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Roger Kilham, Associate Director, Access Economics
Address to the AMA Public Hospital Financing Forum
13 April 2002
I've chosen to look at a bigger picture than public hospitals and a longer timeframe than just the term of the next set of ACHAs.
For the best part of a decade, Australia has been "successful" in restraining national health spending to about 8.5% of GDP while still enjoying access to health services and a quality of care which must rank as close to world best. Among the fruits of this success are:
Australia is a wealthy nation. We could afford to give our citizens first world health care, although we don't choose to do that universally as evidenced by the third world health status of our indigenous people. What we either cannot, or will not, tolerate is public health spending continuing to gobble up an ever increasing proportion of budget expenditures. The expectations of the Australian community are very high. The sort of technological advance we have seen to date has resulted in a net increase in expectations. Some people pin their hopes on gene technology spawning such large advances that health spending can fall as a share of GDP while delivering better much outcomes. Well, maybe, but there is no sign of that yet. All the evidence points to an ageing population wanting to consume more and more health services, including services that are more complex and more costly.
In the mid-1960s, when health and social security spending consumed 25% of the Federal Budget, it was easier for the relevant Ministers to get new spending approved. Now that they consume 55% of the Federal Budget, there is much greater resistance.
Can we spend the health dollar more wisely and/or more cost effectively? Well, there's always scope for improving the way the system works. We would get a better outcome for the health dollar and reduce human misery if, for example, our political leaders showed some "true blue" courage on tobacco control, and told the tobacco companies where to put their money. We could get a better outcome if health consumers made better choices. We could get a better outcome also, if we could at least partly untangle the Commonwealth/State mess. However, many other recipes for improvement are oversold. Governments intervene in the health system on a massive scale—in setting public health standards, in delivery of health care and in financing of health care—without the slightest idea as to how many of these interventions are cancelling each other out. Much of the forward progress occurs despite the efforts of governments, not because of them. I would see the 5 April Health Ministers' communique as offering slight hope for small changes around the edges.
My first three conclusions are:
Conclusion No. 1:
We have a clash between our appetites for consumption of taxpayer subsidised health care and our appetites to pay tax. The taxpayer within us has been winning this struggle.
Conclusion No. 2:
The funding pressures on public hospitals are not unique to public hospitals but are part of a health system generic problem of the taxpayer not being willing to pay.
Conclusion No. 3:
The funding pressures may have squeezed out a few efficiencies but most of the productivity gain in health is achieved through R&D spending—new drugs, better anaesthetics, better surgical techniques and equipment, new diagnostic advances—so the gap between expectations and funding will not be reconciled by greater efficiency. It will be reconciled by greater reliance on rationing.
There is nothing fundamentally wrong with the idea of rationing. Indeed, we cannot avoid it. Health sector resources are scarce while the demands are very large. We can ration badly, or we can ration well—we can ration by prices or we can ration by waiting lists—but we must and will ration health care. Of course, access to public hospitals is not rationed by prices. And the flip side of that is moral hazard—patients will seek to use more services simply because they are free.
The effect of more rationing, and all the cost shifting that it spawns, is that little by little Governments are changing the nature of Medicare while standing with their hands on their hearts declaring their everlasting devotion to it. For the past 17 years, our politicians have preferred surreptitious change in health financing because any process of engaging and consulting with the electorate risks frightening the horses. It is politically dangerous. As we all know, Medicare is popular with the punters. That's why every quest for an open and frank debate about where we are heading with the health system is dumbed down by all parts of the political spectrum.
I have asserted that we cannot reconcile the community's appetite for subsidised health care with the willingness to pay tax. Why is this so? And is it believable after a year in which the Federal Treasurer has cheerfully presided over a 15% increase in Federal tax collections? When we fund health care publicly, there is a significant intergenerational transfer from today's taxpayers to an older demographic cohort who are, by and large, yesterday's taxpayers. Public health insurance is not simply a mechanism for the members of the community to share the financial risk of poor health. It is also a mechanism for redistribution of income, ostensibly from the rich to the poor but more precisely from the income rich to the income poor. So that includes redistribution from those on wages and salaries to those with business income and, in some cases, from the asset poor to those who are able to arrange their affairs so as to be asset rich but income poor.
