Election 2004: Paying for health care

Jane Hall, University of Technology, Sydney

Australia’s health system has performed reasonably well over the last half century. Public hospitals, operated by the State and Territory governments and partly financed by the Commonwealth, have provided free and subsidised care. There has been a national scheme for subsidised but privately provided medical services, operated and funded by the Commonwealth. And all Australians have had access to a comprehensive formulary of prescription drugs at zero or a low co-payment.

This structure has been in place since the post World War II period. Neither Medibank nor Medicare changed the basic architecture; what changed was the way it was financed. National universal health insurance moved health insurance for medical services from private funds to government; and extended the entitlement to free public hospital treatment to all, irrespective of their means, again moving financial responsibility from private insurers to government. It did not change the private practice nature of medical care, the dominant role of State operated public hospitals, and the separate funding of pharmaceuticals (see Sax 1984 & 1990; Crichton 1990; Hall 1999; Duckett 2000).

From 1974 to 1996, health was a major issue in every federal election.

These arrangements have delivered comprehensive, universal health care, at a reasonable cost, when compared with other developed countries. But it hasn’t isolated Australia from the pressures experienced world-wide: whether rising health care expenditures, largely driven by technology, represent value for money (Australian Institute of Health and Welfare 2004).

From 1974 to 1996, health was a major issue in every federal election, with the two major parties offering different approaches to the financing of health care. On the Labor side, there was public finance with universal entitlements; and on the Coalition side, private finance, choice, and individual responsibility. In 1996 the Liberal Party changed its policy to maintaining Medicare but with a strong private sector to provide consumer choice (Swerissen & Duckett 1997). This has been enacted through support for private health insurance, the surcharge for uninsured high income earners, the 30 per cent rebate, and Lifetime Health Cover (Hall, De Abreu Lourenco & Viney 1999). Soon after, the Labor Party changed its policy to continuing the private health insurance rebate. It would seem that the differences that have dominated health policy in the elections of the last 30 years have been resolved.

Or have they? Howard and Latham both declared that health policy will be a major issue at this election; and we have already seen big spending promises from both sides (Latham & Gillard 2004; Howard Government 2004). The voters, according to a recent opinion poll in the Sydney Morning Herald rate it as the most important election issue (Contractor 2004), so what the papers have dubbed the ‘Medicare auction’ is not over yet. But the health sector is capable of readily absorbing big injections of cash that will have little more than a short-term effect. What is required is policy to address the underlying cost and value for money pressures in the system.

The three big components of the system are medical services, largely funded under Medicare medical benefits scheme (MBS) which provides the livelihood for most of Australia’s doctors; pharmaceuticals, largely funded under the Pharmaceutical Benefits Scheme (PBS); and hospitals, public hospitals which operate under capped budgets and an increasingly significant private hospital sector supported by a mix of private insurance, out-of-pocket payments, and government subsidies. The MBS and the PBS are publicly financed entitlement programs, driven by fee-for-service funding, so that the Australian government must provide the funds for whatever of volume of services (or drugs) are provided. In contrast to public hospitals, private hospitals are also driven by fee-for-service. The architecture of the Australian system was designed in the mid-twentieth century, when hospitals and hospital care could be considered as separate and distinct from the other parts of the system. Good contemporary health policy has to address the links and interdependencies of the component parts.


Private health insurance as it is currently structured
is not sustainable.

Private health insurance as it is currently structured is not sustainable, either financially or politically. Lifetime Health Cover was intended not just to increase fund membership but also to increase the proportion of younger, healthier people buying health insurance. This it did, but the influx of fund members turned out to use hospitals just as much as the existing members. It is not entirely clear whether this is due to adverse selection, that is, because new entrants into insurance are a sicker group, or whether it is induced demand due to moral hazard, that is once people have insurance they just use more hospital services. But there is more evidence to support the latter explanation (Savage & Wright 2003; Robertson & Richardson 2000). As a result, the new members did not require lower benefit payouts than the existing members, and coupled with rising private hospital costs, this meant that premiums had to rise to keep pace. Premium rises are unpopular with fund members and, as the government pays 30 per cent of the premium costs, also expensive and politically unpopular. The insurance funds can try and limit their payouts by increasing patient co-payments, by limiting the services they agree to cover, and/or by striking deals on prices charged with certain providers. But all of these strategies run counter to the advantages of private insurance in a system with a universal entitlement to free (hospital) care—they limit choice of provider, they increase waiting times, and they force patients to meet substantial out-of-pocket costs.

