Government attempts to save money by cutting back rebates on health insurance may have backfired – as we reported might happen.

Last month, the federal government announced that it would strip more than $1 billion in savings from its private health insurance rebate. Today, The Australian reports that a rising number of Australians are scaling back their private health insurance. With premiums set to rise again in April next year, and the 30% health insurance rebate set to narrow, we’ll likely see more Australians scaling back their private health insurance or leaving altogether.

Frequent premium increases and changes to government subsidies and surcharges are adding to the frustration of consumers.

A recent report by a unit set up by the Federal government raised concerns that if Australians increasingly shy away from private health insurance, the public system will come under immense pressure. That echoes the view of Ramsay Health Care (ASX: RHC) boss Chris Rex, who slammed the government over the proposed changes.

For listed private health insurer, NIB Holdings (ASX: NHF), Australians cutting back on private health insurance, or dropping back to the public system are an issue, although the company believes that policy non-renewals will be around 0.6%, and policy downgrades just 2.2% of its policies in place. NIB’s expansion into New Zealand and other markets, should offset most, if not all, of the falls in lost policies.

Healthcare is a substantial cost for governments globally. In many countries at least some support is provided to most areas of healthcare. Sigma Pharmaceuticals (ASX: SIP) and major competitor, Australian Pharmaceutical Industries (ASX: API) benefit from subsidies under the Pharmaceutical benefits Scheme (PBS), but as healthcare costs for the government rise, subsidies to the healthcare sector are prime candidates to be pruned. With the government aiming to save more than $500 million per annum from the PBS, both companies will need to adapt to survive.

The Foolish bottom line

Government support for healthcare tends to go in cycles. When times are tough, the government tends to cut back subsidies, and often a relaxed demeanour when the economy is growing nicely. We’ll likely see the government make health insurance more attractive, if we see consumers leaving health insurance en masse.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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