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COMMUNITY AFFAIRS LEGISLATION COMMITTEE
14/07/2009
Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009; Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2009; Fairer Private Health Insurance Incentives Bill 2009; Health Insurance Amendment (Extended Medicare Safety Net) Bill 2009

CHAIR —The committee will now resume its inquiry into the provisions of the Fairer Private Health Insurance Incentives Bill 2009 and related bills. I welcome officials from Treasury. I know that we do not often have officials from Treasury before the community affairs committee, so you are very welcome. I take it you are very experienced witnesses, so you would understand parliamentary privilege in the protection of witnesses and also that as public servants you are not required to answer questions on policy. Senators may still try and ask them, but you do not have to answer questions on policy, just on the role that you have taken in the process.

I understand that your opening statement to the Senate Economics Legislation Committee on 9 June 2009—before the reference for this inquiry was transferred to this committee—remains as your opening statement, and I ask that those comments be incorporated into this committee’s Hansard.

The statement read as follows—

I would like to take this opportunity to make some opening remarks regarding the provisions introduced by the fairer private health insurance bills and the impact they will have on the population with private health insurance. I have colleagues from our fiscal group to answer any policy questions and colleagues from our tax analysis division to assist with any issues relating to costings and the revenue estimates.

From 1 July 2010 the government will introduce three new private health insurance tiers to rebalance its range of policies supporting private health insurance. Spending on the private health insurance rebate is growing quickly and is projected to double as a proportion of health expenditure by 2046-47. The introduction of the new tiers by these bills will generate savings that increase over time. Tier 1 will apply to singles with income for surcharge purposes of more than $75,000 per annum and families with income for surcharge purposes of more than $150,000 per annum based on current projections. Those individuals and families who hold private health insurance policies that attract the rebate will have their private health insurance rebate reduced by 10 percentage points. The Medicare levy surcharge will remain at one per cent for those singles and families who do not hold appropriate private health insurance.

The second tier will apply to singles with income for surcharge purposes of more than $90,000 per annum, and families with income for surcharge purposes of more than $180,000 per annum who hold a complying private health insurance policy will have their private health insurance rebate reduced by 20 percentage points. The Medicare levy surcharge for those singles and families will be increased by 0.25 percentage points for those singles and families who do not hold appropriate private health insurance.

The final tier, tier 3, will apply to singles with income for surcharge purposes of more than $120,000 per annum and families with income for surcharge purposes of more than $240,000 per annum who hold a complying private health insurance policy. Those people will no longer receive any private health insurance rebate. The Medicare levy surcharge for those people will be increased by 0.5 percentage points where those singles and families do not hold appropriate private health insurance.

The singles threshold will be indexed according to movements in the average weekly ordinary times earnings. The families’ thresholds will double the singles threshold. In addition, family thresholds will be adjusted for families with more than one child, in the same manner as existing arrangements for Medicare levy surcharge—that is, increased by $1,500 for each child after the first. These reforms will reduce the proportion of the rebate being provided to higher income earners.

Under current projections, by 2010-11 it is estimated that approximately 14 per cent of single tax-filers who have incomes above $75,000 would receive about 28 per cent of the total private health insurance rebate paid to singles. Under the new reforms introduced via these bills, they will receive around 12 per cent. Similarly by 2010-11, it is estimated that approximately 12 per cent of coupled tax-filers who have incomes above $150,000 would receive approximately 21 per cent of the total private health insurance rebate paid to couples. Under the new reforms, they will receive around nine per cent.

We at the Treasury estimate that means testing of the rebate will impact on around the top 23 per cent of private insured population, measured at single equivalent units by income level. It is estimated that around nine per cent of all single equivalent units fall into the first income tier, around 7 per cent in the second income tier and a further seven per cent in the top tier. People aged 65 or more make up around 12 per cent of privately insured single income equivalent units. But the proportion in that age group and impacted by the measure accounts for less than two per cent of the total.

The modelling we have undertaken suggests that the policy is expected to have very little impact on private health insurance coverage, with around 99.7 per cent of the private health insurance population estimated to retain their insurance. Overall, the measures introduced via these bills rebalances the support for private health insurance so that those with greater capacity to do so will pay a greater share of their private health insurance costs while continuing to provide the existing 30, 35 and 40 per cent rebates for those earning below the Medicare levy surcharge thresholds. This conforms with the concept of vertical equity in that those with a greater capacity to pay make a greater contribution.

CHAIR —That is, Mr O’Connor, the statement that you made in the private briefing to the economics committee. Is that right?

Mr O’Connor —That is correct. I thought we would do that rather than go through it again.

CHAIR —Sure. It would have taken a while, so that is fine. Do you wish to add anything at all at this stage, or shall we go straight into questions?

