Health insurance: paying to boost specialists' incomes

I think I could probably get to the end of the year just writing once a week about the many problems Scott Morrison faces, but doesn’t seem to be making any progress on. And that’s before you get to climate change.

Take private health insurance. The public is terribly dissatisfied with it because it gets so much more expensive every year and because, when you make a claim, you’re often faced with huge out-of-pocket costs you weren't expecting.

The scheme has such internal contradictions it’s in terminal decline, getting weaker every year. Neither side of politics is game to put it out of its misery for fear of the powerful interests that would lose income – the health funds, the owners of private hospitals and myriad surgeons and other medical specialists – not to mention the anger of the better-off elderly who have convinced themselves they couldn’t live without it.

But neither is either side able to come up with any way of giving private health insurance a new lease on life. Anything governments could do – and probably will do – to keep the scheme going a bit longer involves slugging the taxpayer or forcing more people to pay the premiums.

I’ll be taking most of my information from the latest report on the subject by the nation’s leading health economist, Dr Stephen Duckett, of the Grattan Institute, but drawing my own conclusions.

Private health insurance is caught in a “death spiral” for two reasons. First, because the cost of the hospital stays and procedures it covers is rising much faster than wages are. Duckett calculates that, since 2011, average weekly wages have risen 8 per cent faster than general inflation, whereas health insurance premiums have rise 30 per cent faster.

Why? At bottom, because the health funds have done so little to prevent specialists raising their fees by a lot more than is reasonable. Federal governments have gone for years meekly approving excessive annual price increases.

Second, as with all insurance schemes, those policy holders who don’t claim cover the cost of those who do. The government’s long-standing policy of “community rating” means all singles pay the same premium, and all couples pay about twice that, regardless of their likelihood of making a claim.

This means the young and healthy subsidise the old and ill. Which would work if health insurance was compulsory, but to a large extent it’s voluntary. So the old and ill stay insured if they can possibly afford to, while the young and healthy are increasingly giving up their insurance.

The Howard government spent the whole of its 11 years trying to prop up health insurance with carrots and sticks. These measures stopped coverage from falling for a while but, with premiums continuing to soar, have lost their effectiveness.

Over the year to last December, the number of people under 65 with insurance fell by 125,000 (particularly those aged 25 to 34), while the number with insurance who were over 65 increased by 63,000.

So here’s the bind the funds are in: the more healthy young people drop out, the greater the increase in premiums for those remaining. But the more premiums increase, the more youngsters drop out.

The funds’ talk of being in a death spiral is intend to alarm the public into insisting the government bail them out by imposing more of the cost on taxpayers or, ideally, on young people. But before we panic, we should ask why we need the continued existence of private insurance.

After all, our real insurance is Medicare and being treated without direct charge in any public hospital. If the taxpayer-funded public system is less than ideal, it could be a lot better if the $9 billion a year the federal government tips into private insurance and private hospitals was redirected.

To some people, the big attraction of private insurance is “choice of doctor”. But this can be illusory. It’s usually your GP who does the choosing – to send you to one of their mates or their old professor. In any case, if people want choice, why shouldn’t they be asked to pay for it without a subsidy from the rest of us?

Ah, but the real reason I must have private insurance, many oldies say, is to avoid the public hospitals’ terrible waiting lists for elective surgery. That’s a reasonable argument for an individual, who can do nothing to change the system.

But it’s not a logical argument for politicians, who do have the power to change the system. And when the health funds claim that, without them, the waiting lists would be far longer, they’re trying to hoodwink us.

Most specialists work in both the public and private systems, but do all they can to direct their patients to private, where their piece rate is much higher. Were the health funds allowed to die, many fewer patients would be able to afford private operations and would join the public hospital waiting list.

But what would the specialists do to counter the huge drop in their incomes? They’d do far more of their operations in the public system, probably doing more operations in total than they did before. It’s even possible the queues would end up shorter than they are now.

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How we killed off Australia's inflation problem

Before we let 2018 go, do you realise it’s the 25th anniversary of the introduction of the Reserve Bank’s target to achieve an inflation rate of between 2 and 3 per cent? It’s a milestone worth celebrating.

Why? Because it’s worked so well. For the past quarter century, we’ve had inflation that has fallen within the target range “on average, over time” and hence been low and stable.

