An economic analysis of the Private Health Insurance Incentive Act (1998)

Abstract

The Private Health Insurance Incentives Act (1998) (PHIIA) provides a universal subsidy to private health insurance. It was justified on two main grounds: that increased private insurance would ease the pressure on the publicly funded portions of the health system, and that the PHIIA would mitigate the adverse selection consequences of community rating. This paper argues that since insurers are able to design plans to separate risk groups, the consequences of adverse selection may have been exaggerated. Using data on claims and insurance coverage, little evidence of adverse selection is found in the 1998 September quarter. This paper also argues that the reduction in demand for public health services as a result of the subsidy is likely to be small for a number of reasons. Using data from the September 2000 quarter on membership of hospital insurance, we find that the subsidy attracted mostly young individuals into private insurance. While these individuals make few demands on the public sector, the lack of targeting means that they attract the same premium subsidy as older people. Therefore, the expected savings to the public hospital sector of PHIIA may be considerably less than the cost. Show more