Mr O’Connor —No, that is fine. I think we will go to questions. I do note, as I said in my initial opening statement, that I have colleagues here from fiscal group and tax analysis to handle the revenue estimates and policy issues. Mr Coles and I are here to assist with the bills from a legislative perspective.

CHAIR  —Thank you. Senator Cormann?

Senator CORMANN —Just to clarify: we are not supposed to ask officers questions about opinions in relation to policy but we are quite entitled to ask explanations of policy, as I understand it.

CHAIR —The background of policy and the political makeup, no; information or what the officers can control, yes.

Senator CORMANN —To start off, I would like to clarify something in relation to the three tiers. One comment that was made by Mr Robinson in the private briefing of the Senate economics committee was that people in the top tier would see a 30 per cent reduction in their private health insurance rebate. It is worded a bit differently in the explanatory memorandum, which talks about a 10 per cent reduction for tier 1 and a 20 per cent reduction for tier 2. For tier 3 it does not actually talk about a 30 per cent reduction but rather the abolition of the rebate altogether. It says that those in tier 3 ‘will no longer receive any private health insurance rebate’. Can you clarify which of the two it is?

Mr Robinson —Yes, Senator. People in the top tier would not be entitled to any rebate, and for the majority of those people who are currently under 65 it would be the full loss of the 30 per cent rebate; however, for people between 65 and 69 it would be the loss of 35 per cent rebate; and for those 70-plus it would be the loss of 40 per cent rebate.

Senator CORMANN —So people aged 65 to 69 and 70 and over would be hit harder than people under 65?

Mr Robinson —They would lose a larger percentage rebate than the 30 per cent; that is correct.

Senator CORMANN —So, by way of explanation of policy—and I am happy to take your guidance on this if you feel I am straying too far—what is the rationale behind that? It would have been logical, I would have thought, to make it 10 per cent, 20 per cent and 30 per cent, and then people over 65 and over 70 would have had a rebate reduction similar or equivalent to everybody else’s. What is the rationale for abolishing it altogether for people in that third tier?

Mr Coles —I guess the policy rationale is a matter for government in the sense that those over the upper income threshold would not be entitled to the rebate. That is pretty much the rationale.

Senator CORMANN —If that is what it is, I am happy to take that on board. I guess I was wondering whether there was a logical reason brought up by Treasury as this measure was being considered. What you are saying is that, essentially, the government decided to reduce the rebate by 10 per cent for tier 1 and by 20 per cent for tier 2 but abolish it altogether for tier 3.

Mr Coles —That is correct.

Senator CORMANN —Okay. I want to look at the numbers of people impacted. We discussed this in the economics committee private briefing and during Senate estimates as well, to a certain degree—and I am hopeful you have got some more numbers for us today. Your starting number is 9.7 million Australians with private hospital insurance?

Mr Robinson —That is correct; that is according to the latest Private Health Insurance Administration Council data.

Senator CORMANN —And you excluded from your modelling 1.4 million Australians with private health insurance, like those with general treatment cover, because you have no income data for them?

Mr Robinson —Senator, as I said at the budget estimates session when we discussed this, our view is that the majority of people with ancillary-only cover would be under the Medicare levy surcharge threshold. I say that just on the basis that people will generally make a decision whether or not to engage in private health insurance and it would not seem rational for someone to take out ancillary-only cover if they are in the income ranges above and pay the Medicare levy surcharge for not having complying hospital cover.

Senator CORMANN —Nevertheless, the health department did modelling which suggests that, out of 1.4 million people with ancillary cover, 5,000 people would drop general treatment cover. That is right, isn’t it?

Mr Robinson —That is correct.

Senator CORMANN —And Treasury was not involved in that modelling whatsoever?

Mr Robinson —We were consulted in the context of that modelling.

Senator CORMANN —How did the figure of 5,000 people come up? What is the thinking? You say, ‘We expect hardly anybody at all to leave.’ The figure we are given is 5,000, 10,000 dropping ancillary out of combined hospital-ancillary cover and 25,000 overall. How did you get to the 5,000 figure? I understand the methodology that you used in relation to the hospital insurance side of things, but I am trying to understand the methodology around the ancillary side of things.

Mr Robinson —I think that is probably a question best directed at the department of health, given that they undertook the estimates.

Senator CORMANN —Fair enough.

Mr O’Connor —Mr Robinson gave evidence at the private hearing on 9 June, and, from memory—I just cannot find it in the Hansard—Mr Robinson said, ‘In our view, the 5,000 is on the upper component.’

Senator CORMANN —Which is also consistent with what he said during Senate estimates.

Mr O’Connor —That is right.

