The demand for hospital care and private health insurance in a mixed public and private health care system : theoretical and empirical analysis for the case of Australia

Abstract

This thesis examines the processes that underlie how individuals seek hospital care and purchase private health insurance in a mixed public and private hospital system such as that of Australia. To achieve this objective, a theoretical model with explicit functional forms is first developed to analyse the determinants of the intensity of hospital care use, the choice to seek public or private hospital care and the decision to purchase insurance. The key areas of interest are how direct and indirect 'prices' for hospital care, vis-a-vis waiting times and private health insurance, influence the decisions to seek either public or private care and the intensity of care. A key result from the analysis is that individuals with more severe medical conditions are expected to have a higher probability of seeking treatment from the public sector because the duration of wait for public care is shorter due to priority setting in the public sector. In addition, the availability of private hospital insurance reduces the effective price of private hospital care and increases both the probability that individuals seek private treatment and the intensity at which private hospital care is utilised. A simultaneous equation econometric model that is based on the structure of the theoretical framework is developed. The econometric model accommodates count and binary outcomes variables as well as endogenous binary regressors. The model is estimated using data from the 2004-05 National Health Survey to conduct two empirical analyses. The first analysis examines the determinants of the intensity of hospital admissions and the decision to purchase private health insurance. A key result is that having private hospital insurance increases the expected number of hospital admissions each year by 19 percentage points. In addition to insurance status, the intensity of hospital admission is also influenced by age, gender, employment status, health status and locality. The second empirical analysis examines the determinants of the intensity of hospital care use and the decisions to seek public or private hospital care and purchase private health insurance using a simultaneous framework. The results indicate that individuals with private hospital insurance are 81 percentage points more likely to seek hospital care as a private patient. Age, household income, private sector employment and the presence of dependent children are factors that increase the probability that individuals obtain private care. On length of stay, the results show that the expected length of hospital stay by private patients is on average 1.11 nights shorter than that of public patients which suggests that systematic differences exist in the types of medical conditions for which individuals seek public or private treatment. Contrary to existing evidence, this study does not find any significant moral hazard effect amongst patients who sought hospital care as a private patient. From a policy perspective, the results suggest that the effectiveness of government initiatives in Australia to encourage the purchase of private hospital insurance is likely to be limited to reducing public hospital waiting lists and lowering waiting times for public treatment.