Opinion: I’ve read the FSC commissioned report entitled The role and contribution of insurance to NZ healthcare.

I don’t know what the FSC’s brief to the authors was, so I have no idea if it answered questions the FSC wanted answers to.  Advisers may choose to read the report. It is in Good Returns' new research section.  The report gives a useful explanation of the healthcare system in some countries, in particular Australia.  This is not a critique of the report, just some of my observations.

The report makes some interesting observations:

• Cost of healthcare to the Government is set to rise significantly as a percentage of GDP, an ageing population being a large driver of that.  Those over age 80 accounting for by far the greater proportion of healthcare ‘consumed’. (Figures include significant costs for aged care (I assume this is aged residential care), and mental health, neither of which is typically covered by private health insurance (PHI)). (Source Treasury)
• PHI appears to account for 5% of healthcare funding (source OECD).   It’s not clear what that 5% is a proportion of, my suspicion is it includes total Government expenditure, including for mental health care and aged care.  More importantly, it is my understanding that around two thirds of elective surgery was performed by private providers for the year to 30 June 2025.  This is very significant although some of that would have been funded by ACC.
• Apparently, NZ PHI ‘serves a secondary function’ and offers ‘duplicate’ cover (explained as ‘access to services from providers not covered by the public benefit package…’.).  I’m not sure I understand what this means.  In NZ PHI cover is typically limited in the main to Surgery and Hospitalisation, Specialists and Diagnostic tests, most of which are also provided in the Public System.  For Acute treatment, treatment for chronic illness and many more, the Public System is the only provider and must still be accessed by holders of PHI.
• 35% of adults and 29 % of children are covered by PHI.  This is below the OECD average.  47% of those are covered under a group scheme subsidised by an employer.

The report goes on to suggest the following as the case for PHI:

• Expansion of capacity, reducing pressure on public waiting lists; and
• Possibility of greater consumer choice and faster care for those willing to pay.

In my opinion, these arguments for PHI appear to be self-evident. I’d add another case: the ability to fund medical treatment not funded by the Public System.

On the negative side the report suggests the following against PHI:

• PHI could compromise equity, those who can pay get care quicker …’the central argument is that every hour a specialist spends in private practice is an hour not available to public patients.’ 
• ‘Greater dependence on insurance could increase the risk of adverse selection, may require substantial public subsidy (usually via the tax system) to remain viable, and could generate administrative overhead that doesn’t exist in single-payer systems.’ 
• ‘There is also some concern that greater use of insurance may allow private providers to “cherry pick” elective work, while public hospitals retain complex cases, emergencies and teaching burdens’.

In my opinion, these arguments against PHI don’t appear to be particularly strong.

In the first place, the ‘central argument’ on equity assumes, it appears to me, that, in the absence of PHI, specialists would have no alternative but to work in the NZ Public System.  On the contrary, I suspect that, in the absence of PHI, the private system would shrink somewhat but not disappear and Australia would get many new specialists.

On the second argument, I’m not sure what ‘public subsidy’ might be required for PHI to remain viable. PHI insurers in the main either assess health at application or exclude pre-existing conditions.  They are not compelled to accept all lives and all pre-existing conditions.  They are free to price for risk and age, and their financial stability is closely regulated by the RBNZ. 

Thirdly, private providers are already pretty much only providing treatment for “elective work”, since PHI typically only covers limited, non-acute medical treatments.  They already do not cover acute (emergency treatments), for example.  One could argue the “cherry picking” is already well established, but that this nevertheless removes the burden of a great many elective procedures (and diagnostic tests) off the Public System.

My impression is that, done right (and with current Government funding of the Public System), PHI can relieve pressure on the Public System, allowing that to reduce waiting periods for those who cannot afford PHI.  In my view it’s desirable to reduce waiting periods for everyone, even if that means some wait longer than others.  Equity is meaningless if the result is longer waiting periods for everyone.

I’d like to see the following questions answered.

• If PHI disappeared for all practical purposes (because it got too expensive) and the 35% of adults and 29% of children currently insured lost their private provider funding, where would most go for treatment?   
• If Government incentivised PHI, by tax deduction, removal of FBT, applied a zero GST rate to private medical costs, what would happen?
• Is a dollar of tax forgone by incentives outweighed by the reduction of demand on public healthcare and therefore reduction on public healthcare funding?  What are the indirect economic and fiscal benefits of shorter treatment wait periods on productivity?  Is there any empirical evidence on this?

Perhaps people who can afford it are already holding PHI, so incentives would not significantly improve uptake. However, one has to believe that the biggest benefit to public health cost pressure would be continued PHI covering older people, since they account for by far the highest portion of public healthcare cost. 

Perhaps making PHI tax deductible for over age 65’s would be very efficient.  No doubt someone would be unhappy with the inequity of that, but considering PHI premiums for a couple would likely swallow 25% to 35% of Superannuation payments in the early retirement years and rising dramatically over time, perhaps that might be fiscally beneficial, especially with some imaginative product development from insurers. 

For advisers the question remains, how should we be advising clients today?