Economics to solve health problems

By James Whitmore

Faculty researcher Professor Yuting Zhang has been awarded a Future Fellowship from the Australian Research Council, to fund her forthcoming project on private health insurance.

Can you tell us about the project you've been awarded a Future Fellowship for?

This project aims to study choices, consumer behaviours, and policy challenges in two private health insurance markets: Australian private health insurance and US Medicare prescription drug insurance.

I’m hoping we’ll uncover new evidence that can help Australia develop a new framework for private health insurance, new knowledge on how consumers respond to complex pricing structures, and new policy proposals to improve the overall efficiency of the health system. It will help us redesign private health insurance and the health system to improve Australians’ health while saving health costs.

Yuting Zhang

Why is the project important?

Australian private health insurance is in crisis and a new framework with effective insurance design features is needed urgently. It’s not simply a matter of increasing the number of people who have private health cover, which is what other researchers have suggested and previous policies have tried to do. Instead, my goal is to increase the efficiency of the overall public and private healthcare system.

What is the biggest issue facing the health insurance sector?

There are several major issues when it comes to private health insurance in Australia.

First, private health insurance here is in a 'death spiral'. Premiums are rising much faster than wage growth. Consumers are dropping their cover, especially those who are young and relatively healthy. The people who are left are sicker and more likely to use services, driving insurance costs and premiums up further. Why is this happening? Could it be fixed with flexible premiums?

Second, the ways that insurers share costs with consumers are getting more complex. People are often caught by surprise by high-out-of-pocket expenses after receiving treatment.

Third, there is no price negotiation/control. Health care providers can charge whatever they want, and insurers simply have to pay the bill.

Finally, government rebates and penalties to encourage people to take out health insurance aren’t working. Each year the Australian government spends $6 billion on rebates. How is this justifiable when all Australians can already access Medicare? The argument goes that private health care takes the pressure off the public system, and improves the quality of care in public hospitals. But there is little evidence supporting this.

How can economists help solve health problems?

As economists, we study how we can allocate limited resources to get the best outcomes, for instance, how to fund healthcare. Healthcare comes with its own particular set of economic circumstances too – there’s not much competition, it’s hard for consumers to know the price of medical care, and people aren’t always completely rational when they’re sick or need healthcare. Economists have tools that can help us figure out how people behave in markets like this. As an applied economist, I use large amounts of existing administrative data (e.g., hospital, tax files, billing information for medical care) to figure out how people respond in the real world and evaluate intended and unintended consequences of health policies.