Is $6000 enough? The harsh reality of swapping public for private

Even if only 5 per cent of people took up such an offer, this funding loss would be unprecedented

In his recent State of the Nation address, David Seymour flew a policy kite, suggesting people be allowed to take their $6000 of publicly funded healthcare allocation and spend it on private health insurance. Let’s run this idea through a policy lens.

His figures are roughly correct. That $6000 represents about 80 per cent of all spending on health and ACC, with the other 20 per cent paid by out-of-pocket payments (12 to 15 per cent) and private health insurance (5 to 7 per cent), with 1 per cent expenditure from other sources.

In line with the ACT Party’s wish to shrink the size of the Government, Mr Seymour’s motivation is to change this balance significantly, with more people having private health insurance and receiving more services from privately owned providers (especially hospitals). This would be significantly disruptive and have major implications for the health system and people’s access to services.

Let’s compare what $6000 of public funding pays for compared with private health insurance.

For our public funding, we get a comprehensive range of services: healthlines and emergency services; consultations with general practice and hospital doctors and nurses; immunisations; screening for cervical, breast and bowel cancer; blood tests, x-rays and scans; a large range of pharmaceuticals; surgical operations and overnight stays in hospitals; district nursing and rehabilitation services; residential resthome care; palliative end-of-life care; a raft of mental health services; and all the facilities and staff that support all these services. Many of these services are free and available to us when we need them.

We also get policy organisations supporting ministers and the system. They plan, allocate funding, and prioritise who gets care so that those most in need are supported first. Yes, there are problems – many of our hospital buildings are old and need replacing, and there are longer than desirable waits for many services. Our system doesn’t cover some services (eg, dental services for adults), but our $6000 still gives us an awful lot.

Many services currently provided in the public system are not covered by private insurance. What $6000 gets you with private insurance varies substantially according to age, gender and perceived level of health risk.

A healthy 30-year-old could buy a gold-plated insurance policy, but pre-existing conditions might not be covered for three years and there might be dollar caps on some claims. The $6000 would buy a healthy 55-year-old female a less generous policy, with lower dollar caps per year for some services. A 65-year-old would need over $8000 to get the same coverage as a 55-year-old and may not be eligible for some services (eg, some cancer care).

In practice, the $6000 per person figure Mr Seymour quotes is the average spent on health per person. In practice, however, health spending is highly skewed – in any year, most people would have much less spent on them, while a few would cost a lot more – those, for example, undergoing intensive cancer treatment, having heart operations, or living in residential resthome facilities.

The same is true across different people over their lifetimes – some will have a lot spent on them, and others not much, but expenditure will increase as we age. In practice, the amount people would have to take from the public system and put into private health insurance would have to be adjusted for relative need.

It’s not easy to get this right, and if the amounts are wrong, some people may end up with more money than they need, while others will struggle to find coverage for the funding available to them.

The private insurance business model encourages insurers to maximise the number of low-risk subscribers and minimise those deemed high-risk. If those taking up the offer were more high risk, many might be denied coverage or pay significantly more to cover their risk, or private insurers would be unable to cover their costs and go bust. If these new subscribers were more low risk, those left covered by the public system would be older and sicker on average, such that it would be unlikely to save the public system much, if any, money.

Of course, allowing people to take their share would mean that public funding would shrink. Even if only 5 per cent of people took up such an offer, this funding loss would be unprecedented. Increased private financing is also unlikely to free up capacity in the public system (see below), and, assuming that private insurers would not be paying for public hospital infrastructure and many life-saving treatments not covered privately, the public system would be put under severe financial strain.

A major constraint in our health system results from a shortage of specialist doctors and nurses. If a larger private health insurance market also means more services being delivered by privately owned hospitals, then more of the workforce will be drawn from our public sector staff. If privately owned hospitals pay their staff more and/or offer more desirable working conditions, it’s hard to imagine how this wouldn’t exacerbate workforce shortages in the public system.

Unless regulations and funding arrangements are in place to mitigate this, people who are older, sicker and more vulnerable will have less coverage and hence access to healthcare services in the private sector and will rely on a public system that will struggle even more than now to deliver care.

An inevitable consequence would be increased inequities in access to health services and health outcomes. It’s unclear whether this concerns Mr Seymour, but it will be of major concern to others.

Using resources more efficiently is a more likely goal for ACT. If so, would this policy idea help? That would seem unlikely.

In the past, Treasury has looked at whether the Government should subsidise private health insurance and has concluded that a dollar spent on private insurance would not deliver a dollar saving in the public system. It concludes it would be better to spend money on the public system.

Why? One reason is that private insurance systems are costlier than tax-funded systems. Having multiple organisations designing and marketing a suite of policies, assessing the risk of each individual or group, calculating premiums and determining whether claims will be paid, make up a sizeable portion of costs for health insurers. This dwarfs the proportion of expenditure spent on administration in tax-funded systems.

Another reason is that private health insurers typically pay higher prices for services delivered by private providers. These two reasons are partly why the US has a considerably more costly and less efficient health system (in terms of bang for the health-spending buck).

A third reason is the private health system delivers a far more limited range of services than the public system, and people would still need access to public services. An increased role for private insurance and private provision may not actually reduce demand on the public system. Australia has learnt this lesson the hard way – it now has a hugely costly subsidy and tax rebate programme supporting a higher-cost private health insurance sector with far less saved in public spending.

Health policy experts internationally who favour a competitive financing model accept that it would require well-designed regulations to ensure equity and efficiency. These rules would ensure that those taking out their public money actually do purchase insurance; and that insurers take everyone who applies and do not “cherry-pick” healthy people; do not cancel policies or increase premiums once people make a claim; offer comprehensive plans covering preventive care and pre-existing conditions which also stipulate access criteria (eg, maximum wait times and user charges); offer standardised plans so people can compare them across insurers and the Government can monitor performance; and offer fair premiums that do not rise steeply once people reach 65.

Previous governments have sought to review how healthcare is paid for in Aotearoa and have quickly concluded that the current approach works well.

Mr Seymour has also quoted a $6000 average government health spend as if it’s unusually large. However, in fact, our spending on health is not out of line internationally – in recent years (2010–21), we’ve spent about 82 to 87 per cent of that spent by comparable OECD countries, as measured using standardised, per capita data. Some may also remember that this idea of taking a share of public funding to privately owned plans was floated here in the early 1990s. Back then, some work was begun on determining who could take what funding from the public system and developing an explicit set of “core services” to be covered by all payers (public or private). The work was stopped amid the chaos of the time and the recognition that working out both these issues would be extremely difficult to achieve.

Our health system needs sustainable funding, a focus on ensuring an equitably paid and well-supported workforce, and a consistent direction of travel, not a plan that will lead to major disruption and a more inefficient, expensive and far less equitable system.

Jacqueline Cumming is an adjunct professor with the Te Hikuwai Rangahau Hauora Health Services Research Centre at Victoria University of Wellington