Senator CORMANN —Yes, the 5,000 figure is there, and 5,000 seems like a small number out of 1.4 million—but we do not know how many of them are going to be hit with it. You say you do not think it will be many, and I understand the rationale as to why you think that, but we do not really know. You have essentially excluded them. Two-point-three million people out of those 9.7 million will see a reduction in rebate—we have now established—of between 10 per cent and 40 per cent, not between 10 per cent and 30 per cent. Do you have a state-by-state breakdown of that figure, of where those 2.3 million people are from?

Mr Robinson —No, we do not have a state breakdown for that.

Senator CORMANN —Why can’t you have a state-by-state breakdown? It is based on your personal income tax microsimulation model. Does that model not allow you to identify it on a state-by-state basis?

Mr Robinson —I am not sure whether we have the state identifier on that data. We do not have every single item that is on the tax return as part of our model. So, for example, as part of the confidentialisation of the sample file that we receive from the Australian tax office, certain information such as address information of tax files is removed from the data.

Senator CORMANN —So you do not assess if there is a state-by-state variation in terms of the impact? For example, let us say in Western Australia private health insurance coverage is more than 50 per cent. In the ACT it is very high, I believe—I have not got the exact figure at hand. In other states it is much lower. So you do not actually assess whether there is a state-by-state variation in terms of impact?

Mr Robinson —We have not undertaken that analysis.

Senator CORMANN —Can you please take on notice whether it is data that is available. What I understand you have said is that you are not aware as to whether it is there or not. If it is possible to get a state and territory breakdown, I would very much appreciate it. In the private meeting, you mentioned that nine per cent were expected to come from the first income tier. Doing a back-of-an-envelope calculation, across 2.3 million that is 873,000 people. Does that nine per cent include people of all ages or only those under 65?

Mr Robinson —That is all ages.

Senator CORMANN —I thought as much. Then there is 70 per cent in the second income tier. For ease, I am just going through the numbers that I believe. If you think that they are incorrect, please—

Mr Robinson —I actually took this on notice from you at our budget estimates hearing, and I have got some figures I can give you now in terms of the breakdown of the tiers.

Senator CORMANN —That would be great, if you could.

Mr Robinson —We estimate, as you mentioned before, about 9.7 million being the total insured population. Of that, we estimate around 7.4 million, or around 76 per cent of the insured population, are under the threshold and therefore not impacted. We estimate about nine per cent, or 870,000 people, are in the first tier; 720,000, or seven per cent, are in tier 2; and around 690,000, or seven per cent, are in the remaining tier.

Senator CORMANN —You went through that very quickly.

CHAIR —Could you table those figures?

Mr Robinson —Yes.

Senator CORMANN —I went through the percentages in your private briefing, and I came up with 86 for tiers 1, 2 and 3. But I assume that tier 3 was broken up between those under 65, those aged 65 to 70 and those aged 70 and over. Is that right?

Mr Robinson —Sorry, the 86—

Senator CORMANN —In tier 1 and tier 2 there are reductions of 10 per cent and 20 per cent, whereas tier 3 has reductions of 30, 35 and 40 per cent. So I suspect that tier 3 has been split up into three different figures. Is that right?

Mr Robinson —That is correct.

Senator CORMANN —Can you give me the breakdown of tier 3? The figure given in the private briefing was seven per cent, but I assume that excludes people over the age of 65.

Mr Robinson —No, the seven per cent includes those over 65.

Senator CORMANN —The figures that were given were nine per cent in the first tier, 70 per cent in the second tier and seven per cent in the top tier. That totals 86, so we are missing another 14 per cent.

CHAIR —Are those figures correct?

Mr Robinson —Which figures are you referring to?

Senator CORMANN —I am happy to hand them to you. They are from a private briefing of the economics committee on 9 June. They were provided by Mr O’Connor in his opening statement, actually. If you were to review the opening statement you would see them in the second last paragraph before the chair starts talking.

Mr Robinson —We were saying in the opening statement that the means-testing of the rebate will impact on around the top 23 per cent of the privately insured population.

Senator CORMANN —That is the 2.3 million.

Mr Robinson —That is right. That is equivalent to nine per cent of the insured population in tier 1. Seven per cent—

Senator CORMANN —Seventy per cent in the second—

Mr Robinson —No, seven per cent in the second tier and seven in the third tier.

Senator CORMANN —The Hansard that I have says 70 per cent in the second income tier.

CHAIR —I am very relieved that it is actually seven, Mr Robinson. Even my math made 70 look a bit strange there.

Senator CORMANN —This is where I was getting confused. So you are saying: nine per cent, seven per cent and seven per cent. That is of the total insured population, presumably.

Mr Robinson —Of the privately insured population with hospital insurance.

Senator CORMANN —Of the 9.7 million. People aged 65 or more make up around 12 per cent of privately insured single income equivalent units. How many of those are in the third income tier?

Mr Robinson —Was that 70-plus?

Senator CORMANN —No, 65-plus.

