In many countries with universal public health insurance, the government also provides subsidies for private insurance. Examples of this practice include Australia, Spain and the United Kingdom. Why do they do this? Is it a good idea?
There are arguments on both sides.
- Public subsidies are good. Public subsidies for private insurance can stimulate the private health care market, relieving both capacity and cost pressures off the public system, and improving access to and quality of public sector care.
- Public subsidies are bad. These subsidies divert resources from the public sector.
One metric to judge the benefit of these subsidies is whether the cost savings from reduced resource use in the public sector offsets the cost of these subsidies. In other words, are the subsidies self-financing. However, people who buy private insurance typically use more private and public health care. Is this due to the subsidy or are people who buy private insurance those who are either sicker, or who have strong preferences for more medical care?
A paper by Cheng (2014) uses data from the Household, Income and Labour Dynamics in Australia (HILDA) survey to answer the question. The paper finds that:
…individuals with private health insurance are more likely to seek hospital care as a private patient compared to those without private insurance. However, the intensity of hospital admissions and length of overnight stay do not differ between the insured and uninsured groups….reducing premium subsidies is expected to generate net cost savings to the public budget. To illustrate, a 10 percent reduction in rebates for instance is projected to lead to an increase in public expenditure that is either not statistically different from zero, or substantially smaller than the cost savings achieved through lower spending on premium subsidies.
Nevertheless, just because these subsidies are not cost savings, they may have value. Having a vibrant private sector is useful not only to increase the competition with the public. Thus, it may increase quality of care. Further, a vibrant private sector helps the public sector determine appropriate pricing for public services. Subsidies for private insurance may not be cost saving, but policymakers should think twice before abandoning them.
- Terence Chai Cheng. Measuring the effects of reducing subsidies for private insurance on public expenditure for health care. Journal of Health Economics. Volume 33, January 2014, Pages 159-179.