Medicare is one of several large spending programs of this character. Another is old age pensions. These program were never "funded" in the sense that the beneficiaries bore the cost. And they are sustainable only as long as the intergenerational transfer is sustainable. We have always had some intergenerational transfers through the tax system. I'm not seeking to say that an intergenerational transfer is fundamentally wrong. But, it has to be sustainable. We are living longer, birth rates are falling and immigration is contentious. The population is ageing quite rapidly. In the next 50 years, the age dependency ratio (people aged 65+ as a percentage of people of working age—15 to 64) is projected to more than double from the current level (under 20%) to 45%. If the birth rate continues to fall, we could hit the 45% mark even earlier.
Conclusion No. 4:
The intergenerational transfer which is inherent in programs like Medicare and old age pensions is not sustainable in the longer run because there will not be enough taxpayers to meet all of the expectations of the older people.
It is implicit in this that the ever growing number of older people will not contribute much tax. People pay the larger part of their lifetime tax burden while they are working, not after they retire. But if some of you manage to pay tax all the way to the grave, or even beyond it, may I just thank you in advance on behalf of our fellow Australians.
A decade ago, the Federal Government partly recognised the unsustainability of taxpayer funded age pensions. It moved to protect the interests of future taxpayers by mandating occupational superannuation. All of us would have retirement incomes, but most of us would be obliged to save for those ourselves instead of relying on our children and our friend's children to pay more in taxes to fund government pensions. Most people now agree that it was a sensible solution, although it was quite badly implemented with far too many changes in the rules and a very grave temptation on the part of the Government to confiscate people's savings through new taxes. Mr Costello's post-GST threat to "reform" superannuation scared lots of people.
What I'm leading to here is that retirement incomes is one major need in old age. Health care is the other. At the time the SG was implemented, it was assumed somewhat blithely that there was no need to change Medicare. Well, there is and we should have seen it coming.
So what is the solution to the problem of government health budgets being stretched too thin? Is private health insurance the answer? The short answer is "no". Simply shifting the health insurance system from the public sector to the private sector does not address the unsustainable intergenerational transfer. There are three options for implementing PHI:
Conclusion No. 5:
Shifting the health insurance system from the public sector to the private sector does not do anything to solve the problem that the intergenerational transfers in health financing are not sustainable in the longer run.
Conclusion No. 6:
We should start plotting a course now for a quite different health financing system, one that solves both the intergenerational and budget problems.
Looking at it from the point of view of who pays rather than who provides, within one or two generations we may find ourselves looking at a health financing system with the following elements:
Health savings accounts are not some kind of magic panacea. They are no more than a mechanism for reallocating your health costs over your lifetime, so that you can have access to health care when you are older, when you may not have a large income and when you may have assets locked in and hard to redeem (eg, family home).
Health savings accounts are of little use on their own. It is essential to combine them with a system of insurance. The Australian community continually expresses its preference for a viable mechanism to share the financial risk of poor health. Whether public or private is a matter of heated debate far exceeding the importance of the question. The political imperative is to have a workable insurance system.
What I can say, however, is that a vast amount of reform is required to make private insurance workable for the long term. We do need to make some sense of the interface between public hospital financing and private health insurance. PHI sits uncomfortably around the edges of Medicare. Many of us feel obliged to have PHI, but we are not obliged to use it. Governments and private health funds are not the only ones trying to game the system. The patients do it too.
