Reports from government, consumer groups and health bodies depict an unsustainable system. Possible solutions include phasing out private insurance or establishing a single insurer • Help us continue to cover the stories that matter. Support Guardian Australia with a monthly or one-off contribution

Experts agree private health insurance is broken. But how can it be fixed?

Private health insurance is broken and should be scrapped in its current form and replaced by a single health insurer, according to health economists and policy experts who have spoken to Guardian Australia.



This drastic assessment has been prompted by numerous reports from government, consumer groups and peak health bodies over the past six months.

All found private health insurance is increasingly unaffordable owing to rising premiums, prompting people to drop their level of cover to policies that are virtually useless for their healthcare but allow the customer to avoid government surcharges.

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Consumers Health Forum, for example, describes the way many insurance packages lack adequate coverage for even basic needs, “and yet consumers continue to pay high and rising premiums on these policies with misplaced confidence that they will be covered”.

“Despite offering no promise of improved healthcare, premiums continue to rise on junk products that many consumers feel obliged to purchase in order to avoid punitive measures, such as the Medicare levy surcharge and lifetime health cover,” the group says.

“Evidence has mounted in recent years that private health insurance has failed to deliver on one of its fundamental goals: taking pressure off the public system to preserve the fundamentals of universal access.”

It is an expensive public policy failure – the government spends between $7bn and $9bn a year to subsidise the private industry, depending on what calculation is used.

A fellow for the Centre for Policy Development, Jennifer Doggett, says spending billions of dollars propping up a system that has been found in numerous surveys to be unsatisfactory for consumers could be described as a crisis.

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“If any other industry spent up to $9bn to keep its nose above water, you’d certainly question whether that’s reasonable,” she says.

“How did we get into this situation? What is its role in the health system? What do we want it to be in the future? How should it fit in with Medicare?

“These questions haven’t been looked at in a structured way. Almost every area of the health system has been reviewed rigorously. But for some reason private health insurance has been immune from that process.”

The Coalition acknowledges there is a problem. The health minister, Sussan Ley, is undertaking a comprehensive review of the private health system, receiving submissions from stakeholders and consumers.

In September she announced the members of an expert private health ministerial advisory committee, who are tasked with devising and planning changes.

The changes will include: developing easily understood categories of health policies labelled gold, silver, and bronze so that consumers can more easily identify the best policies and what they cover; simplifying billing; making fine print of policies more transparent, and developing products better tailored to those in rural and remote areas, who often don’t live near private hospitals and practitioners.

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Experts are mixed on how effective the proposed changes will be once rolled out. “If you look at the level of health economics expertise in the minister’s department it’s woeful,” Doggett says.

“You’d think a department that looks after $40bn spent on health might have an in-house health economist. I’m yet to find one. They set up these groups with input from industry and consumers and ex-bureaucrats, but not those who understand the economics of it.

“The minister’s intentions are good. But I don’t think she understands what to do to get out of this situation. She’s hoping for a plan B no one has thought of that will keep the current system in place while also fixing everything. Like ‘if we just change the language in the brochures, everything will be fine’ kind of mentality.”

Private health insurance is very much “ingrained in our psyche”, Doggett says. She believes successive Labor governments have been too focused on strengthening Medicare to examine private health insurance.

“And the Coalition have an ideological, non-thought-through view that because it’s called private health insurance it must be aligned with their underlying philosophy but it doesn’t, in reality, fit with many of their policies,” she said.

If you look at evidence worldwide the overwhelming benefits come down on the benefits of having a single insurer Jennifer Doggett

“It’s like the ugly sofa in the corner of the living room you don’t see anymore. No one has stepped back and said, ‘Hang on, is it still serving our interests?’”

A single insurer

Doggett says governments should stop focusing on propping up the current system and instead look at establishing a single insurer. “If you look at evidence worldwide the overwhelming benefits come down on the benefits of having a single insurer,” Doggett says.

A health policy analyst, Ian McAuley, believes that the government will be forced to move towards a single insurer within the next decade, which would most likely be an expanded and better funded version of Medicare that would cover dental and all medical treatments and surgeries.

