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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