This week the Reserve Bank issued a volume of papers from its conference to discuss inflation targeting, and whether it needed to change. (Conclusion: it didn’t.)

In that 25 years we haven’t had a serious worry about inflation – which certainly can’t be said of the 20 years before the target was unveiled in 1993.

In those earlier years we were continually worried about high inflation. It reached a peak of 17 per cent in the mid-1970s, averaged about 10 per cent for that decade and 8 per cent during the 1980s.

All the other advanced economies had high inflation rates at the time, but ours was higher and took longer to fix.

Our problem was usually linked with excessive growth in wages, and the “wage explosions” of the mid-1970s and early 1980s prompted the authorities to jam on the brakes, leading inevitably to severe recessions.

Even though inflation remained high, a third and more severe recession in the early 1990s was more the consequence of the authorities’ overdone attempt to end a boom in commercial property prices.

It’s not by chance that this year we reached 27 years of continuous growth since that recession. Before it, we had recessions about every seven years, all of them caused by the authorities jamming on the brakes – and then, when we crashed into recession, stepping on the accelerator, a “stop/go policy”.

The first reason we haven’t needed to worry much about inflation since then is that, as part of the adoption of the inflation target, responsibility for setting interest rates was moved from the politicians to the econocrats running an independent central bank.

They’ve been a much steadier hand on the interest-rate lever, moving rates up or down according to the needs of the business cycle, not the political cycle.

Another reason we’ve stopped worrying about inflation is that this year is also the 35th anniversary of the floating of our dollar in 1983. A floating exchange rate – which, remarkably, has almost always floated in the direction needed to keep the economy on an even keel – has made it a lot easier for the Reserve to keep inflation low and stable.

A third reason is the extensive program of “micro-economic reform” begun by the Hawke-Keating government in the 1980s – including the deregulation of many industries and the decentralisation of wage-fixing – which has made our economy much less inflation-prone than it used to be.

Yet another factor was the realisation at the time the inflation target was adopted – informally by the Reserve in 1993, and then formally by the incoming Howard government in 1996 – that the key to lower inflation was to get “inflation expectations” down to a reasonable level.

Why? Because there’s a strong tendency for the expected inflation rate in the minds of shopkeepers and union officials to become a self-fulfilling prophecy. If they expect prices to keep rising rapidly, they get in first with their own big price or wage rises.

We’ve spent the past 25 years demonstrating that if you can get everybody expecting inflation to stay low, you have a lot less trouble ensuring it actually does.

The hard part was how to get from the high expectations of the late-1980s to the low expectations we’ve had for most of the past 25 years.

Bernie Fraser, Treasury secretary turned Reserve Bank governor, the man who introduced the target, knew what to do: define what was an acceptably low inflation rate – between 2 and 3 per cent, on average - and keep the economy comatose until you actually achieved the target, then keep it low until everyone had been convinced that “about 2.5 per cent” was what today we’d call “the new normal”.

How did Fraser achieve this? He did the opposite of what his predecessors did whenever they realised they’d hit the economy harder than they’d intended to. Despite knowing we were in for a bad recession, he let the interest-rate brakes off only slowly, and didn’t hit the accelerator.

In other words, he made the recession of the early ‘90s longer and harder than it could have been. I think he decided that, since we were in for a terrible belting anyway, he’d make sure we at least emerged from the carnage with something of value: a cure for our inflation problem that wasn’t just temporary, but lasting.

And that’s what he delivered. With low inflation expectations embedded, he was able to stimulate the economy to grow faster and get unemployment down. It went from 11 per cent after the recession to 5 per cent today.

At the time the inflation target was adopted, some people worried it meant the Reserve didn’t care about unemployment. As events have demonstrated, that was wrong. To Fraser, low inflation was just a means to the ultimate end of low unemployment.

I rate him the best top econocrat we’ve had in 50 years. He was wise and caring, with the best feel for how the economy worked. Peter Costello gets the credit for formally adopting Fraser’s inflation target, pursued by an independent Reserve Bank.

But another person also deserves credit – Dr John Hewson. It was Hewson who, as Coalition shadow treasurer, made the most noise about the need for an independent central bank with an inflation target.

