Risk equalisation and voluntary health insurance markets: The case of Australia

In April 2007, Australia introduced a risk equalisation (RE) scheme (de facto a claims equalisation scheme), which replaced an extant reinsurance scheme that had operated since 1976. This scheme is one of a number of policy measures that the Australian Government has instituted to support the voluntary private health insurance (PHI) market which is subject to mandatory community rating and the attendant problem of selection. The latter has been a persistent concern in the Australian PHI market since the introduction of Australia's universal, compulsory national health insurance scheme Medicare. This paper presents a brief overview of Australia's health care financing arrangements and, in particular, focuses on the history, structure and functioning of the RE scheme. It provides an exposition of the operation of the scheme and empirical evidence of the scheme's effects in its first full year of operation, 2007-08. The paper makes three contributions: first, it provides the only detailed overview of the functioning of the Australian RE scheme published to date; second, it presents the first empirical measures of the scheme's operation at the level of the 38 individual PHI funds; and third, it describes the systematic differences in the scheme's operation with respect to large and small funds. Thus, this paper provides a number of insights into the operation and outcomes of the Australian RE scheme following its first year of operation.