It's the economy, stupid We're getting older, and we're going to the doctor more often than we used to. There are also more of us, thanks to population growth. Health insurance premiums are set to increase this Friday. Credit:Erin Jonasson These are problems that have been known for some time, and they equate to higher demand on the health system. According to Grattan Institute health experts Stephen Duckett and Cassie McGannon, about 30 per cent of the increase in health costs above CPI is attributable to these two influences: ageing and population growth. The rest, according to their analysis, is due to "people of all ages getting more and more expensive services per person".

The analysis, written in 2013, says that "a 50-year-old now is seeing doctors more often, having more tests and operations, and taking more prescription drugs, than a 50-year-old did 10 years ago. The quality of the treatment they are getting has improved in many cases, and there are new treatments that did not exist in 2003." Dr Duckett said the principles in the analysis had not changed in the past three years and health costs had continued to grow. Using more, taking more, demanding more - these are the kinds of things that make prices rise. Paying by proxy You would be forgiven for thinking that you should be insulated from these kinds of increases because you pay insurance, but it doesn't work that way.

Insurance companies are in the business of making money; they aren't charities. They have investors that expect solid, regular returns. You are probably one of those investors, via your superannuation fund. That means they aren't likely to swallow increased costs without a good reason. They need to recoup the money from their membership. One reason a company might swallow increased costs is competition, but in this case competition with the public health system also pushes prices the other way. If you want to be seen to be on the cutting edge, you might have to buy nifty and expensive new machines, even if the actual benefit of having the machine for patients is marginal. The private and public systems are caught in a marketing war to be seen to have the best resources, and that costs money. The thing is, most people will only ever see the cost increases in the system through their insurance bill. Costs in the public system are hidden in government budgets and reports - for example, from the Australian Institute of Health and Welfare. They are wrapped up in your taxes.

What can be done? Most people respond to higher insurance bills by reining in their coverage, but this can cause its own problems. "A decreasing proportion of the health insurance market involves people who are fully covered," Dr Duckett said. "There are strong incentives to keep health insurance, but what they do under premium increases is decrease the level of coverage." "They take out health policies that have significant exclusions, so when they come to make a claim they are surprised." The underlying problem is exploding healthcare costs. There is waste to cut, and harder price negotiations on generic drugs could go a long way to bringing costs down.

But in the end the costs come down to basic principles: service delivery and demand. If we want all the fancy drugs and gadgets we will pay for them somehow; maybe by higher premiums, maybe through higher taxes. Maybe both.