC only 19%-33% increase No study attempted to isolate the effect of MLS (Small effect initially?) The MLS could become more effective over time as fraction of people with incomes exceeding the MLS threshold increased The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 5 / 37

6 Literature There is international literature which seeks to establish how the demand for PHI is affected by gov. incentives Subsidies (tax deductible PHI costs) Gruber and Poterba (1994, QJE) - tax subsidies on the demand for PHI by self-employed in US Finkelstein (2002,JPubE) - reduction in tax subsidy for PHI in Quebec Emerson et al. (2001)- removal of tax subsidy for PHI for elderly in UK Rodriguez and Stoyanova (2004, HE) - tax reform affecting the incentives to purchase PHI in Spain Mandates Buchmueller et al. (2011, AEJ:Policy) - Employer Mandates in Hawaii The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 6 / 37

7 Medicare Levy Surcharge Imposed on high income earners without PHI hospital cover MLS income thresholds from to Singles: $50,000 Families: $100,000 + $1500 per dependent child after the first MLS income thresholds since , with annual indexation Singles: $70,000 Families: $140,000+ $1500 per dependent child MLS rate: 1% of total taxable income High effective marginal tax rate at the threshold The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 7 / 37

8 How the MLS works: Single individuals, no children, After Tax Income, thousand dollars *(Before Tax Income) With PHI (0.70*Before Tax Income) No PHI (0.69*Before Tax Income) dollars $ Before Tax Income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 8 / 37

9 Our study New dataset - income tax returns of the entire Australian population (2008, 2010) Counts of individuals with and without PHI within $250 bins Demographics: age (3 year intervals), gender Family status (single no kids/otherwise) Can study the effect on single individuals with no children A large number of observations around the MLS threshold - can estimate the MLS effect precisely using the regression discontinuity type approach The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 9 / 37

10 Taxable income and PHI coverage (single, no kids), x 104 Distribution of taxable income Counts of individuals Taxable income, thousand dollars 1 Relationship between income and PHI Proprotion with PHI Taxable income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 10 / 37

11 Taxable income and PHI coverage (single, no kids), x 104 Distribution of taxable income Counts of individuals Taxable income, thousand dollars 1 Relationship between income and PHI Proprotion with PHI Taxable income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 11 / 37

12 MLS incentives: Insurance choice m(c) utility from consumption I 0, 1 is private health insurance status (PHI) P is private insurance premium ξ is psychic cost of searching for PHI π is probability of illness τ j is psychic cost of hospital treatment, τ pb > 0, τ pr = 0 C j is out-of-pocket cost of hospital treatment, C pb = 0,C pr = L (1 I ) + 0 (I ) L is such that a person without PHI will always choose public hospital A person with PHI will always choose private hospital The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 12 / 37

13 MLS incentives: Reported Taxable Income Y is income E is the amount of tax avoidance Y r is reported income: Y r =Y E T is MLS threshold ($50,000 in 2008) t is MLS tax (1%) a is per dollar cost of tax avoidance, a > t The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 13 / 37

14 Optimization Choose c, I and E to maximize expected utility u(c, I ): u(c, I ) = m(c) π (1 I ) τ pb I ξ subject to the budget constraint: c Y I P (1 I ) t (Y E) ι(y E T ) ae Solution for E, conditional on I = 0: E = Y T + ɛ for Y [T, Y ) E = 0 for Y [0, T ɛ] [Y, ] where Y = a(t ɛ) a t The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 14 / 37

15 Table: Utilities u I and reported income Y r Y < T T < Y < Y Y Y u I = 0 m(y ) m(y a(y T + ɛ)) m(y t Y ) u I = 1 m(y P) + η m(y P) + η m(y P) + η Y r I = 0 Y T ɛ Y Y r I = 1 Y Y Y where η πτ pb ξ. If η F (η) Pr(I = 1 Y, P, T, t) and Pr(I = 1 Y r, P, T, t) The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 15 / 37

16 Income, reported income and Pr(I ): Y U, η N, Pr(I t = 0) = 0.19 Probability of PHI, cond. on income Distribution of income (Y) and taxable income (Y r ) x 10-3 Probability of PHI, cond. on taxable income (Y r ) p(i Y) Y; Tens thousand dollars x 10 4 Ybar T p(i Y) p(i Y,E=0) p(y), p(y r ) Y, Y x 10 4 r ; Tens thousand dollars p(y) p(y r ) Ybar T p(i Y r ) Y x 10 4 r ; Tens thousand dollars p(i Y r ) Ybar T The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 16 / 37

17 Taxable income and PHI coverage (single, no kids), Distribution of taxable income Counts of individuals Taxable income, thousand dollars 0.7 Relationship between income and PHI 0.6 Proprotion with PHI Taxable income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 17 / 37

18 Taxable income and PHI coverage (single, no kids), Distribution of taxable income Counts of individuals Taxable income, thousand dollars Relationship between income and PHI 0.8 Proprotion with PHI Taxable income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 18 / 37

19 Estimation Probability of PHI, cond. on income Ybar T p(i Y) p(i Y,E=0) p(i Y,t=0) Effect of interest: for all Y >T Pr(I =1 Y,t=0.01) Pr(I =1 Y,t=0) Pr(I =1 Y :Y T,t=0) not observable Estimate Pr (Y =T ): 0.6 p(i Y) 0.5 Pr (Y =T ) Pr(I =1 Y =T,t=0.01,E=0) 0.4 P (Y=T) 0.3 Pr(I =1 Y =T,t=0,E=0) Y; Tens thousand dollars x 10 4 Discontinuity in PHI due to MLS aty = T in the situation when tax avoidance is not possible The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 19 / 37

