Does private health insurance provide value?

Taxpayer subsidies of private health premiums create the illusion of value. Could this money be better spent to improve access to dental care?

Ever stopped to consider the value of private health insurance? Many people do, and when they crunch the numbers, they realise that it might not provide them a good return on investment. On a purely financial basis, health funds collect $27.4 billion in premium revenue and pay out $22.6 billion in benefits – so only 83 cents in every dollar are returned to consumers to help fund health care. For extras cover (general treatment including dental), the premiums are $7.3 billion and only $6 billion (82%) is paid out as benefits (including nearly $3 billion for dental treatment).

Reports this week that private health insurance companies are seeking an increase in premiums of 5-6% next year will likely see more people question that value, particularly in the midst of a cost-of-living crisis.

If health funds are successful in lobbying for that level of increase, it will be the biggest jump in prices since 2016, taking us back to the days when it was routine for premiums to go up by more than 5% each year. In fact, the long-term trend is that private health insurance premiums have significantly outpaced wage growth over the past 25 years – on average around 2% higher. For every year from 2002 to 2021, premiums increased at a rate greater than wages, sometimes by as much as 4%. It is only in the past three years that wages have grown at a higher rate. A large increase next year will put further pressure on individuals and families who may reconsider keeping their private health insurance.

But the question of value is not just at an individual level, but also at a societal level. It's worth revisiting the history of private health insurance in the context of our social insurance (Medicare scheme) to better understand this aspect of value. Prior to the introduction of Medibank in the 1970s more than 70% of Australians held private health insurance, but this declined until Medibank was abolished in 1981, when there was a sharp uptake in private health insurance again. When Medicare was established a few years later, the proportion of Australians with private health insurance dropped to under 50%, and slowly declined to around 30% by 1999.

In other words, with an efficient, functional and well-funded Medicare system, many people decided that private health insurance provided them little value.

For various reasons, the government at the time wanted to reverse this trend, so they introduced a surcharge to penalise high income earners who did not have private health insurance. When this had limited effect, they introduced a rebate to subsidise premiums as an incentive to take out cover. Following the introduction of the 30% rebate and then the lifetime cover initiative, participation increased to around 45% - a figure that has remained relatively constant for the past 24 years.

Which brings us back to the value question? Those incentives to take out insurance – the 30% premium rebate – cost Australia taxpayers approximately $7.5 billion each year. In other words, taxpayers are subsidising consumers to take out private health insurance. Where does that support go? Perhaps not surprisingly, it flows disproportionately to those with higher incomes. There is a strong socioeconomic gradient for those with private health insurance – 79% of people in least disadvantaged quintile have private health cover, compared with only 35% in the most disadvantaged quintile.

How does this affect the value equation? Although only 82 cents in every dollar of extras premiums are returned via treatment rebates, this is not immediately obvious to consumers in light of the taxpayer subsidy – because consumers perceive that they are only paying around 70-75 cents in every dollar of those premiums (with the taxpayer funding the rest through the private health insurance rebate) – so a return of 82 cents creates the illusion value. Most people don’t consider the taxpayer funded support that props up their private health insurance.

What does that look like in dentistry? In 2022 Australians spent $9.6 billion on dental treatment provided in the private sector, with 30% of that coming from private health insurance rebates. But one quarter of the $2.9 billion health fund spending is the taxpayer subsidised private health insurance rebate. That $771 million dollars per year in taxpayer funded support for private dentistry is more than double what the Commonwealth spends on the Child Dental Benefits Schedule, and nearly as much as State and Territory governments spend on their public dental services for disadvantaged and vulnerable population groups.

One of the arguments against expanding Medicare to include more dental services is the proposed cost and the fact that some people do not think that taxpayers should be funding dental treatment. Yet those same critics are silent on the fact that around 8% of dental expenditure in the private sector (excluding the Child Dental Benefits Scheme) is already taxpayer funded.

Is it time to reconsider this private health subsidy and look at a more efficient use of that $771 million to directly support access to dental treatment through Medicare?