Is it efficient to subsidise private health insurance?

The Australian Financial Review this morning quotes part of a report Evaluate recently undertook at the request of Private Healthcare Australia, looking at the history and economic impact of private health insurance (PHI):

Our report, The Relative Efficiency of The Private Health Insurance Rebate v. Direct Public Health Expenditure looked at four issues around PHI in Australia.  It found:

1.       Far from being either a modern or partisan innovation in the Australian health system, versions of PHI have existed since the 19th century and have been recognised and supported by Commonwealth legislation since 1953;

2.       The cost to the Commonwealth of healthcare supported by PHI is substantially cheaper than healthcare provided via public hospitals.  This is in itself obvious, as the Government contribution to private hospital services is only a fraction of its expenditure on a public hospital separations;

3.       As an allocative efficiency measure, a dollar spent by Government on PHI is up to 15% more efficient than a dollar spent on public healthcare.  The key driver in this is that the economic distortions caused by taxation, or deadweight losses, are more prevalent for healthcare entirely funded by Government; and,

4.       Looking at technical efficiency, a marginal dollar spent via the PHI rebate does more to increase overall consumer welfare, measured as a reduction on public waiting lists, than does a marginal dollar distributed to State hospitals.

The short summary of this is that the PHI Rebate, in its current form, is good public policy.  It does what it seeks to do, and there are benefits for all Australians.

However, a couple of cautionary comments are needed.  First, these conclusions do not support a case for replacing public healthcare with private supply (although they also do not argue against it).  Our research is about healthcare finance and, while we identify some benefits from competition, these are not the main thrust of the paper.

Second, it’s important to remember that this is about a marginal dollar.  There is no argument for putting all of the public health funding into private insurance and good reasons remain for retaining a public hospital model that is universally accessible.

The importance of the marginal dollar is to look at the hypothetical next dollar spent and, in this case, it would be well spent via PHI.

But our overwhelming view remains that an effective health system requires a well-constructed balance, both in supply and finance.  PHI today, and under its current settings, is an efficient component of Australia’s mixed system.

Alastair Furnival and Catherine McGovern