Australian Private Health Insurance: Industry Performance, Market Failure and Government Policy

Abstract

Australia has a mixed public–private health system. The core of its funding is universal public health insurance supplemented by voluntary private health insurance (PHI), which despite being smaller, remains critical to the sustainability of the health system. In addition to injecting funding into the health system and thereby increasing capacity, PHI offers choice for consumers and enhances the responsibility of individuals for good health. Nonetheless, in common with many other developed countries around the world, there are several challenges currently facing the Australian health system, including an ageing population, increased chronic disease conditions, and ever more costly medical technologies. To cope with these pressures, the improvement of all sectors within the health care system is necessary. The Australian PHI industry is currently under pressure due to constantly rising premiums and the declining affordability of insurance. Questions have long been raised, not only about the long-term profitability and sustainability of many insurers and the industry, but also whether the mixed public–private healthcare system can continue in its existing form and still meet its wider policy objectives. To address this, this thesis examines three separate yet related dimensions of the performance, sustainability, and stability of the Australian PHI industry using three different empirical analyses. The first analysis investigates the efficiency and productivity growth of Australian private health insurers during the period 2010–2017. The findings suggest that the adoption of innovation and technologies in operations would help insurers to improve their productivity. In addition, there is significant scope for regulatory reform and structural change in this industry to improve the efficiency and productivity of the sector overall. The second analysis examines the phenomenon of adverse selection in the private health insurance, testing whether unhealthy people are more likely to hold hospital PHI. The findings indicate that while adverse selection remains high, it has decreased over time because of government policy, industry conditions and the heterogeneous preferences and risk aversion of individual and potential policyholders. The results also document the emergence of a tendency for advantageous rather than adverse selection in the insured pool. The third and final analysis considers moral hazard in policyholder behaviour. As both adverse selection and moral hazard are examples of market failure, there is the potential for loss of wellbeing for consumers, taxpayers, and citizens. While the approach considers just a single specific aspect of healthcare, namely, dental services, it is by far the largest ancillary healthcare service covered by PHI in Australia. The analysis employs a simultaneous equation framework to examine the relationship between PHI cover and the frequency of dental visits. The findings indicate the existence of moral hazard and the level of moral hazard in PHI has been quite stable over the longer term. The thesis contributes to industry practice and government policy in several ways. First, the current crisis in the Australian PHI industry has pressured all stakeholders to find solutions to cope with the steadily increasing premiums and to provide affordable PHI. Higher levels of efficiency and productivity within this industry would certainly reduce some of the pressure on premiums. The analysis identifies the most and least efficient and productive insurers, and this helps identify firm- and industry-level factors likely to affect insurer and industry performance. The analysis also reveals the nature of the economies of scale within this industry and the prospects for structural reform. Second, adverse selection is a serious problem in determining PHI cover participation, especially among young and healthy members likely to drop their policies when insurers equalize premiums between members not based on individual health risks. Adverse selection death spiral drives insurers to raise premiums even further to cover for the higher healthcare costs of aged and unhealthy insured members, thereby threatening the stability of the PHI system. This thesis addresses this by providing comprehensive evidence of adverse selection and its trend overtime. Third, the thesis documents the existence of moral hazard in dental services, the largest component of ancillary healthcare treatment in Australia. The analysis considers moral hazard using a unique and comprehensive dataset, reflecting the insured’s behaviour pattern over time, which is useful to understand factors contributing to currently rising premiums.