Nathan Kettlewell, Post-Doctoral Research Fellow in the Economics Discipline Group at the University of Technology Sydney and a research affiliate of the ARC Centre of Excellence for Children and Families over the Life Course and the Institute of Labor Economics (IZA).

Yuting Zhang, Professor of Health Economics at the Melbourne Institute: Applied Economic & Social Research in the Faculty of Business and Economics at the University of Melbourne.

New research shows that Lifetime Health Cover, which was introduced in 2000, has increased the uptake of private hospital insurance slightly, but due to its small effect, changes to the policy or abolishment will most likely not change the overall uptake or the consumer age distribution much.

In a recent working paper, Post-Doctoral Research Fellow Dr Nathan Kettlewell from the University of Technology Sydney, and Professor Yuting Zhang from the Melbourne Institute: Applied Economic & Social Research evaluated the effect of Lifetime Health Cover on the take-up of private hospital insurance. Their study results show that the effectiveness of the policy has changed over time – it initially had a relatively large effect, before waning in the mid-2000s and rebounding in 2007-08. Since 2007-08, the penalty has increased the probability of privately insuring by between 4-6%.

Despite having access to a free, high-quality public hospital system, 45% of Australians purchase private hospital insurance. One reason they do so is because the government encourages them with various ‘carrots’ and ‘sticks’. One of the main ‘sticks’ is Lifetime Health Cover Loading introduced in 2000. This policy forces insurers to increase premiums by 2% for every year people are without private hospital cover after their 31st birthday. The rationale for this is that it encourages younger, healthier people to insure, which lowers the cost of private hospital insurance for older people because insurers charge the same premium for everyone. The Australian Government is currently evaluating the effectiveness of Lifetime Health Cover and whether any changes in this policy could improve value for consumers.

In their study, Kettlewell and Zhang estimate the effect of Lifetime Health Cover on the take-up of private hospital insurance, especially its effects in recent years, which is unknown. Previous research has documented the large increase in private hospital insurance coverage that coincided with the introduction of Lifetime Health Cover in July 2000. However, there were other incentive policies introduced around the same time, and it was hard for researchers to disentangle these effects. Also, these earlier studies do not tell us about the ongoing effectiveness of the policy in recent years. Whether the Lifetime Health Cover policy encourages younger people to purchase insurance, and the magnitude of this effect, is an important question.

Kettlewell and Zhang use 1999-2018 data from the Australian Taxation Office 10% of all tax-filers and focus on how the probability of having private hospital insurance changes when the penalty kicks in at age 31. The main findings are in the Figure below, which shows the percentage change in the likelihood of having insurance for the tax years 1999-00 to 2017-18. Initially, the introduction of Lifetime Health cover increased the likelihood of being privately insured by around 10% but then dropped to 2 -3 % between 2003 and 2006, before rebounding in 2007-08. Although the effectiveness of Lifetime Health Cover remains over time with an average increase of being privately insured by 4-6%, their analyses suggest that any modest changes around this policy, (or abolishing Lifetime Health Cover) would unlikely make much difference in the age distribution of the insured, premiums or up-take rates. Instead, focusing on increasing the value of private insurance, especially services useful to the young, may be a better approach to encourage the young to enrol.

Source: authors’ calculation using 1999-2018 Alife data from the Australian Taxation Office. Y-axis indicates the estimated causal effect of Lifetime Health Cover loading on the take-up of private health insurance.

The results show that Lifetime Health Cover loading does encourage people to buy private hospital insurance, but is this effect large enough to meaningfully lower premiums? Kettlewell and Zhang argue that its effect on premiums is small. They base this on the assumption that people who purchase private hospital insurance to avoid the penalty would have bought insurance in the next 5-10 years anyway, which is consistent with rational, forward-looking behaviour. Because people in their 30s comprise a small fraction of the overall insurance pool, shifting their purchase dates forward by a few years is unlikely to have much effect on the market.

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