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Parallel Private Health Insurance in Australia: A Cautionary Tale and Lessons for Canada

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  • Jeremiah Hurley

    ()
    (Department of Economics, Centre for Health Economics and Policy Analysis, McMaster University)

  • Rhema Vaithianathana

    (Economics Program, Research School of Social Sciences, Australian National University)

  • Thomas F. Crossley

    (Department of Economics, McMaster University, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University, Canberra)

  • Deborah Cobb-Clark

    (Centre for Economic Policy Research, Research School of Social Sciences, Australian National University, Canberra)

Abstract

Canada’s restrictions on the role of private health insurance for publicly insured physician and hospital services are unique among countries with universal, publicly funded health care systems. Pressure is mounting in Canada, however, to loosen these restrictions and create a parallel system of private finance. Advocates argue that creation of a parallel system of private finance will ensure the sustainability of the public system (by reducing public cost pressures), improve access to the public system (e.g., by reducing wait times), and improve quality in the public system (through competition). Opponents of parallel private finance argue that it will create “two-tiered” medicine, increase costs, compromise equity and reduce quality and access to publicly financed health care as those with the financial means (and often the strongest voice) exit to private insurance. Australia provides a particularly promising case study for Canada regarding the dynamics of parallel systems of public and private finance. This paper examines Australia's experience with parallel finance for inpatient hospital services to provide insight regarding: (a) the effectiveness of a parallel system of private finance in reducing costs and wait times in the public system; (b) risk selection between the parallel public and private insurance sectors; (c) the financial redistribution associated with the introduction and maintenance of a parallel system of finance; and (d) the dynamics of the broader political economy associated with parallel systems of finance. Australia's experience provides a number of lessons for Canada, including: (1) the potential for cost savings through introduction or expansion of a parallel private sector is very limited; (2) the introduction or expansion of a parallel private finance is unlikely to reduce wait times in the publicly financed system; (3) there is no simple way to regulate private insurers to pursue public objectives; (4) it is impossible to create an independent, isolated parallel system of private finance is false -- interactions between the public and private insurance sectors are complex and unavoidable; (5) quality plays a key role in driving the dynamics between the public and privately financed sectors; and (6) it is essential to articulate clear policy objectives for health care financing and to design public and private roles consistent with these objectives. Our overall conclusion is that the Australian experience provides a cautionary tale regarding the risks, costs and benefits of a parallel private system of health care finance.

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Bibliographic Info

Paper provided by Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada in its series Centre for Health Economics and Policy Analysis Working Paper Series with number 2001-12.

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Length: 45 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:hpa:wpaper:200112

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  1. David M. Cutler & Richard J. Zeckhauser, 1999. "The Anatomy of Health Insurance," NBER Working Papers 7176, National Bureau of Economic Research, Inc.
  2. Amir Shmueli, 2001. "The effect of health on acute care supplemental insurance ownership: an empirical analysis," Health Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 341-350.
  3. Jonathan Gruber, 2000. "Tax Subsidies for Health Insurance: Evaluating the Costs and Benefits," NBER Working Papers 7553, National Bureau of Economic Research, Inc.
  4. Propper, Carol, 2000. "The demand for private health care in the UK," Journal of Health Economics, Elsevier, vol. 19(6), pages 855-876, November.
  5. Jeremiah Hurley, 2001. "Ethics, Economics, and Public Financing of Health Care," Centre for Health Economics and Policy Analysis Working Paper Series 2001-07, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada.
  6. Chiu, W. Henry, 1997. "Health insurance and the welfare of health care consumers," Journal of Public Economics, Elsevier, vol. 64(1), pages 125-133, April.
  7. Carol Propper & Alan Maynard, 1989. "The market for private health care and the demand for private insurance in Britain," Working Papers 053chedp, Centre for Health Economics, University of York.
  8. Jack, William, 1998. "Intergenerational Risk Sharing and Health Insurance Financing," The Economic Record, The Economic Society of Australia, vol. 74(225), pages 153-61, June.
  9. Besley, Timothy & Hall, John & Preston, Ian, 1999. "The demand for private health insurance: do waiting lists matter?," Journal of Public Economics, Elsevier, vol. 72(2), pages 155-181, May.
  10. Besley, T. & Coate, S., 1989. "Public Provision Of Private Goods And The Redistribution Of Income," Papers 36, Princeton, Woodrow Wilson School - Discussion Paper.
  11. Rhema Vaithianathan, 2001. "An Economic Analysis of the Private Health Insurance Incentive Act (1998)," CEPR Discussion Papers 427, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  12. Vaithianathan, Rhema, 2002. "Will Subsidising Private Health Insurance Help the Public Health System?," The Economic Record, The Economic Society of Australia, vol. 78(242), pages 277-83, September.
  13. Jane Hall & Richard De Abreu Lourenco & Rosalie Viney, 1999. "Carrots and sticks-the fall and fall of private health insurance in Australia," Health Economics, John Wiley & Sons, Ltd., vol. 8(8), pages 653-660.
  14. Evans, R.G., 2000. "Financing Health Care: Taxation and the Alternatives," Centre for Health Services and Policy Research 2000:15d, University of British Columbia - Centre for Health Services and Policy Research..
  15. Ettner, Susan L., 1997. "Adverse selection and the purchase of Medigap insurance by the elderly," Journal of Health Economics, Elsevier, vol. 16(5), pages 543-562, October.
  16. Mark Stabile, 2001. "Private insurance subsidies and public health care markets: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 921-942, November.
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Cited by:
  1. Joshua S. Gans & Stephen P. King, 2003. "Anti-Insurance: Analysing the Health Insurance System in Australia," Melbourne Institute Working Paper Series wp2003n10, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. Omar Paccagnella & Vincenzo Rebba & Guglielmo Weber, 2013. "VOLUNTARY PRIVATE HEALTH INSURANCE AMONG THE OVER 50s IN EUROPE," Health Economics, John Wiley & Sons, Ltd., vol. 22(3), pages 289-315, 03.

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