Mr Robinson —About 50,000 people in the 65-plus group.

Senator CORMANN —Then the 70-plus age group is about—

Mr Robinson —We estimate it is around 20,000 people in the 65 to 69 group and about 30,000 in the 70-plus group, which is equivalent to around about half of one per cent of the total population with private hospital insurance.

Senator CORMANN —So where does the figure two per cent of those aged 70 or more come from? Two per cent of the privately insured population are 70 or older, are they?

Mr Robinson —That is two per cent of the privately insured population who are impacted by the rebate.

Senator CORMANN —Two per cent of the privately insured population who are impacted by the rebate is two per cent of 2.3 million, which is 46,000, isn’t it?

Mr Robinson —If you are interested in those in the top tier, as I mentioned before, it comes to about 50,000, but that is the top tier. There are also people in the 65 to 69 year age group and the 70-plus age group in tiers 1 and 2 who are impacted. If you are referring to the two per cent we mentioned in our opening statement, it is less than two per cent of the total population with private hospital insurance, of 9.7 million. Less than two per cent of them are people who are 65 or older.

Senator CORMANN —But essentially there are 50,000 people over the age of 65 who are losing the rebate altogether and consequently will see a cost increase in their private health insurance of between 53.8 per cent and 66.7 per cent.

Mr Robinson —That is right, so around half of one per cent of the total population.

Senator CORMANN —We discussed the 2008 Medicare levy surcharge measure in estimates, and the evidence from both Treasury and the health department was that the estimated savings of $740 million over the forward estimates had not been revised, that you still expected the savings to eventuate, which meant that you also still expected 492,000 fewer Australians to be in private health insurance as a result, because that is the way you achieve the savings.

Mr Robinson —The Department of Health and Ageing and the Department of Finance and Deregulation actually look after the expense measures and any adjustments to those estimates, through parameter or other variations, but I think I mentioned at the budget estimates sessions that, at the time, in the lead-up to the budget, when those parameter and other variations would normally occur, there was only one quarter of available information in relation to private health insurance coverage, being the December quarter data.

Senator CORMANN —Well, the December quarter was not even a full quarter. The December quarter was half a quarter.

Mr Robinson —That is correct.

Senator CORMANN —We have still only had one quarter, and that was pre rate change and pre first tax return. I was surprised to read statements in the private briefing that you see negligible impacts on overall private health insurance membership as a result of last year’s measure, given the discussion we had that it was too early to really make that assessment. It is still too early to make that assessment, isn’t it?

Mr Robinson —As I think I said at the private briefing, initial indications are that the first two quarters of available data have shown a small increase in private health cover. I think that is a fair statement to make.

Senator CORMANN —Growth is of course slowed, but did Treasury expect, when it modelled the impact of the Medicare levy surcharge, that the impact would be felt in the first half quarter or in the quarter after that, or was there an expectation that this would work its way through the system over a period of time?

Mr Robinson —When we undertook the estimates for the Medicare levy surcharge, we did not really take into account any sort of phase-in of people dropping their private health insurance. We assumed on a rational consumer type of basis that people might opt out immediately if they felt that the only reason that they were privately insured in the first place was to avoid the Medicare levy surcharge.

Senator CORMANN —It took a while for people to understand that they were hit by the surcharge and to take rational action as a result, so you would expect that it will not be from one day to the next that people will change their behaviour. The most likely time, surely—and I am sure we established it at the time—would be tax return time, wouldn’t it, when people sit down with their accountant to assess what the impact of various policy changes will be on their income situation?

Mr Robinson —That is possibly the case.

Senator CORMANN —Can you just talk me through the assumptions in your modelling of price elasticity for those in the $75,000 to $240,000 per annum income bracket. Have you assumed the same price elasticity across there?

Mr Robinson —At our budget estimates session, we talked briefly about the methodology we had assumed. We consulted some of the academic literature about price elasticities on the basis of observed historical behaviour—of which there is not much evidence in the public arena. The evidence that we found indicated some estimates in the vicinity of about minus 0.3 as a price elasticity for private health insurance. That was some estimates undertaken on the basis of the introduction of the 30 per cent rebate, and it was on the basis of observed behaviour.

When we undertook our modelling, we felt, however—and I think there is also a generally accepted view from the literature—that higher income households are less price sensitive to health insurance and that in fact incomes are the main driver of people’s decision to purchase private health insurance. On that basis, we made the decision to discount the assumed price elasticity for our modelling and assumed a price elasticity of minus 0.2. So, for example, for every 10 per cent increase in the price of health insurance for a consumer, we would assume about a two per cent drop in cover in the affected ranges.

