BEHIND THE DECLINE: THE CHANGING COMPOSITION OF PRIVATE HEALTH INSURANCE IN AUSTRALIA, Deborah Schofield, Simon Fischer and Richard Percival

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1 BEHIND THE DECLINE: THE CHANGING COMPOSITION OF PRIVATE HEALTH INSURANCE IN AUSTRALIA, Deborah Schofield, Simon Fischer and Richard Percival Discussion Paper No. 18 May 1997

2 National Centre for Social and Economic Modelling Faculty of Management University of Canberra The National Centre for Social and Economic Modelling was established on 1 January 1993, following a contract between the University of Canberra and the then federal Department of Health, Housing, Local Government and Community Services (now Health and Family Services). NATSEM aims to enhance social and economic policy debate and analysis by developing high quality models, applying them in relevant research and supplying consultancy services. NATSEM s key area of expertise lies in developing and using microdata and microsimulation models for a range of purposes, including analysing the distributional impact of social and economic policy. The NATSEM models are usually based on individual records of real (but unidentifiable) Australians. This base produces great flexibility, as results can be derived for small subgroups of the population or for all of Australia. NATSEM ensures that the results of its work are made widely available by publishing details of its products and research findings. Its technical and discussion papers are produced by NATSEM s research staff or visitors to the centre, are the product of collaborative efforts with other organisations and individuals, or arise from commissioned research (such as conferences). Discussion papers present preliminary research findings and are only lightly refereed. Its policy papers are designed to provide rapid input to current policy debates and are not externally refereed. It must be emphasised that NATSEM does not have views on policy and that all opinions are the authors own. Director: Ann Harding

3 National Centre for Social and Economic Modelling Faculty of Management University of Canberra BEHIND THE DECLINE: THE CHANGING COMPOSITION OF PRIVATE HEALTH INSURANCE IN AUSTRALIA, Deborah Schofield, Simon Fischer and Richard Percival Discussion Paper No. 18 May 1997

4 ISSN ISBN NATSEM, University of Canberra 1998 National Centre for Social and Economic Modelling GPO Box 563 Canberra ACT 2601 Australia Phone: Fax: Client services General World Wide Web site hotline@natsem.canberra.edu.au natsem@natsem.canberra.edu.au Core funding for NATSEM is provided by the federal Department of Health and Family Services.

5 iii Abstract Since the early 1980s there has been a substantial decline in the proportion of Australian families with private health insurance. This paper examines the decline in private health insurance between 1983 and In particular, it focuses on the changes in the types of private health insurance held, and in the incomes, ages, family types and geographic regions of residence of the people with private health insurance. This paper also examines the impact of changes in the price of private health insurance across different income groups.

6 iv Author note Deborah Schofield was a Research Fellow at NATSEM. She now works for the Australian Institute of Health and Welfare, Canberra. Simon Fischer is a Research Officer and Richard Percival a Senior Research Fellow at NATSEM. Acknowledgments The authors would like to thank Jenny Badham, Sidney Sax, Ann Harding and Ralph Lattimore for their helpful comments on the paper. General caveat NATSEM research findings are generally based on estimated characteristics of the population. Such estimates are usually derived from the application of microsimulation modelling techniques to microdata based on sample surveys. These estimates may be different from the actual characteristics of the population because of sampling and nonsampling errors in the microdata and because of the assumptions underlying the modelling techniques. The microdata do not contain any information that enables identification of the individuals or families to which they refer.

7 v Contents Abstract Author note Acknowledgments General caveat... iii...iv...iv...iv 1 Introduction A review of recent studies of the incidence of private health insurance The impact of Medicare Income Insurance type Age State of residence Cost Changing composition of private health insurance, Data sources and methodology Health insurance type Income Family type Age Location of residence Price of private health insurance The changing cost of insurance Expenditure on private health insurance Impact of the private health insurance rebate Summary and conclusions References... 28

