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How Do Government Incentive Policies Affect the Demand for Private Health Insurance in Australia?


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Around 45% of Australians have private hospital insurance, despite access to free public hospital care through Medicare. One reason so many Australians are privately insured is because the government encourages them to be through rebates (carrots) and penalties for the uninsured (sticks).

In two new research papers, we set out to learn just how effective these ‘carrots’ and ‘sticks’ are.

Study 1 – lifetime health cover loading

Our first paper looked at lifetime health cover loading (LHC), implemented by the Australian government in 2000. This ‘stick’ applies to people who purchase private hospital insurance (PHI) after the 1 July following their 31st birthday. These buyers face a 2% penalty loading for each year after that date they are uninsured, up to a maximum penalty of 70%.

For example, if the premium for a basic policy is $200 per month, someone who first buys private hospital insurance when he turns 40 needs to pay $40 extra (= $200*2%*10 years since 31 extra), so the total premium would be $240 per month. The loading is only removed after a continuous period of being insured for 10 years.

Using Australian Taxation Office (ATO) data covering a random 10% sample of the tax-filing population, we looked at whether this incentive encourages people to enter the private insurance market just before the penalty kicks in, and whether the policy has become more or less effective over time. We focused on people born just before and after 1 July, who have a one-year difference in when the LHC penalty kicks in. The cut-off date creates a discontinuity in the incentive to insure by age.

We found that the policy has been effective at getting people to insure right before they turned 31, but has no effects for other ages. Moreover, its effect among those turning 31 changed a lot over time. In 2001, the first year after LHC was introduced, demand for PHI increased by 9% at age 31. But by the mid-2000s, the effect was close to zero. Then, after 2007-08, it went up again, increasing demand by about 4-6% in most years.

What happened after 2007-08? We suspect the policy became more effective because the Department of Health started mailing letters to people approaching their 31st birthday after that year. Simple nudges like this have been shown to alter behaviour in a lot of contexts.

Study 2 – private health insurance rebate and the Medicare levy surcharge

Our second study looked at the joint effect of lowering private health insurance rebates, and simultaneously introducing a tax penalty, the Medicare levy surcharge (MLS), when one’s income rises above a certain level.

The table below summarises how these policies worked in 2017-18, the financial year we studied (the values are similar today). There are different levels of rebates available depending on one’s age, income, and family status. In 2017-18, for example, a single person under 65 earning less than $90,000 a year would receive a government rebate worth of 26% of premiums towards the cost of their insurance. A single person earning up to $140,000 would receive some level of rebate. The thresholds double for couples and families.

At the same income thresholds where the rebate becomes less generous, people also face the MLS. This is a tax penalty of between 1-1.5% of taxable income that can be avoided by purchasing private hospital insurance.

Table: Rates and thresholds of rebates and Medicare Levy Surcharge

Threshold Base tier Tier 1 Tier 2 Tier 3
Single threshold $90,000 or less $90,000 – $105,000 $105,000 – $140,000 More than $140,000
Family threshold $180,000 or less $180,000 – $210,000 $210,000 -$280,000 More than $280,000
Medicare Levy Surcharge 0% 1% 1.25% 1.50%
Under 65 25.93% 17.29% 8.64% Not eligible
65-69 30.26% 21.61% 12.97% Not eligible
70 and over 34.58% 25.93% 17.29% Not eligible


We used the same 10% ATO sample of tax-filers as study 1, and examined how demand for private hospital insurance changes precisely at the thresholds where the rebate becomes smaller and the MLS becomes bigger (including where it first kicks in). Although the rebate reduction and MLS should affect the decision to buy private insurance in opposite directions, we expected the MLS to dominate, as this is a much larger cost than the reduction in rebate.

For instance, a single person under 65 earning $90,001 and paying $1,500 per year on private insurance would have to pay about $130 extra in premiums compared to those earning below $90,000 due to the rebate reduction. But if they dropped their cover and paid the MLS instead, they would have to pay an extra $900 in additional tax

Indeed, this is exactly what we found – the MLS as a stick pushes up the demand. At the single threshold where the MLS first kicks in, demand for private insurance increased from about 70 to 73%, and at the family threshold from about 90 to 91%. But there was no further increase at the other thresholds, partially because at those income levels the MLS penalty is much higher than the cost of buying insurance, so if you don’t already have insurance, you must be very resistant to incentives.

An interesting difference between the rebate and the MLS is that the value of the rebate is tied to how much you spend on insurance – the more expensive the plan you choose, the more rebates/discounts you get in absolute terms. We might then expect that as the rebate becomes less generous, people downgrade to cheaper cover.

For this reason, we also looked at changes in premium spending at each threshold. We found no evidence of downgrading cover – if anything, the jump in premium spending at the tier 1 threshold exceeded the jump in take-up in relative terms, and at other thresholds there was no change in spending.

Take aways and policy implications

Together, our two papers demonstrate that the carrots and sticks work, but don’t contribute a huge amount to overall demand for private hospital insurance.

In the case of LHC, this is because the effect is relatively small, and we further expect this is largely just people purchasing a little earlier in life than they would have otherwise. What this means is that the policy doesn’t necessarily grow the pool of people to ever buy insurance, or greatly lower the average age.

In the case of the MLS, the policy only affects a small part of the population (about 16% of tax-filers in 2017-18) and high-income earners already insure at high rates, even without this stick.

What should the future of these policies be then? We think one immediate action could be to target rebates to low-income earners by lowering eligible thresholds, because people earning above $90,000 ($180,000 in couples/families) seem to be highly unresponsive to price. This would create a much-needed saving to the budget, or free up revenue that could be directed towards primary care and preventive care which are considered high-value healthcare.

We caution against any expansion of existing carrot and stick incentives. Some recent research suggests expanding private coverage is not an effective way of reducing waiting times in public hospitals, which brings into question the case for government intervention in this market. More research is therefore needed on whether the cost of these incentives to taxpayers and consumers are justified, taking into account implications for both the equity and quality of healthcare, and fiscal sustainability.

The post How Do Government Incentive Policies Affect the Demand for Private Health Insurance in Australia? appeared first on Austaxpolicy: The Tax and Transfer Policy Blog.


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