Given that the government’s announced policy was to also increase the Medicare levy surcharge at the time that the rebate was being withdrawn at different levels, amongst the top two tiers in particular, we also formed the view that, given that the percentage increase in cost for someone if they did not have complying private hospital cover would be roughly equivalent to their increase in premiums as a result of the withdrawal of the rebate in the second and third tiers, the number of people retaining private hospital insurance would be roughly the same in those two tiers.

Senator CORMANN —Did you make an in-and-out calculation? Did you make an assumption about how many people in and how many people out, or did you just say, ‘We think it’s about the same’?

Mr Robinson —We took the view that it would roughly balance out.

Senator CORMANN —So you did not make an in-and-out calculation?

Mr Robinson —The percentage increases in out-of-pocket costs we estimated to be about 29 per cent for people in tier 2 and about 25 per cent on average for at least the increase in the Medicare levy surcharge going from one to 1¼, and about a 43 per cent increase in out-of-pocket PHI and of course the Medicare levy surcharge going from one to 1½ per cent in the top tier. While there might be some movement in and out within those two tiers, we felt that there was going to be a roughly balancing effect and that the net overall effect within the two top tiers would be about the same.

Senator CORMANN —So there is a 25 per cent increase in the Medicare levy surcharge in tier 2 and a 50 per cent increase in tier 3. What is the dollar effect of that in those income brackets, because the increase in the stick is quite a bit more than the effect on the rebate, isn’t it?

Mr Robinson —For someone in the top tier on $120,000 as a single, for example, it would be equivalent to about a $600 increase in the Medicare levy surcharge.

Senator CORMANN —So that would be the reduction given the estimates on average premiums that you have made for somebody in the top tier losing the 30 per cent rebate?

Mr Robinson —I do not have that figure with me.

Senator CORMANN —Do you remember what your average premium estimate was?

Mr Robinson —I think it was in the vicinity of about $1,500.

Senator CORMANN —I think it was, so it is 30 per cent of that and so it is about $450. Is that so?

Mr Robinson —Yes.

Senator CORMANN —Dr McAuley of the Centre for Policy Development has appeared as an expert before this committee from time to time. In fact, he supports what the government is trying to do, so he does not come from a critical perspective. But he says that the most rational response that anyone can make, given the way the rebate reduction and the increase in the Medicare levy surcharge are structured, is to go for a cheaper policy and downgrade their cover and drop ancillary cover. We have talked about ancillary cover, so we will leave that to one side. The government is assuming that there will not be any downgrading of cover, even though that is the only way you can avoid the increase in the cost of up to 66.7 per cent. It is a bit unrealistic, isn’t it?

Mr Robinson —One of the key things here is that we do not really have any information available to us on the basis of academic literature, for example, that estimates any price elasticities or people downgrading their cover in relation to an increase in private hospital premiums.

Senator CORMANN —So you are not saying it will not happen; you are saying we did not really know what we could base any assumption on credibly so we decided that we were not going to include it in the model at all. Is that a fair summary of your thought processes?

Mr Robinson —I think it is fair to say that trying to estimate people’s behavioural response to policy change is inherently difficult.

Senator CORMANN —But that is what actuaries do every day.

Mr Robinson —Sure, and I think people like to see evidence based on observed behaviour in the past. We do not have access to the industry data in terms of people’s behaviour in response to things like premium increases. We only have what is available largely in the public domain.

Senator CORMANN —Did you ask for that?

Mr Robinson —That goes to the level of consultation in relation to a budget measure. It is a difficult position for us to go and consult with industry in the lead-up to the budget in relation to a budget measure.

Senator CORMANN —But it is fair to say that across the board—and I am quoting Dr McAuley because he cannot be accused of being an advocate for health funds or for privately insured people—there is a view that the most rational response to what is being proposed by the government is to go for a cheaper policy and downgrade your level of cover. Yet that is something that is not included in the modelling done by Treasury, so isn’t it then fair to say that the conclusions that you have reached underestimate the impact of the measure on a range of variables including the number of people expected to leave and the impact on public hospitals in particular. Downgrading cover means an increasing number of exclusions going to higher front-end deductibles. When we talk about cheaper policies we talk about excluding orthopaedics or cardiac or mental health. That is how you reduce your level of premiums if that is what you want to do. Now that means you are underestimating the impact on public hospitals, aren’t you?

Mr Robinson —I think it is difficult to quantify. There are going to be a number of factors which influence people’s decision to retain the level of cover they currently have. It may be that, as a result of the policies, people do go and revisit the level of cover they have. But I think it is also fair to say that people will look at the level of cover they require for the needs that they have for private hospital cover. We also need to take into account that we are talking about the top quarter of the insured population being impacted. The whole basis of the government’s policy is to withdraw assistance from those who have the capacity to pay for their private health insurance.

Senator CORMANN —When you say the top quarter are being impacted, what you are meaning to say is that the top quarter is being directly impacted. You have not modelled the second-round effects, for example, so you are only talking about the top quarter being directly impacted, aren’t you?

