1. INTRODUCTION
Commonwealth expenditure on health services was $6.8 billion in 1985-86. Of this, Medicare -- medical benefits, "free" treatment in public hospitals, and administration -- cost about $3.7 billion.
Governments have made so many changes in health policy in recent years that further upheaval in the system is undesirable; but the present system has so many serious deficiencies that the consequences of attempting to sustain it will be worse. So we propose gradual change to a radically different system which can then continue indefinitely.
1.1 OBJECTIVES
As in so many other areas, government's objectives in health policy have been confused and contradictory. In recent years they have apparently included redistribution of income, control of doctors' incomes, control of the mix of public and private provision of health care, and of course "free" health care for all.
As argued in the Welfare chapter, redistribution of income should not be a primary objective of government policy (although some degree of redistribution is implicit in the concept of social security). Such redistribution as is required is best accomplished by the tax and social security systems: provision of other goods and services at income-related "prices" (e.g. the Medicare levy) tends to obscure the extent and direction of redistribution, and its cost. Nor is there a satisfactory answer to the question, why should rich people have to pay more for health care than poor people, but the same prices for other necessities of life like food?
Attempts to control doctors' incomes have not been particularly successful. If they are needed it is only because:
- Government-sponsored restrictions on who may practise medicine limit the supply of doctors and competition among them;
- Government-imposed medical benefits schedules effectively set minimum prices for medical services, further restraining competition; and
- Government-designed and -regulated health insurance arrangements encourage fraud and over-servicing and provide spectacularly high incomes to the less scrupulous medical entrepreneurs.
Government attempts to control the mix of public and private provision of health care have without exception been motivated by considerations of ideology or political advantage (with bureaucratic empire-building coming third).
Even "free" health care has to be paid for by someone. The Medicare levy raised about $1.4 billion in 1985-86; the rest of the $6.8 billion health spending comes from taxpayers too, either present ones or future ones (deficits are a way of deferring taxation).
1.2 HEALTH CARE: A SPECIAL CASE?
Much of the confusion comes from the tendency to debate health care as if it were something quite different from any other goods and services, to which ordinary economic principles do not apply.
This is wrong. To understand why, think of a politician's speech in support of Medicare, but with the word "food" substituted for "health care" throughout, "meat" for "general practitioner", "vegetables" for "hospitals" and so on. Health care is less a necessity of life than food, clothing and housing, yet no one seriously proposes that government provide these things "free" and pay for them with tax levies. The community accepts a responsibility to save people from starving or going naked and homeless; but it does this, rightly, mainly by making sure through the social security system that people have incomes sufficient to provide a minimum standard of living. The same should be the case with health care.
Health care is not particularly expensive for most people most of the time. Even without Medicare, a GP consultation costs less than a visit from a plumber. Even without health insurance, most families would find themselves with smaller bills for health care than for their car(s).
Where health care does differ from other necessities of life, however, is in the risk of incurring very large costs as a result of injury or serious or chronic illness. This does not happen with food or clothing or housing (there are no sudden life-threatening needs for caviare or sable or mansions); on the other hand very large unexpected costs are just what insurance is best at coping with (which is why accident insurance is compulsory for motor vehicles).
1.3 HEALTH CARE AND MARKET FAILURE
A more plausible argument for health care as a special case is based on the alleged inevitability of "market failure" in a system not controlled by government. One of its subtler forms runs somewhat as follows: efficient allocation of resources by a market is dependent on consumers having accurate perceptions of the difference a good or service makes to their welfare; but patients don't know how their illness would have progressed without treatment, or with different treatment, and so cannot estimate the actual benefit of the treatment they receive and instead have to value it by inappropriate measures such as the doctor's bedside manner, and the number of services provided. Therefore, the argument runs, a market-driven health care system will not achieve an efficient allocation of resources: it will be more expensive than necessary. A simpler form of the argument is that ordinary people do not have the medical knowledge to judge whether they are getting appropriate treatment and so are at the mercy of their medical advisers who will exploit their information advantage to increase their own welfare at the (financial) cost of the patients. Either way, it is argued that the market will not achieve an acceptable outcome and that government intervention is necessary.
This overlooks some important points:
- Similar information problems accompany almost all professions and trades: motor mechanics, butchers, chimney sweeps, any area of activity in which practitioners possess knowledge not possessed by consumers and in which there is uncertainty about the results of action (or inaction). Enforcement of fair trading practices apart, government intervention is seldom deemed necessary (except for attempts to ensure a minimum competence among practitioners).
