Should taxpayers subsidise extras for private health insurance holders?

The government is conducting a review of private health insurance, purportedly aimed at ensuring consumers can access “affordable, quality and timely health services into the future”.

When announcing the review, Health Minister Sussan Ley said:

There are certainly questions that need to be asked, such as perhaps the current ancillary model would be better directed to encourage Australians to save for their out-of-pocket primary care expenses? Perhaps specifically for their later years.

Ancillary cover, otherwise known as “extras”, includes services such as dental, physiotherapy, optometry and natural therapies. Consumers can take it out as stand-alone cover, or as an addition to private hospital cover.

The consumer survey, launched at the weekend, asks specifically whether Australians' tax dollars should go towards rebating premiums of those with only hospital or extras cover, or those with both.

There is little evidence that private health insurance rebates take pressure off the public health system. Instead, they contribute to inequity of health care across the country, ensuring better and timely care for those who can afford it.

Removing subsidies for 50% of Australians (who currently have private health cover) is a politically unpalatable task, especially when it comes to hospital cover. But scrapping rebates for ancillary services can be a good place to start.

High cost of extras

Government spending on private health insurance rebates grew by almost 70% between 2002 and 2013. Claims for ancillary items grew at a rate ten times that of hospital cover.

These ancillary costs are the low-hanging fruit of private health insurance subsidies and have been under fire for decades.

In 1999, a 30% universal subsidy of private insurance premiums for hospital and ancillary insurance was introduced to combat steady health insurance coverage decline and increasing premium levels.

Although advice from commentators and experts was against the subsidy, the government argued that the private health insurance industry and private hospital sector were unsustainable without it.

According to the government, the subsidy would encourage more people to take up cover, expand choice, reduce long waits in public hospitals and use excess capacity in the private hospital sector effectively.

After the government went ahead with the policy, it didn’t have much impact on the number of people insured. This was despite the subsidy applying beyond hospital care to ancillary services – which the government believed would attract a younger population.

Over time, it became clear the predicted premium reductions did not eventuate. In fact premiums increased. And waiting times for public hospital treatment did not change.

But the inequity of the policy was most striking. The subsidy was going to the 50% of Australians who could afford private health insurance.

The half of the population with insurance had higher incomes and better health than those without private cover, and the cost to the federal budget was large and growing faster than other health expenditures.

Low-hanging fruit

In 2002, opposition to the rebate began to target ancillary cover. It emerged subsidies to these services were supporting lifestyle choices such as gym memberships, running shoes, golf clubs and the like.

The Private Health Insurance Ombudsman had revealed, for instance, that a fund paid $400 for a member to buy CDs of relaxing music.

An analysis by Catholic Health Australia showed health fund benefits on ancillaries were growing at double the rate of those for private hospital care, which was what the rebate was primarily designed to promote.

The report found that, in three years since the rebate was introduced, benefits paid to private hospitals had risen by 37%, while ancillary benefits increased by 71%.

The Labor opposition announced removing the ancillary rebate altogether would save $640 million annually.

But private insurance funds lobbied to keep the rebate intact, aware of the gains from having more young, healthy people who were unlikely to need expensive hospital treatment.

The Australian Medical Association president, Dr Kerryn Phelps, stated in 2002:

There is evidence that the cost of the rebate to taxpayers is in danger of blowing out to unsustainable levels… We need to see better targeted products and a move away from non-vital ancillary products.

The 2003 Liberal government responded to the pressure and announced the phasing out of coverage for lifestyle gym shoes, CDs, tents and golf clubs. The change was minor, however, and the cost of the rebate continued to climb.

In response, the Labor government means-tested the rebate from July 1, 2012. It used a three-tiered system (dependant on earnings) and tied increases to inflation, rather than premium increases. This meant the impact of the subsidy would be eroded over time.

Natural therapies

But costs for rebates have continued growing. In 2014-15, the government spent $A5.8 billion on the Private Health Insurance Rebate.

The number of Australians with general cover (which includes ancillary items) is greater than those with hospital. As at June 30, 2015, 47.4% of Australians were covered for hospital treatment while 55.8% had some form of general cover.

In the 2012-13 budget, the Labor government announced a review of rebates for natural therapies, to examine evidence for their clinical efficacy, safety and quality.

A report on homeopathy, the first of 17 natural therapies to be scrutinised, found no reliable evidence for the therapy’s effectiveness. The chair of the review committee stated unproven therapies should not be publicly funded.

But as Ley recognised in response to the report, taxpayers receive the private health rebate based on their entire policy, so removing funding for specific items would not be straightforward.

The minister also cautioned against cuts to the subsidy, stating:

It’s important to remember Labor launched this broader review of natural therapies as part of their multi-billion-dollar raid on private health insurance rebates in government — it was never about health outcomes for patients.

Despite Ley’s claims, the current review can be seen as a cost-cutting exercise. Were the government to scrap the rebate altogether – for both private hospital and ancillary costs – it could redirect the money saved into the public health system.

It would be challenging to remove a large subsidy from almost 50% of the population even if they are the relatively advantaged half. But cutting ancillary rebates may be the easiest to pass off to the public and a good place to make savings.

Elizabeth Savage receives funding from the Australian Research Council and has received funding from the NHMRC.