Crises in the public and private healthcare sectors may create an opportunity for systemic reform to Australia’s complex health financing systems, according to health policy experts from the University of Newcastle.
Josefa Henriquez and Francesco Paolucci write:
For decades, Australia managed its money carefully and kept its economy healthy. But the pandemic changed everything. Like many countries, Australia had to spend big (not necessarily well) to cope with COVID-19. Currently, the national debt remains on an upwards trajectory and is expected to reach 36 percent of GDP by 2027-28.
States’ deficits and debts have risen, leading to post-pandemic fiscal tightening across public services, including healthcare. In response, states like NSW have increased the so-called ‘Health insurance Levy’, from $1.77 to $3.27. This is a surcharge that must be paid by all private health insurance (PHI) members through premiums in NSW.
Meanwhile, the Commonwealth has been evaluating the performance of current ‘PHI Incentives’, such as the premium rebates and Medicare Levy Surcharge, to assess their efficiency and effectiveness in decreasing cost and capacity pressures on the public system.
These mounting pressures, both at Commonwealth and State levels, point to deeper problems in our healthcare system. An urgent question is whether ‘patching up’ our current model with half-way measures is the answer, or if we need a more sustainable system ensuring universal access and value-for-money.
Hospital crisis
The Australian healthcare system is facing unprecedented pressure, particularly evident in the public hospital sector.
In NSW alone, the State faces a $1.5 billion budget deficit, with tangible impacts on patient care. The most visible symptom of this crisis is the dramatic increase in waiting times – people in NSW now wait twice as long for planned surgery as 20 years ago.
This pressure on public hospitals has been intensified by a parallel crisis in the private sector. About 70 private hospitals have closed their doors (while some new ones have opened), destabilising a system where private facilities handle 41 percent of all hospital separations.
The private hospital sector’s heavy reliance on non-government funding (67%), primarily through private health insurers, makes it particularly vulnerable to financial pressures.
This interdependence means that PHI funding isn’t just a private sector concern – it’s a critical public health and policy matter. Indeed, this prompted the ‘Health check’ conducted and recently released by the Federal Department of Health of private hospitals.
Financial constraints are evident at both state and federal levels. With Commonwealth funding increases capped at 6.9 percent, and States facing both political and legal limitations on raising their own revenues, governments are turning to alternative funding mechanisms, such as the increases in the Health Insurance Levy, recently approved by NSW Government.
In recent weeks, this change has pushed to the frontpage of public attention the contention between states like NSW and PHI.
Private Healthcare Australia, the peak body for health funds, says modelling indicates that the potential risks of marginal increases in the levy (~$2 per person per week) will result in “a premium increase of 4.1 percent” and “will prompt at least 75,000 people to drop their health cover in NSW next year, forcing more people to rely on overwhelmed public hospitals across NSW”.
Evidence and impacts
How sensitive individuals are to premium increases has long been debated. Recent work by Mentzakis, Paolucci and McLean (2022), commissioned by the Department of Health and Aged Care, found that premium increases might not significantly drive people away.
Increasing the base premium of Basic/Bronze and Silver/Gold products by $100 would reduce probability of purchasing PHI by only three and one percentage points respectively.
Their study also found that the Medicare Levy Surcharge remains the strongest influence on PHI demand, with high-income earners’ choice between paying PHI premiums or the Medicare Levy Surcharge tax penalty remaining a key driver of enrolment.
PHI enrolment is a key concern of the Commonwealth, which currently invests around $7 billion in PHI subsidies, with the objective of relieving pressure from the public healthcare system.
Recent work shows PHI enrolments generate net savings for the Commonwealth, of $550 per person enrolled with PHI. These savings were calculated considering what it would cost to serve individuals who are currently in PHI in the public sector, estimated to be around $1,400 per person, and contrasting to the investments in the premium rebates and Medicare Levy surcharge exemptions.
But the question is: are these savings going where the need is, and where they deliver most value for money, including to the states and communities?
Findings show that the answer is no. The savings for the Commonwealth aren’t uniformly distributed across groups; while the older individuals are the ones yielding most significant savings, high income and young individuals produce losses.
If we are to increase the effectiveness and sustainability of these investments, improved methods for allocating resources are needed.
For example, needs and risk adjusted payments to state governments responsible for managing and funding public hospitals would direct more funds to higher-risk populations.
Alternatively, the health sector is likely to face recurring crises, increasing deficits and more marked inequalities, unless we undertake profound system reforms.
A sustainable solution
Australia’s healthcare system, with its intricate mix of public and private funding and provision of services, must evolve to meet budgetary challenges, and adapt to increasing healthcare needs as the population grows older, and the prevalence of chronic conditions increases.
The history of healthcare reform highlights ongoing challenges with balancing cost, equity, and efficiency.
Looking back, in the 1990s countries like the UK, Switzerland, Germany, the Netherlands and several Scandinavian nations recognised the limits of political solutions such as price controls, and restricted access to services (like waiting times).
To design a more effective healthcare system today, we can learn from these past experiences, where technical approaches – like competition amongst purchasers or providers and price incentives – were introduced to improve efficiency and reduce costs, with appropriate safeguards so equity is not compromised.
A recent publication outlines further criteria for an integrated healthcare system in Australia, capable of absorbing shocks (such as the COVID-19 pandemic) while guaranteeing universal access.
A key aspect of these necessary changes involves updating the funding arrangements:
- Integrate revenue sources: shift away from fragmented reliance on taxation, premiums, and out of pockets payments towards a more integrated approach to revenue collection, purchasing and distribution
- Allocate funds based on population needs and risks: direct funding to healthcare purchasers according to the population health needs and risk profiles of the population rather than historical service activity
- Introduce consumer-choice of purchasers (that bear financial risk): enable purchasers chosen by consumers to negotiate prices and service levels that align with defined public entitlements.
Many countries began this journey decades ago through politically contentious reforms.
The recent NSW levy changes may ignite long-awaited healthcare system reforms, unless we are prepared to cyclically re-experience the current crises sometime in the near future.
Author details
Josefa Henriquez is Lecturer at University of Newcastle. She was formerly an advisor in the Minister’s Cabinet at the Ministry of Health of Chile, where she focused on the development of the health insurance reform act.
Francesco Paolucci is Professor of Health Economics & Policy at University of Newcastle, Australia, and at University of Bologna, Italy. Previously he was Head of Health Policy at Sir Walter Murdoch of Public Policy and International Affairs, Murdoch University, and the Chief Advisor Health Reforms to Minister of Health in Chile in 2019. He was a member of the Italian Technical Committee for Allocation of National Health Budget.
Watch: How can we afford the healthcare of our dreams?
A recent presentation by Professor Francesco Paolucci
