Abstract
This paper challenges the argument that expanding private health insurance coverage in Australia will reduce the demand for public hospitals. We construct a simple model to illustrate that although a premium subsidy might expand insurance coverage, it may not reduce the demand for public health services. The reason is that, under certain conditions, government subsidies only increase insurance coverage among self–insured consumers; that is, consumers who are uninsured but purchase private health care if they fall ill. We argue that subsidising private health care rather than insurance is a more effective way of reducing the demand for public health services.
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