Introduction

The Australian health care system relies on multiple sources to provide funding. As introduced in Chapter 1, ultimately these all rely on money paid by individuals, who contribute these funds through the tax system, by paying medical practitioners and other health care professionals directly, or by contributing to private heath insurance schemes. Additionally, funding for the health care system also comes from special purpose funds such as state-based motor vehicle accident or workplace injury compensation schemes, or through payments made for medical and hospital expenses of former defence force personnel (usually known as veterans).

Health funding systems which are administered by governments and use some form of tax to raise funds from citizens are known as ‘public schemes’. Systems that rely on individuals (or sometimes companies) paying a premium or contribution to obtain insurance cover for health care expenses are known as ‘private schemes’. There is much debate about which system is likely to produce the best health outcomes for particular populations, but fundamentally all such schemes are ‘pipelines’ for the allocation of money (Richardson 1995). Many of the arguments in this area are about relative efficiency and equity in terms of achieving good health outcomes, and this is certainly the case in Australia.

This chapter looks at the way that private and public health insurance schemes in Australia have developed alongside each other in the period since about 1950. Australia’s current system of health care financing represents a mix of private and public funding arrangements, and although this mix has been in place since the 1950s, the balance between private and public funding has shifted many times since then. This has arguably had implications for accessibility of services and the equity of the health care system, and their influence on the overall wellbeing of the population. It also relates to ideas about whether health care services should be provided through publicly funded universal schemes, or whether such access should be limited to the poor. This is a central argument in the Australian health care system, as it is in many other countries around the world.

Health insurance in Australia

How does health insurance work; where does the money go?

The share of total health care spending which comes from public funds and private health insurance (PHI), and from individuals and other sources (such as compensation funds and so on), is shown in Table 5.1. Of total health expenditure in 2003–04 of $78.6 billion, governments provided $53.2 billion, or about 67.6% of total health care spending. The Federal government contributed 45.1% ($35.4 billion), and the states, territories and local government about 22.6% ($17.7 billion). Direct contributions from individuals (also known as out-of-pocket expenditure) contributed 20.6% ($16.2 billion) and PHI funds 7.1% ($5.6 billion). Figure 5.1 also shows the expenditure shares from various funders.

Table 5.1 Health expenditure by category and source of funds, Australia, 2003–04

Figure 5.1 Health expenditure by source of funds, Australia, 2003–04

Source: AIHW 2006b, Table S38, p 436

Health insurance, whether organised by the government (through a scheme such as Medicare) or by a private organisation (such as a not-for-profit friendly society, or a company in business to make profits) is a way of sharing the risk of getting sick. Someone without any health insurance carries the full burden of risk — if they or their family become ill and need care, they must pay the full cost of that themselves. In many cases, this can be a very substantial amount. On the other hand, someone who has health insurance pays a premium or contribution into a fund. If they need health care, the fund will pay the cost of that care, or a large proportion of it, so that the risk of becoming sick is shared among all the people in the fund.

The most efficient type of health insurance is generally regarded as being a universal system, usually operated by government. Such schemes have the advantage of being able to use the tax system to collect money, which is generally a very efficient way of collecting funds, and to require that all citizens contribute via the tax system. This means that the risk of becoming ill is shared equally among all people who live in the country. If a public health insurance scheme such as this is also the largest (or pre-eminent) scheme (which is certainly the case in Australia) it also offers the potential to use monopsony power to minimise or lower the cost of health care.

Some people are at greater risk than others of becoming sick and needing health care, and in some countries (such as the USA) it is possible for health insurers to ‘discriminate’ between people so that those who are perceived as more likely to get sick will pay a higher premium. This is the same principle that is used for car insurance. In the case of car insurance, young people, or people with a history of motor vehicle accidents, are thought to present a higher risk than people who have been driving for some time, or those with an established history of accident-free driving. Those presenting a perceived higher risk usually pay a higher premium to insure their car. The greater the perceived risk, the higher the premium. In Australia, this is not permitted in the case of health insurance. All members of health insurance funds pay the same premium regardless of their health status, a principle called community rating.

