Effects of private health insurance on the substitution of public-private hospital utilisation in a mixed public-private system

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Abstract: Australia has a long history of using a mix of public and private sectors for healthcare financing and provision. Like many countries, Australia is facing increasing funding pressure on health and social care due to increased longevity and ageing of the population. Whether and to what extent the private sector can relieve the funding pressure facing the public system is a key policy question that has relevance for many countries.

All Australians are covered by Medicare, the publicly funded universal health insurance scheme. In addition, about 45% of Australians have private health insurance (PHI). Australian government subsidises PHI and private healthcare through a number of channels. The justification is that patients with PHI are more likely to use private rather than public hospital care, thus taking pressure off public hospitals. However, due to possible high out-of-pocket costs of private healthcare, patients with PHI may still opt to use public hospitals.

This study investigates the degree of substitution between private and public hospital use arising from an exogenous increase in PHI enrollment. We exploit the discontinuity in the Lifetime Health Cover (LHC) policy introduced in the year 2000. LHC imposes a premium loading of 2% per year for individuals who purchase PHI after they turn 31 years or older; it does not affect individuals aged 30 or younger.

We examine how PHI take-up affects patients’ choice for private or public hospitals and their length of stay (LOS). We allow the endogeneity of PHI decision by using the introduction of LHC as an instrumental variable (IV). We restrict our sample to individuals aged 30–32 and estimate two models: a linear model and a recursive system of two equations, with LHC as an IV.

Our results indicate that a one percentage point increase in PHI enrollment resulted in an increase in private admission of about 0.8 percentage points. This implies an elasticity of approximately 0.89. The increase in PHI enrollment is found to have no effect on LOS. Taken together, these effects suggest that the reduction in public hospital use is unlikely to be financially viable in comparison to the incentive payments designed to encourage the uptake on PHI.

Jongsay Yong

Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics, The University of Melbourne

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