Anti-Insurance: Analysing the Health Insurance System in Australia
Melbourne Business School Discussion Paper No. 2003-09
35 Pages Posted: 13 May 2003
Date Written: March 31, 2003
This paper develops a model to analyse the Australian health insurance system when individuals differ in their health risk and this risk is private information. The Australian system involves mixed public and private health insurance with private insurance both duplicating and supplementing public insurance. We show that, absent any other interventions, the Australian system implicitly transfers wealth from those most at risk of adverse health to those least at risk. When considered over society as a whole, these transfers represent a mean preserving spread of income, creating social risk and lowering welfare. We refer to these implicit transfers as anti-insurance. Further, we use comparative statics to show that a decline in the take-up of private insurance may lead to a reduction in the welfare of all members of society. Increased take-up of private health insurance may be Pareto improving. We consider the recently introduced rebate on private health insurance and show that this alleviates this welfare reducing anti-insurance. However, its ad valorem nature distorts insurance premiums. We demonstrate that a lump sum rebate could achieve the same reduction in anti-insurance while avoiding additional dead weight losses. Nonetheless, we conclude by suggesting that more significant reform of the Australian system is needed, for example by moving to a system of supplementary private health insurance.
Keywords: health insurance, mixed system, rebate, anti-insurance
JEL Classification: H42, I18
Suggested Citation: Suggested Citation