‘Sustainability’ and the great health cost shift

The Prime Minister, the Treasurer and the Health Minister have all used the same word about the government’s bill for health care: unsustainable. Cuts must be made because health costs are rising out of control and no sensible administration can go on paying them. The answer in the budget has been to move still more of those costs from the Commonwealth’s balance sheet onto those of the states and patients.

But these newest cuts simply worsen an already dire situation. That is why they will be so damaging.

To understand what’s going on, we need to go back much further than this week’s budget. We need to look at how the costs of health, when measured against the capacity of each level of government to pay, have crippled state budgets and state public hospitals while leaving federal coffers largely untouched.

Figures compiled by the Australian Institute of Health and Welfare showing key trends over eleven years show that as a proportion of its tax revenue ‒ the most relevant measure of affordability ‒ the Australian government’s health spending has gone from 22.3% in 2001-02 to 26.2% in 2011-12. That’s a rise, but hardly one that’s about to break the government:

Comparison of Commonwealth health funding with tax revenue
(constant prices) 2001-02 to 2011-12


But a further look at the available data shows this modest budget hit has been self-inflicted ‒ a direct result of the desperate give-aways of John Howard in his last term which Kevin Rudd failed to reverse.

These cuts surrendered a cyclical windfall from the mining boom and have put the federal budget into structural deficit. According to work sourced from the National Centre for Social and Economic Modelling, the cuts amounted to a loss to Commonwealth revenue of almost $38 billion in 2011-12.

If those cuts had been reversed, health costs would have taken just 22.4% of tax revenue ‒ up 0.1% over eleven years. That is hardly a picture of an unsustainable blowout:


For the states and territories, though, the situation is very different. There, though tax receipts (including GST) have grown by 74.5% over the period, health costs ‒ mainly for public hospitals ‒ have risen by 161.1%. As a ratio of tax income, the states’ health bill was 16.4% in 2001-02 but had soared to 24.5% by 2011-12:

Comparison of state and territory health funding with tax revenue
(constant prices) 2001-02 to 2011-12


That is the main reason why public hospitals around the nation are struggling to provide patients with adequate care, and why health costs threaten ‒ at state, not the Commonwealth, level ‒ to crowd out all other areas of government activity. Cutting Commonwealth programs like Medicare, the Pharmaceutical Benefits Scheme or federal hospital funding will make matters worse, not better.

The funding burden being shirked by Canberra also falls on the shoulders of individual patients. In 2011-12, direct payments by patients to public and private hospitals accounted for $2.45 billion and is growing fast. It rose over the eleven years by much more than federal or state governments or private health insurers ‒ 10.3% for patients, 7.2% for the states, 5.3% for insurers and 3.9% for Canberra.

The failure of Medicare to keep up with GP charges meant that primary care cost individual patients over $17 billion in 2010-11, almost as much as the Commonwealth’s share of $22.6 billion. This finding is in line with previous survey results.

It can no longer be fairly said that Australia has a universal health care system. These data represent a huge shift in costs from the buyer with the greatest capacity to pay ‒ the Commonwealth ‒ to those with the least ‒ states and individuals. Health costs do not go away just because one party does not want to pay for them. In fact, the Commonwealth’s retreat from its share of health costs can be expected to increase the costs to the nation as a whole. Universal health care funded through taxation has been shown to be significantly more cost-effective and equitable than systems more reliant on individual funding.

There are many ways in which this can happen. Classical economics assumes that people will always act rationally in their own interests. But rational economic behaviour requires free and open competition with a balance of information between buyer and seller, and it requires that consumers have the money to buy necessary goods and services such as health care.

If someone fails to go to a GP because they cannot afford, or do not want to pay, a copayment, the consequences can be devastating not only for them but for the economics of the health system. A GP consultation is one of the cheapest options available in health but patients who avoid primary care may find their condition deteriorating to the point where only a hospital can deal with them. Sometimes, they will die.

It would take relatively few such cases to overwhelm the financial savings of reduced primary care. But in our system the Commonwealth is mainly responsible for primary care and the states for public hospitals. Saving money on Medicare will produce some relief to the federal budget but may involve a much greater cost to the states.

There is now good evidence of how much the budget measures are likely to cost state public hospitals. In the United States, where Medicare funds care for people over 65, some states introduced a $7 copayment for GP consultations and others did not. So researchers were able to compare the subsequent differences in inpatient hospital costs. They found that for every dollar produced through the proceeds of the increased payment, or saved through people no longer going to the doctor, around $3.30 was added to hospital costs.

These figures concentrate on the elderly, so they can’t be applied across the board in Australia. But while the specifics cannot be extrapolated the principle certainly can. Non-concessional patients in Australia is already likely to pay around $30 to the GP for a standard consultation, over what they get back from Medicare. The new copayment adds another $7. Few patients leave a GP without a prescription and that will cost them a PBS copayment of $47.70. That’s $84.70 to go to the doctor.

Pensioners, people with chronic illness and other concessional patients will also be hard hit. Though individual payments are much less, many of these people need many doctor visits if they are to stay out of hospital. The costs quickly add up, and the ‘safety net’ introduced by Tony Abbott when he was health minister, is being wound back.

The pressure on patients to avoid GP visits is now substantial. The effect is likely to be a hit to state budgets of billions of dollars over a forward-estimates period, a higher burden of disease in the community, less social equity ‒ research shows the old, the sick and the poor are disproportionately affected ‒ and a considerable amount of avoidable suffering. And if significant numbers of people get sick enough to land in hospital, it is inevitable that some will die.

Through the range of hospital funding, a universal public health system does a better, more equitable and more efficient job than all the available alternatives.

For instance, government-funded purchasers like the PBS buy on such a large scale that they can get much better deals from drug makers and other sellers. The major pharmaceutical companies tend to act as pricing cartels for their patented drugs, almost never competing on price even when several drugs in a class are interchangeable. The PBS uses its buying power to counter that cartel behaviour in the interest of taxpayers and patients. But for many patients the PBS has become increasingly irrelevant as co-payments become higher than the cost of the drug.

In many areas, some market failure can be tolerated: but not in health. If political leaders come to understand that health is not like other markets, they may make more rational economic choices.