How Do Older Adults Respond to Private Health Insurance Rebates?

All Australians are covered by Medicare, which provides free care in public hospitals and subsidises primary care, specialist treatment, and medicines. Despite this, every year, the Australian Government subsidises the private health insurance industry by paying $6 billion in rebates and $3 billion to cover private inpatient services. One of the primary goals of the provision of subsidies for private health insurance is to alleviate the burden on the public system through increased use of private health services.

Given that health care costs increase with age, in principle, the biggest relief to the public health care system could come from increasing private health insurance coverage among senior Australians. The benefits may come not just through diversion of treatments to the private system, but also because it can help promote better health in seniors by avoiding long waiting time for treatment and providing better access to allied health services, such as physiotherapy. For these reasons, in 2005 the Australian Government redesigned private health insurance rebates from a 30 per cent universal scheme to one that increased with age: 30 per cent rebate for those under 65, 35 per cent for those aged 65 to 69, and 40 per cent for those aged 70 and above, regardless of income.

In practice, it is unclear that targeting seniors with higher rebates will encourage them to buy private health insurance. Seniors’ demand for health care increases as they age, and they could benefit more from having private care. On the other hand, seniors’ income declines with age, and they may be particularly concerned with high out-of-pocket expenses as private patients. Prior studies on the responses to private health insurance incentives provide little guidance on this issue because they have mainly focused on the general population.

Approach

Our research uses Australian tax return data to estimate the effects of this age-specific policy that provides higher rebates for senior Australians. We compare changes in private health insurance take-up before and after the policy change between seniors (aged 65-74) and their younger comparison group (aged 60-64). We also examine differential effects across subgroups by gender, spousal status, remoteness of residence, and income level.

Findings

Our results show that higher rebates led to modest increases in insurance take-up. For those aged 65 to 69, an increase in rebates from 30 to 35 per cent led to a 1 to 1.5 percentage point increase in take-up in the first two years of the policy. For those aged 70 to 74, an increase in rebates from 30 to 40 per cent led to a 1.5 to 2.7 percentage point increase in take-up.

We estimate that a 10 per cent reduction in insurance price would lead to a 1 to 2 per cent increase in the number of seniors having private health insurance. However, this was only a short-term impact. The overall increase in take-up among seniors only persisted for two years after the policy was implemented.

We stratify the analysis by pre-policy income quartile and find that the effect was much larger among low-income seniors. Among seniors in the bottom income quartile (that is, income less than $13,171 as of 2004 in our sample, which is equivalent to $19,413 in 2021’s income on the basis of the consumer price index rates published by the Australian Bureau of Statistics), a 10 per cent reduction in insurance price led to 4 to 8 per cent increase in take-up. In contrast, the effects for the upper three quartiles were smaller or statistically insignificant. It is worth noting that the lower-income group originally had a substantially low insurance coverage rate (around 35 per cent), whereas the other three income groups had a coverage rate of 60 per cent or higher.

We further estimate the effects by gender, spousal status, as well as remoteness of residence. The effects were slightly larger for males than for females, and for those with spouses than those without spouses, but they were not statistically significantly different. We also show that higher rebates led to a statistically significant increase in take-up among individuals living in major cities. In general, the responses were relatively similar across these demographic characteristics.

Implications

Our estimated effects of higher rebates on private health insurance take-up for senior Australians are smaller than those for the general population documented in the literature, which generally range from 2 to 5 per cent increases in take-up in response to a 10 per cent price reduction. This suggests that on average seniors are less sensitive to insurance price change, partly because seniors may value private treatment more and/or are more risk averse than the general population.

More interestingly, we find that seniors’ responses to rebates varied substantially by income. The response was much stronger among seniors in the bottom income quartile, but seniors with higher income already had insurance and did not change their decisions much because of higher rebates. Our findings indicate that private health insurance rebates targeting at low-income seniors would be more cost-effective in helping seniors who need insurance most but cannot afford it.

In 2012, the Government further changed the rebate levels by income: for example, individuals aged 65-69 were entitled to 35, 25, 15, or 0 per cent rebates if their income was below $84,000, between $84,001-97,000, between $97,001-130,000, or above $130,001, respectively. Our research supports the use of this means-tested rebate policy but suggests a need to recalibrate these income contingent rebates to better target those in the bottom income quartile.

Future research

Before embarking on more reforms, evidence on the impacts of rebates across the ‘entire’ population is needed. Our findings are based on responses of low-income seniors, but responses for younger low-income earners may be different because of different needs for health care. Future research could expand our study by measuring how younger people respond to rebates and whether their responses vary by income. Furthermore, it is critical to examine how private health insurance rebates eventually affect the choice of hospitals and health outcomes to assess the full costs and benefits of the provision of subsidies.