“In theory you could have a heavily regulated single private health insurer, but more likely it would be an expansion of Medicare,” McAuley says.

Like Doggett, McAuley believes there might possibly be a role under a single insurer for a few private health insurers offering extras, for example, policies for a bigger hospital room.

But he believes private health insurers will one day be phased out. The government could achieve this by gradually pushing up the bracket at which the medicare levy surcharge takes effect, phasing out the incentive for people to take up private health insurance. The government could then increase the Medicare levy and abolish the exemption, he said.

“In general people are not opposed to paying increased tax if they know it’s going to a specific purpose,” he said.

Systems like ours are just not sustainable – they’re not stable Ian McAuley

“Plenty of research says if you ask people, ‘Are you happy to pay tax to fund health or education?,’ most people say yes if they think it will relieve them of some pressure. Who would not welcome paying $800 more tax if it means paying $1,000 less for health insurance?”

McAuley admits abolishing private health insurance would be too big an ask of the current government. But he believes there will come a point when costs become so exorbitant and private health insurance so worthless that the government’s hand is forced.

“I grew up with a firm belief that both Labor and the Coalition were supportive of industry protection and there was no way any Labor government would withdraw tariff support,” he said.

“That was just set in stone. But guess what the Hawke-Keating government did? They abolished tariff protection. Sometimes a government gets so aware of the need to make reform that it goes ahead. If that realisation can dawn on people that we are paying too much for insurance you will get, eventually, that same sort of feeling set in.

“Systems like ours are just not sustainable – they’re not stable.”

Countries including Finland, Iceland, Norway, Canada, Spain and Sweden have a form of single insurance where the state, rather than private insurers, pays for all healthcare costs.

“None of them are perfect,” McAuley says. “But the government is a strong purchaser in the marketplace, everyone has to pay a co-payment, but that is capped. But the principle is that everyone has access to the same healthcare and Medicare benefit and if you are well off you should have to pay the first few hundred dollars out of your own pocket.”

Last month the chief executives of Australia’s two largest hospital operators, Ramsay Health Care and Healthscope, called on Ley to establish a medical savings account. This is the system used by Singapore, under which people make a mandatory deposit of 6% to 8% of their salary into a national medical savings system. The savings are withdrawn to pay hospital bills, for surgery and other procedures, and goes into consolidated funds when people die.

I’m not convinced that health insurance is the right horse to back any more Chris Rex

“I totally support government getting involved in trying to encourage people to make private choices but I’m not convinced that health insurance is the right horse to back any more,” Ramsay’s chief executive, Chris Rex, told the Australian Financial Review, adding that private insurance was the “weakest link” in the health system.

Prosthesis reform

Consumer groups, experts, private health insurers and the government all agree that the price of prostheses and medical devices is one of the weakest links within private health and in dire need of reform. Rising premiums are being driven by the cost to private hospitals of devices such as pacemakers and replacement hips and knees.

The federal government now sets a fixed-price benefit that private health insurers are required to pay on behalf of their members for more than 10,000 internal medical devices through the prostheses list advisory committee.

In the public system there is no set price and greater competition around purchasing, with different medical device manufacturers competing to get the business of health state departments to supply their hospitals.

This difference means that a pacemaker can cost double the price – or $26,000 more – if it is delivered through the private system rather than public. A common hip replacement, which costs about $4,000 in the public system, can cost $6,000 for private patients.

In October Ley announced some reforms as part of the government’s review of the system, including reducing the cost of medical devices as set by the prostheses list by 10% for cardiac devices and intra-ocular lenses used to treat cataracts or myopia, and by 7.5% for hip and knee replacements.

Ley says the reforms, to take effect 20 February, will cut costs for insurers by $86m in the first year, and total $500m over the next six years, savings that should be passed on to consumers through lower premiums.

The former Australian Competition and Consumer Commission head, Graeme Samuel, was an adviser to the federal government’s private health insurance review, and is a professor at Monash University’s business school.

