Ian McAuley keeps finding new reasons for attacking the private health insurance industry — see yesterday’s Crikey article — the latest being the industry’s contribution to inflation.

It is true that private health insurers, like the government insurer, struggle to contain costs. All insurers face the challenge of moral hazard – the incentive for both service providers and service consumers to exploit the third party funder. The challenge is greater in health than other areas of insurance because of the power of many health providers over both consumers and funders. It is also greater because of regulatory impediments to the use of competition amongst insurers and service providers.

Health inflation is commonly higher than economy-wide inflation in part because of these market failures and constraints. But governments also struggle, and are themselves reluctant to take full advantage of competitive forces.

It is important to recognise that increasing PHI premiums are not a measure of health inflation. The premiums are increasing because of increasing service utilisation as well as costs per service. The total increase in costs per capita is in line with costs of publicly funded health services per capita (between 6 and 7% per annum in recent years). Arguably, we should expect the PHI costs per capita to be increasing faster than public health costs per capita (if private health is seen as a “safety valve” for the cost controls on public health expenditure).

That said, it is certainly true that current PHI subsidies and regulatory arrangements are a dog’s breakfast. The PHI rebate is but one part of the mess, and not the most important.

But replacing the arrangements with subsidies for private hospitals is no real answer either. At present in most states the playing field amongst hospitals for both public and private patients is not even: subsidising private hospitals directly will not fix this. Nor would it address the problem of doctors’ charges above Medicare rebates. Moreover, it would deny private patients the ability to insure themselves against the risks of wanting/needing to access private hospital care.

An alternative prescription to McAuley’s would be to pursue more even playing fields for competition amongst hospitals for both public and private patients, to encourage more use of competition including amongst doctors, and to make insurers accept more responsibility for their members eg to meet all medical costs, including any public hospital costs of their members. This approach would also require rationalising the overall subsidy for those taking out PHI (replacing the current dog’s breakfast).

My strong impression is that McAuley’s real agenda is to make PHI play at most a residual role in Australia’s health system, not to make it more efficient. There is a coherent philosophical argument for this, but there are equally coherent alternative philosophical arguments. The ‘correct’ answer is a matter for political judgment, not technical analysis.

We could have the Canadian approach (denying the right to privately purchase services covered by Medicare), the UK approach (allowing the right to privately purchase services, but with no access to any of the subsidy otherwise available through the NHS) or our traditional approach of allowing people not only the right to opt out but also the right to some of the government support otherwise available. These different philosophies reflect different views on the meaning of ‘equity’ and the importance of ‘choice’.

The Rudd Government’s stated policies seem to suggest continuation of the current philosophy. If that is so, we should stop simply attacking PHI and look for genuine reforms to improve efficiency in the health system, both in the private and the public sectors.

Andrew Podger is a former Public Service Commissioner and former secretary of the Federal Department of Health and Aged Care