The Impact of Means-Tested Premium Rebates and Tax Penalties on the Demand for Private Hospital Cover in Australia

Many governments intervene in private health insurance markets to incentivise demand, balance efficiency and equity, and counter adverse selection. In the context of rising health-care costs, this is a complex task, and understanding the relative effectiveness of interventions can help governments design an optimal policy mix. We evaluate the impact of means-testing a premium rebate and increasing an income tax penalty rate on private health insurance hospital coverage in Australia. We employ difference-in-difference (DID) analysis on a Household Income and Labour Dynamics in Australia (HILDA) survey panel of 6,179 individuals. To construct a valid control group, we employ income band restriction and match individuals below the policy income threshold to the treatment group using entropy balancing on pre-treatment covariates and trends. Our analyses suggest that Australia's Fairer Private Health Insurance Incentives (FPHII) reform in 2012 increased the probability of holding hospital cover by 1.5 percentage points (P < 0.1). The effect was driven by a significant increase in coverage of 2.4 percentage points (P < 0.1) for those in the highest income tier, despite this group experiencing the largest premium increase from the reform. Estimates were relatively robust to sensitivity analyses, including removing those with complicated income streams and removing potential income shifters. Our results suggest that increased tax penalty rates had a stronger impact than means-testing premium rebates, most likely due to the low price elasticity of private health insurance demand in Australia. We discuss these findings in the context of developing an effective policy mix to attract and maintain private health insurance members and promote private health insurance market sustainability.

Automated summary

Many governments intervene in private health insurance markets to balance efficiency and equity. In Australia, means-testing premium rebates and increasing tax penalty rates have been evaluated to understand their impact on private health insurance coverage. The study suggests that increasing tax penalty rates had a stronger impact on increasing private health insurance coverage than means-testing premium rebates.