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Out-of-pocket costs: a wicked problem in search of solutions

Croakey is closed for summer holidays and will resume publishing in the week of 10 January 2022. In the meantime, we are re-publishing some of our top articles from 2021.

This article was first published on Wednesday, July 7, 2021


In the second of two articles at Croakey examining longstanding health system inequities, policy analysts Jennifer Doggett and Associate Professor Lesley Russell urge governments, healthcare providers and funders to acknowledge their responsibility in tackling out-of-pocket healthcare costs.

Below, Doggett and Russell identify nine practical actions that could help address the current policy vacuum, which is contributing to health inequities and reduced access to healthcare.

(Also read: Should procedural specialists be the highest earning doctors in the nation?)


Jennifer Doggett and Lesley Russell write:

Some media reporting and Labor Party commentary have portrayed recent changes to the Medicare Benefits Schedule, made in response to expert recommendations, as cuts to Medicare that mean patients will pay more.

The reality is much more complicated: while some changes will result in reduced reimbursements for some Medicare items, a majority of the changes are around eliminating items that are now out-dated and adding new items to cover new techniques and technologies. Overall, there are more Medicare items with increased reimbursements than items where reimbursements have been cut.

Despite this fact, Labor’s campaign has gained some traction in the media, possibly fuelled by the lack of vocal support for the changes from the Morrison Government, apart from this low-key statement by Health Minister Greg Hunt. This only serves to increase consumer fears that the changes represent a further erosion of the universality of Medicare and its promise of high-quality healthcare for all.

The big unknown that is driving Labor’s political campaign, media hype and consumer fears is that there is no way to predict how doctors, in particular specialists such as surgeons, will align their billing practices with the Medicare changes. And that could mean patients paying more – either out-of-pocket or in private health insurance premiums.

Rising healthcare costs and the lack of certainty around medical bills are understandably issues of concern to consumers. But they reflect a systemic problem with out-of-pocket costs in the Australian healthcare funding system and are not the result of the recent Medicare changes.

This serious and growing problem is being ignored by both governments and the powerful healthcare provider groups representing the clinical professions and private health insurance funds.

Back in 2015 we wrote a discussion paper on Tackling Out-of-Pocket Health Care Costs and in 2019 we put forward a Roadmap for Tackling Out-of-Pocket Health Care Costs. Others have also offered analyses and solutions (see for example the work of the Grattan Institute and this paper from PwC).

We have returned to this topic (rightly identified as a “wicked problem”) yet again as an issue that is a key factor in the growing inequalities in access to healthcare and healthcare outcomes across the nation.

What are out-of-pocket costs?

Out-of-pocket (OOP) costs are the payments consumers make for health products and services over and above the subsidies provided by government programs such as Medicare and the Pharmaceutical Benefits Scheme (PBS) or private health insurance (PHI).

They can be the partial cost of healthcare (such as gap payments for medical services, co-payments for prescription medicines, or a PHI deductible), or the entire cost of a healthcare service or product (such as private allied health and dental services that are not covered by PHI), or the cost of non-prescription medicines and medical devices and aids.

OOP costs can also include the unavoidable but indirect costs associated with accessing care, such as travel and accommodation costs (particularly important for Australians living outside of capital cities).

OOP costs are the third largest source of funding for healthcare in Australia (after the Federal and State/Territory governments), contributing around twice as much health funding as PHI funds.

Proportion of total health spending, by source of funds, current prices, 2000-01 to 20018-18

This figure from AIHW Health Expenditure  

Australians pay for about 17 percent of total healthcare expenditure via OOP costs, more than the citizens of most other OECD countries. In 2018 this amounted to $29.8 billion, or about $1,235 per person.

This figure from OECD Data Health Spending

Undermining universality, equity and efficiency

OOP costs undermine the universality, equity, and efficiency of our healthcare system. They are an inherently inequitable funding mechanism as those with the greatest need and least ability to pay are impacted more than those with lower levels of need and greater affluence.

This is the direct opposite of the aims of universal healthcare systems like Medicare where people’s contribution to healthcare funding is based on their ability to pay and access is provided according to need.

Evidence from a range of sources shows that OOPs are a barrier to accessing care for many Australians, in particular those on low incomes and/or with chronic health conditions.

A report from the Australian Institute of Health and Welfare, using 2016-17 data, found that half of all patients (10.9 million people) incurred out-of-pocket costs for non-hospital Medicare services. The 10 percent of patients with the highest costs spent at least $601 or more in the year and OOP costs varied substantially across Primary Health Networks, with higher costs outside metropolitan areas. Specialist and obstetric services had the highest OOP costs per service.

