When Julia Gillard imposed a price on carbon, most people recognised this as being a broken tax promise. Notwithstanding the professed nobility of her cause, few could credibly justify the breach of trust that had occurred, and Gillard suffered the consequences.
The problem for Tony Abbott is that his proposed Medicare co-payment is a tax, and constitutes a broken promise as well.
As with the carbon price, the intentions behind the broken promise are noble. Zero-price at point of sale government services tend to be over-used. Federal governments of both persuasions have long attempted to restrict GP services; co-payments have been suggested before, putting restrictions on the number of foreign doctors, rationing provider numbers, and so on.
The fact of the matter is that welfare recipients are living beyond the means that taxpayers are able and willing to provide.
The proposed co-payment is a transactions tax. Going to a doctor is a transaction that is now taxable at the flat rate of $5 (the doctor gets $2 of the $7 charge). How the tax is payable is complex, but the government always gets $5 per taxable visit. The mechanism is that government will withhold $5, from already collected tax revenue, from the Medicare rebate and divert that money into a medical research fund. The GP may choose whether or not to charge the co-payment. If it is charged, the tax is paid by the patient. If it isn't charged, the tax is paid by the GP. Either way, the tax is always paid; but the incidence and application of the tax is arbitrary.
Adam Smith identified arbitrariness as the biggest problem a tax system could face. It makes tax collectors — now GPs — particularly unpopular and promotes all manner of corrupt behaviour. We can easily imagine some patients, meant to be rationed out of the Medicare system, over-emphasising their ailments in an attempt to appeal to the GP sympathy. In short, the GP might bear the cost of the Medicare over-use through reduced earnings and not the government. In any event, GPs are now being required to formulate both medical opinions and prop up the welfare state.
TAX IS A RATIONING DEVICE
Some could argue that it doesn't matter that the co-payment is a tax and not a price. The incentives are much the same; but only if the intention is simply to reduce the number of people attending a GP. Prices are charged in markets between willing buyers and sellers — prices convey information. Taxes do not. This tax is designed as a rationing device only and the revenue is being used to finance a medical research fund, not to finance healthcare or even pay down debt.
This part of the government's proposal is particularly incoherent. The Abbott government has been particularly good on corporate welfare. They said "No" when the auto-manufacturers and SPC asked for handouts; they even refused to guarantee Qantas's debt. Good decisions. Yet here we see a $20-billion fund being established — money being ripped out of current healthcare expenditure to finance something as vague as medical research.
To be fair — medical research is very popular. That doesn't mean, however, that medical research is a good use of public funds.
In a report published last year, the Department of Health and Ageing suggested the return to medical research could be as high as 117 per cent. That number doesn't pass the snigger test and when you dig down, you find that is a generously estimated return over 10 years and less generous assumptions generate estimates as low as -42.7 per cent.
CO-PAYMENT TO PAY HIGHER SALARIES
The lower estimate is more likely than the higher.
Arthur Diamond writing in the 2006 European Journal of Law and Economics found that government grant agencies weren't very good at selecting important research projects compared to the private sector. In a 2011 Journal of Public Economics paper Brian Jacob and Lars Lefgren found that a grant from the US National Institutes of Health was associated with 1.2 additional publications over the next five years. It gets worse; in a 1998 American Economic Review paper, Austan Goolsbee found that increased public research funding results in higher salaries for researchers but little increased output.
In other words, the net result of the co-payment is to take money from patients or GPs to pay higher salaries to medical researchers who will, more or less, continue to do what they would have done anyway. This is likely to crowd out private medical research. It is an open question whether rationing some people out of the Medicare system is a good idea and the co-payment concept should be considered on its merits. The medical research fund idea should be quietly abandoned.
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