8 1 1 Introduction Since 1983 (immediately prior to the introduction of Medicare) private health insurance has been an important issue in health policy while it remained a significant source of funding for health services 1, its coverage progressively fell from about 65 per cent of all persons in 1983 (ABS 1983) to about 48 per cent in 1992 (ABS 1992). Analysing the factors behind this decline is important for two reasons: first, it may represent a continuing trend and, second, there is a relationship between the incidence of private health insurance and the cost of providing public health services as insurance coverage declines, the public health system effectively subsidises a greater share of health costs. One estimate is that for every 1 per cent fall in private health insurance coverage, there is a corresponding $100 million rise in the cost of providing public health services (Liberal Party of Australia 1996). However, most recent work on private health insurance coverage in Australia has been concerned with determining its causes at a single point in time (for example, ABS 1993; Burrows, Brown and Gruskin 1993; Hopkins and Kidd 1993; Schofield 1997) or two points (Cameron and Trivedi 1991), or have been restricted to either a simple macro-level description of its decline (Private Health Insurance Administration Council, various dates) or some very limited disaggregation (Australian Institute of Health and Welfare 1996, pp ). Although such approaches can increase our understanding of the demand for private health insurance, they have significant shortcomings. For example, cross-sectional studies are unable to account for important factors such as changes in price structures, economic circumstances or demographic characteristics (Ngui, Burrows and Brown 1989; Scotton 1993, p. 202). 1 For example, private health insurance helped fund 39 per cent of all hospital admissions in (Private Insurance Taskforce 1993). In private health insurance contributions funded 5.7 per cent of public acute hospital recurrent expenditure and 83.3 per cent of private hospital recurrent expenditure. In funding of total health expenditure from health insurance funds was 11.2 per cent, only 2.4 percentage points more than in (Goss 1995, 1996).

9 2 Discussion Paper No. 18 Similarly, macro-level analysis is unable to explain much about the comparative effects on the health sector of changing levels of insurance cover among different groups. This can be clearly seen when the high average use of health services by the elderly is compared with the much lower use by young people. A reduction in health insurance coverage among the elderly would be expected to place a greater burden on the public purse than would an equal reduction in coverage among young people. Conversely, an increase in the number of young people with private health insurance would increase revenue for private health insurance companies, but would do relatively little to reduce the burden on the public health system. To overcome these difficulties, this paper undertakes a time-series analysis of private health insurance coverage using cross-sectional data from health insurance surveys undertaken in 1983, 1986, 1988, 1990 and 1992 (ABS 1983, 1986, 1988, 1990a, 1992). As these surveys were discontinued after 1992 in anticipation of the public release of the 1995 national health survey, microanalytical techniques were used to simulate health insurance coverage in Using this comprehensive data collection, health insurance coverage disaggregated by health insurance type, income, age, geographic region and family type is analysed between 1983 and In doing so, earlier work in this area by Willcox (1991) which included an analysis of health insurance coverage between 1976 and 1990, disaggregated by insurance type, age and state is extended and updated. 2 A review of recent studies of the incidence of private health insurance As already noted, a number of authors have reported on the decline in the incidence of private health insurance in Australia for different family types. These studies have included specific analyses by type of private health insurance, incomes, ages and state of residence. There has also been some attention given to the impact of prices on the demand for private health insurance. The findings of these studies, as they relate to the decline in private health insurance coverage and the more important characteristics that might determine coverage, are now summarised.

10 The Changing Composition of Private Health Insurance in Australia The impact of Medicare Several studies have reported on the decline in private health insurance since the introduction of Medicare in The introduction of Medicare, a system of universal public health insurance, appeared to result in a significant decline in the number of people with private health insurance. According to a federal government report prepared by the Private Health Insurance Taskforce (1993), this decline was anticipated by the government. If this can be confirmed then the introduction of Medicare provides an example of how public health policy can affect the demand for private health insurance and there does appear to be some support for this. The Private Health Insurance Taskforce (1993) used Private Health Insurance Administration Council (various dates) data to examine the decline in private health insurance between June 1983 and June In doing so it found that the sharpest decline over this period was between 1983 and 1984, immediately before and immediately after the introduction of Medicare. In that period coverage declined from around 64 per cent to 50 per cent (figure 1). Further support for the proposition that the provision of public health insurance displaced its private counterpart was presented by Willcox Figure 1 Basic hospital private health insurance coverage, Australia Percentage of population % Data source: Private Health Insurance Administration Council (various dates).

