Saturday, March 12, 2016


Talk to UON Master of Clinical Medicine residential workshop, Sydney, Saturday, March 12, 2016

I want to talk to you about the widely perceived crisis in the funding of healthcare, and do so from a wider, more economic perspective than you may normally be exposed to. I should say I don’t claim to be an economist, just a journalist who writes about economics.

As we were told in the Abbott government’s commission of audit, for example, federal government spending on healthcare - covering in particular the medical benefits scheme, the pharmaceutical benefits scheme, the national health and medical research council, the regulation of private health insurance and grants towards the states’ public hospitals - is among the fastest growing categories of government spending, growing faster than the growth in federal tax collections. The growth in healthcare spending was thus, we were told, “unsustainable”.

Every five years, the federal Treasury produces an intergenerational report that seeks to project federal budget spending over the coming 40 years, and it invariably confirms healthcare as likely to be the fastest growing spending category over that period, growing at a rate far faster than the likely growth in tax collections and thus contributing greatly to an ever-growing budget deficit.

In a few months’ time the NSW state Treasurer will produce her latest intergenerational report, and it, too, will show spending on public hospitals and other healthcare growing much faster than other state government spending categories. I remember the first state intergenerational report showing that health spending is likely to grow so fast that it alone could absorb all of the likely state revenue before we got to the end of the next 40 years. Clearly, this would be an intolerable and, indeed, politically impossible thing to allow to happen, so something fairly drastic will have to be done to ensure it doesn’t.

The politicians - federal and state - find it easiest to explain this projected rapid growth in healthcare spending - all of it based on the assumption that present policies remain unchanged - as produced by the ageing of the population. When you examine the projections more closely, however, you find the main cause of growth isn’t ageing, but the projection for another 40 years of relatively recent rates of growth in spending on medical procedures, drugs and prosthetics. The real cause of the rapid growth turns out to be the ever-increasing cost of advances in medical technology. New and better drugs and procedures almost invariably cost more than the drugs and procedures they supersede. Part of the escalation process is that, when doctors become more familiar with, and confident in, some new operation, they become willing to perform it on older or less healthy patients. Another key ingredient in the process is the public’s demand for immediate access to all new and improved drugs and procedures. If it’s better, we want it. And we want it now. Subsidised, of course.

So this is the healthcare funding crisis, as widely conceived by econocrats, many private-sector economists and virtually all politicians. There is no limit to the public’s demand for government spending on a host of worthy things, of which healthcare is just one. But there is a limit to the taxing capacity of governments, and we’ve pretty much reached that limit. Most people believe they’re already paying too much tax. The present federal government believes that collections from federal taxes can’t be allowed to exceed 23.9 per cent of gross domestic product - which was the ratio’s average over the eight years between the introduction of the GST in July 2000 and the onset of the global financial crisis in 2008. It was the application of this rule that caused the intergenerational report to show an ever-rising budget deficit. Clearly, this can’t be allowed to happen. Governments can’t go on borrowing more year after year just to help finance the day-to-day business of government for another year.

All this explains the pressures I’m sure you’ve experienced to limit the growth in spending in your own hospital, or the growth in government rebates for services delivered in private practices. These have become ever-more pressing over the years and they’re likely to continue and intensify in coming years. This being so, I’ve been assured we’ve seen the demise of the mentality I call “the divine right of doctors”. God has called me to heal the sick, and so I must be free to incur whatever expense in tests and procedures I judge to be necessary in discharging my sacred duty. No mere mortal - certainly not someone who isn’t even a fellow medical practitioner - can be allowed to limit my freedom of action. An economist sees this as an argument that the “budget constraint” - the inescapable truth that resources are limited, so none of us can have everything we want - should apply to everyone except doctors. If the medicos’ open cheque takes up too much of the tax revenue available to the government, force people doing something less important than medicine to take the hit.

It shouldn’t surprise you to be told that this attitude is not accepted by anyone who isn’t a doctor. Those other people’s attitude is that health care is vitally important, but so too are education, the protection of law and order, the provision of public transport and decent roads, and all the other things governments do. The government’s finances can only be kept under control by setting limits on how much can be spent in each spending category, which need to be adhered to as much by people in the health system as by people in other parts of the public sector. As I say, I’ve been assured by insiders that this is now widely accepted by doctors.

So much for the conventional wisdom on the healthcare funding “crisis”. I have to tell you that I don’t accept that conventional wisdom. There are probably other economics-types who share my alternative way of looking at it - particularly health economists - but you don’t often hear from them. You get to that alternative perspective by conducting a thought experiment: what would be economists’ attitude to the rapid growth in healthcare spending if all of that spending were occurring privately? If the health industry wasn’t so heavily subsidised by government?

The answer is, in that case, economists wouldn’t be in the least bit concerned about the rapid growth in healthcare spending, nor even interested in the topic. Why not? Because this would merely be the expression of individuals’ personal “preferences” as to how they chose to spend their income. Nor would economists be surprised that consumers had made this choice. They recognise health care as a “superior good” - goods (or services) that make up a larger proportion of consumption as incomes rise. In other words, as our real incomes rise over time, we spend a high proportion of the increase on superior goods, so that the superior good’s share of our total consumer spending keeps rising over time. Intuitively, it makes much sense for us to treat healthcare as a superior good. There are few human motivations more basic than our desire preserve our health and stave off death. What more natural than for us to spend more on healthcare as we get richer? Do economists disapprove of the high priority we give to improving our health and longevity? Of course not.

End of thought experiment. The reality is that the great majority of the nation’s total spending on healthcare is spent in the first instance by governments, then recouped from us by means of general taxation. The services provided by public hospitals are essentially “free”, while most medical consultations and pharmaceuticals are heavily subsidised. This is supplemented by a heavily regulated, subsidised, mainly voluntary form of taxation known as private health insurance.