The Australian Bureau of Statistics (ABS) found that in 2018-19 almost one in five people (18.7 percent) reported that cost was a reason for delaying or not accessing dental services when needed and one in 12 (eight percent) reported delaying or not seeking needed specialist care due to cost. People with chronic illnesses were twice as likely as those without a long-term health condition to delay getting or go without prescription medication when needed due to cost (eight percent compared to 3.8 percent).

A 2018 report from the Consumers Health Forum of Australia found that “many patients facing harsh choices between long delays in treatment or exorbitant out of pocket costs”. Of the 1,200 people surveyed for the report, one in six reported that costs had a significant impact on their lives.

This report also found that more than a quarter of people surveyed who had received treatment for cancer had incurred costs of more than $10,000 in the past two years. For someone on an average income this represents around 10 percent of their pre-tax income.

The impact of OOP costs is aggravated by broader problems with healthcare financing, including inadequate informed financial consent processes, poorly coordinated bills, unexplained fee variations and the prevalence of unnecessary or low value care.

There is also an intersection with social determinants of health as people on lower incomes, in marginalised and disadvantaged groups and in rural and regional areas experience poorer health, lower incomes and higher rates of discrimination in a health care setting.

For some consumers the main problem is cash flow as often payments for healthcare services are required upfront before rebates and subsidies are provided. Given that health problems often occur unexpectedly, this can cause difficulties for people who might otherwise afford such costs if they were spread over a longer timeframe.

For many people with cancer and chronic conditions, the problem is not single high-cost items but the accumulation over time of relatively modest payments. Their affordability is aggravated when combined with the reduced earning capacity that often accompanies long-term illness or disability.

From consumers’ perspectives there is no logic or fairness to OOP costs – the same service provided by the same doctor can cost nothing if performed in a public hospital or thousands of dollars (depending on fees and insurance status) if performed in a private hospital. People living in different states face markedly different costs  for the same procedures.

Many people with low incomes face difficult choices between costs of living (housing, food, heating, transport etc) and the costs of needed healthcare and medicines. The subsequent costs in more expensive acute care and disability are not well documented but are likely reflected in the seven percent of hospitalisations that are classified as potentially preventable.

Underlying all of these issues is the unequal power dynamics and significant information asymmetry in healthcare – meaning that consumers are often not able to make fully informed choices (even in cases where they do have a choice) or have the power to negotiate and shop around for better value care.

Glaring silence

Despite the long-acknowledged problems, OOP costs receive little policy attention at either federal or state level and have been largely ignored by both sides of politics.

There has been no attempt by any government to coordinate the overall impact of OOP costs on consumers. There has never been a committee of COAG (now National Cabinet) to bring the State and Territory and Federal governments together to look at the impact of OOP costs. And the Morrison Government’s own Expenditure Review Committee has no idea how OOP costs impact, directly and indirectly, healthcare spending, welfare spending and productivity.

The Commonwealth Department of Health has no area that oversees OOP costs or assesses the impact of government policies and programs on these and there is no regulatory process to ensure consumers do not face unaffordable costs when accessing needed treatment.

The Federal Government’s only role in overseeing OOP costs is via the Private Health Insurance Ombudsman, which can only act in very specific instances of costs associated with PHI, such as when a consumer receives a bill for which they did not provide informed consent.

Consumer groups have spoken out on OOP costs but have had little success in influencing governments, providers and funders to act on this issue. Sadly, it is rare for doctors’ groups and medical colleges to advocate for this issue on behalf of patients (see, for example, this report on PHI from the Australian Medical Association).

Neither the Coalition or Labor appears to support comprehensive action on OOP costs and both have ignored the calls of consumer groups for a Productivity Commission inquiry into this issue.

The strongest statement at a political level has thus far come from the Greens.

Prior to the last federal election, then-leader of the Greens, Dr Richard di Natale said:

You don’t have a truly universal health system when thousands of Australians delay or avoid seeing a doctor, dentist or specialist because they can’t afford it…

The Greens’ plan to reduce out of pocket costs and bring dental care into Medicare will finally follow through on the promise of a truly universal health system designed to keep people well.”

However, on their own the Greens have little capacity to influence government policies or the behaviour of providers.

Historical perspective

Medicare today has departed from its original vision as a universal health insurance system that would be “simple, fair and affordable”.

In large part the problem with OOP costs has arisen and grown because the linkage that once existed between MBS reimbursement and doctors’ charges no longer exists. Sometimes the MBS rebate is less than 50 percent of the total cost of a service, leaving huge gaps for patients to pay.