- Government faces an information problem at least as great as the patient's. Medicine is not an exact science, and health care is not a mechanical process for converting sick people into healthy people. It is true that the patient does not know all about the costs and consequences of various courses of action: but, for any individual patient, neither does the government. One of the doctor's main tasks is to relate the condition of the individual patient to the whole body of medical knowledge. The latter is readily available to the government but information about the former is not and would be extremely expensive to collect.
- Individual welfare depends on individual perceptions. People place different values on different goods or services or feelings, and markets serve to integrate these differing values without compulsion. Government cannot hope to duplicate this process.
- Finally, it is necessary to compare imperfect, real markets not with theoretical non-market systems but with imperfect, real government-run systems. In practice, non-market failure is at least as serious as market failure (see the discussion in the Government and Administration chapter). (1)
1.4 DEFECTS OF THE PRESENT SYSTEM
The most serious defects of the present system of delivering and paying for health care are directly attributable to government policy. The design of Medicare ignores the basic principles of sound insurance. Medicare and other elements of the system conceal from patients the cost (or balance of cost and benefit) of the health care they seek or receive. The Medicare levy is not clearly separated from other taxation and anyway does not cover the cost; the levy once paid (by those taxpayers required to do so), health care is provided at a marginal cost often zero and always bearing almost no relation to the actual cost of provision. The result is, predictably, an increase in the amount of health care demanded -- and doctors are blamed by the administration for over-servicing when they respond to the demand. Doctors seem to be expected to bear in mind the true cost of every aspect of treatment, while the design of the system encourages people to think of them as virtually costless.
"Free" treatment in public hospitals has greatly increased demand for the most expensive form of hospitalisation, beds in major teaching hospitals, and reduced demand for cheaper forms in suburban private hospitals. Bed occupancy rates in government hospitals have increased, and conditions for staff and patients alike have deteriorated. This has exacerbated the industrial relations problems characteristic of strongly unionised institutions whose management neither faces the commercial discipline nor enjoys the entrepreneurial freedom of the marketplace. In a market-orientated system the shortage of nurses would never have become so acute: management would have been able to respond early to emerging problems of recruitment and retention.
2. A BETTER HEALTH CARE SYSTEM
In place of the confusion, we propose a single objective for Commonwealth government health policy:
No Australian resident suffering sickness or injury should be forced to |
"Reasonable" is of course the key word. Interpretation needs common-sense; attempts to devise explicit criteria are likely to cause more problems than they solve. A brain scan for every headache is unreasonable. So is a visit to the doctor for every graze. Extremely difficult questions arise: who should have priority for kidney transplants, heart transplants, travel to London or Houston for the latest miracle treatment? There are no simple or tidy answers. No one wants people to suffer or die for want of the very best treatment, but it is not possible to provide the very best to everyone, always; no nation is rich enough for that. There will always be heart-rendingly difficult questions in the allocation of health care resources, and some of them will always involve taxpayers' money and fall to be answered by politicians: for instance, whether or not the taxpayer should pay for a dying child's going to London in the last hope of a cure.
It is nevertheless obvious that the more efficiently health services operate, the better the care that can be provided for a given proportion of national resources devoted to the health sector. To look at it another way, the less money wasted in basic health services, the more is available for expensive machinery like magnetic resonance imaging scanners and for luxuries like treatment abroad. The health service reforms proposed below are therefore aimed at capturing the benefits of free market provision of services to the maximum extent practicable, without denying access to the disadvantaged. The proposed system is outlined in the box.
In this system, providers of insurance and of health care would operate in a competitive milieu, and people would be expected to shop around for the health cover that best suited them, from a much wider choice than Australia has seen to date. Economic theory and libertarian principles both suggest that health insurance should not be compulsory, and that people should be allowed to risk incurring large health bills if that is what they want: but there are good pragmatic reasons for continuation of compulsory cover. It is a matter of public opinion. Universal, guaranteed access to health care is something very close to the public's heart, and democratic politicians would not be able to deny treatment to uninsured people who could not afford to pay large bills: so compulsory health insurance is needed to avoid the problem of free riders.
Under the proposed system, many Government hospitals would remain, especially in rural areas, but their income would come mostly or entirely from fees paid by patients and their insurers. Market forces would ensure that fees were sufficient to allow efficiently-run hospitals, clinics and practices to make a modest profit; State governments would have the choice of running their hospitals efficiently or subsidising them from their own resources. Above all, throughout the system there would be incentives to make the best use of scarce resources and to innovate in ways that combine more effective health care and more efficient delivery of it.
