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Snake oil medicine will not help an ailing health system to recover

By Richard Holden and Andrew Leigh - posted Tuesday, 22 April 2003

Two weeks ago, the Howard government announced a plan to reform Medicare. At the core of its proposals was the suggestion that doctor's visits should no longer be free. In our view, the government is right to try to tackle this problem. But its prescription is flawed. The snake oil it is selling could spell disaster for a large number of Australians, and will have highly counterproductive effects on public health in general.

At the heart of the problem is that in healthcare, as with other goods and services, free provision leads to over-consumption. As health researchers have shown, costless medical care means that people go to the doctor even when they don't need to, driving up the cost for all of us.

But there's a better way of operating a health system, and the change should hardly hurt at all. As economists have shown, the ideal model involves a small co-payment - not enough to put a dent in your weekly budget but enough to make you think twice before you call the doc. And the idea is hardly radical. Countries with a co-paying public health system include Austria, Belgium, Finland, France, Germany, Greece, Iceland, Ireland, Italy, the Netherlands, Norway, Portugal, and Sweden.


So if a co-payment is a good thing, why not applaud the government's plan? The problem is that, as it currently stands, the government's proposal is to allow GPs to charge any co-payment amount. It is therefore likely that the co-payment amount will end up as the difference between the current bulk-billing rate, and the average non-bulk-billing rate: $12. In Sydney and Melbourne, the co-payment may be $20 or more.

The Howard government argues that the benefit of such a scheme is that it will help pay to raise the wages of rural doctors - but it is unclear why urban battlers should bear the brunt of this change. Although pensioners are exempted, low-income workers will be most likely to cut back on visits to the doctor. For them, $12 is a reasonable chunk of change - about one seventh of a day's earnings for a minimum-wage worker. And since 71 per cent of Australians currently go to bulk-billing GPs, this is a drastic reduction in equity.

What is the right co-payment rate? The key with any co-payment system is to set it at a level that deters frivolous visits but doesn't run down preventive healthcare. Diagnosing diseases such as cancer and heart disease at an early stage dramatically improves the likelihood of survival, and is far less costly than treating patients when the disease has become more advanced.

The Howard government should learn from the successes and failures of its predecessors. In 1991, Australia introduced the perfect co-payment system - $2.50, with exemptions for certain groups. This scheme was widely recognised as effective in keeping down excess visits. Yet it was scrapped in 1992, an unlikely casualty of the Hawke-Keating leadership battle.

Converting the 1991-92 scheme into today's money would be equivalent to $3.50 - substantially less than the current Howard plan. It would be enough to deter frivolous GP visits, but not enough to limit genuine preventive care. Everyone, including pensioners, should pay it, with welfare benefits and pensions increased to compensate for the extra burden. Those who are chronically ill could receive an exemption from the co-payment altogether.

Finally, the government should indeed provide its $18,500 incentives for GPs in regional areas. But this should be funded by an increase in the Medicare Levy, rather than a dangerous and unfair cross-subsidy from battlers.


The government has correctly diagnosed two of our health system's ailments - the lack of a co-payment, and the lack of incentives for doctors to move to the bush. But the medicine it has prescribed may do more harm than good. It's time we asked them for a second opinion.

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This article was first published in The Sydney Morning Herald on 14 April 2003.

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About the Authors

Richard Holden is professor of economics at UNSW Business School.

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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All articles by Richard Holden
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