Academic journal article Australian Health Review

Private Health Insurance and the Pharmaceutical Benefits Scheme: How Effective Has Recent Government Policy Been?

Academic journal article Australian Health Review

Private Health Insurance and the Pharmaceutical Benefits Scheme: How Effective Has Recent Government Policy Been?

Article excerpt


The cost to government of the Pharmaceutical Benefits Scheme (PBS) is rising at over 10 percent per annum. The government subsidy to Private Health Insurance (PHI) is about $2.4 billion and rising. Despite this, the queues facing public patients - which were the primary justification for the assistance to PHI - do not appear to be shortening.

Against this backdrop, we seek to evaluate recent policies. It is shown that the reason commonly given for the support of PHI - the need to preserve the market share of private hospitals and relieve pressure upon public hospitals - is based upon a factually incorrect analysis of the hospital sector in the last decade. It is similarly true that the 'problem' of rising pharmaceutical expenditures has been exaggerated. The common element in both sets of policies is that they result in cost shifting from the public to the private purse and have little to do with the quality or quantity of health services.

Aust Health Rev 2004: 28(1): 34-47

THIS ARTICLE is concerned with the two subsectors of the health system which have been the subject of recent and ongoing public debate: Private Health Insurance (PHI) and the Pharmaceutical Benefits Scheme (PBS). More specifically, it focuses upon two issues: (i) changes in PHI policy since 1998; and (ii) the overall performance of PHI and the PBS. The article does not attempt to identify and analyse the full range of reform options. Rather its more limited objective is to examine the widespread belief that both subsectors have had intractable problems which have required the remedial policies discussed.

Our key theme is that neither PHI nor the pharmaceutical sector should be evaluated as isolated industries. It is, of course, desirable that industries are efficient and it is possible to use standard criteria for assessing industry performance. However, both PHI and pharmaceuticals are components of a wider health system. Consequently, consideration of their performance must include an evaluation of their effect upon the wider health system and the extent to which they contribute to the achievement of health sector objectives. This caveat is important. It implies, for example, that the size of the subsidy or the absolute level of expenditure upon pharmaceuticals should not be an immediate concern if these arrangements generate net benefits. For instance, increased use of drugs may reduce health care costs elsewhere, and such expenditure may represent a cost-effective means of contributing to social objectives. Likewise, PHI is not simply a vehicle for the elimination of risk. Rather, it is a source of revenue for private hospital and other health services. The structure of health insurance creates incentives for particular behaviours, and the primary criterion for assessing PHI is its effect upon health system performance.

Furthermore, the analysis of both subsectors needs to be considered relative to the overall size of the health sector. PHI in 2001-02 contributed 10.5% of health sector revenue. This included 7.6% contributed by the private health funds plus 2.9% in premium rebates met by the Commonwealth (Box 1). In the same year, pharmaceuticals represented 13.5% of recurrent expenditures (Box 2). Given these magnitudes, an improvement in the efficiency of these subsectors could be offset by a small adverse effect upon the remainder of the health system.

More generally, caution should be exercised in the evaluation of health system subsectors. The more meaningful task is the global evaluation of the health system of which Medicare - the system of universal financial cover for medical and hospital services and limited access to other health services - represents a central feature. Medicare is widely accepted as a positive feature of the Australian health system. As measured by Disability Adjusted Life Expectancy (DALES), Australia has the second best health outcome in the world (World Health Organization 2000). …

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