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California Can Learn
Health Care Lessons From Down Under

by Diana M. Ernst 5/1/08

Health care reform is still on the table in California, which should consider carefully the achievements and failings of foreign systems. Canada is the usual candidate but Australia’s health care strategies deserve a closer look.

The negative effects of Australia’s government-run health system are predictable and apparent: limited distribution of technology, restrictions on the number of medical students and Medicare providers, and waiting lists. Recognizing this, the country recently reformed private health insurance – which is not mandatory – in order to attract more Australians to sign up.

Diana M. Ernst

Diana Ernst is a public policy fellow in health care studies at the Pacific Research Institute. She contributes opinion editorials to print media, and routinely writes the monthly PRI Health Policy Prescriptions. Prior to joining PRI, Ms. Ernst was an intern at the Heritage Foundation in Washington D.C. in the American Studies and Judicial Studies departments. She was also a Publius Fellow with the Claremont Institute in Claremont, California, and is currently on the board of advisors at the Grassroot Institute of Hawaii. Ms. Ernst is a graduate of Claremont McKenna College with a B.A. in Government and Philosophy.

Pacific Research Institute

Australian taxpayers finance almost 70 percent of total health care expenses, including a subsidy for private health insurance, under which almost half of the Australian population is now covered. Taxes fund a 30-percent rebate on private insurance premiums for Australians under the age of 65. Rebates go up to 40 percent for older patients.

Australia phased in a Private Health Insurance Incentives Scheme (PHIIS) to improve citizens’ access to care, which caused the number of privately insured Australians to rise from 31 to 46 percent. The plan incorporated several reforms. Most importantly, it allowed age-rating in private health insurance, which was previously forbidden.

 With age-rating, insurers started charging lower premiums for younger people, attracting them to purchase policies. To manage the transition, those above 30 who signed up before a cut-off date in 2000 were also given a discounted premium. Those who did not sign up in time would pay higher premiums equal to the base discounted premium plus 2 percent for every year after age 30.

Studies on these policies generally credit age-rating for most of the 15 percent increase in privately insured Australians. Age-rating solved a problem of adverse selection, which occurs when insurers must charge the same premium to everyone: younger members drop out. This leaves only older members, which causes the community rate to rise, leading more people to drop out, and so on. This process is called a “death spiral.”

Australians purchase their health care directly, as individuals, and employers do not generally play a role. By contrast, about three-quarters of all American employees depend on their employers for private health care. That is the result of an obsolete system that began with wage controls during WWII, which ended 63 years ago in 1945.

Australians also enjoy more control of their own health care dollars: Out-of-pocket expenditure accounts for 19 percent of total Australian health spending, but only about 12 percent of U.S. health spending. The state can give Californians more control of our health spending by finally allowing us to deduct Health Savings Account (HSA) contributions and earnings, as we’ve done federally since 2004. Readers may consult http://health.pacificresearch.org/ca-sick-tax-clock to see how much Californians could save if able to deduct HSA medical expenses from state taxes. At this writing it comes to a whopping $102,555,911.00.

We also can make our private health care sector more responsive. Employer-provided care distorts costs, inhibits portability, and limits health care options. The transition to individually-purchased health insurance will require policies similar to Australia’s that help pave the way.

Americans generally object to the idea of government-controlled medicine and it would be irresponsible to adopt such a plan in California. Australia’s reforms, however, show that there’s something to learn from any health system that gives people more choice and individual control over resources. CRO

copyright 2008 Pacific Research Institute



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