Outline of a Better Health Care System
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Despite its attractions, this system is too different in concept and operation from today's to be implemented immediately. In section 3 of this chapter we outline the first steps of an orderly transition from the present system to the preferred one, steps to be taken early in the Government's first term; in section 4 we present some other changes to increase the efficiency of the health care delivery system and "bandaids" for temporary alleviation of some of Medicare's problems; in section 5 we present a "second round" in the process of gradual transition; and in section 6 we sketch the last changes to reach the preferred system in several years' time.
3. FIRST STEPS TOWARDS THE PREFERRED SYSTEM
None of the actions recommended in this section departs from the Medicare principle of automatic basic health cover for everyone. No one will risk losing his health cover through inaction. The actions will, however, change the incentives facing everyone in health care, whether providers or receivers, and as people respond to the changed incentives the system will evolve new institutions and services which will enhance its effectiveness and efficiency.
The policies in this section should be implemented as soon as possible after the Government comes into office.
3.1 COMPETITION FOR MEDICARE
Allow existing health funds to offer full medical and hospital cover, with |
The only restrictions that should apply are (a) community rating (each package must be available to all comers at the same price) and (b) in policies that cover hospital costs and include co-insurance or front-end deductibles, the insurer and not the hospital must bear the risk of the policyholder's failing to pay his or her share of the bill. (Co-insurance involves the insured paying a certain proportion of the expenses. Front-end deductibility involves the insured paying the whole expense up to an agreed limit at which the insurer takes over. A single policy can include elements of both.) The purpose of restriction (b) is to give insurers an incentive not to sell people inadequate cover: without it, insurers would have an incentive to sell policies with very high front-end deductibles or co-insurance rates (and low premiums) to people without the means to pay their share of the cost of a catastrophic illness and leave the hospitals to carry the resulting bad debts.
Funds should be free to set their own prices. Funds would be charged for services provided to their patients by government hospitals.
People who buy medical and hospital cover from the funds should be exempt from the Medicare levy. PAYE taxpayers would have to fill in a new tax instalment form; all taxpayers claiming exemption would have to provide evidence of private cover with their tax returns.
Funds should be allowed (if they wish) to offer insurance packages that restrict the patient's choice of doctor and/or hospital for non-emergency treatment. This would allow funds to offer cheaper cover for instance by negotiating special rates with particular hospitals that specialise in certain treatments.
The purpose of this recommendation is to provide alternatives to Medicare and to reduce the inequity of the present system in which people who want private hospital cover are forced to pay in full for that and also to pay through taxation for public hospitals. It does not affect people who are happy with the treatment they get in public wards. Unfortunately it does nothing to make private insurance easier for people who do not now have to pay the Medicare levy: this problem should be tackled later (see 5.3 below).
Most important, it gives people and insurers wide freedom to decide how to allocate health care risks, while ensuring that everyone is covered for major expenses.
3.2 MAKE HEALTH CARE COSTS APPARENT
The purpose of this is:
- To make people more aware of the true costs of health care by making them see the bills, claim from Medicare, and pay the money;
- To make them think twice about going to the doctor for trivial complaints because it will actually cost them money (even if hardly more than a packet of cigarettes); and
- To give patients and doctors an incentive to avoid over-servicing.
End bulk billing under Medicare. Revise the system of Medicare benefits as follows: Benefit should be calculated on the schedule fee or the actual fee |
Calculating the benefit on the lesser of the schedule or the actual fee is needed to ensure that pensioners too have to pay a little for each service. It will also give doctors an incentive to compete on price (at present the 85% of schedule fee paid by Medicare sets an effective minimum price).
It should be left to the individual health fund to decide whether similar arrangements should apply to its policies, or to offer 100% cover (for schedule or actual fees), or to provide different incentives for economy (probably by deducibility or co-insurance).
The 1.25% income tax levy for financing Medicare does not cover the running costs of Medicare, let alone other Commonwealth expenditure on health.
As part of the policy of making health care costs apparent, the |
This will encourage more people to opt for private insurance, as it will lower the income at which the levy exceeds the cost of private cover.
3.3 MORE INSURERS
Allow organisations other than the existing health funds to offer all |
The only controls should be (a) prudential ones to ensure that the organisations are financially reasonably sound and to protect policyholders if the insurer fails, and (b) requirements for community rating and liability for hospital fees the same as for the existing funds. The rules should be written to make it clear that prepaid Health Maintenance Organisations and other unconventional forms of cover are permitted.