In both Medicare and PHI, we have lost sight of the purpose of health insurance—to spread risk—by trying to turn both into comprehensive payments systems. In the process we have spawned a benefit mentality. Indeed, some of our brethren seem to believe that all taxes paid in their lifetimes are simply held in trust by the government, available to be redeemed by the taxpayer at his pleasure in his twilight years as he draws down his entitlements. However, governments have often spent our taxes before we've paid them. Private health insurance for running shoes? There's no financial risk in running shoes. Insurance simply makes them at least 15% more expensive, depending on how many extra pairs one buys to maximise fund benefits. Yes, there is moral hazard even in running shoes.
Apart from the quest to buy votes, it is very difficult to make any case for a tax rebate for ancillary insurance which is costing over $600m p.a. That money would be better spent elsewhere, for example, on employing more nurses and paying them better.
I do not believe that we can get a sensible policy framework for the next ACHAs if we start with a narrow focus on how to fund the public hospitals and only worry about the next set of agreements. The 5 April communique shows a glimmer of recognition of some of the wider issues. Sensible policy demands that we plan for the longer term and for the wider problems in health financing.
I hope we never see a repeat of the process in the Fraser years when the original Medibank was being dismantled. The ground rules were changed every year. The PHI funds ended up punch drunk and the electorate very restless. The relative stability of Medicare in its early years was a godsend to patients and providers. Change can be managed badly, or well. It is another choice we make by design or by default.
The crude model on the screen is just one of many that we could envisage for the longer term. Let us assume for the moment that we could agree that this sort of model might be sustainable in the longer run and might be something the electorate could tolerate. What would that imply for the next ACHAs?
One of the first things in my view would be to forge a strong Commonwealth/State consensus on a more sensible role for private health insurance. We are crying out for a bipartisan approach to private health insurance—bipartisan across the political spectrum, bipartisan as between the Commonwealth and the States. It is therefore encouraging to see this listed in the 5 April communique. Sorting out the interface between the private and public financing systems is every bit as important as sorting out the interface between the various public financing elements.
Second, the new agreements would be built around a mutual understanding that Medicare is not sustainable in the longer run. Governments cannot fund it all now and they certainly won't be able to fund it all the future. The new agreements would start to introduce some elements designed to change patient expectations about their entitlements and their responsibilities. The corollary is that lobby groups that ask for significantly more public funding of public hospitals are not grasping the hot potato. And it doesn't matter how these demands are dressed up (eg, the CHA Medicare grey card or the somewhat similar proposal by Stephen Duckett). They are reaching the potato that has already fallen to the ground, and now lies there cold and glutenous.
Conclusion No. 7:
There's not a lot of mileage for lobby groups in asking that more and more taxpayer money be poured into public hospitals, because it just ain't gonna happen. See the political reality and lobby for a viable financing system.
Third, we would start to address some of the ambiguities in the system that allow patients to game the system. It is blinkered to assume that only governments try to shift costs. Patients (and providers) do it too.
I read the 5 April communique and saw some glimmers of hope while still I shrugging my shoulders. The current Federal Government policy appears to be to:
It has all the hallmarks of a Budget-driven cost-shifting agenda, not a health quality agenda. No evidence of a patient focus.
The Commonwealth is certain to argue that the States should use the GST bonanza to pay for an increased share of the costs of public hospitals. There are two problems with this:
In the current agreement, we saw the Commonwealth pretending to be providing a significant real increase in funding, whereas it was all smoke and mirrors with indexation parameters which bore no relationship to cost increases or the actual potential for productivity gain. So we are not going to see a sensible dialogue on funding levels until the Commonwealth recognises that the "productivity dividend" formula approach has largely run its course.
The studied silliness of Commonwealth/State relations is not mandated by the Constitution or anything like that, but the old habits die hard. I don't believe that there is any magic formula for a health financing system that suddenly makes all the complexities and the problems vanish. But there are lots of small steps we can take, some of which are mentioned in the 5 April communique. Some others are:
Postscript: Are our leaders able to plot a course so that we start moving towards a health financing system that will sustainable in the longer run? Or will they filibuster while we lurch from crisis to crisis until the weight of circumstances finally forces their hand? The track record suggests the latter. There is always hope. Perhaps there is only hope.
Thank you.
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