Health insurance: a question of value

Private health insurance represents an increasingly disturbing paradox in Australia. While it now finances the majority of surgical procedures, and private hospital admissions for those with mental illness, there is a greater number of uninsured people for whom such services are only available at great cost or after long delays.

The multi-billion dollar subsidies for health insurance which were supposed to ease pressure on public hospitals have failed to stem longer waiting times for elective surgery in public hospitals or to meet the public need for services for many chronic conditions including mental illness.

The notion that private health insurance would drive efficiency and add other value to our system turns out to be a hollow promise for many consumers.

The articles in this edition of Health Voices show there are profound questions about the value and equity of private insurance in Australia’s mixed public-private health system.

At a time when the expense and worth of health insurance represents a huge issue for consumers, the 20 authors in this Health Voices provide a range of insights on this subject rarely seen in one publication.

Significantly, our authors include Jeff Harmer, the person at the centre of efforts to improve health insurance.

Dr Harmer chairs the Private Health Ministerial Advisory Committee which is inquiring into health insurance. His views echo the comments of many others on this issue: health insurance is complex, confusing and increasingly too costly for many people.

The Committee is still to report, but Dr Harmer’s message is sobering. The Committee, Dr Harmer writes, recognises that the Government has limited options for regulation in this area. Despite this, he says the Committee is keen to look at opportunities for industry participants – doctors, insurers and hospitals – to work together to provide better value for consumers.

Hope that a new era of unity in the interests of consumers may emerge among doctors, funds and hospitals in the private sector seems to be the best, if ambitious, hope for the future of health insurance, judging by the tenor of most articles for this edition.

Many of the authors representing consumers and analysts, challenge the value of health cover in terms of both financial return and certainty of outcome and even in terms of its economic and social worth to Australia.

The supporters of private health on the other hand point to its role in reducing demand for public hospital care particularly for elective surgery, and of maintaining the sustainability of Australia’s health system.

The Consumers Health Forum recently opened an online checklist and survey to coincide with the 1 April premium changes. As our policy officer, Rebecca Randall, found in analysing responses, consumers who responded are highly sceptical of the value of private health insurance. They are aware of insurers’ large profit margins and cite this as a reason why they feel that they are paying unnecessarily high premiums. Despite the tax incentives to have private health insurance, a number of participants said that they would prefer to pay higher taxes and contribute to the public health system in this way rather than paying for a product they feel was not of value to them or to others.

The Private Health Insurance Ombudsman Richard Glenn list three common reasons why people take out health insurance: to ensure private hospital care and choice of doctors; to have cover for services not covered by Medicare like allied health services; and because of the various surcharges and incentives to take out private cover.

Arguments for and against the value of Australia’s private health insurance (PHI) system are many and varied but often negative.

To present the issues in some order, I will reflect on authors’ contributions by grouping them according to their communities of interest: consumers, health funds/providers and analysts.


For consumer leaders like Christine Walker of the Chronic Illness Alliance, whose members depend heavily on the health system “The benefits of PHI are limited for people with chronic illnesses, who often have low incomes and face out-of-pocket costs.” She says the effect of the health insurance arrangements, instead of reducing pressure on the public system “is to produce greater inequality in the health system”. Given the continued rise in premiums, the investment by Government in the rebate “will become largely wasted”.

Lesley Brydon of Painaustralia says that while health insurance may cover expensive surgery, there is a real gap when it comes to covering evidence-based best practice treatment for people with chronic conditions needing therapy from allied health professionals. She says there are so many exclusions and inadequate PHI benefits which overlook the value of prevention and allied health services that these costs to patients often far outweigh the benefits of the tax rebate.

Arthritis Australia’s Ainslie Cahill says: “In particular, the government’s private health insurance rebate, which is evidently not achieving its objective of making health insurance more affordable, needs to be urgently reviewed.”

On that aspect, Matt Levey from CHOICE describes PHI as “a very strange market; one where some customers are grudgingly pushed into products they don’t want let alone understand, subsidised by the entire community through rebates. Insurance providers regularly point out the amount of regulation that constrains their industry. But when demand for your product is guaranteed through a combination of legislated carrots and sticks, it is fair to ask what the community should expect in return.”

A group which says the current discriminatory cover for psychiatric care is well below what the community should expect, fears further erosion in health fund benefits. Janne McMahon of the Private Mental Health Consumer Carer Network says suggestions that the present mandatory cover for psychiatric care might be restricted to high cost policies would “dramatically reduce patient access to vital psychiatric services”.

Older Australians, who are more likely to hold health insurance because of their vulnerability and concern about public hospital waiting lists, are another group who are worried by the higher premiums and the out-of-pocket costs they face if they do have private care. Susan McGrath of COTA says that given the enormous public investment, PHI needs to deliver better health outcomes for the nation overall and for older health consumers.

David Butt of the National Rural Health Alliance says that given the meagre private health services in the country and rising cost of private insurance, many rural people must be considering whether to keep their insurance. “Without a drive to innovate in private health service delivery outside the major cities, we will see increasingly smaller levels of uptake of insurance.” Without change, regional and remote Australia will rely increasingly on Federal and State governments to address the ever widening level of disadvantage in access to health services and its impact on health outcomes.