Obviously some commercial insurers will be interested in entering this market. So might employers, unions, churches, and private hospital groups. Foreign companies should not be excluded. Insurers should be permitted to offer cover for services provided by people who are not registered medical practitioners: nurses employed by general practitioners, for example, as well as physiotherapists and other paramedicals. Insurers grounded in alternative or "crank" medicine should not be excluded, but they like all other insurers must be required to provide basic cover for orthodox treatment if their subscribers are to escape the Medicare levy.
4. OTHER ACTION NEEDED
The recommendations in this section are not directly relevant to the major reform of the health care system commenced by the recommendations in the previous section, but each is worth making for its own sake.
4.1 WAITING LISTS FOR TREATMENT IN PUBLIC HOSPITALS
The effect of the Hawke Government's health policy changes on the incentives to seek treatment in public or in private hospitals has been greatly to increase demand for public hospital treatment. Waiting lists for elective surgery have lengthened accordingly, and for some procedures in some hospitals are indefinitely long: pressure of more urgent cases means that people are likely to remain on the waiting list unless or until their condition deteriorates enough to require urgent surgery. A country as wealthy as Australia should be able to do better than this.
Shorten Medicare waiting lists by sending some patients for surgery in |
The Government should instruct the Department of Health to identify the surgical or other specialist procedures in each major city which have the longest public hospital waiting lists, and to negotiate a price for each procedure and associated treatment with private hospitals or specialists in the area. Finally, shorten waiting lists by sending some patients to pay for this limited private treatment of Medicare patients to shorten the waiting lists.
If the cost of treatment in private sector hospitals is less than in government hospitals, this sort of "subcontracting" should become routine.
4.2 MEDIBANK PRIVATE
Transfer Medibank Private to the private sector. |
The most popular way to do this would probably be to give it to its subscribers under its present management.
The purpose is mainly to help fair competition among insurance providers by ending Medibank Private's special position as a government-owned organisation competing with private ones. (What is special is that no one ever really believes that government will let such organisations go bust; consequently their management and workers feel less pressure for efficiency, and their credit ratings are better, than would be the case under private ownership.) It also effectively removes government from one sphere of activity.
4.3 AVAILABILITY OF NEW DRUGS
Australia has a comparatively small population, and the potential profits from the sale of many new drugs (especially those for rare conditions) are therefore not large enough to encourage the manufacturers to go to the considerable expense of getting the drugs approved for use in Australia. There is no justification for our insisting on our own unique testing and certification procedures, especially if the result is to deny new forms of treatment to Australians.
Instruct the Australian Drug Evaluation Committee to approve for use |
ADEC should have discretion to recommend restrictions on the sale or prescription of the drug, which should not be significantly more stringent than the most stringent applied to the drug by one of the selected countries.
5. FURTHER STEPS
Proposals in this section are not as urgent, and will mostly take longer to work out administratively. They should be implemented some time after those in section 3.
5.1 PUBLIC HOSPITAL FUNDING
As mentioned in 3.1 above, health insurers will have to pay for the treatment their subscribers receive in public hospitals, much as at present. To further the general aim of making health costs visible, treatment of Medicare patients should be charged for similarly.
The Government should transfer funding of public hospitals from the |
The precise way in which this should be implemented is a matter for negotiation with the States although as the Commonwealth puts up the money it has the whip hand. "Service" should preferably refer to the whole hospital treatment of a particular condition rather than to a particular item such as a day in bed, a blood test or a surgical procedure, in other words to what the Americans call a Diagnosis Related Group (DRG). The Commonwealth should continue payments to the States equivalent to any subsidy paid to private hospitals, and also make grants to compensate for the extra costs involved in running teaching hospitals.
This will achieve several things besides simply exposing some more costs to view. It will make it easy to compare the costs of similar treatment in different hospitals (private or public, in one State or another). It will put pressure on the States to run their hospital systems on quasi-commercial, efficiency-seeking lines and encourage them to resist excessive wage and conditions claims from doctors, nurses and other staff. Some states may prefer to privatise part or the whole of their hospital systems instead; an intermediate approach is to contract the management of public hospitals to private-sector companies.
5.2 MEDICARE AND PRIVATE HOSPITALS
Once the costs of the public hospitals are exposed, and they charge Medicare on a rational, consistent, quasi-commercial basis per patient, there is no longer any justification for Medicare patients to be denied treatment in private hospitals if it costs no more than treatment in public hospitals. If public hospital treatment costs Medicare more, then private hospitals are to be preferred. (Many Medicare patients will already have been treated in private hospitals as part of the policy of reducing waiting lists.) It will be possible for Medicare to establish the costs of certain treatments in particular hospitals; once this is done, Medicare patients with certain conditions can be sent to hospitals with a record of efficient and effective treatment of them. (Some private insurers will be doing so already.) This already happens to some extent within public hospital systems for specialised surgery such as transplants and hip replacements, but the reasons relate more to personalities, inter-hospital rivalries and bureaucratic cost controls than to economy and efficiency.
