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As we celebrate Medicare’s 40th birthday, here are four ways to grow a more resilient health system

Introduction by Croakey: Debates about taxation in Australia are notorious for generally failing to address critical structural and equity issues, as we are now seeing with so much of the public commentary around the Labor Government’s planned changes to the stage 3 tax cuts.

A report recently published by the OECD underscores the importance of taxation for health system financing – another reason for health advocates to be engaging proactively in taxation policy – and identifies key policy levers for financing more resilient health systems.

Policy analyst Charles Maskell-Knight examines the report in an Australian context, and says it highlights the importance of system reform to: stop doing things that don’t work; start doing things that avoid long-term problems; do things in line with best practice guidelines; and make sure everybody does things as efficiently as the most efficient safe provider.

It is timely advice on the eve of celebrations marking the 40th anniversary of Medicare (and please do join us for a special #CroakeyLIVE webinar on Monday, 5 February to make some related plans).


Charles Maskell-Knight writes:

As I reported recently in The Zap, the OECD published a report in early January titled Fiscal Sustainability of Health Systems: How to Finance More Resilient Health Systems When Money Is Tight?

The report argues that rising incomes, demographic pressures, and expansion in the scope of health treatments will drive growth in health expenditure.

These pressures are exacerbated by the impact of the pandemic on the health sector, which highlighted the need for additional spending to build health system resilience, including by “protect[ing] underlying population health, fortify[ing] the foundations of health systems through a digital transformation and investment in core medical equipment, and bolster[ing] health professionals working on the frontline”.

The report estimates that the combined impact of these factors, absent other major policy changes, will lead to average health expenditure as a share of GDP across the OECD increasing by three percentage points to 11.8 percent of GDP in 2040.

This analysis by the OECD is broadly consistent with the analysis in the 2023 Intergenerational Report prepared by The Treasury. Focusing only on Australia government expenditure – and excluding the 55 percent of health funding contributed by the states and the private sector – it estimates a sustained increase in health spending as a share of GDP.

Demographic factors are forecast to contribute around 40 per cent of the projected growth, with the balance due to other factors such as new technology.

Solutions

The OECD report identifies four broad policy levers to finance more resilient health systems:

  1. Increase government spending and allocate part of these additional funds to health
  2. Increase the allocation to health within existing government budgets
  3. Reassess the boundaries between public and private spending
  4. Find efficiency gains.

How might these options apply to Australia?

1. Increasing government expenditure necessitates increasing government revenue (or increasing government debt, which ultimately needs to be serviced with increased revenue).

While there is a constant conservative commentary about high rates of taxation in Australia, general government revenue as a share of GDP at just over 36 percent is the ninth lowest of the 38 countries in the OECD. It is over 10 percentage points lower than the average for the European Union.

There is clearly economic scope for government to raise a lot more revenue.

Unfortunately, as Danielle Wood and Iris Chan wrote in The Guardian last year: “Australia’s ‘conversations’ about tax seem to quickly degenerate into shouting matches. Tax changes garner far more column inches and airtime than spending changes. There is a laser-like focus on the losers from any tax change, rather than the broader national benefits.”

The current debate about modifying the so-called stage 3 tax cuts exemplifies this problem, as does the response to the taxation review carried out by a panel led by Dr Ken Henry AC.

While politicians are happy to beat their chests and assert their party’s superiority in keeping taxes down, they are awfully quiet when it comes to pointing out that this means a lower level and quality of government services.

Wood and Chan declared that we must tackle our “national cognitive dissonance” and “recognise that you don’t get BMW services on a Kia budget”. Until this happens, there seems little likelihood that the health system will gain any support from increased general revenue.

2. Increasing health’s share of the budget means that the share allocated to something else must decline. This is clearly a lot easier said than done.

Firstly, there are pressures for increased spending across the entire budget. As well as health, there are excellent reasons to spend more on social welfare, education, housing, the NDIS, infrastructure, biosecurity, and climate change resilience, to name a few areas.

Second, the relentless pressure to restrict expenditure to meet self-imposed limits on taxation while achieving a balanced budget has winnowed programs that do not have a vocal interest group supporting them.

A good example is overseas aid, which has no strong lobby group supporting it. In 1995 Australia was the ninth highest donor among the 32 members of the OECD Development Assistance Committee. By 2022 we were 27th.

As a result of this climate of austerity, there are no easy savings options left.

