Government policymaking, private health insurance and hospital-efficiency issues

Senator Graham Richardson, after he became Minister for Health in the Keating Government in 1993, focused considerable attention on the same issue, but had a different approach. The legislation that Labor introduced in 1995 was designed to facilitate the development of contracts between the health funds, private hospitals and doctors, based, in part, on the use of casemix data.

The main reason for Government and Opposition preoccupation with private health insurance has been the alleged threat to the viability of private hospitals posed by the decline in the number of people with private health insurance. It was claimed that, with decreased use of private hospitals, pressures on public hospitals would increase.

However, at the time that these initiatives were foreshadowed or implemented by the Keating or Howard governments, there was no evidence to support the proposition that the decline in private insurance coverage posed a threat to either the public or private health sectors. In fact, the decline in health insurance coverage was associated with increased use of the private sector.

Between 1993-94 and 1997-98, the proportion of patient-days in private hospitals increased from 24.6% to 26.9% of all acute hospital patient-days.² The proportion of the population covered by private health insurance declined from 39.4% in June 1993 to 30.1% in December 1998.³

The principal reason for this apparent paradox is that the people who have dropped out of private health insurance have been the younger contributors, who, with the exception of women in their childbearing years, are not heavy users of hospital services.⁴ There may have been increased pressures on public hospitals in this period, but these can hardly have come from a declining private hospital sector.

But why was the evidence on increased use of private hospitals ignored by health policymakers? The interests of influential private sector groups, including the private hospitals, the health funds and some doctors, would be fostered by a policy of supporting private health insurance. Moreover, State governments, in their never-ending quest for additional Commonwealth funding for public hospitals, also had an interest in subscribing to the same doctrine of the threat posed to these hospitals by the decline in private health insurance.

The introduction in 1999 by the Howard Government of the 30% rebate on private health insurance contributions was partly a response to these political pressures. However, there is an equity issue arising out of the payment by health fund members of substantial premiums, and of a proportion of their taxation to support public hospitals that they may never use. Discontent among many electors, possibly concentrated in marginal electorates, is the politically relevant outcome of this perceived inequity.

The equity issue is complicated by the positive association between private health insurance and income. It can also be argued that subsidising health fund contributions from government revenue means that many people on low incomes are being required to meet part of the costs of more affluent people using private hospitals. As with most arguments about equity, different value judgements will determine which aspect is perceived as being more important.

Efficiency issues
If private hospitals were more efficient than public hospitals there might be a case for subsidising private health insurance to facilitate a shift of resources from the public to the private sector, or to maintain the existing balance. The article by Duckett and Jackson in this issue of the Journal demonstrates, subject to the limitations of the data and the methods, that, in 1996-97, private hospitals were apparently less efficient than their public counterparts.⁵Duckett and Jackson use national casemix cost data to quantify the relative technical efficiency in the two types of hospitals, and make careful adjustments for differences in cost structures.

They argue that insulating public hospitals from any effects of the decline in private health insurance could have been achieved by making further Commonwealth payments to public hospitals. Duckett and Jackson recognise in passing the political arguments for the subsidy, although not the contentious equity argument.

It is of considerable importance for future policymaking that the unadjusted cost relativity between public and private hospitals has changed substantially since the original national casemix costing study was conducted using 1991-92 data. The average cost per separation was $2405 in public hospitals and $1630 in private hospitals.⁶ One study concluded that private hospitals were probably more efficient than public hospitals. In other words, allowing for casemix and cost structure adjustments was highly unlikely to reduce the cost ratio of 1.48 to less than 1.0.⁷

Duckett and Jackson's work indicates that, for 1996-97 data, the unadjusted cost ratio of 1.19 ($2319/$1942) is reduced to 1.11 by casemix adjustment, and to 0.91 when the different cost structures are taken into account.^8,9 The combination of budget cuts, casemix funding, and benchmarking in the public sector has led, it seems, to considerable efficiency gains for which, to that time, there was no counterpart among private hospitals.

What does the future hold?
The very modest increase in hospital insurance coverage after the first year of the new policy -- from 30.1% to 31.2% -- casts doubt on whether government subsidies provide any long term solution to the perceived problem.

The fundamental contradiction in the current healthcare arrangements in Australia is the provision of free hospitalisation in public institutions, co-existing with what is essentially full cost recovery in the private sector. What is perhaps most surprising is that the decline in private health insurance coverage has not taken place more rapidly. Private hospitals have been successful in competing with public hospitals for patients partly because, as Duckett and Jackson point out, they provide a method of avoiding the queues in public hospitals for a range of non-emergency services.

If the decline in private health insurance coverage continues, the pressure to erode one of the cornerstones of Medicare -- the provision of free services in public hospitals without a means test -- may become overwhelming for a Coalition Government if it succeeds in winning a third term. It is this aspect of Medicare that has the most potent influence in undermining the demand for private health insurance for a large majority of the population. A more evidence-based approach to private health insurance policymaking might have been derived from the results of a comprehensive enquiry into all aspects of the healthcare system as recommended by the Industry Commission.¹⁰

George R Palmer
Emeritus Professor of Health Services Management
Faculty of Medicine, University of New South Wales, Sydney, NSW

1. Palmer GR, Short SD. Health care and public policy: an Australian analysis. 3rd ed. Melbourne: Macmillan Education, 2000: 76-78.
2. Australian Institute of Health and Welfare. Australian hospital statistics, 1997-98. Canberra: AGPS, 1999.
3. Private Health Insurance Administrative Council. Industry statistics. Coverage of hospital insurance tables. Year ended 30 June. <www. phiac.org.au> (accessed 7 April 2000).
4. Industry Commission. Private Health Insurance. Canberra: AGPS, 28 February, 1997. (Report No. 57.)
5. Duckett SJ, Jackson T. The new health insurance rebate: an inefficient way of assisting public hospitals. Med J Aust 2000; 172: 439-442.
6. Commonwealth Department of Human Services and Health. National Costing Study. National cost weights project: Final report. Canberra: DHSH, November, 1994.
7. Palmer GR, Hindle D, Lapsley H. Health policy and technical issues in the use of casemix to demonstrate potential savings in private hospitals. Healthcover 1995; 5: 7-11.
8. Commonwealth Department of Health and Family Services. Report on the national hospital cost data collection 1996-97. Canberra: DHFS, 1998.
9. Australian Institute of Health and Welfare. Australian hospital statistics, 1996-97. Canberra: AGPS, 1998.
10. Palmer GR. Evidence-based health policy-making, hospital funding and health insurance. Med J Aust 2000; 172: 130-133.

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