Why is healthcare so heavily subsidised by government? The simplest explanation is for what economists would call “equity” reasons. We don’t want to see people dying or suffering ill-health simply because they can’t afford the cost of unsubsidised healthcare. Like every other developed country bar the US, we’ve decided that access to a reasonable standard of healthcare must be “universal”.

But you can also make what economists would call an “efficiency” argument for universal healthcare. Although healthcare doesn’t fulfil the textbook requirements for it to be a “public good” - it’s not “non-rivalrous” and “non-excludable” - it can be described as not just a superior good, but also a “merit good”. That is, governments should ensure it is made available to all because, like other goods such as education, it carries with it “positive externalities”. Just as all of us benefit economically from the compulsory education of others - including workers who’ve never been to university benefiting from the education of those who have - because it means we live in an economy with a better educated and more highly skilled workforce, so the rest of us benefit from living in an economy with a healthier (and thus more productive) workforce and from reduction in the spread of communicable deceases. It may also be the case that universal provision brings economies of scale.

It’s never a good argument that government subsidisation of a particular activity or industry is a good thing because it creates a lot of jobs and generates a lot of income. That’s because all spending - public or private - generates jobs and income, so the real question is whether we’re spending on the particular things that would benefit us most. Even so, this is the place to remind you that Australia’s hybrid, public and private healthcare system is one of our biggest industries. Judged by its share of total employment, what the Bureau of Statistics calls “health care and social assistance” is our biggest industry by far, accounting for almost 13 per cent of all jobs. And don’t let any economic ignoramus tell you the private sector part of the industry is “productive” but the public sector part isn’t.

All this being so, there’s no reason we should regard the relatively rapid growth in the nation’s spending on healthcare as a bad thing. Indeed, quite the reverse. It’s a predictable and desirable consequence of the advance of medical science on the one hand and our growing prosperity on the other. So why the depiction of healthcare spending as “unsustainable” and a “crisis”? For two reasons - one bad and one good.

The bad reason for the crisis-mongering arises from an attitude that views government budgets purely from the tax side. It starts with the assumption that taxation is fundamentally a bad thing, that we’re already paying too much of it, that there can be no justification for increasing taxes and, indeed, we should be working towards reducing them. This attitude is a convenient combination libertarian political philosophy and populism - voters never like the sound of new or higher taxes. The push for lower taxation and resistance to higher taxes can be sustained only by assuming that much government spending is wasteful: it’s being spent doing things governments don’t need to do, much of it involves “churning” - taking money off people so you can give it back to the same people - or involves outright waste, so that you could end that waste without doing any harm to anyone.

This is exaggeration at best, wishful thinking at worst. Since it’s widely accepted that there should be such heavy government involvement in and subsidisation of healthcare spending - since no one is seriously arguing that healthcare should be left to the private sector - the question we should be asking is: is it clear the public wants increased spending on new and better procedures and drugs? I think it is clear the public is getting what it wants, with the budget used to distribute the ultimate burden of that spending in a way we’re reasonably content with. If so, the only problem is the extreme unwillingness of our politicians - on both sides - to confront voters with the consequences of their preferences: if you want more spending on better healthcare you’re welcome to it but, as with everything else in life, you’ll have to pay more for it. We should stop allowing the veil of the budget to allow people to dissociate cause from effect.

That’s my basic position: the growth in healthcare spending is only “unsustainable” for as long as our leaders lack the courage to ask us to pay more for it.

But there is also a good reason for disquiet about the present state of healthcare funding. The economists’ training - including the anti-government attitude implicit in their neoclassical model - makes them suspect the high level of government involvement in healthcare is resulting in inadequate and distorted economic incentives and a fair bit of waste. So a second question we should be asking is: And are we confident the public is getting value for the money we spend?

My answer is no, not really. I believe there is plenty of scope to make savings in spending by reducing the “rents” being extracted from the system by drug companies, chemists and suppliers of prosthetics, by improving the coordination of care, putting more effort into preventive medicine, overcoming the obstacles to electronic, portable health records, better management of hospitals, updating the medical benefits schedule, reducing the reliance on subsidised fee-for-service, and so forth.

I wasn’t at all impressed by the measures proposed in the Abbott government’s first budget, which were aimed at cost-shifting - to patients and to state governments - rather than cost control. The $7 co-payment was framed as an efficiency measure - it was intended to make people think twice about going to a GP because there was now an upfront payment involved - but it could easily have proved to be a false economy if it discouraged patients who really needed to see a doctor and to get working on their medical problem.

That measure was beaten off, but not so far the plan to save $80 billion over 10 years by moving to less adequate indexation of federal grants to the states for their public hospitals and schools (with hospitals accounting for $57 billion of the $80 billion, and most of the saving starting from 2017). There’s no way the states can save that amount of money through genuine efficiencies. But nor are simple cutbacks in levels of service - with lengthening waiting lists and times - a politically sustainable solution.

But these ham-fisted attempts to limit healthcare spending don’t mean there aren’t sensible, better thought-through and more painstaking ways to achieve genuine efficiencies and savings. The point to remember, however, is that any success in achieving efficiency savings won’t reduce public sector healthcare spending, nor even stop it continuing to grow. That’s because the public’s demand for early access to the latest advances in medical technology is most unlikely to abate. The greatest likelihood is that healthcare spending will continue growing in real, per-person terms for as long as we can imagine. This means the primary reason for seeking greater health efficiencies is to deliver taxpayer-patients greater value for money. But the best the taxpayer (and the politicians) can hope for is that increasing efficiencies lead merely to healthcare spending growing at a slower rate.