Fraser decided he’d better get on with specifying his own target before “some dickhead minister” tried to impose a crazy one on him.

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Digital disruption is stopping retail prices from rising

I’ve heard of the gap between perception and reality, but this is ridiculous. According to the experts, increased competition among supermarkets, department stores and other retailers is holding down prices in a way we’ve rarely seen before.

This fits with the consumer price index, which showed prices rising by just 2.1 per cent over the year to June. Over the past three years, the annual increase has averaged even less: 1.8 per cent.

What it doesn’t fit with are the complaints we keep hearing about the high cost of living. I read it’s got so bad parents are raiding their kids’ piggy banks to help make ends meet.

How can the experts’ reality be reconciled with the people’s perceptions? It’s simple. With a few glaring exceptions – electricity prices, for instance – the cost of living isn’t rising much.

No, the reason many people are having trouble making ends meet is because their wages aren’t growing much either. We’re used to wages rising a bit faster than prices, but that hasn’t been happening for the past four years.

Modern politicians seek popularity by reinforcing our perceptions, whether they’re right or wrong. If you doubt that, just listen to the soothing noises Prime Minister Scott Morrison will be making between now and the election.

Unfortunately, our tiresome econocrats remain committed to determining the reality and correcting misperceptions. Last week Reserve Bank deputy governor Dr Guy Debelle gave a speech which departed from the official talking points and revealed a truth which must not be spoken: the digital revolution is squeezing many retailers’ profit margins and forcing them to cut costs so rising prices don’t cost them customers.

Debelle says that, since 2015, the price of the typical food basket (excluding fruit and veg, and meals out and takeaway) has actually fallen a fraction. Fruit and vegetable prices have risen, but by only a third of their average rate over the past 25 years.

The prices of alcoholic drinks have risen more slowly since 2015, and non-alcoholic drink prices have fallen a bit.

The prices of consumer durable items, including fridges and furniture, have been falling since 2015, meaning they’ve hardly increased over the past 25 years.

The prices of audio-visual equipment – including TVs, computers and phones – have fallen significantly over the past 25 years and particularly the past three.

If you’re finding this hard to believe, there are two main explanations. The first is that, because bad news interests us more than good news, big price rises stick in our minds, but small price falls don’t. Nor do we notice when prices stay unchanged for long periods.

The second is that every new TV, computer or phone does better tricks than the previous model. The new model may cost more than old one, but when the official statisticians allow for the value of the improvement in quality, they almost always find that the underlying price has fallen. Again, this is something we should notice, but usually don’t. Our perceptions play us false.

If we’re having trouble affording the new whiz-bang, big-screen, digital, internet-connected TV, that’s not the higher cost of living, it’s us straining for a higher standard of living.

When we confuse the two we’re deluding ourselves. We’re not getting better off, we’re just having to pay more.

Debelle says changes in the cost of imported goods used to be passed straight on by wholesalers and retailers. But over the past decade or so retailers have become reluctant to pass on higher import prices.

This is only partly because consumer spending hasn’t been growing as strongly as it used to. Debelle finds evidence that net retail margins have been declining.

Cost-cutting means the productivity of labour in retail is rising faster than in other industries, with the savings used to keep prices down rather than fatten profits.

What’s been happening in recent years is intensifying competition between retailers. One cause is the advent of “category killers” such as Bunnings, Officeworks and JB Hi-Fi. These are giving department stores and smaller retailers a hard time.

The buying-power of the many chains of liquor stores now owned by Coles and Woolworths is keeping prices down and putting great pressure on independent stores.

We’ve also seen large foreign retailers setting up bricks-and-mortar operations in Australia. In clothing, these include H&M, Zara, Topshop and Uniqlo.

The biggest bricks-and-mortar disrupter, of course, is Aldi supermarkets. Aldi seems to have taken market share from independent IGA stores, while forcing Coles and Woolies to avoid losing customers by lowering their prices.

Then there’s online shopping, which exposes our retailers not just to competition from big overseas businesses but between themselves.

Online sales still make up only about 5 per cent of total retail trade, but they’re growing rapidly, increasing by 50 per cent over the year to June.

Last year local retailers trembled over the impending arrival of Amazon, but so far it hasn’t had a big impact. Not directly, anyway. Maybe the locals have taken evasive action by keeping their prices low.