Although insurance coverage reached a peak of 45.7 per cent of the population just after the implementation of Lifetime Health Cover, it has been dropping since—the latest figures for the June 2004 quarter show coverage at 42.9 per cent (Australian Department of Health and Ageing 2004). The drop-outs have been the younger members, and the average age of the privately insured person is now back up to almost where it was before Lifetime Health Cover was introduced. The government’s new provisions for higher insurance rebates for the elderly will exacerbate these pressures. The insurance funds have indicated they will be seeking further tax concessions, such as employer based insurance plans, and medical savings accounts.

Further expanding private health insurance, either by increasing the number of people it covers, or by increasing the range of services it can cover, will shift more health care finance through the private sector and threaten the universality of entitlements to health care. It will not necessarily cost the government and the taxpayer less. Unfortunately, the strategy that is most likely to encourage private insurance growth is to reduce the quality and accessibility of publicly funded services—I say unfortunately because that would further reduce the universality of the system.


The decline in bulk-billing in general practice was one of the major health policy issues in 2003; it had dropped to 66.5 per cent in the December quarter 2003 (Department of Health and Ageing 2004). Both Government and Opposition responded with policies to increase Medicare rebates and so make bulk-billing more attractive. The Government targeted higher rebates to select areas (rural and Tasmania) and population groups (concession card holders and children), with a subsequent rise in bulk-billing to 70.7 per cent of general practitioner attendances. The Opposition promised to raise rebates across the board and provide incentive payments to GPs who bulk-bill above a target rate.

Bulk-billing rates have fallen in areas with fewer providers.

Since the introduction of Medicare, bulk-billed attendances have been charged at 85 per cent of the Medicare scheduled fee, initially reflecting the savings in administration, faster transfer of funds, and reduction of bad debts. Increasing the Medicare rebate to 100 per cent of the scheduled fee is not much different to increasing the scheduled fee by 15 per cent, other than symbolically indicating that bulk-billed consultations should not be discounted. Increasing the rebate primarily increases the income earned from those 70 per cent or so of GP consultations already bulk-billed (Savage & Jones 2004). Experience suggests that it does not reduce the average co-payment for those who are not bulk-billed. Despite a 30 per cent increase in the standard consultation rebate over the last six years (while bulk-billing was falling), the average co-payment for those patients not bulk-billed went from $8.89 to $12.91. Since the December 2003 quarter, when bulk-billing was 66.5 per cent, patient co-payments have risen from $14.03 to $15.37 in the June 2004 quarter (Department of Health and Ageing 2004). Although the new safety net provisions are unlikely to affect GP charges—and hence costs faced by most patients, they have already encouraged some specialists to raise fees substantially.


General practice is a key component of the system, as only medically trained providers can claim Medicare rebates and GPs act as gatekeepers to the rest of the system. It is in areas with fewer providers, typically outer suburban and rural areas, and so less competition, that bulk-billing rates have fallen. Although some recent provisions allow for nurse practitioners, Medicare rebates can only be claimed by the doctor for those services provided by nurses. Much has been made recently of the shortage of doctors, particularly in general practice and both the ALP and the Coalition support increasing the doctor supply. In fact, recent Government announcements on new medical schools will have seven new schools in place over the next few years, including two or three outside the inner capital city areas.

But increasing the numbers of doctors is not the same as increasing the relative numbers practising in under-served areas. Over the last twenty years, doctor numbers have risen more rapidly than the population but the supply differential between city and country has widened (Hall & van Gool 2001). Doctors are virtually free to practice where they choose, and being licensed for eligibility for Medicare rebates is not restricted geographically (other than some recent provisions for rural bonded medical school places, and new immigrants). General practice has remained a series of small businesses, with most doctors in small groups or solo practice. But this form of working is losing its attractiveness to the younger generation of doctors, who no longer want to pay for the goodwill capitalised in existing medical practices. Government subsidies are directed to services provided by doctors, and exclude a range of primary care services that could include nurses, pharmacists, physiotherapists, psychotherapists, for example. These factors are working against achieving productivity gains in general practice, and re-balancing the maldistribution of supply.