11 4 Discussion Paper No. 18 (1991) who analysed the coverage of private health insurance over the period Between 1976 and 1981 (when universally free health services were provided under Medibank, a precursor to Medicare), private health insurance declined steadily. However, this trend was sharply reversed from 1981 to 1982, when public coverage was removed. With the introduction of Medicare in 1984 and the reintroduction of universal cover, private health insurance coverage fell sharply again. As figure 1 shows, except for a slight rise from 47.7 per cent in 1985 and to 48.8 per cent in 1986, private cover has continued to fall, albeit at a more gradual rate. Based on data collected by the Private Health Insurance Administrative Council (various dates), the average rate of decline between 1983 and 1995 was 2.2 per cent a year. After the years 1984 and 1985 the rate of decline was highest (5.5 per cent) over the period By June 1995 only 35 per cent of people had private health insurance (Private Health Insurance Administrative Council 1995). 2.2 Income Of the studies that considered the determinants of private health insurance since the introduction of Medicare, the most comprehensive have been by Hopkins and Kidd (1993), the Australian Bureau of Statistics (ABS 1993) and Schofield (1997). Each confirmed that high income families were the most likely to have private health insurance. In this context, it is also worth noting, as the Australian Council of Social Service (1994) did, that the relatively sharp decline in coverage in 1992 may have been a result of the recession in the Australian economy that is, a result of the decline in real incomes. A decline in the coverage of private health insurance during periods of recession is not surprising, given that income has been found to be one of the most significant predictors of health insurance coverage. However, it must be remembered that this finding is based on crosssectional analyses of persons or families currently holding private health insurance. A very different relationship may exist between income and the retention of insurance, and income and the take-up of insurance. This point is expressed in the Australian Institute of Health and Welfare (1994, p. 139) report. The report states that, even when incomes rise

12 The Changing Composition of Private Health Insurance in Australia 5 following a recession, persons who dropped insurance prior to the recession will not necessarily reinsure even if their incomes return to an economically viable income level. 2.3 Insurance type Although there has been a steady decline in the overall incidence of private health insurance, as pointed out by Willcox (1991) and the Australian Institute of Health and Welfare (1994), the coverage of some types of insurance has been growing. According to the Australian Institute of Health and Welfare, after the introduction of Medicare, ancillary 2 insurance cover grew (see table 1). Table 1 Ancillary-only private health insurance coverage, Australia June 1984 June 1987 Sept Dec % % % % Ancillary Source: Australian Institute of Health and Welfare (1994). Willcox reported that between 1986 and 1990 while private hospital insurance cover fell from 44 per cent to 43 per cent (table 2) the coverage of ancillary insurance (with or without hospital insurance) rose from 35 per cent to 37 per cent. According to Willcox this may have been due, in part, to the limited supply of public ancillary services. Table 2 Hospital-only and ancillary private health insurance coverage, Australia % % % Hospital-only Ancillary a a Includes contributors with either hospital and ancillary or ancillary-only insurance. Source: Willcox (1991). 2 Ancillary insurance covers health services such as dental, optical and physiotherapy treatments.

13 6 Discussion Paper No Age The decline in health insurance coverage has varied considerably across different age groups. In general, younger people have been dropping out of health insurance at a faster rate than older people have (Private Health Insurance Taskforce 1993). As a result, the age structure of the insured population has changed. As shown in table 3, Willcox (1991) found that, while the coverage of year olds and year olds almost halved between 1983 and 1992, it remained constant for those aged 60 years and over. The reduction in the number of younger people with private health insurance, together with the ageing of the population, has resulted in an ageing pool of insured (Private Insurance Health Taskforce 1993; Willcox 1991). Table 3 Private health insurance coverage, by age groups, Australia Age % % % % % years years years years years years All Source: Willcox (1991). 2.5 State of residence One of the more interesting findings of some of the studies was that there have been significant interstate differences in the changes in the incidence of private health insurance over time. Between 1984 and 1990 the incidence of private health insurance in Western and South Australia fell by 25 and 21 per cent respectively. However, in New South Wales and Victoria, over the same period the incidence fell by only 3.7 and 6.7 per cent respectively. A suggested reason was the comparatively high level of industrial action and

14 The Changing Composition of Private Health Insurance in Australia 7 disputations involving public health sector workers in these states (Willcox 1991). Of all the states, Queensland consistently had the lowest insurance coverage. This may in part be explained by the historically greater provision of free public health services by that state s government (Australian Institute of Health and Welfare 1994, p. 137). 2.6 Cost A number of authors have suggested that the rapid increase in private health insurance premiums in recent years may have contributed to the reduction in private insurance coverage. Data collected by the Prices Surveillance Authority (1993) showed that the nominal value of annual premiums for private health insurance covering hospital treatment in Victoria increased from $795 in 1986 to $2195 in 1993 (figure 2). The direct connection between such increases and the decline in private health insurance has been pointed out in two government commentaries (ABS 1992; Private Health Insurance Taskforce 1993). The ABS, which reported the results of the 1992 private health insurance survey, found that 67 per cent of people who dropped insurance between 1990 and 1992 said they did so because they could no longer afford it. Figure 2 Average annual private hospital insurance premiums, Victoria Nominal values $ Data source: Prices Surveillance Authority (1993).

