Legalizing Health Insurance

By Freeman, Felix | Review - Institute of Public Affairs, December 1999 | Go to article overview

Legalizing Health Insurance


Freeman, Felix, Review - Institute of Public Affairs


IN this year's Budget, the Commonwealth Government announced the introduction of `Lifetime Health Cover'. Like the 30 per cent rebate scheme, it is aimed at slowing or reversing the decline in private health insurance.

Critics, of course, claim that the rebate is pumping money ($6 billion over 4 years) into the private system, at the expense of the public system. This has some ideological appeal, but is economic nonsense. As with education, private places (beds) can be provided more cheaply to the public purse, because consumers share the cost. So more money is in fact available per user to the public system.

But unlike education, health-care costs are not only large but unpredictable, discouraging use of the private system. Insurance is the obvious answer, so much so that almost no-one uses private hospitals without private health insurance. So the survival of private hospitals depends on viable health insurance.

There are two main problems with the viability of private health insurance:

* it is subject to `community rating' (all customers pay the same);

* the government's own health `insurance' system, Medicare, competes unfairly with the private sector.

The results are predictable. Imagine we had Medicare for cars. If you had a prang, you could go to a `Medicar' garage, and have it fixed for nothing. But you'd have to settle for the salaried duty panelbeater. And if the car was still drivable, you might have to wait. People with private car insurance, on the other hand, could have panelbeater of choice, and faster service on small dings, for a standard premium. But they'd still have to pay an excess.

Who then would insure?

The wealthy might be prepared to pay more for choice, and to avoid having to drive around in a dented Mercedes. Inexperienced or reckless drivers who had regular accidents (who in the real world would pay higher premiums or excess, or be refused insurance) might also pay more to avoid the inconvenience of waiting for repairs.

Of course, premiums would go up. Then people would drop out, leaving the really bad, or really rich, drivers still in the insurance pool. So premiums would go up again. And so on.

Clearly a system where insurers could not charge higher premiums to high-risk drivers would be virtually unworkable. Yet this is what happens in health insurance under `community rating'.

The new scheme of `lifetime community rating' will work more like life insurance. The older you are when you join, the more you'll pay.

People who take out health insurance at or before age 30 all pay the standard rate, indefinitely. Others pay an extra 2 per cent for every year they're over 30 at joining, to a maximum loading of 70 per cent.

The approach was described in the Commonwealth Health Department's January discussion paper Lifetime health cover: an unfunded lifetime community rating model for private health insurance.

The paper proposed a slightly different cutoff age, `age step', and maximum loading, but we are assured that this doesn't matter. …

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