Overcoming adverse selection death spirals in private hospital insurance through Lifetime Health Cover: the Australian experiment

In response to the sharp drop in private hospital insurance take up and the risk of an adverse selection death spiral under community rating, Australia introduced Lifetime Health Cover in July 2000. Lifetime Health Cover penalises people who delay the take up of private hospital insurance until after age 31 with an ongoing loading on insurance premiums. Using the universe of tax records, we find that the introduction of Lifetime Health Cover resulted in a large and statistically significant  increase in the take up of private hospital insurance by singles. The increase was largest for younger people, thereby deepening the insurance pool. We estimate that the increase in take up by tax filers was 15.8 percentage points (80.6 per cent increase) for singles aged 31 and was only 3.6 percentage points (8.0 per cent increase) for singles aged 64, despite them facing the highest loading if they delayed the take up of insurance. Surprisingly, we find that singles under age 31 also responded to Lifetime Health Cover. This may reflect confusion about what age people needed to take up private hospital insurance, particularly by people aged 30. But, the response for people aged 26-30 was more pronounced for those who were above the Medicare Levy Surcharge threshold. This suggests that the additional ongoing penalty under Lifetime Health Cover may have helped people overcome optimisation frictions, including the upfront search cost for private hospital insurance cover.