The inherent difficulty in competing with free goods. 

By Lyle Dunne 

The Howard government’s private health insurance rebate was the subject of near-universal condemnation by health economists, and not just the usual suspects.

It’s hard to isolate the effect of the rebate because of other, better-considered policies introduced at the same time for the same end. For example, the tentative move toward a degree of risk-rating via linking premiums to age made health insurance a bit more like life insurance (though still not very much like insurance), creating an incentive for people to approach it as a “whole of life” decision rather than something to take up at an age when it was likely to be cost-effective.

The consensus view, however, is that the “30% rebate” did little if anything to arrest the decline in take-up rates.

Nevertheless the rebate now forms part of the architecture of Australian healthcare financing.

The rebate is not in essence “middle-class welfare”, but a subsidy to the perennially-struggling private health insurance industry.

The industry struggles largely because of the inherent difficulty in competing with a free good. Governments subsidise it, as they subsidise private education, not just because they believe in competition and choice (though some do), but because it’s a means of drawing private money in to fund the system.  Without the subsidy, governments would have to increase the capacity of the public system, at prohibitive cost – or ration services further through queues, arbitrary rules or allowing services to degenerate to the point where only the desperate would use them.

It’s not often there are rewards for providing bad services (unless one counts reality TV), but governments in Australia who run down elective-surgery provision can at least take comfort from the knowledge that they’re propping up the private sector. Unfortunately, they tend to be those governments for whom this offers least comfort.

(This all sounds very untidy. But there’s an argument that the resultant arrangement is like Churchillian democracy: the worst possible system – except for all the others.)

I suspect it was recognition of this that led the ALP to make the undertakings to maintain the rebate in its then-current form — undertakings it has just repudiated in the Parliament by imposing a means test, in a one-vote victory after a marathon debate.

There is an argument that our private health insurance system is like Churchillian democracy: the worst possible system — except for all the others,

I’m sure breaking promises gets easier every time, which may be why it seems habit-forming.

Clearly this is a short-term cost-saving measure, which will create the need to subsidise the system in some other way if it is to survive. The alternative is a vicious circle of falling membership, premium increases and “adverse selection”: the healthiest policy-holders withdrawing, leading to increased costs per member and still-higher premiums.

The government is seeking to offset this by increasing the Medicare rebate surcharge on high income earners who don’t taking out health insurance: what some opposition members in the debate called a “stick and stick approach”. (Sorry dear, carrots are off.)

In other words, higher-income earners have a choice of paying more for health insurance, or paying more tax. All in the name of the hunting of the surplus snark.

So in summary, we’re retrospectively funding the stimulus package in time-honoured labor fashion: by soaking the rich. Which is of course guaranteed to produce the opposite of stimulus. It seems all the economic lessons of the Hawke and Keating years have been unlearned – or simply abandoned – and we’re looking for short-term quick-fix damage control, in anticipation of an electoral rout.

One can only hope they’re right on the last.