Private Health Insurance Incentives in Australia: In Search of Cost-Effective Adjustments

The appropriate structure, scope and cost of government incentives in the private health insurance (PHI) market is a matter of ongoing debate.

In order to inform policy decisions we designed a two-stage study to (1) model the uptake of PHI covering hospital treatment in Australia, and (2) identify the costs of various policy scenarios to the government.

Using a microsimulation with a cost-benefit component, we modelled the insurance decisions made by individuals who collectively represented the Australian insurance population in the financial year 2014-15.

We found that the mean willingness to pay (WTP) for PHI ranged from A$446 to A$1237 per year depending on age and income. Our policy scenarios showed a considerable range of impacts on the government budget (from A$4 billion savings to A$6 billion expense) and PHI uptake (from 3.4 million fewer to 2.5 million more individuals insured), with cost-effectiveness ranging from -A$305 to A$22,624 per additional person insured, relative to the status quo.

Based on the scenario results we recommend policy adjustments that either increase the PHI uptake at a small per-person cost to the public budget or substantially reduce government subsidisation of PHI at a relatively small loss in terms of persons insured.