Photo by JAFAR AHMED on Unsplash

Governments use policy levers to incentivise desired population behaviours. ‘Sticks’ punish ‘undesirable’ behaviours, while ‘carrots’ reward favoured behaviours. Within Australia’s private health insurance system, tax penalties (sticks) and premium rebates (carrots) are used to encourage people to take out hospital cover. The assumption is that more private hospital membership reduces the public hospital burden.

Whether increased private health insurance membership reduces public hospital burden is a contentious issue and worthy of further review. Nonetheless, the Australian Government should understand the relative effectiveness of tax penalties and premium rebates on private health insurance membership to ensure valuable taxpayer dollars are not being wasted. This is especially relevant today, as the federal budget reels towards historically large, ingrained deficits and the rebate is expected to cost around $7 billion every year.

In a recent research study, we estimated the net impact of the 2012 Fairer Private Hospital Incentives (FPHII) reform on private health insurance hospital coverage. By looking at the combined impact from changing the Medicare levy surcharge and the private health insurance rebate rates, we found membership increased the most among the highest income earners. This was despite the cost of their membership increasing by up to 40 per cent.

The 2012 change and fears of a membership ‘exodus’

The Australian Government introduced the Fairer Private Health Insurance Incentives reform to rebalance efficiency and equity. It reduced or removed premium rebates for people across three high income tiers. It simultaneously increased the Medicare levy surcharge for not holding adequate hospital cover on the two highest income tiers. The 2012 reform therefore exerted two ‘opposing’ incentives on the decision to hold hospital cover.

FPHII aimed to reduce government expenditure on the rebate, while still incentivising higher-income earners to hold hospital cover. It was implemented after concerns that the premium rebate provided ‘windfall gains’ to higher-income earners and growing concerns around substantial government outlay on the rebate (which tripled from $2 billion in the early 2000s to $6 billion by 2011).

The announcement of the reform led to insurers fearing an exodus of people leaving the private health insurance market. Commissioned research predicted 1.6 million people would drop their hospital cover, in the two years after the reform.

Using longitudinal survey data to estimate the impact of the policy change

To investigate the impact of the reform on membership among high income earners, we analysed data on over 6,100 individuals from the Household Income and Labour Dynamics in Australia survey. This is a nationally representative, longitudinal dataset which allowed us to look at private health insurance membership decisions of policy-affected higher income earners both before and after the policy change (the ‘treated’ group).

Since the FPHII reform was targeted at higher income earners and introduced across all Australian regions, we compared the actions of this treated group of higher-income earners to a suitably-constructed, lower-income control (unaffected) group. We used different statistical techniques to ensure that the groups we were comparing were well-matched in terms of their average characteristics, including age, gender, health condition and health behaviours, and on their past private health insurance coverage trends.

We estimated the reform’s impacts using ‘difference-in-difference’ estimation. This allowed us to remove the impact of other policy changes or time trends that would have affected both the treated and control groups.

The impact of the increased penalties outweighed the impact of reduced rebates

Contrary to insurer expectations, we found the 2012 reform increased the probability of holding hospital cover by 1.5 percentage points among the higher income earners group. That is, more people were attracted to the private health insurance market because of the reform. The estimated policy impact was driven by a significant increase in hospital cover probability of 2.4 percentage points for those in the highest income tier, despite this group also experiencing the largest price increase.

Overall, the increased Medicare levy surcharge encouraged membership more than the disincentive to hold cover from increased prices (reduced rebates). This suggests the Medicare levy surcharge had a greater bearing on decision-making for this group than premium levels.

The way forward for private health insurance policy in Australia

Our findings of the response to the Medicare levy surcharge outweighing the response to the premium rebate might be due to private health insurance demand being ‘sticky’ or price-inelastic. While our study looked specifically at higher income earners, older and more recent academic studies looking at different Australian population groups have found a low price elasticity of demand for private health insurance. This may also explain why recent premium discounts did little to attract younger consumers back to the private health insurance market.

These findings support behavioural economics predictions from loss aversion theory, with consumers potentially weighing losses (‘sticks’) more heavily than rewards (‘carrots’) in their decision to hold or purchase private health insurance. ‘Inertia’ in decision-making for those already holding private health insurance may also play a role in limiting responsiveness to price increases.

The cost of the premium rebate is large, with the Australian Government expecting to spend nearly $28 billion on the rebate over the next four years, while the cost-effectiveness is yet to be strictly reviewed. Despite this, Private Healthcare Australia has recently appealed to the Government to restore the rebate to 30%, as a way of encouraging hospital coverage.

Our results suggest this approach is unlikely to be cost-effective. A more effective policy option, if the Australian Government sought to encourage hospital coverage, would be to leverage the power of the Medicare levy surcharge. Lowering the income threshold for Medicare levy surcharge liability, for example, would incentivise take-up amongst more individuals, including younger age groups, at no additional cost to the Australian Government. Another recent study supports that the ‘stick’ is an effective policy lever for encouraging membership, with effectiveness growing the longer an individual is liable for the Medicare levy surcharge.


Further reading:

Bilgrami, A., Cutler, H., Sinha, K. and Cheng, Z. (2021), ‘The impact of means-tested premium rebates and tax penalties on the demand for private hospital cover in Australia’, Economic Record, 97(317): 170-211,


Leave a comment

Your email address will not be published. Required fields are marked *