What will the Henry Review mean for health? This question was asked in a recent Croakey post, and now health economist Ian McAuley has provided the answer.
In a nutshell, his analysis suggests it could mean a lot if the Government implemented the many recommendations which have a bearing on health financing and public health.
McAuley, a Centre for Policy Development Fellow and lecturer in Public Sector Finance at the University of Canberra, writes:
“There are many useful ideas buried in the details – ideas which could form the basis for, say, a Productivity Commission review of health funding.
The Review reminds us that the Medicare Levy collects only about ten percent of government spending on health care. We are also reminded of its complex exemptions and phase-in arrangements for people with low incomes.
The Review says the Levy “may send a misleading message to taxpayers about the cost of health spending”. The Review suggests the Levy should be removed and incorporated into the general tax scale, which would mean that about 60 percent of personal income tax would be associated with health care.
The Review’s formal recommendation (# 5) is that “The Medicare levy and structural tax offsets … should be removed as separate components of the system and incorporated into the personal income tax scales.”
The Government has specifically rejected this recommendation in so far as it relates to the Medicare Levy.
There is no reason given for the Government’s rejection. The Levy is a legacy of the Hawke Government’s introduction of Medicare in 1983; its function was to expose the incremental cost of universal health insurance which replaced the complex mixture of public and private funding which had evolved under the Fraser Government. It serves no current function.
Medicare Levy Surcharge (MLS) and Private Health Insurance (PHI)
The Review is critical of the MLS because of administrative complexity (it is levied on individuals but it is based on family income) and, at the margin where it cuts in, it results a spike in the effective marginal tax rate. Also, its name is misleading, because it is related to PHI, not to Medicare.
It is also critical of the PHI subsidy in terms of complexity, because it can be claimed using multiple mechanisms, including through the tax system.
Its recommendation (# 7b) is that “The Medicare Levy surcharge and assistance for private health insurance should be reviewed as part of the package of tax and non-tax policies relating to private health insurance. … Assistance, if retained, for private health insurance should be provided exclusively as a direct premium reduction.”
The Review goes on to say (emphasis mine):
Providing assistance as a direct premium reduction is more efficient than through a tax offset because a premium reduction provides timely assistance, particularly for those who are least able to afford the cost of insurance at the time it is purchased. It is also the most common method of claiming assistance.
Means testing subsidy entitlements risks inaccurate assessments of annual income and consequent debts. If government wishes to increase the fairness and sustainability of private health insurance subsidies, it could consider other ways of limiting the cost of the subsidy, such as limiting the type of eligible policies or capping the value of subsidies paid. If used as an alternative to means testing, these approaches could also facilitate the use of direct premium reductions as the sole method of subsidising private health insurance. This would simplify the system, increase transparency and make it easier for people to make decisions about their insurance cover.
The Review has opened up the possibility of at least a partial review of PHI. While abolishing all assistance to PHI would be ideal, capping the value of subsidies would be a desirable move, for it would leave the insurers responsible for any excess premiums. In this regard it would be similar to the Commonwealth’s payments to the States for hospitals, which caps assistance at 60 percent of standard DRG costs.
Medical Expenses Tax Offset
There is a 20 percent tax rebate to those who have unreimbursed family medical expenses above $1500 in a year.
The categories of expenses eligible to be counted include payments to doctors, dentists and optometrists. Some others, such as ambulance charges, are not covered, while some others not covered by Medicare are covered. The Review points out that this complexity “can make it difficult for people to understand their entitlements.”
The Review goes on to say:
The offset does not provide assistance when the expense is incurred, as it can only be claimed at the end of the income year. A family that incurs significant medical expenses early in the financial year will have to wait some time to recoup part of the cost through the offset.
The offset must be claimed by an individual but is assessed on a family basis. This can make it difficult for people to decide which family member should make a claim for assistance. The design of the offset is also inequitable for single people as the amount of unreimbursed medical expenses they must incur before they can receive assistance is the same as for families. In addition, some low-income individuals and families with high medical expenses cannot claim the full value of the offset because they have an insufficient tax liability and the offset is not refundable.
