Introduction by Croakey: Analysis by Charles Maskell-Knight into 2021-22 Australian health expenditure finds, among four key takeaways, that states were again doing the heavy lifting on hospital funding, while the private health insurance sector did well out of the COVID-19 pandemic.
Charles Maskell-Knight writes:
The Australian Institute of Health and Welfare (AIHW) released its report Health Expenditure Australia 2021-22 on 25 October – a day when the news cycle was taken up with the war in Gaza, the Prime Minister’s visit to Washington, and chaos in the United States Congress.
Given this timing, it is hardly surprising that the report was largely ignored by the mainstream media (as far as I can see only the Burnie Advocate carried an article on it, although Professor Stephen Duckett wrote on it for Pearls and Irritations: New data shows the Commonwealth Government is not pulling its weight on hospital funding).
The AIHW’s website highlighted three findings from the report:
- total health spending in 2021-22 was $241.3 billion, equating to $9,365 per person
- health spending increased by 6 percent in real terms, which was higher than the decade average growth of 3.4 percent per year
- government health spending increased by 9.5 percent while non-government spending declined by 2.4 percent.
However, these findings need to be considered in the light of the perturbations in the patterns of service delivery and hence health spending resulting from the COVID-19 pandemic.
Delving into the report – and particularly the detailed tables underlying it – shows that the spikes in real growth and government spending are essentially COVID-19 related.
The four most interesting results from the report for me are set out below.
- Leaving aside direct spending on COVID-19, total health spending was in line with long term trends
The report identifies direct COVID-19 spending in 2021-22 under two categories: spending under the National Partnership on COVID-19 Response (NPCR), and additional spending by the Commonwealth in other areas. It does not identify additional spending by the states and territories outside the NPCR.
NPCR spending totalled $12.8 billion, made up of $3.8 billion on public hospitals and $8.6 billion on public health (both shared equally by the Commonwealth and the states) and $400 million on private hospitals (paid by the Commonwealth alone).
Other Commonwealth COVID-19 spending totalled $12.1 billion, including $5.4 billion for vaccines, $1.1 billion for testing services, and $3.8 billion for other medical services.
Total identifiable COVID-19 spending amounted to just under $25 billion – or almost $1,000 per person across the population.
Adjusting the 2021-22 data for this expenditure, and then comparing it to 2018-19, shows underlying real growth of a total of 3.5 percent over the three years – only a little above the trend leading into the pandemic.
However, the AIHW report does not identify COVID-19 expenditure by the states outside the NPCR framework. Assuming the states did incur additional spending outside public hospitals and public health, then underlying COVID-19 adjusted real growth would probably have been a bit below the medium-term trend.
Of course, COVID-19 has not vanished, even though inconsistent reporting makes tracking the disease hard. There will thus be an ongoing impact on health services and hence health expenditure from prevention, immediate treatment, and the as yet largely unknown impact of managing long COVID. This will add to the ongoing costs of the health system into the future.
- The states are meeting the indirect cost impact of COVID-19 on public hospitals
In 2006-07 Commonwealth spending on public hospital services (excluding treatment for veterans and the private health insurance premium rebate) was 39.0 percent of combined Commonwealth and state and territory expenditure on these services.
The hospital funding agreements with the states negotiated by the Rudd and Gillard governments in 2010 and 2011 were intended to push the Commonwealth share up closer to 50 percent.
Despite a blip under the Abbott Government, the arrangements have been maintained, subject only to a cap of 6.5 percent on annual growth in the Commonwealth contribution. By 2018-19 the Commonwealth share had increased to 42.7 percent of total combined government funding.
The COVID-19 period has seen a reversal of this trend. Even though the NPCR was based on the Commonwealth and states sharing the direct cost impact of COVID-19 on public hospitals, the Commonwealth contribution in 2021-22 had declined to 41.0 percent.
Removing the spending attributable to the NPCR (by both Commonwealth and states), the Commonwealth share had declined two and a half percentage points to 40.2 percent.
This change has resulted from a disparity in growth in Commonwealth and state spending. Between 2018-19 and 2021-22 Commonwealth spending increased in real terms by 5.8 percent, while state spending increased by 19.1 percent.
