Want Medicare savings? Stop paying for private hospitals

Peter Sivey writes: The polls this week suggest half of Australians think the Abbott government should reduce the cost of Medicare. My solution? Claw back some of the A$9 billion the government pays to private hospitals.

Consider my experience … A few years ago I twisted my knee playing football. My GP, maybe after estimating my salary, suggested a private sports physician to diagnose my injury. The sports physician pulled and prodded at my knee before telling me:

It doesn’t seem like any ligaments are torn, but I can’t tell for sure. Why don’t we get you a scan – you’ll only pay $60. And Medicare will pay  […]  the rest.

I had an MRI scan at a Melbourne private hospital where you lie down in a big tube for ten minutes or so. Despite this scan being part of the “private” system, I paid $60 and the Australian taxpayer picked up $340 for the scan. I wasn’t put on a waiting list, had full choice of my doctor and hospital, and all of the benefits of private treatment.

Turns out my anterior cruciate ligament was “partially” torn and I just had to wait six weeks before running again.

I was happy to have my private treatment so heavily subsidised, but in an era of rising waiting lists for public treatment and calls for government cutbacks, this subsidy was not a good use of taxpayers’ money.

Nor was it equitable: this speedy access to a nearly-free diagnostic scan would not have been available to somebody who couldn’t afford to pay the $200 for a private sports physician. Recent changes also allow GPs to refer patients for MRI scans.

So, how much does Medicare spend subsidising private patients to visit private hospitals?

Medicare spent A$18.6bn in 2012/13 (these are my calculations based on data from Medicare reports, as are the following figures). This includes $8.2bn on “professional attendances” – out-of-hospital consultations with doctors, which is roughly equally between GP consultations ($4.3bn) and specialists (like my sports physician).

Of the remaining $10.4bn, around $1.7bn goes to other out-of-hospital funding of allied health services (such as physiotherapy), psychological counselling and dental care. The rest ($8.7bn) mainly gets handed over to private hospitals for a variety of services including surgical procedures, diagnostic imaging and pathology services.

(Note, this $8.7bn also includes some out-of-hospital private pathology and diagnostic tests as well as treatment for some private patients in public hospitals).

Over the last five years, spending on doctor consultations in Australia has risen 28% and spending on operations in hospitals has risen by 25%. Given inflation in prices and rises in population, these don’t seem too dramatic.

But looking at diagnostic imaging (scans and x-rays), we see an increase of a whopping 38% over five years. This might be explained by an increase in unnecessary knee scans for amateur footballers!

These figures illustrate one problem with subsidising the private system: a lack of control over spending. With public services, the government can use waiting lists and other rationing rules to hold back spending growth. Subsidising the private sector can be a blank cheque to private hospitals, hence the 38% growth in spending on diagnostic imaging.

The government should not allow this spending on subsidising private patients to continue to grow unchecked at the expense of funding public services.

In Australia, the government subsidises private sector health care in two main ways: first, through Medicare payments to private hospitals, and second, through the 30% rebate for private health insurance.

A useful contrast is with the United Kingdom. The UK government funds the National Health Service to provide free-at-the-point-of-use health-care services for everyone. But patients who choose to “go private” don’t receive a cent (or a penny) of subsidy for their care.

It’s difficult to know for sure if subsidising the private sector saves money for the government overall, or is an unnecessary expense. You have to estimate how many people are encouraged to “go private” rather than use publicly provided services, as a result of the subsidy.

But when it comes to the possibility of removing the private health insurance rebate completely, University of Melbourne health economist Dr Terence Cheng has estimated the measure would save around A$500m, even after accounting for more people using the public system.

Furthermore, the previous Labor government was clearly unconvinced of the merit of subsidising private insurance through the rebate, and introduced a means test so individuals with incomes of more than A$88,000 don’t receive the full rebate and individuals with incomes of more than A$136,000 pay the full cost of private health insurance themselves.

The Coalition government has vowed to abolish the means test but hasn’t made any concrete commitments about if and when this would occur.

If the government isn’t willing to rein in spending by subsidising private insurance, perhaps it should consider reducing the other subsidy to the private sector: Medicare items for procedures, diagnostic imaging and pathology, which largely go to private hospitals.

Given their recent strong growth in spending, Medicare items for diagnostic imaging could be first in the firing line. A means test – such as reducing Medicare benefits for individuals without health-care cards – could yield substantial savings to the public purse for little cost to health-care access.

* Peter Sivey is Senior Lecturer at La Trobe University’s School of Economics. He has received funding from the NHMRC and ARC.

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

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.