Australia’s healthcare system has been creaking and groaning like a ship’s timbers in a gale for years. According to the chief executives of some of the country’s largest health insurers, a tipping point looks to be not far away, a point past which there is no return and whole arrangement will collapse.

The problem stems from massive Government intervention in the market – healthcare is one of the most highly regulated sectors of the economy and this regulation will eventually destroy the system and it will have to be wholly redesigned and rebuilt. As the experience in the US shows, redesigning national healthcare is a hugely disruptive activity. APRA statistics show that the number of people under the age of 60 with private medical insurance in Australia is reducing. The number of people over age 60 with private medical insurance is still growing, but the rate of growth is slowing. At younger ages, the rate of withdrawal from private medical insurance or the lack of take up in the first place has been accelerating. Clearly, this will be driven by price – the cost of cover is too much for those people to justify. They are putting their money to other purposes. There is nothing wrong with that decision, but for our system of community rating based on age at entry, it means that the premiums that used to come from younger healthier people but were generally in surplus to their cost of claims, is no longer available to subsidise the older people, whose premiums are inadequate, at a cohort level, to fund their claims. The result is that overall premiums must rise, again, which will push out even more younger people and so on. Eventually the music will stop and there won’t be enough chairs.

Meanwhile, those going without private medical insurance will rely on the public hospital system. It provides fewer services than private cover currently does but the cost of health is not fully funded by the Medicare levy on income tax. The cost has been rising faster than the levy can be raised and with more claims on the system because the private system is funding fewer, the public funding crisis will get worse.

The structural source of the issue is twofold:

1) In the public system, no choice is offered to the patient as to the level of service or choice of doctor, choice of treatment. In the private system, what choice there is remains very limited.

2) The price that people pay for health care is completely unrelated to the services they use. Either they pay nothing, or they pay a levy based on their taxable income or they pay a government fixed price.

Both of these together create the wrong incentives. People respond rationally to incentives. If the incentives encourage overuse of services and underpayment by some, then do not be surprised if others decide to pull out. Governments can attempt to change how services are delivered and priced in a community but the attempts will always fail in the end, without exception. Unfortunately, much harm is caused along the way while the government of the day does its best to perpetuate the folly.

There is a solution. Health services, and how they are paid for, will have to be deregulated. The consumers will have to be given the opportunity to adjust their medical coverages to match what they are prepared to pay for. Some will willingly pay more for top quality care, others will pay less for a more basic service. Incentives matter. One way or another, this will have to happen – it is only a matter of time. A necessary consequence will be the public safety net Medicare will need to be constrained in the services it provides. The basic coverage will have to be exactly that – basic. Then, individuals can pay for what ever else they want. Whenever the expected premiums match the expected claims, insurance principles can be applied in a durable way – there will no longer be any forced cross-cohort subsidisation. This way, the system is fairer and more robust. Until that happens, the current gradual collapse continues like a slow-motion train wreck.