In many cases, especially for primary care and cognitive (non-surgical and non-invasive) services, MBS rebates have not grown in line with business and operational costs and do not reflect the time that quality patient care requires.

But in other cases, especially in surgical areas where techniques and technologies have changed, specialists have objected to recommendations for reduced Medicare rebates (as, for example, with cataract surgery), have pushed to use robotic techniques not covered by Medicare, or have simply claimed their skills and clinical results justify their fees.

Another reason for large OOP costs is the lack of competition in many areas (due to supply side restrictions and workforce shortages). Providers who want to charge high fees are often able to do so without incurring any reduction demand for their services.

As a result, additional government funding for rebates or increased safety-nets can have an inflationary effect on doctors’ fees with limited or no benefit to consumers.

This illustrates one of the main barriers to taking effective action on OOPs – the need for a collaborative approach between government and providers.

Historically this has been very difficult to achieve. Medical colleges and provider groups have resisted taking any responsibility for the impact of healthcare costs on consumers and governments have been reluctant to challenge them on this issue.

The Royal Australasian College of Surgeons has spoken out about outrageous fees, and has some guidelines about these on its website, but there is no evidence that it has ever acted to censure or sanction members on this issue.

The Medical Board of Australia, which is responsible for developing standards, codes and guidelines for doctors, outlines the following very general guidelines for doctors’ responsibilities in relation to fees:

  • Ensuring that your patients are informed about your fees and charges in a timely manner to enable them to make an informed decision about whether they want to proceed with consultations and treatment.
  • When referring a patient for investigation, treatment or a procedure, advising the patient that there may be additional costs, which patients may wish to clarify before proceeding.
  • Not exploiting patients’ vulnerability or lack of medical knowledge when providing or recommending treatment or services and setting fees.

This view was reiterated recently by Dr Walter Abhayaratna, ACT president of the Australian Medical Association, who told The Daily Telegraph: “It’s not our role to actually to take on the doctors who are providing the service for the highest amount and expose that practice. That’s not our role. Our role is to make sure the patient gets access to information about informed financial consent.”

This stalemate between the Government and providers benefits them both: the Government can argue that putting more money into Medicare would be wasted as there is no guarantee that this will result in better or cheaper services; the medical profession can point to a lack of growth in Medicare rebates to justify increasing OOP costs.

Patients are the losers.

Piecemeal action

The piecemeal efforts that have been made to address OOP costs have generally focussed on specific aspects of healthcare rather than the healthcare system/s as a whole and most of them have problems with effective targeting, inflationary effects and perverse incentives.

Even when safety nets work well within their specific areas, they are not coordinated and fail to recognise that consumers who accrue large OOP costs in one area (for example, prescription medicines) will almost certainly have large OOP costs for other healthcare services (for example, doctors’ visits).

Arguably the most successful example of a government program addressing OOP costs is the Pharmaceutical Benefits Scheme (PBS) safety net. Research from 2006 showed that the PBS was highly progressive with major distributive effects towards the poor, and the safety net, while available to all, also had a redistributive effect and played an important function in capping costs for many concessional families.

However, it does require payment upfront to reach the safety net threshold, and while the thresholds were lowered in 2020, data show that over 960,000 people a year are  delaying or not taking prescribed medicines due to cost.

Other attempts to minimise the impact of OOP costs on consumers have been less effective.

The Extended Medicare Safety Net (EMSN) is overly complex, difficult to understand, poorly targeted (delivering greater benefits to people on high incomes) and encourages fee inflation. The MBS Review Taskforce has recommended changes to the EMSN.

The small incentive provided by the Federal Government for GPs to bulkbill may reduce OOP costs for medical services but is not sufficient to support quality care and is only available to consumers if their doctor chooses to bulkbill.

While the number of primary care services that are bulkbilled has risen, so too have the gap payments for those services which are not bulkbilled. A key factor here is likely the finding that non-GP specialists earn almost twice as much as GPs. This gap has been boosted by freezes on Medicare rebates and the absence of specific national policies to address this disparity.

In the states and territories, some governments have their own programs to assist consumers with health costs, but these generally these target only one area (such as travel expenses) and provide nominal, capped amounts of funding.

The “no gap”, “known gap” and “preferred provider” policies provided by health insurance funds can reduce or remove some OOP costs for services covered by PHI. But these often come at a high, upfront cost and do not always guarantee no or low co-payments; they also require a high degree of health literacy to navigate the policy options and limitations.

Some critics have also argued that these policies can inflate the “floor price” of services, resulting in higher overall costs. = Regardless, they are only available to consumers with the resources to pay for private cover health insurance.

