Unlike Australia, private health insurance in New Zealand is unregulated and, since the abolition of the tax deductibility of premiums in the late 1980s, does not receive any direct financial assistance from the government. It has also not been a topic of any significant public debate. However, the issue is of interest, first, because government policy towards private insurance industry in New Zealand contrasts sharply with that in Australia, and second, because the industry is currently lobbying for change based upon much the same arguments as those that were used to support the introduction of the Private Health Insurance Incentive Scheme in Australia.
In October 2004, the insurance industry published two reports within two days, both of which lobbied for direct government assistance to private insurance as a means of enhancing efficiency, equity and choice within the health sector [28
]. The first report was commissioned by the Southern Cross Medical Care Society, which provides health insurance to around two thirds of the people who have private health insurance cover in New Zealand. Written in collaboration with some Australians, the report claimed that the health insurance industry in New Zealand faces "serious decline" and that, without government assistance, health insurance coverage "may halve over the next 10 years" [[28
], p.i]. The proposed solution was a 30% rebate on insurance premiums akin to that in Australia. The authors argued that the Australian experience ".....shows that a rebate on health insurance premiums has boosted coverage to a healthy level, reduced pressure on the public health system, improved the fairness of the health system (by the government paying some health costs of both insured and uninsured people) and generally secured the future of the health insurance industry" [[28
The second report, published by the Health Funds Association of New Zealand (i.e. the body that represents the interests of the health insurance industry), claimed that "public health inflation is at record levels" [[29
], p.1] and that such rates of increase "will quickly become unsustainable" [[29
], p.13]. Based upon an estimated public health inflation factor of 8% per annum over the last 3 years, the report projected that public health expenditure would reach 63% of GDP by 2050! The report went on to suggest that costs could be contained if contestable funding was to be introduced into the DHB system. It proposed that people earning in excess of NZ$38,000 should be required to purchase their own health insurance, with the government refunding the amount of their tax that would otherwise have been used to purchase health services. Any contributions made by employers should be exempt from the fringe benefit tax. DHBs would then sell their services to those people who are privately insured at a price equal to the true cost of the service. The report claimed that such a system would encourage both DHBs and individuals (or their employers) to focus on value for money, thereby providing the necessary incentives to keep health inflation down.
Interpretation of the data which form the basis for the claims made in each of these reports is highly questionable. This comment applies both to the evidence presented to illustrate that there is a problem with current financing arrangements in New Zealand, as well as to the impact of the proposed solutions. Even the basic premise that private health insurance is in serious decline is not well supported. While the proportion of the population covered by private insurance has indeed declined from a peak of around 45% in the late 1980s [30
] it has remained fairly stable at around one third of the population over the past five years [28
]. And although the proportion of insured with comprehensive cover (as opposed to cover mainly for hospital services) has declined from 20% in 2000 to 14% in 2004 [28
], this could equally reflect improvements in access to publicly-funded primary health services as much as a response to increases in insurance premiums.
It is also difficult to accept that New Zealand should follow Australia in introducing a 30% tax rebate on premiums. In Australia, the rebate was one part of a package of subsidies and regulations. Separating out the precise effects of the rebate from the effects of the other components of the package is problematic and requires the adoption of a number of assumptions. Even so, there appears to be some consensus amongst analysts that, while the rebate does appear to have stimulated an increase in insurance coverage in the short term, the size of the effect may have been less than the government expected, and may not have been large enough to justify the expenditure [31
]. Moreover, recent figures suggest that health insurance coverage in Australia is now declining [33
It is even more difficult to justify a subsidy on the grounds that it will reduce pressure on the public health system. As Richardson recently pointed out in this journal, in Australia, changes in public and private bed numbers indicate that problems of access to the public health system are determined primarily by constraints on the supply side, rather than by an excess demand caused by an inability to afford private health insurance [34
]. Vaithianathan, too, has shown that the demand for public hospital beds is unlikely to decline because an insurance subsidy is most likely to increase insurance coverage of people who previously paid directly for the use of private hospital beds, rather than of people who currently use public hospitals [35
]. Even if a subsidy does actually encourage a shift from the public sector to the private sector, Frech III and Hopkins have suggested that, from a theoretical perspective, the optimal subsidy may actually be negative (i.e private health insurance should be taxed) [32
In the second report [29
], while the main justification for a greater role for private health insurance was escalating costs in the public sector, the meaning of the term "public health inflation" was unclear. In some instances [e.g. [29
], p.12], the term seems to apply to changes in public health expenditure, while in other cases it apparently refers to increases in public hospital costs adjusted for hospital throughput [[29
], p.9]. Neither of these are good indicators of cost increases across all of the services that are publicly funded, but either way, the estimated figure appears to have been simply extrapolated to the year 2050, thus producing an estimate of public health expenditure that is both excessive and, more importantly, newsworthy. Even if such a figure could be substantiated, there is little evidence from the international literature in support of the claim that contestable insurance funding is likely to assist in controlling costs. If anything, total health expenditure tends to be higher in insurance-funded systems than in systems that are predominantly funded by general taxation [36
]. Reasons for this higher expenditure include the difficulty of containing costs in a system where there are multiple purchasers, and where reimbursements are usually on a fee-for-service basis.
While the government did not respond publicly to the claims and proposals made by the health insurance industry in these two reports, it did take two decisive actions. First, it requested briefings from the Treasury on both of the reports immediately prior to their public release [38
]. Second, on the same day that the second report was published the Ministry of Health released its own report on the future funding of health services in New Zealand [40
]. One of the conclusions from this report – which had in fact been written for the Ministry two years earlier but which had not been released – was that "there should be no public subsidies of private health insurance in New Zealand" [[40
], p.xiv]. The main reasons behind this conclusion were (a) inequalities are likely to be exacerbated, because expenditure on private insurance increases with income; (b) control over health expenditure is more difficult under private insurance than under direct public funding; (c) greater value is likely to be achieved by increasing expenditure in the public sector because service provision tends to be more expensive and administration costs tend to be higher in the private sector; and (d) because demand for private insurance is relatively insensitive to price changes, the cost of a health insurance subsidy will be greater than the value of any health services that are stimulated by that subsidy.
In summary, while a rebate on private insurance may well improve the health of the private insurance industry, there appears to be little evidence that it would make any useful contribution towards improving the health of New Zealanders. More fundamentally, the current government would require any changes to financing arrangements to align with the principles which underpin the New Zealand Health Strategy. One of these principles is: "timely and equitable access for all New Zealanders to a comprehensive range of health and disability services, regardless of ability to pay" [[17
], p.vi]. As Richardson has noted, the egalitarian desire of equalising access to health care regardless of ability to pay, and reducing inequalities in health are "more easily achieved through a compulsory public health system" [[34
], p.5]. In contrast, contestable funding and subsidisation of private insurance are more appropriate for a health system aimed at maximising individual choice.