Health & the economic crisis: the Australian case

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1 Health & the economic crisis: the Australian case Country: Australia Partner Institute: Centre for Health, Economics Research and Evaluation (CHERE), University of Technology, Sydney Survey no: (14) 2009 Author(s): Kees van Gool Health Policy Issues: Funding / Pooling, Others Current Process Stages Idea Pilot Policy Paper Legislation Implementation Evaluation Change 1. Abstract The Australian Government's response to the global financial crisis has been dramatic. It has made substantial one-off payments to most families and increases in infrastructure spending on education and transport. Health has, by and large, not received stimulus spending, but instead has been the target of savings, designed to help return the budget to surplus in the medium term. In this report we focus on the biggest health savings measure; changes to the private health insurance rebate. 2. Purpose of health policy or idea The impact of the global financial crisis (GFC) in terms of lost tax revenue and additional government spending has meant a turn around of $70 billion Australia's financial position. From a budget surplus of $21 billion in 2007/08 to a projected deficit of $53 billion (or around 4.5% of GDP) in 2009/10, the GFC's impact on the budget's bottom line has been substantial. The Government's immediate response to the GFC was to provide significant stimulus to the economy through two rounds of one-off payments to most Australian households as well as funding large scale infrastructure projects in the field of education, transport and to a more limited extent the environment. Health has not been a beneficiary of the stimulus spending. In the 2009/10 Federal Budget, the government outlined its plans to return the federal budget to surplus. Budget surpluses are a sensitive political issue because there is a widely held view in the Australian electorate that budget deficits equates to bad economic management. The government announced $22.6 billion (over four years) in projected savings in the 2009 budget. Over $3 billion of these savings were derived from health care programs. The biggest savings measures were in the area of the private health insurance rebates ($1.9 billion) and the Medicare Safety Net ($0.5 billion). A seperate report has been prepared on the Medicare Safety Net changes. In this report, we will focus on the private health insurance rebate changes. Main objectives The main objectives of the saving measures announced in the federal budget were to improve the budget bottom line - 1 -

2 over the medium term. These savings measures were initiated in the context of the global financial crisis and the reported need to plan a return to budget surplus. The two main savings targets (PHI rebate and Medicare Safety Net) have been the subject of strong debate within the federal Labor party when it was in opposition. However, now in Government, the opportunity for the Labor party to make more substantial structural reforms to these policies was not taken up. The changes to the PHI rebate proposed by the government were to introduce three new 'Private Health Insurance Incentive Tiers' - so that higher income earners receive less 'carrot' and more 'stick' to be insured: Tier 1: for singles earning more than $75,000 (couples $150,000), the Private Health Insurance Rebate will be 20 per cent for those up to 65 years (25 per cent for those over 65, and 30 per cent for those over 70 years). The Surcharge for avoiding private health insurance will remain at one per cent. Tier 2: for singles earning more than $90,000 (couples $180,000), the Private Health Insurance Rebate will be 10 per cent, for those up to 65 years (15 per cent for those over 65, and 20 per cent for those over 70 years). The Surcharge for avoiding private health insurance will be increased to 1.25 per cent. Tier 3: for singles earning more than $120,000 (couples $240,000), no Private Health Insurance Rebate will be provided. The Surcharge for avoiding private health insurance will be increased to 1.5 per cent. Type of incentives The biggest saving measures announced were associated with changes to private health insurance (PHI) rebate. The PHI rebate was introduced in 1999 by the former government to create incentives for Australians to purchase private health insurance. PHI membership had been in steady decline since the introduction of universal public hospital coverage in early 1980s. The rebate equates to 30% to 40% of the price of the PHI premium. All Australians were entitled to the rebate and no limits were placed on the rebate amount. Older groups were entitled to higher (40%) rebate, whereas everyone else was eligible for the 30% rebate. The PHI rebate was part of a wider set of reforms designed to encourage households to take-up private health insurance. The rebate is sometimes refered to as the "carrot" of these initiatives, whereas other measures provided a "stick". Whilst private health insurance increased substantially following the introduction of the PHI reforms (around 43% of the population is currently insured), there is now some evidence suggesting that the "stick" reforms were more effective in driving up membership compared to the "carrot". In 2007/08 the Australian Government spent $3.6 billion on the rebate (or around 5% of total government health care spending). The policy has been controversial, because it is deemed to have had limited impact on increasing the number of people who are privately insured and because it is a regressive policy with higher income families benefiting more than those on lower incomes. The changes announced in the budget in relation to the PHI rebate were: Removal or reduction in the PHI rebate for higher income earners. Increase in tax for high income earners who do not take up PHI. The government anticipates that together these initiatives will have a neglible impact on PHI membership across the population. 3. Characteristics of this policy Degree of Innovation traditional innovative Degree of Controversy consensual highly controversial - 2 -

