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Lifetime Fairness? Taxes, Subsidies, Age-Based Penalties, and the Price of Health Insurance in Australia

Author

Listed:
  • Connelly, Luke B.
  • Brown III, H. Shelton

Abstract

Australia has voluntary private health insurance (PHI) markets in which open enrolment and community rated premiums are mandated by government. Historically, adverse selection in these markets led to a substantial decline in coverage, giving voice to fears about the viability of PHI markets in the longer-run. In order to preserve community rating but improve the PHI pool, the Australian Government instituted a novel scheme of age-based penalties (ABPs) for individuals who join a PHI fund later in life. This paper computes the price of health insurance under the so-called Lifetime Cover (LC) scheme and shows that the LC scheme per se is not appropriately calibrated to prevent another adverse selection death spiral (Butler 2002). Based on our results, we recompute age-based penalties that would result in a fair price of PHI for all age groups. The premium multipliers we derive suggest a premium ratio of 10:1 for the oldest and youngest joiners. Our premium multiplier sequence is well-approximated by a linear ABP scheme that is approximately three times that of the present LC scheme for older joiners.

Suggested Citation

  • Connelly, Luke B. & Brown III, H. Shelton, 2008. "Lifetime Fairness? Taxes, Subsidies, Age-Based Penalties, and the Price of Health Insurance in Australia," MPRA Paper 14671, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:14671
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    References listed on IDEAS

    as
    1. 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, December.
    2. Mitchel Y. Abolafia (ed.), 2005. "Markets," Books, Edward Elgar Publishing, number 2788.
    3. Luke B Connelly & H Shelton Brown, 2006. "Lifetime Subsidies in Australian Private Health Insurance Markets with Community Rating," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 31(4), pages 705-719, October.
    4. Bradley Herring & Mark V. Pauly, 2006. "The Effect of State Community Rating Regulations on Premiums and Coverage in the Individual Health Insurance Market," NBER Working Papers 12504, National Bureau of Economic Research, Inc.
    5. Bradley Herring & Mark Pauly, 2003. "Incentive-Compatible Guaranteed Renewable Health Insurance," NBER Working Papers 9888, National Bureau of Economic Research, Inc.
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    Keywords

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    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I1 - Health, Education, and Welfare - - Health

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