It is a myth that every private hospital admission saves one in a public hospital.

The Pharmaceutical Benefits Scheme also attracted its fair share of attention this year around the provisions of the Free Trade Agreement. There was a widely held perception that American drug companies would like to see an end to the PBS as we know it. In fact, the PBS provides drug companies with a big market—100 per cent of the resident population are entitled to subsidised prescription drugs, once the drug is listed for the PBS. This is a much bigger market than if individual consumers had to pay the market price for their medicines so we are unlikely to find the pharmaceutical industry wanting to restrict that. In fact, in recent moves drug companies have teamed up with retail pharmacists to advocate on behalf of those consumers finding the PBS co-payments difficult. What we can expect the industry to be concerned about is the price it gets from the government for its product. Government has monopoly power to negotiate on price; and it has used that to buy drugs at lower than comparative world prices. The industry has won some concessions on pricing in recent years and the price the Australian governments pay has increased against international comparisons (Goddard, Henry & Birkett 2001).

Not only is the PBS a universal program, it is open-ended. Once a drug has been accepted onto the PBS list, most can be prescribed for anyone. Hence the phenomenon that is labelled leakage, that is a drug is approved for one purpose but used far more widely. The Pharmaceutical Benefits Advisory Committee is aware of this but under the current arrangements it is hard to contain; and certainly not in the pharmaceutical manufacturers’ interest to see it achieved.


That leaves public hospitals, the other big part of the health system in terms of spending, and in terms of public concern about adequacy. Public hospitals expenditure has risen more slowly than the other major components of the health sector spending (Australian Institute of Health and Welfare 2004). This is not the result of any easing of demand but the effect of applying expenditure caps, a cost control mechanism that is not available in those parts of the system—including private hospitals—where funding is by fee for service. Private hospital spending and private hospital admissions have been growing at a much greater pace; but this growth was occurring before any change in health insurance, that is, while private health insurance coverage was still falling (Hall, De Abreu Lourenco & Viney 1999). And it is a myth that every private hospital admission saves one in a public hospital. If the privately insured use more hospital admissions, then additional private hospital admissions can represent growth in demand rather than its transfer from public to private sectors.

Public hospitals have problems that will not be solved by money alone.

There needs to be some way to tie public hospitals into other service/funding streams, such as out of hospital medical care, community care, aged care, and possibly pharmaceuticals, to allow for more effective resource management and to distribute expenditure caps more rationally. Some form of funds pooling or budget holding, where the funds from all sources are held by one agency which determines how they should be allocated across services for a defined population is being considered in all countries as a way to increase value for health care spending (Hall 2004). But the Australian Co-ordinated Care Trials (CCTs) were an attempt to do just that, to identify groups of people with high health care needs and assign a co-ordinator who notionally held all Commonwealth and State funds. Experience with CCTs has shown that implementation of any such strategy requires more than just notionally bringing the separate funding streams together (Commonwealth Department of Health and Aged Care 2001).

More money will no doubt help the pressure being felt in public hospitals. There are, however, underlying problems that, though not helped by budget cuts, will not be solved by money alone. These include shortages of nursing and medical staff and safety and quality issues. In all of this, transferring responsibilities for hospital funding from Commonwealth to States, or States to Commonwealth is only a distraction.


What is certain is that over time Australians will pay more their health care. They face a choice. It could be financed through taxation with access not related to one’s ability to pay and more emphasis on the public provision of services. Alternatively it could be financed privately, through insurance, co-payments, and user charges with the need for cross-subsidies and safety nets to limit the extent to which ability to pay rations access to health care. Within either strategy, there are challenges in ensuring universal access, building in incentives for cost-effective care, and developing a way to co-ordinate service delivery.


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Jane Hall is Director of CHERE and Professor of Health Economics in the Faculty of Business at UTS. She is actively involved in policy analysis and critiqueand is a regular commentator on health funding and organisational issues in Australia.