Private health insurance fails to deliver

From Leith van Onselen at Macrobusiness:

The high financial overhead of private insurance in Australia means that only 84 cents in every dollar collected by private insurers is returned as benefits, with the rest going to administrative costs and corporate profits. By contrast, Medicare returns 94 cents in the dollar, even after the cost of tax collection is taken into account. In the United States, which is highly dependent on private insurance, only 69 cents in the dollar are returned as payment for health services.

More importantly, competing private insurers have less ability to control prices demanded by powerful service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals simply choose to do business with another insurer.

By contrast a single national insurer has the market power to push down costs and improve utilisation. The below chart of health costs across 18 OECD countries highlights this point: single national insurers provide cheaper (and often better) health care than systems heavily reliant on private health insurance:

This is an argument for abandoning private health insurance, not private health care. Experience of Italy’s Lombardy region suggests a level-playing field, with open competition between public and private health care providers, delivers superior results. From Margherita Stancati at WSJ online:

Like other European countries, Italy offers universal health-care coverage backed by the state. Italians can go to a public hospital, for example, without involving an insurance company. The patients are charged a small co-pay, but most of the bill is paid by the government. As a result, the great majority of Italians don’t bother to buy private health insurance unless they want to seek treatment from private doctors or hospitals, which are relatively few.

Offering guaranteed reimbursements to public hospitals, though, took away the hospitals’ incentive to improve service or rein in costs. Inefficiencies were rampant as a result, and the quality of Italy’s public health care suffered for years. Months-long waiting lists became the norm for nonemergency procedures—even heart surgery—in most of the country.

Big changes came in 1997, when Italy’s national government decentralized the country’s health-care system, giving the regions control over the public money that goes to hospitals within their own borders…..

In much of the country, regions have continued to use the standards of care and reimbursement rates recommended by Rome. Some also give preferential treatment to public hospitals, making it more difficult for private hospitals to qualify for public funds.

Lombardy, by contrast, has increased its quality standards, set its own reimbursement rates and, most important, put public and private hospitals on an equal footing by making each equally eligible for public funds. If a hospital meets the quality standards and charges the accepted reimbursement rate, it qualifies. Patients are free to choose between state-run and publicly funded private hospitals at no extra cost. Their co-pay is the same in either case. As a result, public and many private hospitals in Lombardy compete directly for patients and funds.

…..Around 30% of hospital care in Lombardy is private now—more than anywhere else in Italy. And service in both the private and public sector has improved.

State hospitals have improved their service levels while private hospitals have lowered costs in response to the increased competition. A win for all …..except private health insurers.

4 thoughts on “Private health insurance fails to deliver

  1. Craig Offenhauser says:

    I am open minded on this issue. However, I would like more information on Leith van Onselen at Macrobusiness to see if he and his company are independent analysts or bias on some political basis. In general around the world the basic opinion, from talking to ordinary people, is that public health care is inefficient, slow and substandard. This is my general observation from talking to people. Lombardy is very interesting. As my brother-in-law is from northern Italy, I can safely say his opinion is stay away from public health systems.

  2. Jay.T says:

    Not to mention price forecasting…and…funds increasing premiums just after a pay rise !

  3. Vic Russo says:

    It sounds like Italy has broken the code on health care and improved national healthcare significantly. Although I am skeptical based on my observations. In the remainder of the world, national healthcare is a disaster. The Fraser Institute in Canada has studied the Canadian system and found wait time up to 39 weeks in some provinces and some specialties. In the US, most private doctors will no longer take Medicaid patients (low income) enrolled in the government program because the reimbursement rates are so low. The VA system that serves military men and women has killed thousands of people who were in the process of waiting for appointments. In England, a friend in the Royal Navy tells me that if you can afford it, you have private insurance because the national health program is so bad. As for quality, when the rich and powerful get sick, nobody goes to a country with national healthcare. The problem of private healthcare is access not quality. And the big reason it is so poor is that government is involved. A true market based system is the only hope for the future.

    • ColinTwiggs says:

      I don’t believe that market forces are all that is need to optimize health outcomes. If we take the example of health insurance, there is a correlation between private health insurance and increased health costs. Not exactly proof, but certainly warranting further investigation.

      If we examine how market forces affect big drug companies, profits are maximized if the company develops drugs that treat on-going symptoms of a disease rather than drugs that cure the disease. Research also assiduously avoids treatments that cannot be patented. The goal is to maximize profits, not health outcomes. And that is achieved by establishing a patent, not encouraging competition.

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