Various government pilots of “bundled” payment systems (the Coordinated Care trials, Healthcare Homes etc) have included some attempts to reduce OOP costs for consumers with chronic and complex conditions. So far none of these programs has led to major policy changes.

Under pressure to address high charging specialists, the current Federal Government introduced the Medical Costs Finder website. This resource aims to inform consumers about the typical costs of medical specialist services, with a view to empowering them to shop around.

The website has been widely criticised by both consumers and doctors. It currently has only limited data on doctors and is not widely used by consumers. There is no evidence that it has impacted the fees if high charging specialists and some critics have suggested that it might cause fees to rise.

Next steps

There is clearly no simple solution to the “wicked problem” of OOP costs in the Australian healthcare system but there are strategies which could reduce their negative impacts. Our previous paper outlined short- and longer-term approaches; although this is now several years old, it is still largely current.

More recently, there is a series of recommendations from the MBS Review Taskforce, including the creation of an independent Medical Fee Complaints Tribunal to deal with consumer grievances about high or unwarranted out of pocket medical costs.

None of these can happen without information to drive evidence-based approaches, a consumer-centric approach, and changes in culture from stakeholders.

We therefore also recommend the following actions, that should be undertaken with a sense of urgency:

  • Acknowledge the problem: Governments, healthcare providers and funders need to acknowledge that OOP costs are a problem for which they all have some responsibility. Unless there is some in principle agreement on this between stakeholders it will be impossible to make any progress.
  • Data collection: Currently there are significant data gaps on how OOP costs impact consumers. For example, the AIHW only collects data on OOP costs from people who got a service and does not include information about those who didn’t get a service because of cost. Better data would help identify specific groups at higher risk and areas of healthcare where OOP costs are a particular issue needing targeted solutions.
  • Ask the community: All healthcare funding ultimately comes from consumers (either directly or via PHI premiums and tax) – but consumers have had little input into decisions about how healthcare is funded. For example, there is evidence that consumers would support abolishing the PHI rebate if this funding was used to include dental services within Medicare. Changes in the healthcare system are largely driven by government, providers and PHI funds – the generators of OOP costs. It is time that consumers had a greater say in how costs are managed within our health system.
  • Explore proposals in specific, critical areas: Health experts have proposed solutions that would reduce OOP costs in specific areas, for example, dental services. These may be a partial solution but should be explored in order to address some key pain points for consumers in our current system.
  • Increase public specialist services: Properly funding outpatient specialist services would increase access and choice for consumers and create some competitive pressure on over-charging doctors. The government could also introduce incentives to specialists who bulkbill or charge lower fees to identified groups of patients.
  • Reform primary healthcare funding: Reducing the reliance on fee-for-service within primary health care would help support quality care and also address the current uncoordinated and ad hoc system of OOPs. Unfortunately, the recent discussion paper from the Primary Health Reform Steering Group does not address the need to move away from fee-for-service funding.
  • A complaints mechanism: CHF has proposed the establishment of an accessible and consumer-friendly complaints mechanism to provide consumers (and other payers such as PHI) with a process to address unfair or overly high medical bills. This is similar to the complaints tribunal proposed by the MBS Review Taskforce. To be effective, CHF suggests that this needs to include the ability to impose sanctions and national jurisdiction.
  • Address outliers: High charging specialists are not the main contributor to OOPs for most consumers but they do impact a small number of consumers. Some experts have suggested that the Commonwealth could take action against over-charging specialists without violating the Constitutional prohibition on civil conscription, for example, through removal of access to Medicare rebates for a service if the fee is extreme.
  • Educate and empower consumers: Improving health literacy and in particular financial health literacy can encourage consumers to be more proactive in shopping around for health and medical services. However, it also needs to be recognised that consumers on their own have very little ability to influence medical and healthcare costs and little ability to shop around for different specialists. These efforts need to be supported by action by governments and providers.

An election opportunity?

Getting OOP costs on the political agenda is always a challenge when both governments and provider groups resist the need for change.

But unless the current ad hoc approach to this costly consumer burden changes, OOP costs will continue to create barriers to access and to undermine the equity and efficiency of our health system.

The strategies outlined above provide some practical suggestions for action which would deliver improvements to the current approach without requiring major structural reforms.

In the lead-up to the next federal election, health and consumer groups have an opportunity to advocate for these and similar strategies, which would go some way towards filling the current policy and regulatory vacuum on this important issue.

Jennifer Doggett is an editor at Croakey Health Media; Associate Professor Lesley Russell is a contributing editor and columnist at Croakey Health Media.


See our previous coverage of out-of-pocket costs.

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