Public and Private Health Insurance in Australia: Substitutes or Complements?

Abstract

Australia's national health insurance scheme (Medicare) provides coverage against the cost of a wide range of inpatient and outpatient health care services for all resident Australian citizens. Yet over 40% of the population purchase subsidised private health insurance which, under the current scheme, does not affect any entitlements for those covered by Medicare or allow individuals with private cover to opt out of the public scheme. Under such a financing system, to what extent is private health insurance a substitute or a complement for public health insurance? In its report on private health insurance published in 1997, the Industry Commission argued that "the core issue is the extent to which private funding should be seen as, or in fact is replacing public funding (eg private patients in private hospitals) or topping up public funding to provide extra dimensions of service (eg doctor of choice, or private room)" (p.23, emphasis in original). This paper addresses these issues, taking care to distinguish between substitutability and complementarity between the insurance products and between health care services. It is argued that, under the current arrangements, some individuals may well be overinsured against health care expenditures, raising attendant concerns about both ex ante and ex post moral hazard.