Separating the Effects of Tax Penalties and Subsidies on Private Health Insurance Demand

We provide the first separate estimates of the independent demand effects of Australia’s two main private health insurance (PHI) instruments: the Medicare Levy Surcharge (MLS), a tax penalty for uninsured higher-income individuals, and the PHI rebate, an income- and age-differentiated premium subsidy. Prior work estimated only bundled effects because the 2012 reform moved MLS and rebate thresholds jointly. We exploit the fact that rebate rates vary not just by income but, for given income, by age and over fiscal years, enabling separate GMM identification of MLS and rebate effects using linked administrative tax and Medicare data from the Person Level Integrated Data Asset (2010–2020). Our jointly estimated effects allow us, for the first time, to assess the relative importance of penalty and subsidy incentives on PHI demand and fiscal balance. We present counterfactual experiments assessing budget-neutral simultaneous changes to both instruments that raise population PHI coverage. Our estimates are directly applicable to recent proposals to equalise PHI rebate rates across age groups: equalising at the under-65 rate would reduce PHI take-up among older Australians modestly, with fiscal savings accruing primarily through reduced payments to infra-marginal existing policyholders.