Smart phones have made it easier for people to comparison shop – even while in someone else’s store.

And I believe the internet increases the emphasis on price competition, rather than the emotive advertising and marketing big business prefers.

Digital disruption is bad news for the workers in disrupted industries – including journos – but don’t let anyone delude you: it’s almost always good news for consumers.

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What you'd have to live on if you were poor

Speaking of the cost of living, how much do you need to live on? Surveys show most people's answer is: just a bit more than I'm getting at present. Trouble is, they keep saying that no matter how much their income rises.

One way to convince yourself you're not doing all that well is to compare what you earn with people of your acquaintance who're earning a lot more than you.

A better assessment would be to compare your finances with those of people a lot closer to the bottom – if only you knew any.

Not to worry. On Wednesday, Professor Peter Saunders and Megan Bedford, of the Social Policy Research Centre at the University of NSW, will publish new "budget standards" for low-paid and unemployed Australians.

The study was funded by the Australian Research Council, with a quarter of the cost covered by donations from Catholic Social Services Australia, the United Voice union and the Australian Council of Social Service.

In a painstaking exercise, the researchers have put together, and costed, the baskets of goods and services different-sized families at these income levels would need to allow each individual – adult or child – to lead a fully healthy life.

So it's not a poverty line and it does take account of prevailing community standards, but it's the minimum amount required to satisfy basic needs.

"There is no allowance for even the most modest or occasional 'luxuries' and wastage was kept to an absolute minimum. The budgets are thus extremely tight," the researchers say.

For instance, low-income families are assumed to have a car, but it's a second-hand, five-year-old Toyota Corolla, kept for five years. Unemployed people have no car.

Because it's a healthy standard, its only allowance for alcohol is a couple of glasses a week, with no allowance for smoking.

Let's see how you fancy living on these budget standards (I've rounded the figures to the nearest $10 for ease of comprehension). Each of the low-paid categories assumes one person working full-time on the national minimum wage.

A single adult would need to spend $600 a week. A couple with no children would need $830. Add a child of six and that rises to $970. Add a second child, of 10, and it's up to $1170. A sole parent working part-time, with a child, would need to spend $830 a week.

Let's take a couple with two children. Their biggest expense would be rent, $460 a week for a three-bedroom unit in an outer suburb. Then $200 for food, $140 for transport, $140 for household goods and services, $80 for recreation (swimming lessons; bit of sport for the kids), $60 for education, $40 for personal care, $30 for clothing and footwear and $20 a week for out-of-pocket healthcare.

The budget standards for unemployed families are, perforce, a lot tighter.

Whereas the low-paid were assumed to shop at Woolworths and Kmart, unemployed people in the focus groups used to check the realism of the standards said they couldn't afford such stores and went to Aldi and discount stores. They chase specials and collect discount vouchers, make things last longer and waste nothing.

Even with this frugality, an unemployed single adult needs $430 a week. A couple without children needs $660, but that rises by $110 to $770 with one kid, then by a further $170 to $940 with a second kid. An unemployed sole parent with one child needs $680 a week.

It's true that economies of scale mean a couple needs only 1.5 times as much money as a single. But additional kids cost more, partly because older kids cost more, but also because you need to rent a bigger unit.

The good news is that a single adult on the minimum wage earns about $60 a week more than they need to maintain the minimum healthy standard of living, costing $600 a week. A sole parent working part-time, with one child, gets wages and welfare benefits of $45 a week more than their minimum living costs of $830 a week.

After that, however, the news is bad. A low-paid couple with no children earns $40 a week less than the $830 they need. After allowing for family benefits, a low-paid couple (one in full-time work and one doing some part-time work) with one child is almost $10 a week shy of their $970 healthy standard, while a couple with two children is short by $90 of the $1170 a week they need.

One of the great stains on our fair-go nation's conscience is the long-running attempt by governments of both colours to starve the unemployed until they find a (usually non-existent) job.

The study finds that the dole, plus any other welfare benefits for which the jobless are eligible, falls almost $100 a week short of the much tighter minimum healthy living standard for the single jobless.

A childless couple on the dole falls short by almost $110 a week and a couple with two kids is shy about $130 a week.

