Ever since the Whitlam Government introduced Medibank, the conventional wisdom has been that Labor governments have been unsupportive of private health insurance. Labor governments have generally favoured the European single insurer model over the more expensive and inequitable US model of competing private insurers.

Until now.

Contrary to glib press reports, the Budget changes to private health insurance actually increase support for the industry, and do more to embed a two-tier health system — one tier for the well-off, the other for the plebs and the losers.

Let’s take someone — call her Gladys — with an income of $120,000, the point at which the rebate would cut out under the Government’s proposals. Imagine her taking a basic hospital only scheme with exclusions and the highest co-payment. Such policies are available for just over $700, or $500 after the 30 percent rebate.

At present she would pay $512 for the cheapest Medibank Private product. Without the rebate she would pay $731. So, at first sight Gladys is $229 worse off.

But the other aspect of the budget changes is that the penalty she will pay — the “Medicare Levy Surcharge” — if she chooses not to have private insurance, increases from $1200 (1.0 percent of income) to $1800 (1.5 percent of income). That’s a $600 higher incentive.

Her net incentive to hold private insurance rises by $371 (which is $600 minus $229).

And the higher her income, the greater is her incentive. Consider someone with an income of $500 000 taking out a $2500 comprehensive policy — about the most expensive policy available. Loss of the 30 percent rebate costs $750, but the tax incentive has risen from $5 000 to $7 500. The net incentive has risen to $1750.

Even though they will pay more, the incentives for the well-off to hold private insurance are actually higher. The hysterical claims by the insurers that this will cause a rush out of private insurance lack credibility; their higher income clients will become even more locked in to private insurance.

It’s extraordinary for a Labor Government, with a minister for Social Inclusion, to extend a set of incentives for the well-off to opt out of sharing their health care with others, and to support a mechanism which encourages queue-jumping, thereby worsening stress on public hospitals. And it’s extraordinary for a government which boasts of its economic credentials to support to an industry which is bureaucratically heavy and which, as international experience shows, contributes strongly to health care price inflation.

If there is one sound outcome from these measures, it is that the well-off will no longer have a 30 percent incentive to hold ancillary cover, for the tax penalties relate only to hospital cover. Ancillary insurance is a particularly poor product, for almost all claims are capped, leaving the consumer with the open-ended risk, and people with high incomes should be able to self-insure for dental and similar services — if they cannot hold $2000 or so in liquid assets they are in serious need of financial advice!

Otherwise the changes are poor public policy. Perhaps the Green and Independent Senators can send the government back to the drawing board — to find some measures which support private hospitals without the distortion of private insurance and which contribute to rather than detract from social inclusion. Or, if there is to be a compromise, to allow through the cuts in the subsidies while rejecting the increase in the Medicare Levy Surcharge.

Ian McAuley is a Centre for Policy Development Fellow and lecturer in Public Sector Finance at the University of Canberra.