3 Structural or Systemic Impact marginal fundamental Public Visibility very low very high Transferability strongly system-dependent system-neutral Australia's mix of public and private insurance has historically been a controversial topic in Australian public debate. This controversy seemed to have settled down when the conservative side of politics accepted the need for public universal coverage and when the more progressive side of politics accepted the notion of public support for private insurance. However, what appears to be a relatively minor change has stirred up this controversy again. Parliament has not agreed to the government's proposal - meaning that the government either has to make substantial changes to the PHI proposal or abandon it altogether. 4. Political and economic background Both the PHI rebates and the Medicare Safety Net have been widely regarded as 'middle class' welfare - mainly because the greatest beneficiaries of these publicly funded programs have been mid to high income households. Both policies were introduced by the previous conservative government and both have been hotly debated in the Labor Party when it was in opposition. However, prior to the 2007 election the Labor Party had promised to retain both the PHI rebate and the Medicare Safety Net. The Labor Party won that election. Now in office, the Labor Government has taken the opportunity for some health (and wider) reforms that seem to address the issue of middle class welfarism. Primarily, the reforms aim to provide some financial savings without any structural changes to the policies. The argument used by the Government is that these savings measures will help return the budget to surplus once the global financial crisis has passed. Whilst changes have been made, it could be said that overall the policies have remained intact and therefore the government has 'largely' kept its election commitments. However, it seems that the opportunity to tackle more fundamental issues associated with these policies has been missed. 5. Purpose and process analysis Idea Pilot Policy Paper Legislation Implementation Evaluation Change Origins of health policy idea From the outset the PHI rebate has been controversial. The previous government argued that its purpose was to create incentives for people to purchase private health insurance and thereby take pressure of the public hospital system. However, there is considerable debate over whether the rebate has been effective in raising PHI membership and, even if it did, whether it was an efficient use of money. That is, if the rebate was designed to take pressure of public - 3 -

4 hospitals, the money could also have been given directly to public hospitals. Effectively, the proposed new PHI measures place a means test on eligibility. Means testing is frequently used in Australian social welfare policy to limit the extent of government support. Initiators of idea/main actors Government Parliament Private Sector or Industry Approach of idea The approach of the idea is described as: amended: Fairer Private health Insurance Incentives Bill Stakeholder positions The Australian Treasury modelled the impact of the PHI changes on PHI membership. It estimated that the changes would reduce PHI membership by around 25,000 or around 0.26% - in other words a neglible impact. These figures were hotly disputed by the Private Health insurance Association and other stakeholders such as private hospital groups who argued that the impact was likely to be much greater. Actors and positions Description of actors and their positions Government Minister for health very supportive strongly opposed Parliament Opposition parties very supportive strongly opposed Independent senators very supportive strongly opposed Private Sector or Industry Private Health Insurance Association very supportive strongly opposed Influences in policy making and legislation A senate inquiry was held where community views were heard. To a large degree, academics supported the Government's argument that the measure would have little effect on PHI membership. The private health industry strongly opposed the measures arguing that it would have a detrimental effect on membership as well as encourage households to downgrade the type of cover they have. The opposition parties argued that the PHI rebate should not be judged on the basis of middle class welfarism, but on the basis of health policy - with the objective of relieving stress on public hospitals. Presumably, on the basis that the opposition parties believed the measures would reduce PHI membership, the opposition voted against the legislation in Australia's upper house (the senate) along with the support of an independent senator. Legislation needs to be passed by both houses of parliament before it can be implemented. The measures, as they currently stand (October 2009) cannot be implemented

5 Legislative outcome Actors and influence Description of actors and their influence Government Minister for health very strong none Parliament Opposition parties very strong none Independent senators very strong none Private Sector or Industry Private Health Insurance Association very strong none Positions and Influences at a glance Adoption and implementation None to report Monitoring and evaluation No formal process has been proposed to monitore or measure the proposed PHI initiatives - however the Senate approved an amendment to evaluate the impact of the Medicare Safety Net changes in three years time. Results of evaluation No evaluation conducted

6 6. Expected outcome Should the proposed measures be implemented, they are unlikely to result in any large-scale changes in private health insurance membership. Thus, those who support the status quo of Australia's public and private mix should not be concerned. A much bigger issue is whether the PHI rebate should remain in place at all. The Senate Inquiry heard from some leading academics that the rebate is an inefficient and ineffective policy in terms of raising health care funding from private sources (Deeble, 2009). Another academic questioned the notion of Australia's private/public mix of insurance altogether (and policies that support this mix). Professor McAuley from the University of Canberra stated that the proposed PHI measures "do nothing to reduce Australians' reliance on private health insurance, which is a high cost, inflationary and divisive means of funding health care" (McAuley, 2009). Quality of Health Care Services marginal fundamental Level of Equity system less equitable system more equitable Cost Efficiency very low very high By preventing high income earners from receiving public subsidies, the proposed PHI changes would improve financial equity to some degree. The new measures, if implemented, should deliver almost $2 billion in savings over a four year period - leading to a relatively small gain in efficiency - provided of course that the measures do not invoke any further changes to insurance status. 7. References Sources of Information For information on changes to the private health insurance rebate changes see the Senate Inquiry website at Deeble, J (2009) Submission to Senate Inquiry into Fairer Private Health Insurance. See McAuley, I (2009) Submission to Senate Inquiry into Fairer Private Health Insurance. See For information on the Medicare Safety Net see: van Gool, K (2009) Health Policy Monitor Survey Round 14. Author/s and/or contributors to this survey Kees van Gool Suggested citation for this online article van Gool, Kees. "Health & the economic crisis: the Australian case". Health Policy Monitor, October Available at -

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