Health insurance and demand for medical care : theory and application to Australia

Abstract

Private health insurance plays an important role in Australian health care finance, complementing the universal health insurance system, Medicare, established in 1984. The road to the current health insurance system was long and winding, filled with political passions and debates. This study covers the major historical steps leading to the introduction of Medicare, and analyses specific features of the Australian private health insurance sector. After the recent policy change, regulations of the private health insurance industry were somewhat eased, and a new range of benefits permitted to be provided. This thesis seeks to analyse the likely effects of the policies, and develops a theoretical model which adds to the existing literature on the demand for health. Studies of demand for medical care and health insurance constitute an important part of the health economics literature. Grossman’s theory of demand for health has become a major framework for the analysis. Generalisations of the Grossman model to incorporate uncertainty about health status and insurance against medical expenditure are major challenges for theoretical economists working in this area. This thesis proposes a new dynamic continuous time stochastic optimisation model of demand for medical care, in which uncertainty about health and wealth is modelled by correlated Wiener processes. Consumption and leisure decisions are included in the model. A health insurance contract with coinsurance rate is introduced in this model, and a two-stage procedure of choosing an optimal ex-ante coinsurance rate, and optimal ex-post amount of medical care, consumption and leisure is discussed. The theoretical model is then applied to the 1993-94 Household Expenditure Survey, Australia. Even though the full structure of the model cannot be tested on this dataset, some empirical evidence is found in support of the new theoretical model. A two-part bivariate probit model and quantile regression analysis allowed the estimation of the income elasticity of demand for medical care and health insurance, which was shown to vary with income. To study the quantitative effect of the recent policy change based on the new theoretical model, a finer level of data is needed.