Policy change and private health insurance: did the cheapest policy do the trick?

TLDR

Since Medicare’s introduction in 1984, private health insurance coverage in Australia has steadily declined, prompting a 1997 Industry Commission inquiry that led to policy changes aimed at reversing the trend and increasing government subsidies, raising concerns about potential adverse selection. The study argues that the recent rise in private insurance uptake is largely due to the introduction of lifetime community rating, while also examining whether subsequent membership declines signal a return of adverse selection. The authors describe two main policy interventions: financial incentives—subsidies for purchasing and tax penalties for non‑purchase—and the implementation of lifetime community rating to modify existing community rating regulations. The lifetime community rating policy incurred virtually no government cost, was introduced after subsidies were already in place, and although it boosted uptake, declining membership—partly from unpaid premiums and an aging insured pool—suggests the policy’s protective effect may erode over time.

Abstract

From the introduction of Australia's national health insurance scheme (Medicare) in 1984 until recently, the proportion of the population covered by private health insurance declined steadily. Following an Industry Commission inquiry into the private health insurance industry in 1997,a number of policy changes were effected in an attempt to reverse this trend. The main policy changes were of two types: "carrots and sticks" financial incentives that provided subsidies for purchasing, or tax penalties for not purchasing, private health insurance; and lifetime community rating, which aimed to revise the community rating regulations governing private health insurance in Australia. This paper argues that the membership uptake that has occurred recently is largely attributable to the introduction of lifetime community rating which goes some way towards addressing the adverse selection associated with the previous community rating regulations. This policy change had virtually no cost to government. However, it was introduced after subsidies for private health insurance were already in place. The chronological sequencing of these policies has resulted in substantial increases in government expenditure on private health insurance subsidies, with such increases not being a cause but rather an effect of increased demand for private health insurance.The paper also considers whether the decline in membership that has occurred since the implementation of lifetime community rating presages the re-emergence of an adverse selection problem in private health insurance. Much of the decline to date may be attributable to failure on the part of some members to honour premium payments when they first fell due. However, the changing age composition of the insured pool since September 2000,resulting in an increasing average age of those insured, suggests the possible reappearance of an adverse selection dynamic. Thus the 'trick' delivered by lifetime community rating may not be maintained in the longer term.