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Explainer: what is Medicare and how does it work?

Medicare guarantees free public hospital care and funds a range of primary care and other health services. Image from

Medicare is Australia’s universal health scheme. It is a Commonwealth government program that guarantees all citizens (and some overseas visitors) access to a wide range of health services at little or no cost.

Medicare is funded through a mix of general revenue and the Medicare levy. The Medicare levy is currently set at 1.5% of taxable income with an additional surcharge of 1% for high-income earners without private health insurance cover.

Medicare funds access to health care in two main ways. The first, the Medical Benefits Scheme, provides benefits to people for:

  • out-of-hospital medical services, including general practitioner (GP) and specialist services
  • selected diagnostic imaging and pathology services
  • dental care for children in limited circumstances
  • eye checks by optometrists
  • allied health services in limited circumstances, and
  • medical services for private patients in public and private hospitals (excluding accommodation, theatre fees and medicines).

The benefits paid to patients under Medicare are generally 85% of the fee listed for the service in the Medicare Benefits Schedule (75% of the schedule fee for private patients in hospital). When providers are willing to accept the Medicare benefit as full payment for a service, they bill the government directly (bulk-billing) and the patient is not charged.

The Commonwealth’s Medicare scheme also guarantees public patients in public hospitals free treatment. Public hospitals, however, are funded jointly by the Commonwealth and state and territory governments (who own and operate public hospitals).

Medicare sits alongside the Pharmaceutical Benefits Scheme, which subsidised the cost of a wide range of pharmaceuticals.

Medicare’s limits

The hospital funding arrangements sitting under Medicare have led to longstanding disputes between the Commonwealth and states and territories governments (states). Commonly known as “the blame game”, one level of government blames the other for inadequately funding public hospitals when patients wait too long for elective surgery and emergency care.

The arrangements have also given health services incentives to “cost shift” between governments. The states can do this by discharging patients from hospital to have follow-up care from GPs, whose services are funded by the Commonwealth through Medicare. The states can also shift costs to the Commonwealth by limiting access to community health services, for example, which then forces patients to seek treatment from GPs or in public hospitals.

The Rudd government’s health reforms aimed to reduce the blame and cost shifting by replacing annual Commonwealth grants to the states for public hospitals with an activity-based funding model. But it’s too soon to tell what impact it will have.

It’s unclear whether the Rudd government’s reforms will end the blame game. AAP Image/Julian Smith

Because Medicare was originally set up to replace private insurance schemes for hospital and medical services, it does not cover many other important services, such as dental, some allied health, and ambulance services.

Health services not covered under Medicare are funded through a range of other Commonwealth and state government programs, by private health insurers, or individuals themselves.

About 47% of the population is privately insured. Depending on the insurance product purchased, private insurance provides coverage for hospital treatment, ancillaries (such as glasses, allied health services and dental services), and, in some jurisdictions, ambulance services.

How did Australia get Medicare?

Medicare officially started on 1 February 1984. After 30 years, it is fairly settled policy and enjoys strong public support. Medicare’s history, however, has been highly contentious.

An earlier version of Medicare, Medibank, was introduced by the Whitlam Labor government in 1975 after a bitter and protracted political battle (it included a double-dissolution election and the only ever joint sitting of Parliament).

Medibank was only operational for about a year before the Fraser Coalition government began to dismantle it. By 1981, Medibank had been abolished and Australia went back to having a system of voluntary private insurance, subsidised by government. Many Australians, and observers from overseas, were stunned.

The number of people without health insurance soon began to grow, and so did public discontent. Because economic times were tough in the early 1980s, the only chance Labor had of reviving Medibank was to devise a plan that made its introduction contingent upon successfully restructuring the economy, boosting productivity and economic growth (the Prices and Incomes Accord).

The plan worked and the Hawke Labor government introduced the scheme with a new name, Medicare.

Universal health care: realistic or not?

Maintaining universal health care is a challenge in all developed countries, including Australia, as demand for care continues to increase, along with costs, expectations and the possibility of cure. To address these challenges in Australia, we will need to reform Medicare and our health system more broadly.

Medicare guarantees all Australians (and some overseas visitors) access to a wide range of health services at little or no cost – but is it sustainable? AAP Image/Dave Hunt

Because budgets are tight, it is almost certain that we will have to do more with less. The World Health Organisation argues that it has become unrealistic to think that everyone can have access to all possible care. Instead, all countries should be striving to achieve a “new universalism” where all citizens are guaranteed access to high quality, cost-effective essential care.

On the 30th anniversary of Medicare, determining what constitutes “essential care” is the most important challenge today’s policymakers face.

Anne-Marie Boxall’s latest book Making Medicare: The Politics of Universal Healthcare in Australia, co-authored with Jim Gillespie, was published in September by UNSW Press.

Further reading: Medicare turns 30 and begins to show signs of ageing

The Future of Medicare Conference opens on 13th August in Sydney.

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