Opt out for lower tax and better health care

The higher proportion of the population aged over 65 is sure to have significantly greater political muscle in coming decades. The baby boomer generation will expect the public health and hospitals system to satisfy its healthcare needs and wants, and to deliver its members the health benefits offered by the latest, very expensive medical technologies, in the fashion Australians have become accustomed to.

Politicians already pork-barrel the “grey vote”, and the expanding elderly constituency can be expected to vote in favour of tax and health spending policies that extract higher transfers from younger workers.

Due to Medicare’s open-ended commitment to provide “free” (or nearly free) health care for all Australians, if an ageing Australia continues to rely on pay-as-you-go tax contributions to fund the bulk of health spending, then governments will siphon off a considerably larger portion of the earnings of young generations as taxes to subsidise the ageing-fuelled cost of Medicare.

The alternative path to avoiding a high-tax future is to uncouple as much future health spending as possible from the PAYG tax system. However, with the bulk of the baby boomers nearing 65, only a minority of this demographic are likely to join any new health savings system. For this fortunate breed, the free ride in health will simply have to continue.

Gen X and Y are therefore in an invidious position. The time has come to face the problem that bedevils attempts to switch from pay-as-you-go to pre-funded health-care or pension systems: one unlucky generation has to pre-fund their own health or retirement costs while still paying tax to finance the social costs of the elderly. Gen X and Y have partly crossed this Rubicon. They are already forgoing part of their incomes to pre-fund their retirements, while paying tax to fund the pensions of people who are already retired.

Gen X and Y are paying twice because the Keating government realised that demographic change dictated reform of the old age pension system and introduced the compulsory Superannuation Guarantee in 1992. Having set the international pace and moderated the future cost of the old-age pension, Australia has acquired a long-term advantage compared to other OECD countries.

The introduction of a health savings system would follow the trail of self-provision blazed by the superannuation system. Very similar health savings systems, which would allow people to opt out of Medicare, have been proposed by the Centre for Independent Studies’ Peter Saunders, and by Health Group Strategies before the 2006 House of Representatives inquiry into health funding.

Adults who voluntarily opt to “cash out” their entitlement to Medicare-funded medical treatment would receive a tax credit to fund a tax-advantaged Health Savings Account. They would be able to pay for their day-to-day medical expenses out of their account, and would be required to take out private health insurance to cover expensive hospital care and treatments.

A voluntary opt-out system has the potential to bring about far-reaching health reform. It would definitely shift the funding and provision of health care outside of the faltering public health system for those who choose to take on financial responsibility for their own health care. Creating a consumer-driven alternative to the public system would allow participants to enjoy the benefits of choice and competition. The demonstrated benefits - better quality healthcare - for those who opt out would encourage others to follow suit.

A voluntary opt-out system is also specifically designed to be a transitional arrangement. The option of sticking with the public system would especially insulate the elderly and those near retirement age against changes to their current Medicare entitlements. This would address the greatest political obstacle to genuine health reform, and neutralise the scare campaigns - of the “Medicare under threat variety”, which are usually targeted at the elderly - which the discussion of healthcare reform invariably generates.

For their part, Gen X and Y need to be fatalistic about paying twice for health care. The need for intergenerational reform will not go away, and the longer we continue to delay establishing a national system of health savings, the more taxing a problem Medicare will become.