In our boundless generosity, however, we go easy on an unemployed couple with one kid (short by a mere $60 a week) and a jobless sole parent with one kid, short by a piddling $50 a week.

If only you and I weren't having such a struggle to maintain our own living standards, we could perhaps ask the pollies to be a tad more munificent.

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How we delude ourselves about the cost of living

Let me tell you a home truth no politician would dare to: We don't have a problem with the cost of living. In fact, consumer prices rose at the unusually slow pace of just 1.9 per cent over the year to June.

I don't expect that telling you you're kidding yourself will make me popular – which, of course, is why the pollies aren't game to tell you, even though they know it's true.

But how on earth can I claim there's no problem with the cost of living when, in this column only last week, I wrote that the retail cost of electricity had more than doubled over the past decade, and was now rising by a further 15 or 20 per cent?

Because electricity bills do not the cost of living make.

Households have to buy a hundred other things apart from power, and it's changes in the combined cost of all those things that determine what's happening to the cost of living.

Trouble is, humans are not good at keeping track of what's happening to all the prices of the 101 things we buy.

We tend to focus hard on some price changes, while ignoring loads of others. Which ones do we focus on? The ones that are rising rapidly, of course.

Which ones do we ignore? The ones that don't change much. We even fail to notice or remember for long the prices that are falling.

Nothing's better suited to misleading us than bills for water, gas or electricity. They tend to come only once a quarter, which makes them a large dollar figure.

When they're a lot higher this quarter than they were last – and when we struggle to find the money to pay them – we're left convinced the cost of living is out of control.

Actually, it says we could be better at budgeting – could hold more spare cash aside for unexpected bills. But it's easier for us to shift the blame to someone else – the gov'ment, for instance.

All this subjectivity is why we get a reasonably realistic picture of changes in the cost of living only by accepting what we're told by the people whose job it is to keep a careful record of price changes, the Australian Bureau Statistics, with its consumer price index.

The index measures changes in the prices of a fixed basket of goods and services bought by households in the eight capital cities. The bureau conducts a detailed survey every six years to ensure the items in the basket reflect changes in our purchasing habits.

The basket includes 87 different classes of expenditure, covering – as we'll see – far more than just the things we buy in supermarkets. The bureau checks about 100,000 individual prices every quarter, across the eight capitals, mainly by having its workers go into shops to see for themselves, or by contacting service providers.

It tries to get the actual prices people are paying, and to adjust for changes in quality and quantity (such as when a producer reduces the size of a tin or package without reducing the price commensurately).

The index confirms that, over the decade to June, the price of electricity rose by 116 per cent, while the combined price of all the goods and services in the basket rose by just 26 per cent.

How is that possible? Because most prices rose by far less than electricity did, some prices actually fell, and – get this – electricity accounts for less than 2 per cent of the cost of all the many things we buy. (For age pensioners, it's 3.4 per cent.)

Let's look closely at that 1.9 per cent rise in consumer prices over the year to June. It includes a 7.8 per cent rise in electricity prices.

But food prices (accounting for 17 per cent of the total cost of the basket) rose 1.9 per cent, alcohol and tobacco prices by 5.9 per cent, clothing and footwear prices fell by 1.9 per cent, housing costs rose 2.4 per cent, while prices for furnishings and household equipment and services were unchanged.

Out-of-pocket health costs rose 3.8 per cent, transport costs rose 2.1 per cent, communication costs (mainly phones) fell 3.8 per cent, recreation costs (mainly audio, visual and computer costs) fell 0.1 per cent, education costs (mainly private school and uni fees) rose 3.3 per cent, and the cost of insurance and financial services rose 2.1 per cent.

This means prices fell for categories worth 17 per cent of the total cost of the basket and were unchanged for a category worth 9 per cent of the basket.

The truth so many people can't see is not that the cost of living – consumer prices – has been rising rapidly, but that wages are only just keeping up with prices.

Over the four years to March, consumer prices rose by 8.3 per cent, whereas the index for wage rates rose by an unusually weak 9.2 per cent.

What's really making us dissatisfied is not that the cost of living is rising rapidly, but that our wages haven't been rising by the 1 per cent or so per year faster than prices that we're used to, thus preventing us from increasing our standard of living.

That is, our ability to buy a bit more stuff than we bought last year.

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