1. Introduction
The universal Australian public health care system, Medicare, was introduced in
1984. Subsequently the private health insurance coverage of the population fell
steadily, reaching its lowest level of just over thirty percent in 1998. Governments of
both political persuasions at the Commonwealth level, argued that if the decline of
private health insurance was to continue it would place unacceptable pressure on
public hospitals in the future. Therefore over the last decade the Commonwealth
introduced a suite of policies to create incentives for Australians to purchase private
health insurance with the aim of promoting choice and relieving pressure on the
public hospital system.
In 1997, the government introduced a private insurance tax rebate for low income
singles and families and a tax surcharge (one percent of taxable income) for those on
high incomes. The tax surcharge could be avoided by purchasing private health
insurance. In 1999, the income-tested rebate for low earners was replaced with a
constant thirty percent premium rebate, available to all regardless of income. In 2000,
the Lifetime Health Cover policy (LHC) reform introduced an age gradient into the
premium schedule. After July 15, 2000, all new private insurance enrollees aged over
30 pay a premium loading in future period of two percent for each year of age over 30
at entry. The loading is capped at 70 percent. Irrespective of age, people already
insured prior to the deadline who maintain their private insurance coverage are
exempt from the loading. The 2000 reform was accompanied by extensive publicly-
funded advertising under the theme “Run for Cover”. As a result of these insurance
incentives, private insurance coverage in Australia increased from 30.1 percent in
1998 to 43 percent in 2000, a jump of nearly 50 percent, most of which occurred just
prior to July 2000. There was also a change in the mix of the insured population with
large fall in the percentage aged over 65.
Three policies have remained relevant in 2000 and since:
1) the increased Medicare levy for ‘high income’ earners who did not purchase
private hospital cover;
2) the 30% rebate for the purchase of hospital cover; and
3) The Lifetime Health Cover policy.
Previous Australian research on private health insurance falls into three categories:
analysis of insurance demand prior to the reforms of the last decade; analyses of the
PHI incentives overall; and analyses of the incentives that focuses on heterogeneity
across individuals or families.
The factors influencing the demand for private insurance coverage prior to LHC have
been examined using the ABS National Health Surveys (NHS). Using the NHS
surveys undertaken between 1983 and 1995, Schofield et al (1997) examine PHI the
changing composition of PHI coverage of the population. They identify a decline
among middle income families compared with both upper and lower income groups
and a smaller decline among families headed by a person over 55 years old than
younger families. They also find that rising premiums had the greatest impact on low
income families. Using the 1989 and 1995 NHS data respectively, Savage and Wright
(2003) and Barrett and Conlon (2003) found a strong association between demand for
insurance and income. Savage and Wright also examined the association between