Means testing free hospital care will make Medicare sustainable

Redirecting the private health insurance rebate away from private health funds by converting it into private hospital subsidy, as Stephen Duckett suggested yesterday, is a superficially attractive way of stopping taxpayers indirectly paying for natural therapies.

Public subsidies for public and private hospital care were a core feature of pre-1980s Australian health system. However, reviving this approach today in the limited form of a publicly-funded private hospital subsidy is unlikely to promote a more efficient, mixed public-private health system without reintroducing another key policy of that era – a means test for public hospital care.

Unless a means test is employed, and so long as the Medicare continues to offer ‘free and universal’ public hospital care paid for by taxes, consumers will have scant incentive to take out private health cover regardless of the subsidy available for private hospital care. This is the chief lesson of the last half-century of health policy.

The National Health Scheme put in place by the Menzies government in the 1950s was designed to help keep health services affordable while encouraging those who could afford to do so to take out private insurance to share the cost of healthcare.

A Commonwealth ‘hospital benefit’ covered part of the cost of hospital care provided in either public or private facilities, but membership of a registered health fund was mandatory to be eligible to receive the subsidy. Public hospital treatment was available without charge but was subject to a means test, which provided a safety net for disadvantaged people unable to pay for private insurance premiums.

These rules had the desired effect on consumer behaviour. The means test meant that most people acted prudently and took out private health insurance to both receive the Commonwealth subsidy and avoid having to pay large hospital bills out of their own pockets. Not surprisingly, the vast majority of Australians were covered by private health funds that took care of most of the cost of hospital treatment.

The creation of Medicare in 1984 upset the equilibrium struck between government support, protection of the poor, and self-reliance and private funding – and posed a mortal threat to private health funds.

As soon as public hospitals were required to treat all comers for ‘free’, the incentive to take out private insurance was destroyed, as it was felt that private cover could be safely ditched. The result was a calamitous fall in private health insurance membership to less than 30% of the population by the late 1990s.

This was the point at which the Howard Government intervened. In response to state government complaints about the number of uninsured patients who had flooded public hospitals, the PHI Rebate, Lifetime Cover, and Medicare Levy Surcharge arrangements were introduced. These measures have helped restore private cover to around 55% of Australians currently.

The simple logic of the Howard policy was that a combination of carrots and sticks was needed to encourage people to pay twice, in effect, for health care by paying private premiums on top of taxes paid to fund Medicare. Private health funds also grappled with this issue by trying to sweeten the deal for consumers. This is why we have private insurance for aromatherapy and Thai massages – funds are trying to add value for members to encourage them to buy hospital cover they do not necessarily need thanks to Medicare.

There would be no need for ‘extras’ if there was a means test, because reliance on ‘free’ public hospital treatment would no longer be an option for millions of Australians. Taking out full hospital cover would once again be prudent and virtually mandatory for those who could afford it.

A more complete re-jigging of the health policy of the pre-Medicare period along these lines would also facilitate far-reaching changes to public hospitals. Funding for public hospitals (excluding the portion reserved for ‘free’ means-tested treatment), not just the PHI Rebate, could be used to fund a national hospital subsidy scheme that would part-fund treatment in either public or private hospitals. This would promote efficiency across the sector as public and private hospitals would be forced to compete for the custom of privately insured patients.

Is this unrealistic? Medicare as it currently operates is another a form of middle-class welfare. A means-test in combination with a national hospital subsidy scheme would better target government funding for health, and make the health system more sustainable in the long run by requiring individuals to bear more of the cost of their own health care through private insurance.

This proposal is more realistic than expecting the private health industry to continue to compete on an unlevel playing field against the ‘free’ Medicare system. The aim of the architects of Medicare was to drive the private health insurance industry out of business. A private hospital subsidy without restrictions on access to ‘free’ public hospitals would promote the same objective.

Jeremy Sammut is a Research Fellow at The Centre for Independent Studies.