As part of the carefully scheduled program of budget leaks, the government has leaked a likely change in the medicare levy in this weeks’ budget.

A few blogs have comments – Larvatus Prodeo, wonders whether this will increase the pressure on the public system with a long comment thread, covering all sorts of health economics ground, and Joshua Gans comments that it is important to understand the price elasticity of health insurance when assessing this kind of policy change.

Some commenters miss this, but it seems to me that most people look at this kind of policy from the lens of a healthy person. And for a healthy person, it isn’t really cost effective to take out private cover. The public system covers you for catastrophes, and the chances of you receiving more than you pay in premiums over the next year are pretty small.

However, much of current health policy (as it impacts private health insurance) is an attempt to force as many healthy people as possible to take out private cover. Why? The insurers are required to charge the same premium for everyone. As I discussed in these two posts, most people understand their own health pretty well. The unhealthy people (like my cousin with chronic asthma) know that they are at a reasonable risk of needing medical care. The healthy people – who are generally younger than the unealthy people – know that the value of their health insurance is pretty low, and are often prepared to take the risk of some nasty event catapulting them into the public system.

But health insurers desperately want those healthy people. Because it reduces their overall premium. So that’s why they give out silly things like gym memberships and payments for alternative therapies. Because it’s a marketing ploy for the young. And the government’s compulsion in the form of an extra medicare levy gave the private funds an extra way of attracting healthy people – those well enough off to earn enough to pay the extra levy are also more likely to be healthy and not suffering a chronic disease.

I imagine that the premiums will find a new, higher, equilibrium level, as the proportion of healthy workers in the funds goes up. And private health insurance will become slightly less of a tax on the better off and the sick, and instead become more of a tax on the very well off and the sick.

Because as several of the larvatus prodeo commenters noted, the public system is at its worst if you have a chronic, but not life threatening disease. For those people, private health care will make an enormous difference to their quality of life.

I’d like to think that the changes to the healthcare system that might come with this proposed tax change could improve the public experience for the somewhat unwell. But I’m not holding my breath.