Funding health care - a principled approach

How we got into a mess

Successive administrations have been guided by the (real or perceived) health priorities of the time, their partisan ideologies, the influence of pressure groups, and constraints on government finances. They have tended to build on, rather than replace or overhaul, existing funding arrangements.

Priorities have shifted. In the postwar years the need for affordable pharmaceuticals, particularly life-saving antibiotics, saw the birth of the Pharmaceutical Benefits Scheme. In the 70s and 80s Medibank and Medicare were developed to provide universal cover. Equitable access to medical care was a priority. At present there is recognition of the need for more resources for illness prevention and health promotion, mental health, and the health of the most disadvantaged in remote regions.

Partisan ideologies have played their role. Labor governments have tended to favour universal and free service delivery. Coalition governments, while nominally preferring the use of market forces, have favoured private insurance as a means of funding health care, even though private insurance, in its suppression of price signals at the time of delivery, is no more a “market” mechanism than Medicare. Coalition governments have also tended to see the government's role in health care as a residual or “charity” one, with the well-off encouraged to opt out of any shared system.

Pressure groups have had strong influences. In 1946 the British Medical Association (yes - the British Medical Association) successfully blocked the Commonwealth's attempt to introduce a universal health care scheme along the line of those operating in European democracies.

Retail pharmacists and medical specialists have been particularly influential - the former in terms of keeping pharmacy separated from other health care services, and the latter in terms of restricting the throughput of postgraduate medical schools. Once groups gain privilege, as the health insurers have done, they are able to use some of their gains to mount strong lobbies to sustain their privilege.

Another constraint on policy is set by the vigilant state and Commonwealth treasury departments - guardians of the public purse - who see budgetary constraint as a priority, even to the extent of overriding other economic considerations. Hence Labor in office was never able to implement a comprehensive dental scheme, and governments of all persuasions have always found that funding of established programs, such as hospital care, has crowded out other possible priorities with good returns, such as public health. We cannot have it all, but the dividing line between what is financed privately and out of our taxes shows no coherent logic.

Then there are the Commonwealth-state demarcations, which are the legacies of states' long-standing role in funding public hospitals and constitutional legal battles.

The result is a highly complex set of funding arrangements, illegible to the outsider, and bamboozling to anyone trying to infer any underlying principles - for there are no underlying, coherent principles.

If the reader's patience allows, consider the following partial guide to health funding:

• we have free public hospitals, but have to pay $30.70 for pharmaceutical prescriptions;
• if we have private insurance, generously subsidised by the government, some “ancillary” services such as dentistry are covered (only up to a capped amount), but if we choose to rely on our own savings for our ancillaries or private hospitalisation, we get no support;
• the safety net scheme for medical benefits is on an individual basis: for pharmaceutical benefits, by contrast, the safety net is on a family basis. Then, while safety nets operate calendar years, there is a 20 per cent tax rebate for medical expenses above $1,500 in a financial year, with different definitions of what qualifies as a medical expense.

And that's not to mention concessions for certain disadvantaged groups, such as concession card holders.

The result of these influences is waste and inequity. Although Australia's health care outcomes, on most criteria, are good by international comparisons, particularly in comparison with the USA, we could do far better.

In many aspects we have combined some of the worst of all possible arrangements. We have large bureaucracies, not only in governments, but also in health insurance funds - whose administrative overheads are now about $1 billion a year.

For many health needs there is a mixture of “free” and paid services. When there is such a mix there is a natural drift to the free services, even though some paid services may offer better value. In some cases the free services are publicly funded, but in many they are funded through private insurance. The Coalition Government fails to understand (or does not want to understand) that private insurance carries the same incentives for over-use that Medicare carries, but without the strong market power which gives single national insurers the capacity to control use and to keep prices under control. (For an explanation of the economy-wide costs of private insurance, see the InSight article “Paying for health care”.)

In terms of equity, we have developed a “two tier” hospital system, thanks to the generous subsidies for the well-off to use private insurance (particularly the 1 per cent tax break, which more than pays private insurance premiums for anyone with an income above about $70,000).

When public hospitals become a “charity” or residual service, there is no guarantee that their quality will be preserved. (And, conversely, the linking of private insurance to private hospitals ensures that they never come to compete alongside public hospitals.)

Cleaning up the mess

A case can be made for a universal, “free”, tax funded system of health care. And a case can be made for a system in which most people pay for most of their health care for most of the time - essentially a competitive market system, with safety nets for those with very high needs. The former could be classified as “socialist”, the latter as “free enterprise”. Private insurance is neither, for while it is private, it carries all the distortions, and more, of bureaucratic systems.

Nowhere in the developed world is health care left entirely to the market. Even the most “dry” economists accept that there are market failures in health care, and even the most rational and disciplined consumers cannot plan for their health care needs. We all opt to share the costs of our health care to some degree, and the most efficient and fair way to do that is through the taxation system.

On the other hand, a universal, free system has drawbacks - in particular an imbalance between supply and demand. Long queues are an inevitable outcome of a free system, and there often has to be a heavy hand of intervention to ensure scarce resources are applied where they can do most good.

But a universal system doesn't have to be free. “Universalism” in health care essentially refers to equality of access (in contrast to the two-tier hospital system we have now). Co-payments serve a function in that, if well-structured, they can convey some price information, and can help direct resources more efficiently, particularly around the borders of health care. At present, services such as physiotherapy, podiatry and similar therapies tend to be under-used in comparison to other services which are higher cost but free at the point of delivery.

Nor does universalism mean all services have to be provided by the public sector. The private health insurance lobby has been very effective in a scare campaign, suggesting that without private insurance we will not have private hospitals, but private hospitals can easily be placed on the same funding basis as public hospitals. Indeed, competition between private and public service providers can be quite healthy.

Most of those who have contributed to the CPD's policy development accept that Australia can have a universal health care system, with carefully structured co-payments. The underlying principle in such a system is collective insurance, helped by some use of market signals to the extent that they do not cause hardship or deprive people of necessary care.

Some have argued for an entirely free system, and it is possible that Australians would be willing to pay the extra tax and to tolerate the extra management which that would entail. That question is one to be resolved through community engagement.

Rationalisation of financing, of course, would be part of a larger process of reform, in which the presently disparate elements of health care are brought together in one integrated system, designed around the needs of consumers.

Such a reform process would break from the bipartisan tradition of incremental change, referred to above (known by the political scientist Charles Lindblom as “muddling through”).

Sceptics may wonder if such change is possible, pointing to the extreme caution the Labor Party is showing in relation to health policy. But Australia has a good record in achieving change, such as tariff reduction, tax reform and financial market deregulation. There would be few losers from any basic reform of health care. Perhaps some bureaucrats may have to find alternative employment, and the private insurers would have no role, but they are only a high-cost overhead. Those delivering health services will always find their skills in demand, in both the private and public sectors.