20 Estimation 1. Estimate Y and Y T 2ɛ using taxable income distribution 2. Estimate Pr(I = 1 Y = T, t = 0, E = 0) by extrapolating Pr(I = 1 Y : Y < Y ) to Y = T 3. Estimate Pr(I = 1 Y = T, t = 0.01, E = 0) by extrapolating Pr(I = 1 Y : Y > Y ) to Y = T 4. Extrapolate Pr (Y = T ) to Y > T using various assumptions The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 20 / 37

21 Possible discontinuity in sample selection probability The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 21 / 37

22 Solution 1. Using the whole sample (single and married males) estimate Pr All (Y = T ) 2. Assume that Pr M (Y = T ) = 0 3. Therefore Pr All (Y = T ) = Pr(S Y = T ) Pr S (Y = T ) 4. Estimate Pr(S (Y = T )) 5. Compute Pr S (Y = T ) = Pr All (Y =T ) Pr(S (Y =T )) The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 22 / 37

23 Estimation of Y and Y Using data on all males estimate C i = 3 j=0 β0 j Y j i + 5 k=1 γ k ι(t 250 k<y i <T 250 (k 1)) + 15 k=1 α k ι(t +250 (k 1)<Y i <T +250 k)+ε i where C i is counts of individuals in income bin i, Y i is the mid-point of the taxable income bins, s.t. 5 k=1 γ k+ 15 k=1 α k=0 Y T (k + 1) 250 where k max{k : γ k > 0} Y T + (k + 1) 250 where k max{k : α k < 0} The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 23 / 37

24 Estimation of Y and Y Variable Coefficient P-value Y Y Y γ γ γ γ γ α α α α α α α α α α α α α α α const Y Y The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 24 / 37

25 Income distribution, males (single and married) Income distribution, income Actual fitted distribution Counts Counterfactual distribution The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 25 / 37

26 Estimation of Pr All (Y = T ) Using the data on all males estimate I i = (β β 0 2Y i )ι(y i <= Y ) + (β β 1 2Y i )ι(y i >= Y ) + ε i where I i is proportion of individuals with PHI in income bin i, Y i is the mid-point of the taxable income bins, and Y 1 = 40, 875 Y = 48, 875 Y = 52, 625 Y N = 64, 375 Compute combined MLS effect: Pr All (Y = T ) = (β1 1 + β ) (β1 0 + β ) = The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 26 / 37

27 Estimation of Pr All (Y = T ) income I- phirate2008 I+ The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 27 / 37

28 Robustness PHI income YhatT2008 phirate2008 PHI income Fitted values YhatT2008 end phirate2008 PHI income PHI income Fitted values YhatT2008 end phirate2008 Fitted values YhatT2008 end phirate2008 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 28 / 37

29 Robustness PHI income YhatT2008 phirate2008 PHI income Fitted values YhatT2008 end phirate2008 PHI PHI income income Fitted values YhatT2008 end phirate2008 Fitted values YhatT2008 end phirate2008 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 29 / 37

30 Robustness 1. The prediction error for Pr(I = 1 Y ne+5; Y nb : Y ne ; Y ne+5 Y ) is ( 0.004, 0.002) N obs = n b n e + 1 = 33, N p = 8 2. The prediction error for Pr(I = 1 Y nb 11; Y nb : Y ne ; Y nb 11 Y ) is ( 0.002, 0.003) (N obs = n b n e + 1 = 48, N p = 17) 3. The upper bound on the true effect is Pr S (Y = T ) = Pr All (Y =T ) Pr(S (Y =T )) The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 30 / 37

31 Estimation of Pr(S) and Pr(I = 1 Y = T, t = 0.01, S) Single Rate PHI Rate, Single PHI PHI income income yh1 yh2 singlerate2008 yh1 yh2 phirates2008 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 31 / 37

32 Estimation of Pr S (Y = T ) and Pr S (Y > T ) Pr S (Y = T ) = Pr All (Y =T ) P(S (Y =T )) = = Pr(I = 1 Y = T, t = 0.01, S) = 0.40 Pr(I = 1 Y = T, t = 0, S) = MLS increases PHI rate at Y = T by 20%. Extrapolate for i : Y i > T assuming constant effect per dollar of MLS tax: PHI CF i = C i (Prop(I = 1 Y i ) [0.01 Y i ] ) Equivalent to assuming linear m(c) and η Y U(a Y, b Y ) s.t. a Y b Y = c The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 32 / 37

33 Extrapolating to Y > T Actual and counterfactual PHI rate PHI income phirates2008cf phirates2008 The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 33 / 37

34 Extrapolating to Y > T Total counts, single males 3,076,275 Total counts with PHI, actual 1,018,175 Total counts with PHI, counterfactual 933,758 84,417, percent 9% Overall PHI rate, actual 33% Overall PHI rate, counterfactual 30% Budget revenue, mln The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 34 / 37

35 PHI rate (total), 2010 PHI rate,2010 PHI income The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 35 / 37

36 Conclusion The effect of MLS in 2008 is relatively large at Y = T (but not as large as expected) The total effect of MLS in 2008 is small The total MLS effect was probably even smaller when the policy was implemented in 1997 The total MLS effect is probably even smaller when the threshold increased to in 2008 Future work: heterogeneity of the MLS effect by age and gender The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 36 / 37

37 Counts of individuals with PHI (single, male), PHI coverage 7000 Counts of individuals with PHI Taxable income, thousand dollars The effect of the Medicare Levy Surcharge on the Demand for Private Health Insurance in Australia 37 / 37