Ian McAuley writes: Ahead of the May budget, health minister Peter Dutton has said he wants to start “a national conversation about modernising and strengthening Medicare”.

A national conversation would be welcome, but is that what the government really intends? Or are we simply being softened up for an expansion of private health insurance?

If so, the government needs to be reminded of Australian and international evidence showing that the more private health insurance is used to fund health care, the more expensive the health system becomes, without any improvement in the quality of care.

Modernising and strengthening Medicare

A conversation about public policy has to start with an understanding of the problems to be addressed, and in health care there are two distinct issues.

One is about whether we get value for money from the A$170 billion we spend each year on health care: can we reduce bureaucratic overheads? Is our health workforce deployed where the needs are greatest? Should we direct more resources to prevention? Are we over-using medications or are medications helping keep people out of hospital?

Opinions range on these and many other questions. But almost all reasonable people, regardless of their value systems, would agree that it is desirable to get the same or improved outcomes from existing resources.

However, even if we eliminate waste and inefficiency from health care, we need to address the inevitability that health-care costs will rise over time. Therefore, the second – and more basic question – is how we share those costs between consumers, governments and the private sector.

The answer depends on the extent to which we treat health care as a normal market good (financed by out-of-pocket outlays) and share that burden with others (through private or public insurance).

This question also challenges us to confront our values and long-held beliefs – some of which stem from earlier times, when we had shorter lives, when there were fewer therapies available, and when we were much poorer, an era when even the cost of a GP visit could be a burden.

But framing the issue as merely a problem of unaffordable demands on public budgets, as Dutton seems to be doing, is not helpful because shifting costs off-budget, particularly through use of private health insurance, can result in those costs being much higher than they need be.

International cost-sharing

The graph below shows how other high-income OECD countries with per-capita gross domestic product (GDP) of $US35,000 or more divide health costs between consumers, governments and the private sector. In general, these countries opt for sharing, but not entirely: there are no “free” systems in the list. 

Australia is among the countries with a comparatively low call on government (only the United States is significantly lower) and with a comparatively high call on out-of-pocket expenses (only Switzerland is higher).

These countries differ in their use of private insurance as their way to share expenses, ranging from negligible dependence in the Nordic countries, up to 35% in the United States.

Single national insurers keep costs down

As many economists have pointed out, private health insurance is a high-cost mechanism for achieving what taxes and national insurers (such as Medicare) do much more efficiently and equitably, while delivering no improvement in outcomes.

One may believe that competition between insurers can keep prices in check, and that they do a better job than a monopoly government insurer, but there are three reasons why this does not hold in the case of health insurance.

First, is the high financial overhead of private insurance. In Australia only 84 cents in every dollar collected by private insurers is returned as benefits, the rest going to administrative costs and corporate profits. By contrast Medicare returns 94 cents in the dollar, even after the cost of tax collection is taken into account.

In the United States, which is so highly dependent on private insurance, only 69 cents in the dollar comes back as payment for health services.

Second, and more important, competing private insurers have little ability to control prices demanded by powerful service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals simply choose to do business with another insurer.

By contrast a single national insurer, usually a government agency, has the market power to put some discipline into prices and utilisation.

Third, insurance by its very nature removes the most important aspect of markets, which is the discipline of prices.

The insurance premium is a “sunk cost” and when the time comes for consumers to make a claim, the service is free or heavily subsidised. There is no difference between the thinking “Medicare will pay for it” and “NIB/Medibank Private/BUPA will pay for it”.

International health costs

The graph below, drawn from OECD data for the same 18 high-income countries, shows the relationship between their dependence on private insurance and their total health-care costs as a percentage of GDP.

All these countries have good health outcomes. As a basic indicator, life expectancies at birth range from 82.8 years in Switzerland to 78.7 years in the US. 

The US is the standout example of the loss of cost containment when the task of sharing is left to private insurance. Its health-care costs are 18% of GDP, well above the OECD average of 9%, and are bound to rise under the new regime of compulsory private insurance (“Obamacare”).

In fact the US government, because it has yielded control of the market to private insurance, now spends around 9% of GDP on its limited government programs – Medicare and Medicaid – more than most European countries are paying for universal or public insurance.

The lesson from overseas experience is that the conversation we should be having about health-care costs concerns what we pay from our pockets and what we share. Unless we are to have a truly unaffordable health care system, that sharing should be through Medicare.

Read the other instalments in The Conversation’s Paying for Health series

** Ian McAuley is lecturer of public sector finance at the University of Canberra.

This article was originally published on The Conversation. A reminder to Croakey readers that TC articles are freely available for republishing under a Creative Commons license.