Most governments most of the time appear to accept that the political pain of finding the savings to fund increased spending elsewhere outweighs the political gain to be derived from the increased spending.

3. Reassessing the boundaries between public and private spending is code for increasing private contributions.

According to the OECD, the share of health expenditure funded by governments or through compulsory social insurance across the 38 countries averages 76 percent, while in Australia it is only 72 percent. The boundary in Australia is already set further to the private side than two-thirds of OECD members.

However, AIHW data for 2021-22, summarised in the table below, shows that the proportion of total expenditure met by out-of-pocket costs varies considerably by type of service.

There is little scope to require further private contributions for dental services, aids and appliances, or other medications, where the existing level of out-of-pockets is very high and the government contribution is limited or non-existent. Nor is there much scope in relation to referred medical services and other health practitioners, where very substantial out-of-pocket costs already apply to many services.

The Government has recently reduced the level of co-payments under the PBS, with the intention of addressing the increasing cost of living. And it is under constant pressure to maintain the proportion of GP services that are provided with no out-of-pocket cost, and allocated $3.5 billion in the last budget towards this goal.

That leaves hospitals – and free access to public hospitals is an integral part of Medicare.

Beyond the practical and political difficulties in moving the boundary to expand private funding, it would raise equity issues. The OECD report notes that “cuts to benefit packages or increases in user charges risk exacerbating health inequities”.

Increased private spending means making sick people (who are likely to be older and poorer) pay more, while healthy people pay less through taxes (or compulsory contributions).

The private health insurance sector is likely to suggest that a transfer of costs to private payments should be accompanied by an expansion in the role of insurance to cover these payments. Such an expansion will be inefficient, as Medicare operates with administrative costs a fraction of the private sector. And it would only be affordable for sick people if it was community-rated, meaning governments would need to continue to dragoon healthy people into paying actuarially unfair premiums.

4. Finding efficiency gains is the last option.The OECD report concludes that if countries could eliminate half of ineffective and wasteful health spending, average health expenditure as a share of GDP across the OECD would be only 10.6 percent in 2040, rather than 11.8 percent.

There is plenty of guidance about how to improve the efficiency of the Australian health sector.

For example, the Productivity Commission released a research paper on the topic in 2015, putting forward a number of proposals. The Grattan Institute has released a series of papers over the last decade on how to improve health system efficiency (see, for example, here, here and here). Any number of reviews and evaluations conducted by consultants paid for by the Department of Health present ideas on how to improve efficiency on a smaller scale.

The common themes are clear: stop doing things that don’t work; start doing things that avoid long-term problems; do things in line with best practice guidelines; and make sure everybody does things as efficiently as the most efficient safe provider.

Barriers to action

Unfortunately, hardly any of these ideas are adopted. Most reports adorn the bottom shelf of bureaucrats’ bookshelves, or are used as impromptu computer monitor raisers.

There are many reasons why governments are reluctant to throw their weight behind reforms of this nature.

One is cost. Better preventative measures may well reduce the burden of disease and mortality several decades down the road, but they require additional spending now. The Department of Finance Budget Process Operational Rules mandate that the cost of new policy proposals is offset by savings within the forward estimates period, not savings achieved in 10 or 20 years’ time. Governments are obsessed with budget surpluses next year, not in 2040.

Another is deference to clinical opinion, rather than clinical evidence. I once watched aghast as a committee, having read a literature review citing a meta-analysis concluding that a device was ineffective, recommended its inclusion on the private health insurance prostheses list.

Why? Because a clinical member of the committee said he used the device all the time with great results.

Then there is likely opposition from groups who will lose from any reform. For example, allowing non-medical health professionals to work to their full scope of practice may reduce the workload – and possibly remuneration – of doctors. Few governments have enough political capital to waste some of it on a fight with the Australian Medical Association.

More broadly, any significant reform will challenge vested interests of some sort.

As Machiavelli wrote 500 years ago, “it ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new”.

Australia’s health system performs well compared with many other countries, but it is creaking under the stress. As Peter Breadon wrote here recently, the pandemic brought to the surface many underlying problems that have been growing slowly over the last decade or two.

Now is the time to act to remedy these deficiencies.

If spending more money on health or shifting the burden to sick people is not feasible or desirable, the Government should focus on making the system work better. There is no shortage of ideas on how to do this; what has been missing so far is the political will to do this.

Over to you, Mark Butler.


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