There is a recurring difficulty with government schemes designed to make things fairer. Somebody eventually receives the bill. Labor's proposed changes to the private health insurance rebate provide an unusually clear example, because new Parliamentary Budget Office modelling indicates that a remarkably large share of the government's savings will come from age pensioners.
The government proposes removing the additional private health insurance rebate currently available to Australians aged 65 and over. From April 2027, support would instead be determined by income rather than age. The government expects the change to save about $3 billion, which it says will help fund improvements to aged care. Its stated principle is intergenerational fairness: people should receive the same private health support at the same income regardless of whether they are 45 or 75.
As an abstract proposition, that has a certain bureaucratic neatness. Then somebody asked the Parliamentary Budget Office who would actually pay. The answer is considerably less neat. Analysis commissioned by independent MP Monique Ryan estimates that about $1.6 billion of the savings will come from approximately 1.5 million age pensioners who hold private health insurance. Another roughly $1.6 billion would come from people aged 65 and over who do not receive the pension. Pensioners therefore account for about half of the expected savings.
These are not, by definition, Australia's plutocrats. Eligibility for the age pension is means-tested against income and assets, subject to the usual exemptions including the family home. COTA Australia says pensioners constitute about 42 per cent of all people affected by the change and more than half of the affected population aged over 70.
Therein lies the peculiar politics of the proposal. The government is effectively asking one group of older Australians to pay more for their own health insurance so that the Commonwealth can spend more money on services for older Australians. Money has performed one of Canberra's more impressive circular journeys.
There is, of course, a respectable argument for abolishing age-based rebates. If two Australians have identical incomes, why should the older one automatically receive a larger government subsidy merely because of age? Labor says assistance should be based upon capacity to pay rather than date of birth, and that is not an inherently absurd proposition.
But public policy cannot stop at the elegance of the principle. It has to examine the population upon whom the principle actually falls.
An age pensioner who has maintained private health insurance may have done so for decades precisely because health expenditure becomes more important with age. Private insurance for such a person is not necessarily a luxury comparable with an overseas holiday or expensive car. It may be a deliberate decision to preserve access to treatment and reduce dependence upon the public hospital system. Now that person is being told that the incentive helping maintain that insurance will be reduced because the government needs savings for aged care.
The government itself does not deny that premiums will effectively become more expensive for older Australians. Health Minister Mark Butler has acknowledged that the change represents a cost-of-living hit but argues that difficult budget decisions are necessary if additional aged-care expenditure is to be funded. Labor's modelling predicts that around 44,000 people will abandon private health insurance as a consequence, approximately 0.4 per cent of membership.
That estimate is crucial because the entire exercise contains a potential feedback problem. If an older Australian retains private insurance, the Commonwealth saves money by reducing the rebate. If that person instead decides the higher premium is no longer affordable and moves entirely into the public system, some of the apparent saving may be displaced elsewhere in government expenditure.
Several state and territory governments have consequently expressed concern about additional pressure on public hospitals. Queensland and Tasmania have called for the proposal to be abandoned, while New South Wales, Victoria, South Australia and the Northern Territory have also raised concerns. On the other hand, University of Melbourne health economists have produced modelling broadly supporting the Commonwealth's estimate that departures from private insurance will be limited, and former health department secretary and health economist Stephen Duckett has argued that the overall systemic effect will be small.
That disagreement deserves attention. Predictions that the public hospital system will suddenly be overwhelmed should not be presented as established fact when independent modelling disputes them.
But there is a second issue that does not disappear even if Labor's modelling proves completely correct. If only a relatively small number of pensioners abandon their insurance, that means most will stay and absorb the increased cost. That may be good for the government's budget arithmetic, but it does not make the expense disappear from the pensioner's household budget. The saving to Canberra is substantially the additional cost imposed elsewhere.
COTA's objection therefore goes to distribution rather than merely hospital capacity. It argues that people on fixed and low incomes will be significantly affected and says its own research found one in four older Australians living in poverty. The organisation wants the proposal reconsidered.
There are also awkward individual consequences hidden inside broad budget categories. Reporting in The Australian has highlighted cochlear implant users aged over 65 who rely upon private insurance for replacement sound processors. Only months before proposing the rebate reduction, Butler had himself pointed to private health insurance and the rebate as an avenue of support for older cochlear implant recipients. That illustrates the danger of viewing private health insurance simply as a subsidy to people wealthy enough to afford it.
Older Australians use more health care. That is hardly surprising. Encouraging those who can maintain private cover to continue doing so has historically been justified partly as a means of sharing demand between the private and public systems. The higher rebate for older Australians reflected that reality as well as the greater cost of maintaining insurance later in life.
The government's alternative principle is easily stated: assistance should follow income rather than age. Fine. But the PBO numbers then deserve to be taken seriously. If a reform justified in the language of fairness obtains roughly half its savings from means-tested pensioners, policymakers should at least ask whether the mechanism has produced the distributional result they intended.
There is an obvious compromise available for parliamentary consideration. Ryan is proposing an amendment exempting age pensioners while allowing the broader reform to proceed for other older Australians. That would preserve much of Labor's move away from an automatic age entitlement while protecting those already assessed by government as having sufficiently limited income and assets to qualify for the pension.
Whether that compromise is affordable is ultimately a budgetary question. It would necessarily reduce the savings available for aged care or require the Commonwealth to find the money somewhere else. There is no costless version of the decision.
That, however, is precisely the point. Government savings are rarely savings in the ordinary meaning of the word. When Canberra reduces a rebate by $3 billion, it has not made $3 billion of economic cost vanish. It has changed who pays it.
The Parliamentary Budget Office has now provided a clearer answer about who pays a substantial part of this one. Around 1.5 million of them are pensioners.