Brash nibbles at tax carrot for insured

National's leader, Don Brash, has raised the prospect, in a non-committal way, of tax relief for people paying for private health insurance. It is a policy the health insurers have been advocating.

The Treasury opposes it, on the grounds that it would cost the public purse more than it would save by encouraging more people to go private.

The justification Brash offered in a speech last Friday was not fiscal but ethical: "It is not at all clear to me why some New Zealanders should be expected to pay twice for their healthcare and the education of their children - once through their tax and once through health insurance premiums and school fees."

But in the next breath he seemed to have second thoughts, noting that "the more exemptions and deductions there are, the less likely it is we can move to a lower [tax] rate structure".

The cynical view would be that such a proposal is a sop to National's electoral base, as health insurance is more common among those on higher incomes. Could this be a consolation prize for foot-dragging on getting rid of the top personal tax rate?

Coupling the issue with school fees is interesting, however.

The Institute of Economic Research, in a 2001 report on the tax treatment of health insurance premiums, cites as a precedent the case of integrated (mainly Catholic) schools.

They used to be entirely funded by parents. "However, after 1973, the Government recognised that those who chose to educate their children in integrated schools were reducing the burden of education on the state. Now integrated schools get the same funding as state schools."

Opponents of a tax break for health insurance see it as more akin to independent than integrated schools: if people prefer private provision to the state-provided alternative, that is fine, but they must expect to pay.

The institute acknowledges that the political culture is wedded to the idea that access to healthcare should be based on need rather than ability to pay, so the public sector will remain the core of the system.

But when healthcare is delivered at low or no cost to users, demand will tend to exceed supply, even in a generously funded regime. "Hence rationing is needed: long waiting times, limiting of elective surgery, prioritisation and strict assessment criteria," the institute says.

The tax system assumes private health insurance provides no social benefits over and above the benefit to the user. "This is demonstrably untrue."

While those in low-income households are heavier users of healthcare, uptake of private health insurance is strongly skewed towards higher-income earners.

"This indicates the equity of healthcare provision could be improved and the efficiency of Government spending enhanced by improving access of lower-income households to private insurance," says the institute.

But the Treasury doesn't buy it.

"Whatever the arguments in support of tax relief, we consider that any proposed insurance subsidy falls at the first hurdle if it cannot break even from the Government's perspective," it said in a response to the institute report.

"Our modelling shows that it cannot do this because the majority of the total subsidy is simply a transfer to people who would have had health insurance anyway."

A 30 per cent tax rebate along the lines of Australia's would cost $202 million (or would have in 2001) with a potential saving of $94 million, leaving a net cost to the taxpayer of $108 million, it reckons.

But the saving is likely to be significantly less than $94 million, the Treasury says. An additional $1 spent on insurance would not reduce pressure on the public system by $1 because:

* Private insurers are likely to have higher overheads.

* Privately financed healthcare is generally more expensive than public care.

* In many cases, health insurance buys different services from those offered in the public system (such as co-payments to GPs and varicose vein surgery).

* And some of the value of the proposed rebate might be captured by the health insurers and those who provide services for them by enabling them to increase prices more than they might otherwise.

How much of a reduction in pressure on public health services a tax rebate would engender depends on the price elasticity of demand.

The institute's modelling found that a 1 per cent fall in premiums (after tax) would trigger a 0.54 per cent increase in the number of people covered.

That suggests the proportion of people covered would rise from about 33 to 38 per cent in response to a 30 per cent tax rebate.

In the meantime, Southern Cross, with two-thirds of the market, suggests price elasticity is working the other way. Use of private insurance is falling as costs and premiums rise, it says.

Southern Cross accuses the Government of being short-sighted.

By rejecting the proposal of a rebate because it does not break even, the Treasury overlooks the possible long-term impact of not supporting the industry.

"If the current arrangements remained in place, and health insurance coverage halved in 10 years, the added burden on the public health system could be substantial."

But the evidence for this is not clear.

Southern Cross gives evidence of a decline since the early 1990s in the proportion of the population it covers, but industry-wide data that only goes back to the late '90s shows coverage as flat.

Statistics New Zealand's household economic survey found that between 1989 and 1998 the proportion of households with health insurance rose slightly, from 32.2 to 33.5 per cent.

Supporters of a tax break cite the Australian experience. Coverage rose sharply from 30 to about 43 per cent after a rebate was introduced.

However, the Australians also brought in a tax penalty for those on high incomes who don't have insurance, and made regulatory changes.

With the cost of the public health system climbing at an unsustainable rate despite temporarily favourable demographics, the case for more private provision is strong.

But any policy initiatives to foster that need to be carefully designed to mitigate the risk of cherry-picking and perverse incentives to ignore prevention measures.