Any infringement of individual liberties caused by this "direction" of patients is no worse than that caused by the present denial of cover for treatment in private hospitals.
When public hospitals are charging on a quasi-commercial basis for |
Private health insurers will tend to do this sort of thing without urging, to offer the most attractive (often but not always the cheapest) packages in a competitive market.
5.3 TAXPAYERS, PENSIONERS AND THE MEDICARE LEVY
In the Welfare chapter we recommend a simplification of the tax and social security systems, the effect of which will be to save pensioners and beneficiaries having to pay income tax by revising the means test so that it does the entire job of controlling the amount of net benefit received. For consistency it will be necessary to make arrangements that will replace the Medicare levy now paid by some welfare recipients with substantial private incomes. It is also desirable to make it easier for pensioners to opt for private health cover if they want it: the policies recommended in section 3 make them no better off in this regard than they are today.
This should be done by increasing the basic rates of pension and benefit, and charging recipients who do not take out private health cover a "Medicare levy" equal to the increase. This way there is no net financial effect on pensioners who are happy to stay with Medicare, but those who want to opt out can more easily afford to do so. Ideally the increase and levy should equal the cost per person of Medicare, but budgetary constraints mean that the Government will probably prefer to cheat and settle for a smaller sum, perhaps half the cost of typical basic private cover.
6. FINAL TRANSITION TO THE NEW SYSTEM
By this time the distinction between private and public health care will begin to lose its strength, as both Medicare and private health funds pay for treatment in public and private hospitals as convenient, and surviving "direct" Commonwealth subsidies go to public and private hospitals on comparable bases.
A wider range of organisations will be offering a wider choice of health insurance than at present. They will probably include Health Maintenance Organisations which for a set fee guarantee to look after all customers' health care needs as well as insurance with various sorts of "excess" and "low claims bonuses" (the scope for the latter will be limited by the requirement for community rating).
Pensioners and beneficiaries and people on average or above average incomes will have a fairly free choice between Medicare and a variety of forms of private cover. The one group which will still find Medicare much cheaper than private cover is taxpayers with low incomes, for whom the levy will be less than private premiums.
Three interrelated changes remain to be made:
- Stop subsidising poor Medicare patients and hospital beds, and start subsidising people with heavy health care costs in relation to their incomes.
- End community rating of health insurance and allow insurers to offer different premiums to good and bad risks.
- Wind up Medicare, giving State and Territory agencies the responsibility for arranging health cover for the mentally and physically incapable whose families cannot do it for them.
For people with very low incomes and average health, insurance should be subsidised through Family Income Supplement (which with luck will by then have been incorporated into a system of refundable tax credits: see the Welfare and Tax Reform chapters) and by increasing pensions and benefits if this has not already been done as recommended in section 5.3.
With the end of community rating, people in bad health may face very high premiums; if they also have relatively low incomes they should be subsidised appropriately. (3) People in average health with average incomes should pay the full cost of their health cover, as should people with above-average incomes and below-average health. (Besides making sure that subsidies go only to those who need them most, this gives everyone an incentive to take care of their own health, both by self-treatment and, more importantly, by adopting healthier life-styles.)
Finally, if this has not already been done, absorb the remnants of the Department of Health into a super-department of Health, Education and Welfare.
ENDNOTES
1. People who oppose the idea of markets in health services often cite the US health care system as evidence of market failure, although most of its problems are due to perverse incentives put into the system by government: e.g. the way the income tax system encouraged employers to provide health insurance as a fringe benefit, so a substantial proportion of patients were barely aware of its cost, while other subsidies and regulations discouraged insurers from looking at the efficiency of hospitals, and gave non-profit hospitals no incentive to improve their own efficiency. Much of this is improving, but American litigiousness and rocketing damages awards have forced health care providers into over-servicing in the attempt to practice "defensive medicine". The malpractice insurance industry in the US is another example of "market failure" brought about by external agency, in this case changed interpretation of the law by judges and juries.
2. Adapted from R.J. Wood, Empty Bed Blues: Australian Health Care Policy, 1991. The health care system proposed in this chapter is basically that outlined by McLeod.
3. See McLeod, op. cit.
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