Health Funds/Providers

Rachel David, who heads Private Healthcare Australia, representing health funds, says however that surveys show over 80 per cent of the Australians with private health insurance value the product and want to keep it. PHI pays for nearly two thirds of essential non-emergency surgery in Australia, 90 per cent of day admissions for mental health care, 70 per cent of joint replacements and 60 per cent of chemotherapy. Ms David says there is scope to address the sustainability of healthcare through sensible policy correction. The PHI reform process must deliver real change to improve affordability and value of private cover. “There’s no alternative.”

Matthew Koce of the NFP community sector funds organisation, says that if affordability pressure is to be relieved, “consumers need to be empowered to make better informed choices…Giving consumers access to the information they need to take a more active role in their own healthcare will result in greater competition and better outcomes, while also placing downward pressure on medical costs”.

Health fund policies come under severe fire from Michael Roff of the Australian Private Hospitals Association. “Few consumer products are as complicated and difficult for the purchaser to understand as a private health insurance policy.” He writes that it is often private hospital staff who are left in the unfortunate position of having to explain to prospective patients that their policy does not cover the surgery and they must choose between either high out of pocket costs or joining the public hospital waiting list.

Dr Lawrie Malisano from the Royal Australasian College of Surgeons warns the long term viability of private health in Australia will decline if insurance premiums continue to rise above CPI and wages growth. His College has criticised the “extortionate” fees that bear little relationship to performance charged by some surgeons. The College supports measures to reduce complexity and improve consumer information about health insurance coverage. A consistent approach to the use of rigorous quality indicators for performance of surgeons would also be of significant benefit, Dr Malisano said.

Alison Verhoeven of the Australian Healthcare and Hospitals Association details the complex funding arrangements between public and private hospitals. To criticism of privately insured patients using public hospitals, she says the cost to the health funds is less than what they spend on overall administration. She urges caution over any moves to limit private patients in public hospitals given impact on funding and difficulties retaining clinicians in public hospitals.

The Royal Australian and NZ College of Psychiatrists questions whether it is “morally justifiable” for insurance companies not to cover such a large percentage of the burden of disease represented by those with mental illness. College President, Professor Malcolm Hopwood says that despite the fact that mental illness represents 24 per cent of the burden of disease if substance use disorders are included, fewer than half of all major health fund policies cover the cost of admission into a private psychiatric facility. The College is advocating that the Government consider health funds’ psychiatric cover in the private health review.

Dentists also argue that health funds deal unfairly with them and their patients. Dr Hugo Sachs, President of the Australian Dental Association, says consumers have paid out $6.2 billion more in general or extras policy premiums than what they received back from health funds over the past five financial years. Dr Sachs says the health funds are also using discriminatory rebate regimes to make their contracted dentists appear more attractive than dentists who are not contracted to them, placing the latters’ practices in jeopardy.

Health fund sweetheart arrangements with health practitioners are also a concern for Allied Health Professions Australia’s executive director Lin Oke. She says health providers are increasingly faced with the choice of securing their customer base by entering into preferred provider agreements with insurers or losing customers to preferred providers who attract higher rebates. “Those with preferred provider agreements are under significant pressure to keep costs low which conflicts with their ability to provide high quality care.”


Private health insurance is unfair, wasteful and a grave threat to Medicare. That’s the verdict of distinguished former business leader and public servant, John Menadue. Rebates and tax incentives pump an estimated $11 billion every year into health insurance, bolstering an inefficient and unfair system that is weakening Medicare’s power to control costs. Mr Menadue says the former Health Minister, Sussan Ley, had herself said “Australians are paying too much for health insurance that does not deliver them much value.” The Government had continued to support huge subsidies for health funds which did not have the market power to restrain costs, resulting in premiums soaring at more than double the inflation rate throughout this century, Mr Menadue says.

Health financing analyst Ian McAuley, writes there are strong efficiency arguments for ending Government subsidies of health insurance. The savings could be reinvested in Medicare which is significantly more cost effective than health funds whose administrative costs are significantly higher. If tax rises were needed to boost public hospitals, the people who dropped health insurance would make very significant savings by not having to pay, the “high cost privatised tax” of PHI premiums.

Without significant change, the omens for health insurance are discouraging. Health economist Terence Cheng says that if the current trend in downgrading of policies by many people continues, it may potentially worsen the problem of increasing premium costs, as healthier consumers (i.e younger) scale back their insurance, resulting in a remaining pool of ‘less healthy’ consumers with greater health care needs.

For the Consumers Health Forum that provides a disturbing signal for the likely future of health insurance: an unhealthy prospect for those who need care most.


CHF is represented on PHMAC through our Chair, Tony Lawson. Tony believes that while there are many challenges for consumers in understanding and managing private health insurance (PHI) policies, he is encouraged by the commitment shown by the Federal Government in attempting to transform PHI. Tony also points to the high level of co-operation and willingness of all the key stakeholders to achieve much needed and overdue change to PHI. On behalf of CHF, Tony has been advocating for changes which will bring significant improvements to PHI for the benefit of consumers. The key issues Tony has been pursuing cover a range of matters including;

  • Greater simplicity in the range of policies
  • More easily understood information, common language and common definitions
  • Improved communication to consumers by insurers on the coverage they have as they reach particular life milestones and as their needs change
  • Less out of pocket expenses
  • Reduction in exclusions
  • Greater coverage of mental health
  • Improved coverage for the rural and remote population

And most importantly of all, greater value for consumers.