Mr Robinson —That is right.

Senator CORMANN —Have you reviewed the Access Economics assessment of this measure that was commissioned by Catholic Health Australia? They estimate up to 100,000 fewer people in private hospital insurance as a result of this. Why the difference?

Mr Robinson —I think people from different areas will use different methodologies in undertaking their estimates.

Senator CORMANN —But they have used the same data and the same methodology, haven’t they? Haven’t they just changed some of the assumptions, in particular those in relation to the number of people downgrading cover? I see you have got some advice there, so maybe you can talk me through it.

Mr Robinson —I am not directly familiar with the Access Economics analysis, but my colleague has just passed me a statement in relation to that analysis. Access Economics state that in summary they have reached broadly the same conclusions regarding coverage as the Treasury based on a conceptually quite different scenario analysis.

Senator CORMANN —I accept that their conclusion is that up to 100,000 fewer Australians will be in private health insurance as a result. The health department has previously told us that, based on Ipsos data, about 35 per cent of people over a two-year period will require access to a hospital. So the estimate of 8,750 people all of a sudden becomes an estimate of 35,000 people. That is reasonably material, isn’t it? I do not think that it is not materially different. I think it is quite materially different.

Mr Robinson —In broad terms we need to put that in perspective as a proportion of the entire insured population. Our estimate is that around a quarter of one per cent of people would potentially drop their private health insurance. On that basis that would suggest as to Access Economics—and I think they are acknowledging this in their analysis, and you are saying up to 100,000—that there is obviously some range in the estimate that they have undertaken. That is around one per cent. So what we are really talking about is a figure of a quarter to one per cent in terms of the total of people dropping their hospital cover.

Senator CORMANN —Can you put on record for me why, for measures like this, there is not any modelling of second-round effects given that obviously there are public policy implications from these sorts of measures that go beyond the immediate fiscal impact?

Mr Robinson —As I think we have mentioned on several occasions, when behavioural response is a key element of a policy and there is significant uncertainty in the first round, let alone the second round, it is standard practice, under our Charter of Budget Honesty guidelines, to not engage as to the second-round impacts of any policy.

Senator CORMANN —You say that yet you have sort of made assertions in the budget and these have been made in statements before this committee and during Senate estimates that spending on the rebate would double as a proportion of health expenditure within the next 40 years. For you to be able to make that assumption, and it was said in a private briefing of the economics committee, you have got to make assumptions on how premiums are going to develop over a 40-year period. You have got to make an assumption on how healthcare costs are going to track over that period. How can you make a comment like that without making assumptions as to second-, third- and fourth-round effects and as to a whole series of effects?

Mr Montefiore Gardner —The modelling that is in the IGR is of a different sort to the modelling that we do. It is a long-run projection. It takes how much is being spent by the government per person on private health insurance over the historical period and it projects that forward based solely on the growth rates that we see in historical data.

Senator CORMANN —But this data is used by the government as a justification for what it is doing. If it is good to use that figure on one side, why don’t you look at these sorts of longer term impacts on the other side? Part of our argument is that this will have a negative medium- to long-term impact. You are talking about the long-term impact of one policy scenario but you are not modelling or giving a perspective on the medium- to long-term impact of a different scenario. I am not sure that is the most objective presentation of a forward-looking trend. Specifically in relation to the 40-year forecast, you are saying that the expenditure on the private health insurance rebate would double as a proportion of health expenditure over the next 40 years. That means, all other things being equal, the private contribution made by people who are privately insured would also double as a proportion of federal government health expenditure over the same period, doesn’t it?

Mr Montefiore Gardner —I am not sure I quite understand the question.

Senator CORMANN —The 30 per cent rebate is just that—30 per cent of the contribution made to the private health system. There is the 30, 35 or 40 per cent, and then there is the 70, 65 or 60 per cent. If you expect the Commonwealth proportion to double over a 40-year period, that would be proportional to what you expect to be the total private health expenditure over that period, wouldn’t it?

Mr Montefiore Gardner —The comparison is that the rebate is expected to double as a proportion of Commonwealth expenditure on health over the next 40 years.

Senator CORMANN —If the cost to the Commonwealth of the 30 per cent proportion of the private health funding pool is going to double then 70 per cent proportion is going to double as well, isn’t it? It is not part of the Commonwealth expenditure, but if you take it as a figure and make it proportionate to Commonwealth expenditure over that same period it would have to double. It is absolutely basic maths. Surely if the 30 per cent proportion is going to double then the 70 per cent proportion of the same figure would have to double, if you compare it to the same overall expenditure item.

Mr Montefiore Gardner —That sounds correct.

