Should the private health insurance rebate be abandoned?

The Commonwealth spends about $5.5 billion on the private health insurance rebate, representing 8 – 9% of its health expenditure. A declared intention of the rebate is to stimulate the uptake of private health insurance by making it more affordable and thereby to relieve strain on the public hospital system. Its critics allege that Lifetime Community Rating makes the rebate redundant and that it has little or no effect on private health insurance uptake. If it were scrapped (so the argument runs) it would represent a source of budgetary savings or could be used more propitiously in the public system.

The Commission of Audit is equivocal about the merits of its abandonment. The rebate's opponents ignore that in a backhanded way it contributes to levelling the funding playing field between public and private hospitals.

Besides the Commonwealth's contribution to recurrent state and territory public hospital funding, state and Commonwealth transfers also provide public hospitals with funding for their educational and research infrastructures. In teaching hospitals especially, educational, training and research activities are impossible to disentangle from patient care. This effectively constitutes an additional contribution to both public and private care in public hospitals.

Whilst there are reward payments in the National Health Reform Agreement that encourage states to maintain minimum public patient throughput, with state acquiescence, specialists with rights of private practice in public and private hospitals may prefer to admit patients to public hospitals. This is because the private patient businesses of public hospitals are beneficiaries of free public infrastructure.

Resident medical officer (RMO) and registrar support is attractive to senior consultants, as is state of the art capital equipment, not always available or as free capital items in the majority of private hospitals.

Junior medical staff undertake medical functions in the name of training, including surgical assistance, afterhours care and the transcription of medical records and discharge summaries. Although the cost of RMO and registrar support and the provision and maintenance of capital equipment is met from public funding, their ready availability to assist in private patient care represents a private patient subsidy.

Similarly, insofar as staff specialist salaries and Visiting Medical Officer sessional payments constitute baseline 'retention fees', these too, are in part a subsidy to private patients who are capable of yielding their doctors incremental fee for service income as well as contributing handsomely to public hospital revenue targets.

The availability of publicly funded private human and physical infrastructure attracts private patients to public hospitals. This represents a burden to the private hospital industry that violates the principle of competitive neutrality.

The private health insurance rebate thus levels the playing field between public and private hospitals. It is nevertheless poorly targeted. To the extent that the rebate applies to private patients in public hospitals, the Commonwealth should claw this money back from public hospitals, or better still in lieu of the rebate, reinstate a private hospital subsidy. The bed day subsidy, abandoned in 1986, directly benefited private patients in private hospitals.

David Gadiel is a senior fellow at The Centre for Independent Studies.