15 8 Discussion Paper No Changing composition of private health insurance, Data sources and methodology This chapter uses data from the 1983, 1986, 1988, 1990 and 1992 ABS health insurance surveys (ABS 1983, 1986, 1988, 1990a, 1992) and estimates for 1995 from NATSEM s private health insurance dataset to analyse the decline in private health insurance by type of health insurance, income, age, geographic region and family type. The analysis is undertaken at the contributor unit (or, in the case of NATSEM s dataset, income unit) level. The principal data source used to simulate private health insurance coverage in 1995 was the national health survey (ABS 1990b). The national health survey provided a particularly useful resource for analysing private health insurance because of its comparatively large sample size (about persons) and the large number of important socioeconomic, health insurance, health risk and health service use variables it contains. However, before the national health survey could be used to model current aspects of private health insurance arrangements, information it contained needed to be updated to This was undertaken in three stages. The first stage was to age the data from to 1995 to capture the demographic, labour force and family composition changes that had occurred over this period. The second stage was to uprate from to 1995 what is perhaps the key determinant of who has private health insurance family income. The third stage used a regression model and data from the 1983, 1986, 1988, 1990 and 1992 private health insurance surveys to determine the composition of the decline in private health insurance and to predict for important subgroups the trends through to See Percival, Schofield and Fischer (1997) for a full description of the modelling processes used in compiling NATSEM s private health insurance dataset.

16 The Changing Composition of Private Health Insurance in Australia Health insurance type Over the period , hospital and ancillary insurance was the most popular type of private health insurance, followed by the less comprehensive (and, consequently, less expensive) hospital-only and ancillary-only insurance types (figure 3). However, since 1983 a substantial portion of the market share of hospital and ancillary insurance has been lost to the less comprehensive forms of insurance. Hospital and ancillary insurance covered 59 per cent of all families in 1983 but only an estimated 25 per cent in Some of this decline was initially taken up by hospital-only insurance, whose coverage increased from 4 per cent in 1983 to 12 per cent in However, between 1986 and 1990 there was a slight recovery in the incidence of hospital and ancillary insurance (from 33 per cent to 34 per cent) while the incidence of hospital-only insurance declined (from 12 per cent to 9 per cent). Between 1990 and 1995 hospital and ancillary insurance coverage declined from 34 per cent to 25 per cent while the coverage of hospital-only insurance continued to decline to 7 per cent by According to the Australian Institute of Health and Welfare (1994, p. 139) the more rapid decline in participation rates in the early 1990s may be attributed to the economic recession. This was accompanied by a Figure 3 Private health insurance coverage a, by private health insurance type, Australia Hospital and ancillary 20 Hospital-only 10 Ancillary-only 0% a data are for contributor units; 1995 NATSEM estimates are for income units. Data sources: ABS (1983, 1986, 1988, 1990a, 1992); NATSEM s private health insurance dataset.

17 10 Discussion Paper No. 18 suggestion that coverage might not increase even in more favourable economic circumstances. If this is correct, and both a predicted rise in the unemployment rate (from 8.6 per cent in to 9.2 per cent in ) and a decline in the economic growth rate (from 3.2 per cent to 2.5 per cent over the same period) occurs, as suggested by Access Economics (1996), then at least over the short term a further decline in private health insurance can be expected. As figure 3 shows, of the three types of insurance, ancillary-only insurance was the only one showing fairly constant growth, albeit from a low base of 1 per cent in 1983 to about 4 per cent in Income Analysis of private health insurance coverage by income was undertaken by dividing the population in the datasets for each year into income quintiles, ranked by the combined gross incomes of the adults in either the contributor or (for 1995) income units. As noted, income has consistently been found to be an important determinant of who holds private health insurance. Therefore, it was not surprising to find that families in the fifth quintile (those with the highest incomes) had the highest incidence of private health insurance, while families in the first and second quintiles had the lowest (figure 4). This ranking was maintained between 1983 and 1995, although the declines in private health insurance coverage were not uniform across income groups. The declines in coverage were greatest for families in the third and fourth quintiles, the sharpest drops occurring between 1983 and 1986 (from 75 to 47 per cent and 90 to 61 per cent respectively). Between 1986 and 1990 the declines stalled and there were even slight recoveries in the proportions of families insured in the first and second quintiles. However, from 1990 there were declines for all income groups. The dispersion of private health insurance between the income quintiles altered significantly over the period In 1983, there were two broad groupings one consisting of the first and second quintiles and the other the third, fourth and fifth quintiles. In 1995 the grouping with the lowest incidence of private health insurance consisted of the bottom three quintiles, each with participation rates of per cent. The fourth