Senator CORMANN —So essentially what you are doing is containing that proportion of the expense that is carried by the Commonwealth and forcing a larger proportion on those that continue to be privately insured. That is also correct, isn’t it? The cost is not going to reduce. The cost is still going to have to be carried.

Mr Montefiore Gardner —That is correct. That was, in fact, the point of the measure—to ensure that those who had the capacity to pay paid a larger share of their private health insurance costs—

Senator CORMANN —You mean the private healthcare cost, because it is not just their private health insurance costs. In the private briefing you said you expect private health insurance premiums to increase to the extent that they will because of what you expect will happen to the cost of health care over that period, didn’t you?

Mr Montefiore Gardner —It is a projection based on what has happened to the cost of private health insurance to the government over the last period.

Senator CORMANN —I go back to the statements that you made a couple of weeks ago—

Mr Coles —Perhaps we could clarify this with the press release put out by the Treasurer and Minister Roxon. The opening paragraph says:

The Government is rebalancing the suite of policies supporting private health insurance—so that those with a greater capacity to pay for their own private health insurance do so.

Senator CORMANN —I understand that. That is the government’s stated objective. I am now going by the evidence provided at the private briefing, where the chair said:

… spending on the current private health insurance rebate is growing rapidly and is expected to double as a proportion of health expenditure within the next 40 years—

and she asked why. Essentially your answer was: ‘Those projections are based on the methodologies that we use in the IGR, the Intergenerational report. It looks at the benefits paid out by age groups’—that is, benefits paid out, not health insurance costs. These are benefits paid out for health care. So there is an effect there from the ageing of the population. Obviously the benefits paid to people who are privately insured vary with age and tend to get larger as people age, so there is an impact there. There is also the effect of increasing costs in health. What we are essentially going to get as a result of this is that those who do decide to remain in private health will have to pay an ever-increasing proportion, whereas the Commonwealth proportion is going to be significantly contained. That is the effect of the measure, isn’t it?

Mr Montefiore Gardner —No, that is not the effect of the measure. The effect of the measure is that those who are earning over the income limits will pay the whole cost of their private health insurance, if they choose to take it.

Senator CORMANN —No, sorry. Your statement here is that over the next 40 years, if the parliament does not change anything regarding the private health insurance rebate, the cost to the Commonwealth is going to double as a proportion of overall expenditure on health. That is what you have said, isn’t it?

Mr Montefiore Gardner —Yes, that is right.

Senator CORMANN —Over 40 years. Now you are saying, ‘We’re proposing to change something, so it will not double.’ Does that mean that you expect the cost of health care to increase by less?

Mr Montefiore Gardner —No.

Senator CORMANN —Exactly. So if the Commonwealth now is paying less than it would if you do not make this change, somebody will have to pay. Who is that going to be?

Mr Montefiore Gardner —The private citizens.

Senator CORMANN —Exactly. Essentially, looking at your figures, given what your expectation is as to what will happen to private health insurance premiums over the next 40 years, what you are essentially saying in those statements is that you expect significant additional increases in the private health insurance premiums because the proportion that the Commonwealth will pay is going to reduce significantly as a result of this measure. It is no longer going to double. Given the change that you have introduced, what do you now expect to be—

CHAIR —Senator Cormann, is this your last question?

Senator CORMANN —There is one more after that.

CHAIR —No, Senator Furner has a question and that will be the end of it.

Senator CORMANN —Maybe this could be taken on notice and then I will ask the one question I would like to ask.

CHAIR —Do you have that question clearly in terms of taking it on notice?

Senator CORMANN —The question on notice is: in 40 years if the parliament passes this measure what will be the expenditure on the private health insurance rebate as a proportion of overall health expenditure?

Mr Montefiore Gardner —Sure, I can take that on notice.

CHAIR —And this question will be on notice as well.

Senator CORMANN —Okay. My final question on notice is: what is your estimate of the cost of administration of the means testing of the private health insurance rebate?

Senator FURNER —If I take you to the Access Economics report, it certainly concurs that Treasury used, in their words:

... appropriate tool for forecasting the impact of the means-testing of the PHI rebate and the associated changes ...

I take it there is no way, in relation to when Treasury did what I think you referred to as micro—help me here; what is the modelling method?

Mr Robinson —Microsimulation modelling.

Senator FURNER —That is it. There is no way of ascertaining what a tax payer’s income is when you do that modelling?

Mr Robinson —Do you mean in order to derive an estimate for the price elasticity? Sorry, you will have to elaborate.

Senator FURNER —Sorry—to ascertain the effect of the changes as a result of dropout, downgrades—I know you did not do any modelling on downgrades—and all the indications that witnesses have indicated will be a direct result of the outcomes.

