Individual choice of health insurance in Australia is limited to supplementary health insurance policies provided by private (though government-regulated) health insurance funds. This supplementary insurance provides an outlet for consumers who desire a higher level of health care than that provided by the compulsory government-managed Medicare health insurance scheme. And it provides budgetary relief to the government to the extent that it covers health care that would otherwise be provided by the government. Study of insurance choice in Australia is clearly of relevance to any regime with a mix of compulsory basic cover and optional supplementary private cover.

Despite relatively stable institutional arrangements since the 1984 establishment of Medicare, the proportion of Australians covered by hospital insurance policies purchased from private health insurance funds has declined steadily from 49 percent of population in 1986 to 36 percent of population today. Here we investigate whether or not long-term health risk is a major determinant of health insurance choice in this environment. This is done using an unusually rich data set, the NCEPH Record Linkage Pilot, which has administration records on individual health care utilisation over the past five years and several measures of health status. In addition to studying the decision on whether or not to insure, we model data on the amount spent on insurance, the duration of time that people hold health insurance, and the self-stated reasons for holding health insurance.