Under changes introduced by the Howard Liberal–National Coalition government from 1 July 2000 (the ‘lifetime health cover’ policy), health funds charge a higher rate for people who become members of health funds after they turn 30 years of age. This rate increases for each year that membership is delayed after the age of 30. This modified version of community rating is called ‘lifetime health cover’, and was introduced to encourage younger people to become health fund members. The reason for this is that young people are much less likely than older people to need health care. The more young people who join funds, the more money then becomes available to pay the health care costs of those who are more likely to need care. If the only people in a health insurance fund were older people who need a lot of care, the price of premiums would be very high. To a certain extent, this happened to PHI after the introduction of Medicare in 1984, because many people, particularly young people, saw little point in paying to be members of a fund they were unlikely to use, especially since Medicare was arguably seen as providing all necessary health care services and was funded through the tax system.

Pause for reflection

One of the issues which arises from increasing the rate of private health insurance (PHI) coverage is that if consumers are paying relatively substantial sums for cover, they are quite likely to want to make use of that cover. This can give rise to a situation known as ‘moral hazard’, effectively the likelihood that people paying for insurance will be likely to make claims whenever they can. One way of preventing this is to impose ‘front-end deductibles’ — what is known as an ‘excess’ in motor vehicle insurance. These payments act as a ‘brake’ on consumers wishing to make use of their insurance for relatively unnecessary services, but do not prevent claims for serious problems. PHI cover with front-end deductibles is generally offered at a reduced premium, since the risk of a claim is reduced by the imposition of the excess.

How does PHI fit with Medicare?

Private health insurance sits alongside Medicare in the Australian system. At present, PHI is available to pay for treatment in hospital (including medical fees not covered by Medicare, which pays 75% of the ‘schedule fee’ for medical and surgical treatment in private hospitals), some ancillary services (such as dental treatment, and allied health and similar services), and a small number of non-admitted procedures and services. Usually, having PHI means that patients can gain access to services more quickly than if they wait for a place in the public hospital system. People with PHI are also entitled to be treated by the doctor they choose. However, PHI premiums are relatively expensive. For example, in August 2007, the top hospital cover for a family in Victoria cost $101 per fortnight or more than $2640 per year with the largest health insurance fund. This amount is after the contribution made by the 30% government rebate on PHI (Medibank Private 2007). Extras, or cover for ancillaries such as allied health and dental services, cost more. PHI premiums have risen substantially over recent years, (7.4% average in 2003, 7.6% in 2004, 8.0% in 2005, 5.7% in 2006, and 4.5% in 2007). That is, between 2002 and 2007, PHI premiums increased by a cumulative 37.9%, while the consumer price index only increased by 13.9%. PHI price increases were thus much more than inflation over this period (ABS 2007b).

Medicare (see Chapters 1 and 3) provides access without charge to necessary treatment in public hospitals for Australian citizens and residents, and also provides a rebate for services provided by medical practitioners and for some services provided by some other practitioners. Medicare also provides financial ‘safety nets’ to guard against high out-of-pocket costs on medical expenses. The first of these provides for an increase in the amount rebated for medical expenses once the accumulated gap payments in any calendar year exceed $358.90 for an individual or family. The second, ‘Medicare plus’, safety net relates to the actual amount spent on medical services, and allows for a rebate of 80% of actual out-of-pocket expenses once these reach $519.50 per year (for relatively low income families eligible for a payment known as Family Tax Benefit) and $1039 for all others. These safety nets appear to provide a guarantee of access to medical service for people who need high levels of such care.

Unfortunately the available evidence demonstrates that the effect of these safety nets (particularly the ‘Medicare plus’ safety net) is to subsidise the relatively affluent rather than those most in need of services. Figure 5.2 shows the per capita distribution of Medicare safety net payments for 2006, using Federal electoral districts (usually referred to as ‘electorates’) ranked according to the Australian Bureau of Statistics (ABS) ‘SEIFA’ index of comparative disadvantage. What this figure illustrates is that the wealthiest electorates in Australia (those with high SEIFA scores) receive a disproportionate amount of the safety net rebates, whereas the most disadvantaged electorates (those with low SEIFA scores) tend to receive very much lower average payments. This pattern is statistically significant, indicating that it is unlikely to have come about by chance.