18 August 2011 Australian Healthcare & Hospitals Association Position paper Private Health Insurance (Rebate and Medicare Levy Surcharge) Introductionn The Australian Healthcare & Hospitals Association is supporting the proposed legislative amendments to Private Health Insurance regarding the means testing off the rebate and the Medicare Levy Surcharge. In this document, we aim to cut through some of the more emotive e claims in the polarised debate around these changes by putting a logical argument based on two main grounds: 1) facts and numbers and 2) equity. The Australian Healthcare & Hospitals Association is the independent peak membership body and advocate for the Australian healthcare system and a national voice for universally accessible, high quality healthcare. History Currently, the PHI rebatee reimbursess 30% of the cost of a premium (higher rebates apply for people aged over 65). The government policy to t means test the private health insurance rebatee was first announced in the 2009 10 Commonwealth Budget and remains an important policy of the Gillard Government. The changes The proposed changes introduce three income tiers, with the rebate reducing as income rises. Single people on incomes below $80,000 a year or families below $160,000, will not be affected and will continue to be eligible for the full rebate. The proposal also increases the Medicare Levy Surcharge, ann additional tax on high income earners who are not privately insured. 1
The new PHI Tiers will operate as follows for the 2011 12 financial year. Singles Families Age Under 65 $80,000 or less $160,000 or less Tier 1 Tier 2 Tier 3 $80,001 $93,000 $160,001 $186,000 REBATE $93,001 $124,000 $186,001 $248,000 $124,001 or more $248,001 or more 30% 20% 10% 0% 65 69 35% 25% 15% 0% 70 and over 40% 30% 20% 0% MEDICARE LEVY SURCHARGE All ages 0.0% 1.0% 1.25% 1.5% These thresholds increase annually, indexed by Average Weekly Ordinary Time Earnings. There is also an increase of $1,500 for every child after the first. Let s look at the facts. Currently, 45.4% of the Australian population carries PHI (hospital cover). More than threequarters of them (76%) will not be affected by the proposed amendments at all because their income puts them under the threshold of Tier 1. The following two examples illustrate how this will work. John and Mary are a couple who both work full time at the average male wage ($71,000 pa) and the average female wage ($59,000 pa). Their family income is $130,000 pa. That is below the first tier family threshold of $160,000 pa. If they are insured, they will still receive the full 30% health insurance rebate and they will not pay a Medicare levy surcharge if uninsured. Sonia is a single parent with two children and an income of $147,000 pa. That is also below the first tier family threshold of $160,000pa. She will still get a full 30% rebate if insured and will not pay a Medicare levy surcharge if uninsured. There is no reason for the highest income earners to change. For all those in Tier 3 singles earning over $124,000 a year and families with over $248,000 incomes plus the top quarter of those in Tier 2, private insurance will still be less expensive than reliance on Medicare because the Medicare Levy Surcharge will rise by more than the increase in their premiums. For example: Martin is a single high income earner on $200,000 pa. He is insured with an annual premium of $1,395 pa. His income is above the third tier threshold and he will not receive a rebate. His premium will therefore rise by $597 to $1,992 pa. However his Medicare levy surcharge will rise by $1,000 to $3,000 (1.5% of $200,000 pa). Private insurance will still be cheaper and he will continue to hold it. 2
That leaves only the 15 % of the insured population in Tiers 1 and 2 (9% in Tier 1 and 6% in Tier 2) who may be affected by the changes. For Tier 1 members, the rebate would fall by 10%, for Tier 2 members by 20%. Price sensitivity There is an extensive literature about the price sensitivity (elasticity of demand) for healthcare services. The elasticity of demand is a measure of the responsiveness of product demand to changes in factors such as the price of the good or service, the income of the consumer and the prices of related goods or services. Despite a wide variety of empirical methods, the consistent finding is that while the demand for private health services is income elastic richer people are more likely to buy them than poorer ones it is relatively insensitive to price. The introduction of the Private Health Insurance Rebate in 1999 showed just how insensitive it actually is. The Table below shows the history of policy changes in relation to PHI over the two years surrounding the introduction of the rebate. As can be seen, it had almost no effect on PHI membership. Policy changes and Private Health Insurance Membership Year and Quarter PHI population cover (%) 1998 Dec 30.2 30% PHI rebate January 1999 1999 Mar 30.4 June 30.6 Sept 31.0 Dec 31.4 2000 Mar 32.2 Lifetime insurance, April 2000, plus publicity campaign June 43.8 Sept 45.8 Dec 45.4 In effect, the price of PHI fell by 30% from 1 January 1999 when the rebate was introduced. Nothing else changed. That had almost no effect on membership. Fifteen months later, population coverage had risen by only 1.8%. Membership increased, but by only 2% for every 10% reduction in price. As a result, the system was changed again. From 1 June 2000, for people over 30 years of age, private health insurance premiums would rise by 2% for every year that they delayed membership. This measure was accompanied with a very large, government funded publicity campaign designed to show that the only way to ensure hospital access was to privately insure. Within six months, this combination raised private health insurance coverage to 45.8% of the population, very close to what it is now. However the 30% rebate itself had almost no effect. 3
