A more expensive healthcare cop-out

Yes, Australia needs to improve hospital efficiency and co-payments would wisely manage demand. But greater use of private health insurance would simply guarantee worse outcomes for everyone.

Yesterday’s release of the National Commission of Audit report has created plenty of controversy and disagreement across the country. Among the biggest recommendations was the reform to health care and Medicare – two areas that pose the greatest challenge for the budget over the next few decades.

Health care reform is necessary, but what form should it take? And did the commission get it right?

The Productivity Commission estimates that federal spending on health care will increase to 7 per cent of GDP by 2059-60 (up from 4 per cent in 2011-12) and state spending will increase to 3.8 per cent (up from 2.4 per cent). The total rise is estimated at around 4.3 per cent of GDP – creating a significant gap that must be filled by either more tax, health care reform or other spending cuts.

Medicare currently costs around $19 billion per year and is expected to double by 2023-24. Hospital spending is currently around $14 billion per year and is anticipated to rise to $38 billion over the next decade. The Pharmaceutical Benefits Scheme is expected to rise to around $17 billion from $9.3 billion in 2013-14.

The Commission makes a range of recommendations for Medicare.

First, it suggests requiring higher-income earners to take out private health insurance for basic health services in place of Medicare and precluding them from accessing the private health insurance rebate.

Second, it recommends the introduction of co-payments for all Medicare funded services. General patients would pay $15 per service up to a certain threshold of services (the commission recommends 15 services) and then $7.50 per service after that. This is higher than leaks from the Coalition which suggested co-payments of $6 per service.

For concession card holders, services would cost $5 up to the service threshold and $2.50 per service after that.

The commission’s plan to direct Australians – rich or otherwise – towards private health insurance seems questionable. Effectively it substitutes private spending on health for public spending. The issue is that private health insurance is typically more expensive than its public equivalent because the government is better placed to use its market power to lower costs and is better able to manage insurance risks.

If we think about the total health sector (public and private spending), higher spending on private health insurance would actually  leave Australians worse off, with fewer services per dollar spent. Effectively our health burden would increase.

Instead of forcing high income earners to take out private health insurance, the government would be better off directing those funds to public health spending via a higher tax or Medicare levy.

The US system provides a perfect example of why we should resist greater use of private health insurance. The US spends more on health care than any other developed country yet obtains inferior health outcomes. The US also shows how difficult it can be to reduce the influence of private insurers once they establish market power – despite two highly efficient public health programs there is widespread resistance to universal health care in the US.

Co-payments are easier to justify and are actually a fairly good idea. A small payment can be an effective method to manage demand for health services and emergency departments. Naturally safeguards should be in place to protect low income earners and our most vulnerable citizens – considerations that the commission has addressed.

Unfortunately the system suggested by the commission is likely to place a greater burden on concession holders -- not only because they are low income earners but also because low income earners tend to use health services more often.

Personally I’d prefer a system that based your co-payments on your capacity to pay rather than a fixed two-tier system. The higher your income the greater your co-payments, allowing richer Australians to take greater responsibility for their health while also protecting low income earners.

Rather than shifting the responsibility of health to the private sector, health care reform should place greater emphasis on service efficiency. The Productivity Commission identified a study that found that there were around 200 procedures in Australian hospitals where the cost can vary from half to around one-and-a-half times the average cost, depending on the hospital undertaking the procedure.

The Commission of Audit states that of the nearly 6,000 items on the Medicare Benefits Schedule, only 3 per cent had been formally assessed against contemporary evidence of safety, clinical effectiveness and cost effectiveness.

Greater collaboration between hospitals is needed to determine best practice and identify the most effective procedures. With the Australian health system primarily a public affair, greater collaboration across health providers should not be difficult.

The Australian health system should, where possible, favour evidence-based procedures. There are a range of expensive procedures which either do not work or provide limited benefits over a cheaper alternative.

In crude economic terms, the health care debate is about resource allocation – how to obtain the best health outcomes per dollar spent. The Commission of Audit has correctly identified the need to improve efficiency within hospitals and the use of co-payments to manage demand but it has completely missed the boat by advocating for greater use of private health insurance.

Private health insurance may reduce the level of public health spending but is likely to increase total health spending across the economy. Reducing health costs is important but the government should place greater emphasis on improving productivity and identifying the most effective procedures rather than passing the responsibility on to someone else.