He says prostheses reform does not go far enough, and argues the the prosthesis list should be abolished altogether. Insurers should negotiate with manufacturers directly on prices, he says.

Excess prosthesis cost is in excess of $800m per year being passed on in insurance premiums Graeme Samuel

“The insurers might also consider going to state governments and saying, ‘Add an extra few hundred devices to your order and we will buy the excess from you for a small increase on that, since you buy them for a fraction of the cost,’

“That’s money for jam for state governments and it lowers the price. That’s something again that can be investigated. It’s suggested the amount we’re talking about in terms of excess prosthesis cost is in excess of $800m per year being passed on in insurance premiums.”

Such a move would be opposed by private hospitals and the prostheses manufacturers, he said.

“Some private hospitals might have been putting some pressure on to retain the current list and pricing schedule as they didn’t want to lose the rebates that are quite profitable to them,” he said.

The Australian Healthcare and Hospitals Association is hopeful that the government’s revamped prostheses list advisory committee will work out a better system. It has called on the committee to look at inflated prostheses prices which are being passed onto consumers in premiums.

But it and other stakeholders argue prostheses reform alone will not go far enough to fixing the overly complex and non-transparent private health system.

Empowering consumers through greater transparency

As a starting point the Consumers Health Forum says the private insurers should have to justify the enormous government subsidies they receive and measure their performance against the government’s interests. This could be done by through a reinstated private health insurance advisory committee.

McAuley says the industry is supported by the government and subsidised “off-budget” through some key means.

This is going into the dark world of hidden figures. Any economist would want to see that figure Ian McAuley

The main way is that Australians who earn more than $90,000 and who do not have private hospital cover have to pay the Medicare levy surcharge, with the $90,000 threshold frozen by the government.

“With normal inflation, $90,000 in a few years time will become much lower in real terms,” McAuley says. “I worked out that by 2025, $90,000 would be significantly below average weekly earnings, so the surcharge would come in at a lower threshold encouraging more people to take up insurance to avoid it.

“So that’s the key creeping assistance to private insurance,” he says, adding that this was not disclosed in budget papers. “Assistance to the industry should not be hidden off-budget.

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“Apart from a few people like me who calculate it, there’s no official record of it. It’s what is called a hidden subsidy.

“Just about every economist says if you assist an industry, then expose it. Make sure it’s recorded. That’s been a very strong principle in public policy. But this is hidden. This is going into the dark world of hidden figures. Any economist would want to see that figure.”

According to Samuel, the performance of doctors and surgeons should also be more transparent. At the moment there was no way for consumers to compare the prices being charged and quality of service being provided by individual public and private hospital surgeons.

Reviews by individual patients were not enough to determine the quality of surgeons, he said.

“If I go in to have a surgical procedure the most I can say is I had a short conversation with the doctor or nurse, I went to sleep, and I woke up,” he said.

“I can’t tell you much more though my recovery might be good or bad but I won’t know if that’s the result of good or bad service by the surgeon.

“Medibank has entered into arrangement with the Royal Australasian College of Surgeons where it does an analysis of quality of service by surgeons. So what it will tell you is amongst all surgeons that are a member of the college there is a variation in experience from good to bad. That’s nice to know but I’d prefer to know who is providing the very bad and very good. But they won’t tell you.”

He said the data was available, but not to consumers. “Consumers should be able to see who the surgeons are operating out of a hospital and be able to say, ‘I’m not keen on this one because of infection issues or longer recovery time or higher death rates.’”

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What all the experts, politicians, and stakeholders seem to agree on is that private health insurance is incredibly complex. This is, in part, because of an endless series of tweaks and minor amendments to aspects of the system over the years by various governments.

While the concept of a single insurance and the abolishment of the private health industry might seem pie-in-the-sky at the moment, it is the massive shakeup the industry needs to reform, many experts agree. And it may become the only logical option within a decade or so, if consumers continue to feel frustrated by lack value-for-money from their private health insurance and if premiums continue to rise.

• Is private health insurance worth paying for? Readers respond

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