Our health: using more, paying more

Australians are worried about their health.

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Indeed, the ABC’s recent Vote Compass survey identified health as the number three worry after climate change and saving for retirement. So why are so many turning their back on private health insurance?

" Affordability of private health insurance is an issue for many. And demand for private health insurance is price elastic."

There is no one reason but increased out-of-pocket expenses are a key factor linked to consumer dissatisfaction with - and exits from - private health insurance.

Trading down

Affordability of private health insurance is an issue for many. And demand for private health insurance is price elastic. That means when prices increase, demand decreases.

Higher premiums are linked to consumer dissatisfaction and exits from private health insurance. This is especially the case with younger policyholders who use their insurance less if at all.

Although the growth rate of private health insurance premiums has slowed, it has long outpaced that of wages and contributed to consumer concerns around affordability.

Over recent years a declining proportion of the population has enrolled in private health insurance. More noteworthy though is how a majority have ‘traded down’ - that is, switched out of higher premium policies with wider coverage into exclusionary policies (lower premium policies with narrower scope of coverage).

The trading down trend in hospital cover is significant: six in 10 individuals with hospital cover now have exclusionary policies compared to just one in 10 a decade ago.

Although still a minority of hospital cover policyholders, older policyholders are accounting for an increasing percentage of the total private health insurance membership as younger policyholders exit.

This matters because those older policyholders are using more services on a per capita basis (compared with previous generations). They also account for an increasing proportion of hospital episodes and a majority share of the private health insurance benefits paid.

Assuming these factors play out, private health insurance participation is likely to continue declining despite recent reforms. History suggests a return to private health insurance participation closer to 30 per cent - a level Australia hasn’t seen in around 20 years.

That scenario would present challenges to private health insurance funds whose business models rely on a relatively small minority of insured persons using their private health insurance. As younger policyholders exit and the proportion of older policyholders increases, that pattern of usage is unlikely.

Over the horizon

Hospitals, practitioners, private health insurance funds and others are all quick to point out that Australia’s public system would struggle to take on the volume of activity.

Private hospitals already do the majority of elective surgery, so public hospitals under greater pressure would inevitably see longer waiting lists and waiting times. They would also require material funding increases to create additional capacity.

Merit goods

People tend to think of health services as “merit goods” that should be provided for free as they generate material benefits for the wider community. Australia’s hybrid health system reinforces and perpetuates this thinking, with access to universal coverage under Medicare in the public system and private health insurance also available for those who want to pay for choice and access in the private system.

Yet despite unique purposes, attributes and ethical considerations, health services still mirror other areas of economic activity when it comes to the realities of input costs and private - or public - operators looking to recoup costs, compensate for risks and earn returns.

As in other markets, there is also price discrimination: providers charge higher prices where they believe consumers can afford to pay.

Medicare reporting on out-of-pocket expenses reflects this too, as it shows how such expenses have trended upwards over time and vary significantly according to geography and service type.

It’s also worth remembering how practice incomes have been constrained under Medicare funding arrangements over time, including not only the freeze on Medicare rebate levels but also benefit levels that may not have kept pace with prior cost increases. Practice costs including workforce, devices and consumables, and other material items such as professional indemnity insurance costs have all trended up over recent years.

Australia can still maintain our hybrid healthcare system though the question of who will pay is likely to become a more pressing one.

With the government (and by extension, the taxpayer) the main funder and a range of factors driving sustained increases in health services expenditure, without measures to address costs health services in the future may look slightly different to the ‘merit goods’ of today.

Glen Fisher is Associate Director for Health at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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