Authors: Dr Nathan Kettlewell1, Professor Yuting Zhang2
1University of Technology Sydney, Sydney, New South Wales, Australia
2University of Melbourne, Melbourne, Victoria, Australia
Research by economists Dr Nathan Kettlewell (University of Technology Sydney) and Professor Yuting Zhang (University of Melbourne) explores how high-income earners respond to financial incentives that encourage them to buy private hospital insurance.
About 45% of Australians have private hospital cover, despite being eligible for free treatment in public hospitals through Medicare. People often privately insure to avoid waiting times for elective procedures, like hip replacements or cataract surgery. They might also value the greater ability to choose a physician in the private sector, and differences in hospital amenities like room sizes. Another reason people privately insure is government rebates and penalties.
Kettlewell and Zhang study the Medicare Levy Surcharge (MLS) and premium rebate. The MLS is a tax penalty that kicks in for singles earning more than $93,000 and increases at $108,000 (tier 2) and $144,000 (tier 3) (income thresholds double for couples/families). People with income above these thresholds need to either purchase private hospital cover or pay a tax penalty of between 1% (tier 1) to 1.5% (tier 3) of their taxable income. This is a steep penalty – for most single people earning more than $100,000, the penalty will exceed the cheapest plan they could buy. At the same time, the MLS kicks in (and at each point that the penalty gets higher), the government rebate for private hospital insurance is also reduced (eventually to zero), which increases the insurance cost. These two policies work in opposite directions – the MLS provides a strong incentive to buy private insurance, while the rebate withdrawal acts against this, and may encourage people to switch to cheaper plans.
Using the tax records of a 10% random sample of the population, Kettlewell and Zhang make several interesting findings about the effect of the MLS and the rebate withdrawal. First, when the MLS kicks in, the probability of insuring only increases modestly from about 70% to 73% for singles, and about 90% to 91% for families. Second, there are many high-income earners who don’t insure even when it’s in their financial interest to do so. About 8% of eligible people pay the MLS rather than insuring. Third, there is no evidence that the rebate withdrawal leads to people purchasing cheaper plans. This is important, as ‘means testing’ of the rebate helps to reduce the overall cost to the government.
Kettlewell and Zhang conclude that since the MLS only affects a relatively small group of the population, most of whom are likely to insure regardless, its overall contribution to the demand for private hospital cover is small (less than 1 percent). Their results also support further tightening of government rebates, which could be reduced for high-income earners without necessarily decreasing the number of privately insured or their degree of coverage.