Mr Robinson —The literature upon which we base our price sensitivity is not available by income level. As I mentioned earlier, the price elasticity of minus 0.3, which we subsequently discounted to minus 0.2, is basically a broad estimate of aggregate price sensitivity in the market. Where we do have the detail within our microsimulation model is in knowing how many taxpayers fall into each of the income gap categories, broken down by age group as well so that we can model the impact of the rebate for individual taxpayers on an aggregate average premium assumption.

Senator FURNER —Can you explain in some brief detail the difference between the 0.3 and the 0.2 elasticity in the result?

Mr Robinson —As I mentioned previously, the minus 0.3 is price elasticity which has been estimated on the basis of historical observed behaviour. It is a figure which appears in the literature. That basically means that, for example, for a 10 per cent increase in price you would assume about three per cent of the insured population would drop their private health insurance. The key thing is that, that being an aggregate, price elasticity is across the full private health insurance population. As I have mentioned previously, the government’s policy impacts on about the top 23 per cent of people with private hospital insurance. We know as well that it is people’s incomes which drive their decision for private health insurance and people on higher incomes are typically less sensitive to price changes in the insurance market. We discounted the assumed price elasticity from minus 0.3 to minus 0.2 on the basis of the view that price sensitivity is less at higher incomes.

Senator FURNER —Treasury also indicates that there will be 130,000 people captured by the new MLS and therefore the likelihood of balancing those that may drop out resulting in a lessening of the overall outcome and effects on PHI—

Mr Robinson —I will just qualify that number there. The 130,000 is the number of people in the top two tiers who are directly impacted by the higher Medicare levy surcharge. We estimate that there are around 310,000 Medicare levy surcharge payers altogether and the 180,000 in tier 1 will not be impacted by any increase in the Medicare levy surcharge.

Senator FURNER —But the effect will be in tiers 2 and 3 on 130,000—

Mr Robinson —That is correct.

Senator FURNER —and that is broken up into the numbers that you have indicated. I do understand that for tier 2 there will be an increase of 0.25 per cent and for tier 3, 0.5 per cent.

Mr Robinson —That is right.

Senator FURNER —A number of witnesses have indicated that the stick is not big enough to entice people to take up PHI. Do you have any comment on that?

Mr Robinson —As I mentioned previously, the percentage increases for people in those top two tiers are roughly commensurate with an average out-of-pocket cost on their private health insurance premium. For example, based on an average premium in the second tier it would relate to about a 29 per cent increase in private hospital cover whereas it is obviously going to be a 25 per cent increase in their Medicare levy surcharge, so in percentage terms they are very similar. The increase in out-of-pocket costs is about 43 per cent for someone in the top tier versus a 50 per cent increase in their Medicare levy surcharge.

Senator FURNER —A number of witnesses indicated that there will be a degree of downgrading, a dropping of ancillary matters and drop out as a result of these changes. Certainly, all of the witnesses from the various insurance groups were unable to identify the income of their members, because they just do not hold that data. I understand you have predicted that 8,000 will be tipped into the public hospital arena. I am wondering if you have a different point of view on what you have heard as a result of the inquiry so far.

Mr Robinson —The key thing there is, as I mentioned before, there is a lot of uncertainty. The private health insurers themselves do not, as you have mentioned, have income information for their members. There is no empirical evidence based on observed behaviour which estimates any price elasticity for people downgrading health cover. That is not to say that it will not happen, but, as I mentioned before, there are in the order of 20,000 health insurance products out there and the government’s policy may induce people to reassess the policy they currently have. People retain their private health insurance for many different reasons. Peace of mind is one of the key reasons why people take out private health insurance. People will look at what sort of cover they need to achieve that peace of mind.

Senator FURNER —Some of the witnesses appear to support the government’s proposals—Mr Wells, Mr McAuley and Dr Deeble. In particular Dr Deeble went to the extent of claiming that the proposal will result in costing a couple of cups of coffee. I am wondering whether you are able to comment on the assessments that have been made by those witnesses.

CHAIR —Mr Robinson, I do not think you can make—

Mr Robinson —No, I am probably not in a position to comment on the evidence given by other witnesses.

CHAIR —I do not think comparison with the price of coffee is something that Treasury has modelled, but you may want to put something on record about the amounts.

Mr Robinson —A couple of witnesses have also taken the view that people with private health insurance are not particularly sensitive to price change. They have also given evidence that they feel that the overall impact on private health insurance coverage will be quite minimal in the longer term.

Senator BOYCE —An issue that came up during our hearing in Melbourne was corporate purchased health insurance. I was hoping that you might be able to give me a sense of what percentage of the market this was and whether you took that into consideration in your assessment and modelling. The evidence we were given was that this area is likely to be decimated or cease to exist. I would like an assessment of how important you regard that to be to private health insurance viability.

Mr Robinson —We can take that on notice.

CHAIR —Thank you very much for your time and evidence. The secretariat will provide you with the specific questions taken on notice.

 [4.09 pm]