Australian Politics and Policy - Senior, 2019a

Health policy
using indicators of risk, charge according to those indicators. Someone with a safe
driving record pays a lower premium than someone with a string of accidents and
offences. This practice is known as ‘risk rating’.
But risk rating for health insurance would be extremely difficult because for
many high-cost contingencies there are no clear risk indicators: debilitating
conditions such as cancer can occur without any prior indicators.
The other main problem with risk-rated health insurance is political unacceptability.
Private insurers would set prohibitively high premiums for older people,
and could refuse to cover people who have pre-existing chronic conditions, who
work in hazardous occupations or who have known risk factors. This would be
unacceptable by most people’s norms of social justice, remembering that the poor
are often those with highest health care needs.
Therefore, through political processes that override market mechanisms,
governments generally intervene to achieve what is known as ‘community rating’
for health insurance. That is a system where there is partial or complete equalisation
of insurance premiums across the community, or even forms of subsidies from
thosewithlowneedstothosewithhighneeds.
Government-financed ‘single-payer’ systems, such as those in the Nordic
countries, the UK and Canada, achieve community rating through their taxation
systems. In terms of administrative costs these are by far the most efficient systems,
because they tap into the scale economies and powers of compulsion of the taxation
system, and to the extent that their taxation systems are progressive they achieve an
equitabledistributionofhealthcarefinancing.
Achieving community rating through private insurance is more difficult.
Private insurers incur high administrative costs, including the costs of competing
for customers, and the regulations that are designed to achieve community rating
are complex, often leading to perverse incentives.
Public or private insurance
Itmayseemoddthatmanygovernmentsshouldchoosetouseprivateinsuranceto
do what the tax and public expenditure system, with all its controls and accountability,
can do more efficiently and equitably. When private health insurance is
compulsory (as in Japan and the Netherlands), or highly subsidised and incentivised
(asinAustralia),itcanbeconsideredasa‘privatisedtax’.Intermsoftheimpacton
people’s pockets, there is little difference between a tax collected by a body such as
the Australian Taxation Office and a compulsory or near-compulsory payment to
ahealthinsurer:acutinofficialtaxesmaybemorethanoffsetbyariseinprivate
health insurance premiums.
The explanation lies partially in the politics of public accounting. Governments
areoftendrivenbyasimplisticagendaofkeepingtaxes(officialtaxesasrevealed
in public budgets) low, and politically it is easier to blame private insurers for high
and rising premiums.
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