For these reasons, the medical expenses tax offset should be removed and an alternative method for delivering safety net arrangements for individuals with very high medical expenses should be developed using (for example, Medicare safety net arrangements). In light of this, the Review supports the NHHRC’s recommendation that the scope and structure of safety net arrangements be reviewed. The purpose of the review would be ‘to create a simpler, more family-centred approach that protects people from unaffordably high’ health care costs.
Its formal recommendation (# 7a) is that “The Medical expenses tax offset should be removed following a review of the scope and structure of health safety net arrangements”
The Henry Review has identified one of the many complexities in health funding analysed in Jennifer Doggett’s paper “Out of Pocket: Rethinking health copayments” published by the Centre for Policy Development. Doggett’s paper also points out that while the 20 percent rebate is based on financial year payments, all other health safety nets are based on calendar years. A review should be welcomed by those who seek simplification of health funding arrangements.
The 20 percent rebate, while being far from ideal, does provide some equity between those who rely on PHI and those who self-insure for their own private hospital and ancillary care; a criticism of PHI subsidies is that they discriminate against those self-reliant individuals who pay for such services out of their own savings. For example, someone incurring $10 000 of uninsured health care services receives a rebate of $1 700, or 17%. That goes some way to closing the inequity, for the insured are subsidized at a rate of 30 percent (but effectively somewhat less because of the administrative costs of PHI.) If PHI subsidies are to be retained, similar subsidies should apply to those who self-insure.
Taxes on alcohol
The Review points out the inconsistencies in alcohol taxes:
Taken together, current alcohol taxes reflect contradictory policies. They encourage people to drink cheap wine over expensive wine, wine from small rather than large producers, beer in pubs rather than at home, and brandy rather than spirits, and to purchase alcohol at airport duty-free stores (see Box E5–3). As a consequence, consumers tend to be worse off to the extent that these types of decisions to purchase and consume, which may have no spillover cost implications, are partly determined by tax.
In an ideal world, the Review suggests, taxes should apply only to the “spillover effects” of excess alcohol consumption (personal harm and harm to others such as drunk driving), but in practice the most efficient form of tax is to apply a uniform tax based on the volume of alcohol, above a low threshold (1.15 percent). Its formal recommendation (# 71) is that “All alcoholic beverages should be taxed on a volumetric basis, which, over time, should converge to a single rate, with a low-alcohol threshold introduced for all products. The rate of alcohol tax should be based on evidence of the net marginal spillover cost of alcohol.”
Such a tax, if it were applied to collect the same average tax as at present, would see a very high rise in the price of cask wine, a smaller rise in the price of draught beer, and a fall in the price of spirits and high value wine. The Review refers to the success in the Northern Territory of programs which have partially restricted sales of cask wine.
The Government’s response, however, has been to rule out any change in alcohol tax “in the middle of a wine glut and when there is an industry restructure underway”.
Regional political considerations seem to have overridden health considerations. Or is it that they don’t want to concede a point to Senator Fielding?
Taxes on tobacco
Interestingly, the Review dismisses what is known as “rational addiction theory” – the notion that, given adequate information, consumers will make rational decisions on whether to commence smoking. Rather, it accepts the notion that smokers suffer self-control problems, and that they may welcome mechanisms which help overcoming their cravings. This is essentially an acceptance of Thomas Schelling’s nation of a “rational self” in competition with an “impulsive self”. It’s a large leap into the territory of behavioural economics for Treasury officials.
More in keeping with conventional economics, the Review also finds that tobacco smoking imposes costs on others, including unborn babies.
Both these costs justify higher taxes. The Review alerts readers to the equity effects of higher taxes – “a 10 per cent increase in tobacco excise rates would be equivalent to an additional tax on gross household income of 0.16 per cent for households in the lowest 20 per cent of incomes but only 0.03 per cent for households in the highest 20 per cent.”
The Review makes three recommendations:
# 73 The existing regime for tobacco taxation in Australia should be retained, with the rates of tax substantially increased, depending on further evidence on the costs of harm from tobacco smoking.
# 74 Tobacco excise should be indexed to a broad measure of wages rather than CPI.
#75 There should be no duty free allowance on tobacco for international travellers entering Australia.
The harsher treatment of tobacco than of alcohol is notable. Why, for example, should alcohol continue to enjoy duty-free concessions?”
• Update 4 May: Ian McAuley has also done this more general analysis of the Henry Review for NewMatilda.