Health spending: patients bearing higher costs

From the Commonwealth Parliamentary Library’s FlagPost blog comes the following excellent overview of the main issues in the current debate on out-of-pocket costs.   This piece was written by Amanda Biggs and posted with permission.

Recent reports have highlighted the growing cost of health services and the increasing financial burden on individuals. According to data from the Australian Institute of Health and Welfare (AIHW) Australia spent more than $130 billion on health in 2010–11, or around 9.3% of Gross Domestic Product (GDP). Around 70% of this was spending by Government—the Commonwealth and the states and territories combined, through programs such as Medicare, public hospital services and the Pharmaceutical Benefits Scheme (PBS). But a significant and growing component of health expenditure comes from individuals.

Australians paid $24.3 billion out-of-pocket on purchasing health goods and services in 2010–11. More than a third of this was used to purchase medicines—mostly non-PBS medicines—about 18% was spent on dentistry, 10% for aids and appliances and 11% on doctor provided services. Around 7% was spent on services purchased from other (non-medical) health providers. Over the last decade, out-of-pocket spending on health has grown slightly faster than overall spending on health (6.2% compared to 5.3% growth).

Australians also contribute to the cost of government funded health programs via the taxation system. The 1.5% Medicare levy on income tax raised around $9 billion in 2011–12, meeting just over half the cost of Medicare itself.

In terms of annual individual expenditure, the Consumers Health Forum (CHF) recently estimated that Australians pay an average of $1075 per year out-of-pocket on health services. This is $94 higher than the average paid in other developed countries.

So why are Australians who have access to free public hospital treatment, subsidised medicines and rebates for medical services, paying so much out of their own pockets for health care?

The answer is not straightforward, but a number of factors could be driving this expenditure, including government policies.

Successive governments have encouraged Australians to purchase private health insurance (PHI), in the interests of reducing the load on the public system. The Government provides a means-tested rebate on premiums; the Medicare Levy surcharge is a financial disincentive on higher income earners to forego purchasing private hospital cover; and Lifetime Health Cover penalises those aged over 30 with a 2% loading on their premium for each year they delay taking up cover. Together, these policies have been credited with driving growth in PHI membership, reversing the downward trend which occurred following the introduction of Medicare in the mid-1980s.

Patients with PHI can potentially avoid long public hospital waiting times and choose their own doctor. PHI can also help defray the cost of ancillary services such as dentistry and optometry. But sometimes there will be a gap between the fee charged by the provider and what the health insurer and/or Medicare reimburses. The regulator estimates that while few hospital services generate a gap, nearly half of all ancillary services will include a gap payment (see figure p.17 of their annual report).

Patients with chronic conditions such as diabetes often need multiple medications to manage their condition. While the PBS helps subsidise the cost of these medicines, patient co-payments apply ($5.90 for concession card holders and $36.10 for others). A safety net applies after annual expenditure reaches a certain threshold, but patient co-payments up to this point can be high. In 2010–11, patient co-payments for PBS medicines totalled $1.5 billion, according to AIHW (p. 69 of the AIHW report). But patients paid considerably more for over the counter and non-subsidised medicines—$6.3 billion according to AIHW (p. 71). Growth in the cost of medications paid for by individuals is well above other health costs.

While Medicare reimburses patients for many professional medical services and bulk billing is common, a growing proportion of medical costs are being met by individuals. Out-of-pocket expenditure on medical services increased by 6.5% in 2010–11 according to AIHW (p. 63). While patient costs can be offset by the Medicare Safety Net, many services now have a cap on reimbursement. CHF points out that more patients are now foregoing seeing their doctor due to cost. Some argue the fee for service model which remunerates doctors is the problem. Doctors are paid for each time they see a patient, creating a financial incentive for them to see more patients, but not necessarily provide a quality service.

Added to this is the cost of non-medical health goods and services. These include a range of complementary therapies such as physiotherapy and so-called alternative therapies like homeopathy and aromatherapy. In 2010–11, individuals paid around $1.8 billion for such services.

Then there is our health ‘system’, which the National Health Reform Commission described in 2009 as fragmented and unduly complex. CHF describes it as ‘failing’. As more Australians develop lifestyle related chronic conditions and health costs to both patients and governments grow, calls for reform to our health system look set to continue.