Tuesday, November 14, 2006


Talk to Federal Health Department’s Biennial Health Conference
Sydney, Tuesday, November 14, 2006

So far we’ve heard from speakers giving expert and finely tuned comments on technical aspects of acute care funding, but I think the most useful contribution I can make given my own expertise is to help you see acute care funding in a broader budgetary and political context. I’ll also range wider than just hospital funding, partly because outsiders (including politicians) tend to see hospitals as part of the total health care package, but also because it can be a mistake to focus on particular elements of health care spending in isolation. The various elements are interrelated and these linkages can be overlooked if we’re not careful - particularly when different levels of government are responsible for different elements.

Consider the case of hospitals on the one hand and the pharmaceutical benefits scheme on the other. One of the trends of advance in medical technology is for the use of better medicines to keep people out of hospital. The result is we spend more on pharmaceuticals but make savings on the number and length of hospital stays - which, as we all know, are very expensive. When you divide health care funding into silos, however, it’s too tempting for the feds to get overexcited about the rapid growth in the cost of the PBS, and wonder what draconian measures could be taken to slow the growth, while ignoring the savings being generated elsewhere in the system.

I’m sure you’re aware of the many reports econocrats have produced in recent years examining the budgetary pressures likely to arise over the next 40 years as the baby boomers retire and the population ages. Federal Treasury began the fashion in 2002 with its Intergenerational Report, which it will update in next year’s budget. Then the Productivity Commission had a go - trying to add the implications for state as well as federal budgets - and most state treasuries have now completely similar exercises, culminating in the NSW Treasury’s report on long-term fiscal pressures, issued with this year’s state budget.

Although there’s been some attempt to obfuscate matters, all these studies come to the same, surprising conclusion: though population ageing will generate considerable budgetary pressures in most developed countries, the likely pressures in Australia are modest and manageable. This is mainly because our age pension is flat-rate and heavily means-tested. The budgetary cost of ageing will show up more in health care spending than in pensions, but won’t be great. Even so, all the reports have projected considerable upward pressure on government budgets over the coming 40 years. Most of that pressure will be coming in one spending category: health care. The studies show that, whether you look at federal or state, health accounts for about three-quarters of the projected growth in total government spending. At present in the NSW budget, health (mainly hospitals) is the second biggest spending category after education, accounting for 26 per cent of total expenses. In 40 years time it’s projected to be the biggest category, accounting for 37 per cent.

As we’ve seen, this growth will be partly due to the higher proportion of older people in the population. For the most part, however, it will be due to a combination of supply and demand factors unrelated to demography. On the supply side, continuing advances in medical technology will add to costs for various reasons: because improved procedures tend to be more expensive than those they replace, because more conditions become treatable and because safer, less intrusive treatments can be prescribed for a wider range of patients. On the demand side, the public will continue to press for the fullest and earliest possible access to medical advances.

The first point to make is: don’t let anyone tell you this inexorable pressure for increased spending on health care is a bad thing. It’s a good thing. The projections assume real income per person will double over the coming 40 years. And health care is what economists call a ‘superior’ (or merit) good. Superior goods are things to which we devote an increasing share of our income as it rises over time. In the case of health care, that’s eminently sensible and hardly surprising: as we get richer why wouldn’t we spend more on staving off death and disability? What more pressing priority could we have?

If health care was sold in the marketplace like most goods and services, the news that we were likely to significantly increase our spending on it over coming years would attract not the slightest controversy. The contention arises because health care is delivered primarily by the public sector, with its cost funded mainly by general taxation. So the first problem is: will the public be prepared to pay the higher taxation needed to cover the cost of the greater care it will be demanding? Short answer: it will almost certainly be reluctant to but, since the politicians’ desire to please voters will ensure health care spending continues growing strongly, the pollies will have no choice but to keep raising taxes.

It’s not that simple, however. The fact that so much health care is delivered by - or, at least, funded by - the public sector rather than the private marketplace does mean there’s less discipline on spending and greater scope for over-servicing and other forms of waste and inefficiency. Even so, health care is funded primarily by general taxation for good reason: because we’re not prepared to let people who can’t afford health care they need go without. Health care is judged too important to be left to the market. And even though we can expect to see economic rationalists in the bureaucracy and elsewhere urging governments to shift more of the cost of health care off the budget and into private hands, I wouldn’t expect to see that process go very far.

Put all these factors together - inexorable pressure for greater spending, reluctance to pay the higher taxes needed to fund this spending, and well-founded suspicion that our delivery and funding arrangements aren’t as cost-efficient as they could be - and they add up to continuing and increasing pressure on the health system to do more with less.

In other words, I foresee health as the greatest public sector battle ground in coming years. There’ll be unrelenting pressure for improvement - or at least change - in funding arrangements. The likely growth in health care spending makes this inevitable. It’s possible a future federal Labor government could simply replace the now ailing Medicare with a completely new funding system that was just as radical as Medicare - or really, Medibank - was in its day. There’s nothing sacrosanct about Medicare. As Dick Scotton, one of its original designers has remarked, it was state of the health economists’ art when first conceived in the late 1960s, but there’d be something wrong if the health economists couldn’t come up with a vastly improved model 40 years later. There’s nothing sacrosanct about Medicare - save for one not-negotiable design feature: universality; the guarantee that all are covered and no one misses out. Preserve that and all the details are up for grabs. It’s universality that gives national health insurance its fairness or equity. What you’d be hoping for in replacing Medicare is greater efficiency in the allocation of health resources without much loss of fairness - or, in the parlance of economists, a better trade-off between the equally desirable but conflicting objectives of equity and efficiency.

I have to say, however, that if Labor has such a big bang replacement for Medicare up its sleeve, I’ve see no sign of it. The more likely prospect is for governments of either colour to be engaged in a process of continuous tinkering in response to the budgetary pressures I’ve described. We’ve heard from other speakers indications of the directions that reform could take. I’d just make two points. I believe the essential first step on the road to reform is to resolve the division of responsibility for health between levels of government, and the obvious answer is for the feds to take over public hospitals. That wouldn’t solve all problems, but it would make progress in solving them very much easier to achieve. Second, I don’t have much doubt that any progress we do achieve will involve moving the system in the direction of managed care. That’s the only way to achieve the unmentionable objective in every health bureaucrat’s mind: ensuring that too much of the increased spending on health care doesn’t end up lining the pockets of medical specialists.

Finally, it’s worth remembering that, though much of the talk about the need to increase efficiency and eliminate waste will be couched in terms of saving money and reducing spending on health, the reality is that, no matter how successful the economies are, there’ll be no reduction in health care spending nor even much slowing in the rate at which spending grows. Why not? Because of those inexorable pressures I’ve described. Rather, any success in raising efficiency will simply mean better value for the taxpayers’ ever-growing dollars.