What is going on?
Under the hospital funding arrangements, the Commonwealth contribution is based on the National Efficient Price (the NEP) determined by the Independent Hospital and Aged Care Pricing Authority three or four months before the start of the financial year.
The NEP for a given year is set based on the results of a hospital costing study carried out three years previously, and then indexed based on average growth in hospital costs over the previous five years. For 2021-22 the NEP was calculated as the average cost of public hospital activity in 2018-19, indexed at an annual rate of 2.7 percent.
The state contribution is the amount necessary to make up the shortfall between the actual costs of operating the public hospital system and the Commonwealth contribution. It is highly likely that the indirect impacts of COVID-19 in 2021-22 (including high levels of overtime to address staff shortages due to isolation requirements applying to hospital staff testing positive, as well as price increases due to general inflation) led to actual hospital costs being far higher than those reflected in the NEP.
While the system has operated very well in an environment of relative cost stability, rapid cost growth leaves the states responsible for tipping in additional money during a year to keep the system running. Presumably this issue will be canvassed by the mid-term review of the hospital funding arrangements which is currently underway.
In considering the longer term, Professor Duckett’s article sets out some ideas about how the Commonwealth can lift its share of hospital funding while achieving other worthwhile policy aims.
- Private health insurers have benefited from COVID-19
The AIHW report confirms that private health insurers have done very well out of the COVID-19 pandemic. Between 2018-19 and 2021-22 private health insurance (PHI) spending (net of the premium rebate) increased in nominal terms by $268 million – a decline of 5.2 percent in real terms.
Constraints on elective surgery meant PHI spending on hospitals overall fell by 6.9 percent, while spending on insured patients in public hospitals fell by 28.1 percent. (This drop in PHI revenue needed to be made up by state governments, further contributing to their increased spending on hospitals.)
Similarly, the impacts of lockdowns on community allied health services such as dentistry and physiotherapy saw real declines in spending on dental services (3.7 percent) and on other health practitioners (nine percent).
While there may be some future spending associated with ‘catching-up’ for elective surgery, the dental check-ups and physiotherapy sessions that were missed during lockdown have gone for good.
There were only two areas where PHI spending increased in real terms: patient transport, which increased by 6.3 percent to $319 million; and administration, where spending increased by 8.3 percent. As a result, in 2021-22 one in nine PHI premium dollars was allocated to administration.
In an upcoming article I will discuss the recent Australian Prudential Regulatory Authority report on PHI finances for 2022-23, which shows continued strong growth in insurers’ reserves. On this basis there is a strong case for the government to refuse premium increases for most insurers for the 1 April 2024 premium round.
- Aggregate out-of-pocket costs were stable during COVID-19
Between 2018-19 and 2021-22 aggregate out-of-pocket costs fell marginally in real terms by 1.1 percent. Given a population increase over the same period of 2.3 percent, out-of-pocket costs per capita fell by 3.3 percent.
However, there was considerable variability between sectors. Hospital out-of-pocket costs fell by over 11 percent, consistent with the decline in insured hospital activity.
Costs for unreferred medical services (i.e. GP services) increased slightly by 2.2 percent after allowing for population growth.
Costs for referred medical services (including diagnostic services as well as specialist consultations) and in-hospital services) increased by almost 11 percent after allowing for population growth. As the aggregate costs for in-hospital services would have declined significantly, this implies a substantial increase for community-based services. Other AIHW data released in June also shows a decline in the proportion of specialist fees paid by Medicare.
In this year’s Budget the government allocated $3.5 billion in additional funding to address the decline in bulkbilling for GP services. However, it has done nothing to deal with the out-of-pocket costs of visits to specialists, which are far higher than GP out-of-pocket costs and appear to be growing rapidly.
These costs can present a significant barrier to lower-income or chronically-ill patients obtaining care for more complex conditions.
In a 2019 paper Lesley Russell and Jennifer Doggett proposed a number of strategies to deal with this issue. The problem has only got worse since then: it is time now for the government to take some action.
Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years before retiring in 2021. He worked as a senior adviser to the Aged Care Royal Commission in 2019-20
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