18 The Changing Composition of Private Health Insurance in Australia 11 Figure 4 Private health insurance coverage a, by gross income quintile, Australia Fifth quintile Fourth quintile Third quintile Second quintile 20 First quintile 10 % a data are for contributor units; 1995 NATSEM estimates are for income units. Data sources: ABS (1983, 1986, 1988, 1990a, 1992); NATSEM s private health insurance dataset. quintile was estimated in the model to take up an intermediate position in 1995 with coverage of about 41 per cent, and the fifth quintile occupied a position by itself as the only grouping with over 60 per cent of families covered by private health insurance. The lowest income quintiles had, on average, the lowest rates of decline in insurance coverage. This might reflect at least in part the greater concentration of aged persons in these quintiles. To determine whether this was the case, further analysis was undertaken of income quintiles by the ages of the heads of the contributor units. It was found that those aged 55 years and over made up about 50 per cent of the population of the bottom two quintiles. By contrast, they made up less than 14 per cent of the top quintile. Interestingly, not only the aged, but most age groups in the bottom quintile appeared to have held onto private health insurance over the period (table 4). In the second quintile, however, there was a noticeable difference in the declines of private health insurance coverage between contributor units aged 55 years and over and younger units. The insurance coverage of units aged 55 years and over remained reasonably stable, while there were substantial declines among the younger groups. In the third and fourth quintiles, the declines were more consistent across all the age groups, while in the top quintile it was

19 12 Discussion Paper No. 18 again more substantial among the younger groups. (Further analysis by age is discussed in section 3.5.) As noted in section 3.2, the proportion of families choosing hospital and ancillary insurance in 1995 was much lower than in 1983, despite this insurance type remaining the most common form of private health insurance for all income groups (table 5). The drop was found to be most Table 4 Private health insurance coverage a, by gross income quintile and age group, Australia % % % % % % First quintile years years years years and over Second quintile years years years years years and over Third quintile years years years years years and over Fourth quintile years years years years years and over Fifth quintile years years years years years and over a data are for contributor units; 1995 NATSEM estimates are for income units. Data sources: ABS (1983, 1986, 1988, 1990a, 1992); NATSEM s private health insurance dataset.

20 The Changing Composition of Private Health Insurance in Australia 13 marked in the middle income quintiles (the differences in coverage between 1983 and 1995 being 53 and 56 percentage points for the third and fourth quintiles respectively). In contrast, the proportion of families choosing ancillary-only insurance was estimated to have been higher in 1995 than in 1983 for all quintiles. Table 5 Private health insurance coverage a, by gross income quintile and insurance type, Australia % % % % % % First quintile Hospital and ancillary Hospital-only Ancillary-only None Second quintile Hospital and ancillary Hospital-only Ancillary-only None Third quintile Hospital and ancillary Hospital-only Ancillary-only None Fourth quintile Hospital and ancillary Hospital-only Ancillary-only None Fifth quintile Hospital and ancillary Hospital-only Ancillary-only None a data are for contributor units; 1995 NATSEM estimates are for income units. Data sources: ABS (1983, 1986, 1988, 1990a, 1992); NATSEM s private health insurance dataset. 3.4 Family type Over the period , couples with children had the highest incidence of private health insurance followed by couples without children, single people and sole parents. This ranking is estimated to

21 14 Discussion Paper No. 18 have held through to 1995, although the rate of decline in the incidence of insurance varied among the family types (figure 5). For all family types there was a rapid decline in private health insurance coverage following the introduction of Medicare. This was followed by a period of relative stability from 1986 to 1990 when a second decline emerged. The most significant decline between 1983 and 1995 was among couples with children whose coverage dropped from 83 per cent to 47 per cent. This drop is of particular significance because, for each family that withdraws from private insurance, three or more health consumers become uninsured and more reliant on public health services. The differences in the rates of decline among family types has resulted in the insurance coverage of couples with children being little more than that of couples without children. In 1983 the difference between the proportion of couples with children insured and the proportion of couples without children insured was 16 percentage points. In 1995 the estimated difference was only 5 percentage points. The initial rapid decline in the proportion of single people with private health insurance also narrowed the gap between the proportions of singles and of sole parent families insured from 21 percentage points in 1983 to about 8 percentage points in Figure 5 Private health insurance coverage a, by family type, Australia Couple and dependants Couple only Head only Head and dependants % a data are for contributor units; 1995 NATSEM estimates are for income units. Data sources: ABS (1983, 1986, 1988, 1990a, 1992); NATSEM s private health insurance dataset.