Effects of the changes now proposed Surveying intentions can establish almost anything, particularly when the issues are complex and clouded by dispute. But in this case we have real data to go on and there is no reason to believe that the effects of a 10 20% increase in price would be any different to those of the 30% reduction in January 1999. About 1.53 million people would be affected by the proposed changes 920,000 in Tier 1 and about 510,000 in Tier 2. The average price increase would be 14%. At a 2% drop out rate for every 10% increase in price, only 31,000 people would be expected to drop their private insurance. Our calculations show almost the same result as the Treasury has estimated. This is a trivial number. It would have almost no effect on the usage of public hospitals, because, at most, only one third of them would expected to be hospitalised in a year about 11,000 admissions or only 0.2% of the 5.06 million admissions to public hospitals last year. These figures indicate that arguments opposing the measure are exaggerated. Not only are the claimed effects on membership and hospital usage wildly wrong but the arguments are contradictory. The Australian Health Insurance Association claims that over half (56%) of insurees have only a certain amount that they are prepared to pay each year for their private health insurance. But they also claim that the Medicare Levy Surcharge is only a weak deterrent against dropping insurance cover. The juxtaposition of these two claims is both counter intuitive and wrong. 1 The equity argument There are strong equity arguments for the change. Medicare is a national health financing system, not just medical benefits and access to public hospitals. Private insurance is as much a part of Medicare as either of these programs. It should always have been regarded as such, but it has been in the interests of the health insurers and private providers to portray it as a competitive alternative. If that is accepted, then premiums should vary with capacity to pay. One of the main reasons why universal insurance was first established 36 years ago was because flat rate premiums were increasingly putting private insurance beyond the reach of poorer people. At the very least, public subsidies should be uniform. But the present PHI rebate does not work that way. The more you spend, the larger public subsidy you get. Because higher income people are both more likely to insure and hold a higher level of insurance cover, their share of rebate expenditure is disproportionately high. There are a number of problems with the rebate s present structure, not least its facilitation, through gap insurance, of a significant rise in specialist doctor fees. But that is not the present issue. The proposed changes will not threaten either private insurance or the private hospital industry. However they will make the distribution of public money fairer. 1 Research, commissioned by the Australian Health Insurance Association (AHIA), by Deloitte based on market research company ANOP Newspoll s survey of 2000 Australian households. 4
AHHA Policy PHI hospital cover While the above position paper focuses on the current proposed changes to the PHI rebate, the AHHA s long held position on PHI for hospital cover is that: all eligible Australian citizens continue to have a right of access to public hospitals as public patients irrespective of their insurance status. funding currently used to subsidise private health insurance be paid directly to private and public hospitals (for private patients) on the basis that this would: o underpin a more consistent approach to funding hospitals in both sectors, thus more effectively recognising their complementary roles; and o be more efficient in decreasing public hospital waiting times; 2 subsidised private insurance should not distort the market for medical care. Gap insurance currently supports specialist fees well above the Medicare fee schedule, which has both drawn doctors away from the public system and raised the cost of retaining those in public employment. Ancillary products should remain as a voluntary option for people to purchase a range of services that are complementary to services in the public health sector. Professor John Deeble Ms Prue Power Executive Director, AHHA 2 Evidence from the UK and Canada suggests that a higher take up of private health insurance is associated with longer public waiting lists. A study in the Australian public hospital context by Professor Stephen Duckett (Australian Health Review Feb 2005 Vol29 No1) confirms this. 5