Do Financial Incentives for Supplementary Private Health Insurance Reduce Pressure on the Public System? Evidence from Australia

In many developed countries, budgetary pressures have made government turn to private insurance as a means of reducing pressure on their public health system. Between 1997 and 2000 the Australian government implemented a series of financial incentives for supplementary private health insurance, intending to increase insurance enrollment and reduce public health care costs. Using the Australian Bureau of Statistics 2001 National Health Survey, we examine the impact of increased private insurance coverage on use of both public and private hospital systems. In particular, we investigate how supplementary private insurance affects public and private admissions and lengths of stay for new enrollees and for those insured prior to the reforms. We use Propensity Score Matching to control for selection in the insurance decision and we estimate a two-part model for hospital admission and length of stay. Our results indicate that there is selection associated with insurance choice. We also find that hospital use measured by unconditional public and private lengths of stay, differ significantly depending on insurance duration. Those who enrolled in response to the incentives behave more like the uninsured than the long-term insured. Their use of the public hospital system is slightly lower than that of the uninsured, but this reduction is outweighed their higher use of the private system. While the insurance incentives substantially increased the proportion of the population with supplementary private insurance, the impact on the use of the public system appears to be quite modest. The cost of the subsidy to insurance premiums was over $AUD2 billion in 2001/02. Our results suggest that using financial incentives to take up private insurance is not a cost-effective way of reducing pressure on public hospital systems.