It’s time for a ‘new Medicare’

In August 1974, the Whitlam government famously called our nation’s only joint sitting of Parliament - where the House of Representatives and the Senate sit together - and voted for the introduction of universal health care. Now, 35 years later and following the report of the National Health and Hospitals Reform Commission’s report, the government is considering giving the system a makeover.

At the heart of Australia's health policy is a conflict that cannot easily be resolved. We desperately need health care reform to achieve the outcomes that people want, and yet any sort of meaningful reform is opposed.

So the government falls back on some old solutions such as centralising powers or simply throwing more money at a problem. The advantage of these approaches is that they are politically popular. The disadvantage is that they don't work.

What does work is competition. Besides a handful of pro-bureaucracy ideologues, most people understand why competition leads to a better outcome. The threat of losing customers drives providers to offer better quality care and lower prices, while the lure of making profits drives providers to do things in the most efficient way possible and quickly adapt to new innovations. Without competition there is little incentive for high quality, low cost, and efficient service.

The difficulty with reforming health care is that many people fear a more competitive system may not adequately protect the poor. But there is a solution that ensures everybody will have adequate health care while still allowing the benefits of competition.

First, everybody would be required to take out a minimum amount of health cover. This should at least cover catastrophic events, and perhaps other benefits currently provided by the government such as subsidised visits to the GP, subsidised hospital visits, and subsidised pharmaceuticals.

Health insurance can be provided by a range of suppliers, including a government supplier (a “new Medicare”) in an open and competitive market. People will still be able to purchase the same government cover they already have now or switch to a private competitor in search of lower premiums, better quality health care, or both. Regulations can be put in place to ensure that health firms do not discriminate against high-risk customers.

On the basis of current government spending, the “new Medicare” would initially cost about $3,000 per year to provide all the benefits currently available. Competition would result in a range of pricing options, allowing people to match their health cover to their health needs so long as they at least have the mandated minimum cover. Or they could just stick with “the devil they know”.

But how will people be able to pay for this?

The answer is that the government can provide each person with $3,000 per year. People who pay tax can have their tax lowered by $3,000 per year and use that money to purchase health insurance. Unemployed or low-income earners can receive $3,000 as a transfer payment to purchase health insurance.

For people who don't want the hassle and are happy with their current arrangements, they can agree to have their $3,000 go directly to the government “new Medicare”. So the worst case scenario is that people will be in the exact same position as they are now.

A similar approach has been tried recently in the Netherlands, was suggested by the Australian Centre for Health Research and was included as a reform option in the National Health and Hospitals Reform Commission’s report, dubbed “Medicare Select”. Commission chair, Christine Bennett, has suggested that greater consumer choice will result in “better and more responsible delivery” of health services.

Not only will competition lead to higher quality health care at lower cost, but it will also remove billions of dollars of pointless tax-welfare “churn” and middle class welfare.

Under the current system, middle- and high-income earners pay extra tax just so that they can receive this money back in subsidised health. This tax-welfare churn provides no benefit. It would be far more efficient to allow these people to keep their own money and purchase their own health care.

Tax-welfare churn has many costs - administrative, economic, social, intergenerational and political. It involves taking money from one person and giving it back to the exact same person. It is not redistribution. Rough estimates of our current welfare systems (including transfers, health and schooling) suggest that of the $260 billion spent every year, about half is redistribution and half is churn.

Some of that churn is unavoidable. But the churn linked to income tax is avoidable and adds up to about $80 billion every year. That is $80 billion (about 7 per cent of GDP) every year pointlessly going from taxpayer to bureaucrat and back to the same taxpayer. And one of the biggest reasons for this wasteful churn is the current health system.

Allowing open competition in health, linked with a $3,000 per person tax cut (or transfer payment) would address churn, decrease administration costs, result in higher quality and more efficient health care, reduce economic distortions, guarantee health care for everybody, and allow greater choice and diversity. Reform of health policy is difficult, but the benefits are worth it.