The Medibank sale only goes so far

A raft of federal regulations and incentives will continue to stifle the private health insurance market.

The Coalition government deserves full credit for allowing Medibank Private to finally live up to its name. It was always a bizarre anachronism that the commonwealth government -- taxpayers -- owned a health insurer that was competing with other private health insurers. The expected proceeds, perhaps over $5 billion, will be better invested in public infrastructure, which government is better suited to guiding.

But Australia’s private health insurance market will still be hobbled by vestiges of Canberra command and control that undermine insurers’ ability to offer quality low-cost services by distorting their incentives. For instance, the health minister will still have the power to approve premium increases. Each year Peter Dutton, like federal health ministers before him, has to consider “justifiable” health costs and make a decision.

Late last year, the minister approved for the 2014 premium year, for each of the 34 regulated private health insurers, a weighted average annual increase in private health insurance premiums of 6.2 per cent. Health premiums typically rise by far more than inflation every year. “There is no doubt this increase could have been lower had it not been for the pressures placed on the sector by Labor. Each application has been closely scrutinised to ensure the increases sought are fully justified,” Dutton said at the time.

To the thoughtless person it might seem appealing that the minister’s ability to veto “excessive” price increases is a bulwark against unconscionable gouging of customers. But a moment’s analysis suggests the minister’s role, however well meaning, might have a perverse impact.

For a start, private insurers currently devote resources to presenting arguments to the minister about private health insurance premiums rather than satisfying their core business of providing health insurance.

Second, they have a strong ­financial interest in making arguments that will permit them to increase premiums. It is naive to expect the minister or his bureaucrats to have as good an understanding of the business of health insurance — the possibilities for savings, for instance — as the insurers themselves.

Insurers don’t even have to worry about the public relations of rapid hikes in premiums: that will be a political problem for the minister. And as the government’s Commission of Audit pointed out earlier this year: “If a fund attempted to reduce administrative costs, the resulting savings would be factored into the minister’s next assessment of the fund’s premium increase, leaving the fund no better off and removing incentives for the fund to be more efficient”.

To be sure, maintenance of this power has political appeal for the government. Despite the fact privatisation of power generation and transmission in Victoria and South Australia has led to lower electricity prices in those states, the public ownership still has a strong emotional appeal for a ­majority of Australians.

Health insurers’ incentives to reduce costs are also ameliorated by the availability of the private health insurance rebate. This has become totemic policy for the Coalition, which has vaguely undertaken to restore it in full sometime in the distance future after Labor means-tested it in government. Ideally, it wouldn’t exist at all.

The PHIR is not responsible for the dramatic increase in private health coverage in the early years of the Howard government. It is next to no inducement to take out health insurance compared with the Lifetime Health Cover, the government policy that lifts members’ premiums permanently if you take out hospital cover later in life. And anyone on an income above $90,000 a year without private health insurance will pay a 1 per cent tax penalty, or $900 a year, if they do not take out private hospital health insurance.

On a typical health insurance plan of $1400 a year, a $900 tax is a far better inducement to take out cover than a opaque subsidy.

Even if the minister’s premium setting role were to go, there remains a raft of federal regulations that stifle the private health insurance market. Funds are not permitted to charge different premiums to customers based on age or illness.

The greater cost of insuring older and sicker people is mutualised across the entire industry in a way that gives little incentive for health funds to encourage their members to be healthier.

Mutualisation could occur in other ways. Reimbursements might occur based on the risk characteristics of their members rather than the level of outgoings.

A 2011 study from the OECD showed that individuals who “live a physically active life, do not smoke, drink alcohol in moderate quantities, and eat plenty of fruit and vegetables have a risk of death in a given period that is less than one-fourth of those who have invariably unhealthy habits”.

The Commission of Audit found: “The community rating of health insurance products means that the unhealthy lifestyle ­choices made by some forces up premiums for everyone.”

Federal government also undermines state government health policy. Medicare agreements with the states prevent the latter from imposing any charges on public hospital admittance. The flow of people presenting at emergency departments with relatively minor ailments will become a flood if the government manages to introduce a co-payment for GP visits.

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