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Securing Australia’s future: health care

Governments setting out to control spending, or move it in more efficient directions, must have strong backbones. AAP Image/David Crosling

SECURING AUSTRALIA’S FUTURE: As the Commission of Audit reviews government activity and spending, The Conversation’s experts take a closer look at key policy areas tied to this funding – what’s working, what’s not and where current funds are best spent.

Most measures of Australian health outcomes show a system that delivers – especially compared with other developed countries. Life expectancy, deaths from cancer and heart attacks, rates of smoking have all improved dramatically over the past few decades.

But obesity, physical activity and other factors that will shape future health look less rosy. And the gap in Indigenous health remains glaring.

The link between positive factors and spending on health is problematic: the drop in smoking stems from “nanny state” regulation; others, such as improved survival rates with heart disease, are more clearly linked to new medicines or clinical innovations.

Government and private spending on health has been rapidly rising. We now spend more than A$140 billion (2011), up from A$82 billion ten years earlier (adjusted for inflation). Put as a proportion of the entire economy, the increase looks a little more modest: health spending went from 8.4% to 9.5%, around the OECD average.

At the same time, this increase has drawn unequally on three sources: the federal government, the states and private households. Canberra’s contribution to the cost of hospitals actually fell over the decade, while the burden borne by the states has risen.

A recent study found that almost a quarter of the costs of health care come out of the pockets of Australian households. The cost of medicines was the largest budget item for older households; private health insurance premiums the biggest cost for the younger.

Consequently, talk about Canberra “cutting” health expenditure needs to be greeted with some scepticism. Is the federal government merely shifting costs to the states and private households; clearing its own balance sheet? Much of the history of health policy since the 1970s has seen this type of cost shifting.

Waste and inefficiency

The central problem in Australian health finance – and policy innovation – always comes back to the divided responsibilities of federal and state governments. The states have too many costs and few financial resources of their own. And Canberra’s responsibility for paying for medical services through Medicare perpetuates silos between key parts of the health system.

The Council of Australian Governments (COAG) health reform process, which ran from 2008 to 2012, tried to end this blame game of cost shifting. It marked some real achievements, especially around making hospital expenditure more transparent.

Activity-based funding (ABF) – paying hospitals a standard price for the services they deliver – established incentives for greater efficiency. ABF also promised to gradually increase the Commonwealth share of hospital funding.

Australia spends 9.5% of its GDP on health, which is around the OECD average. Image from

However, the COAG reforms became focused on the hospitals. The key performance measures were hospital-based: elective surgery queues and emergency waiting times. A recent review for the COAG Reform Council confirmed that:

most effort has been directed at the hospital system, with little attention to the integration of care necessary across the whole of the health system.

The biggest gains in efficiency – and improved outcomes for consumers – lie in improving the ability of different parts of health to communicate seamlessly.

Strategic cuts

The largest part (about three-fifths) of Commonwealth expenditure pays for the pharmaceutical benefits scheme and payments for medical services under the Medicare Benefits Schedule (MBS). These are the areas under its direct control. This spending is the least entangled in complicated agreements with the states.

The previous government made large inroads into the costs of pharmaceuticals. A recent Committee for the Economic Development of Australia report has pointed to further major savings if federal governments were to bargain harder over the prices of generic (off-patent) drugs.

The Grattan Institute has estimated savings of more than A$1 billion from better pricing policies. It advocates an independent pricing authority, on the model of the Pharmaceutical Benefits Advisory Committee, which has successfully held down the prices of new, patented medicines.

The MBS is a different matter. While new benefits now undergo economic evaluation for cost effectiveness before approval, there is little scrutiny of existing benefits in the light of new evidence on efficacy and safety. Rebates set at a high level often remain long after changes in medical technology have cut costs.

Here we are moving into a politically difficult terrain. One person’s waste is another’s income. Efficiency cuts can lead to ferocious opposition, as Labor found when it cut rebates for ophthalmology which had not kept pace with technological change.

A more rigorous scrutiny of the MBS – involving the professional organisations rather than sudden coups from Canberra – is a recipe for a slow haul. It would require considerable political skill and courage. The dividend would be in more efficient, safer medical practice.

Areas of priority

Two areas of the health system are seriously misaligned.

Prevention – with the greatest hope of long-term savings – remains neglected. Lifestyle-related chronic illnesses, such as diabetes, provide the fastest growing burden on the health system.

The Business Council of Australia has warned:

There is little evidence that the preventative health and health care agendas will be brought together, and despite major new public health programs being announced, the balance of resources allocated to prevention (at just over 2% of total public health expenditure) continues to be dwarfed by the resources allocated to curative care.

Similarly, incentives for individuals to take greater responsibility for maintaining their health remain little changed.

Investing in preventative care delivers saving later on. Image from

Second, the consumer experience is of a confusing and fragmented system. The split between hospital and primary health care funding creates barriers to cooperation and communication between health-care providers.

Disability and aged care services are pioneering new models of funding following the consumer. Health services have done little to follow this patient-focused model. Greater investment in attempts to bridge the system – such as the new Medicare Locals, which bring together primary health care services within the same boundaries as the hospitals – offer a productive way forward.

How likely is this to happen?

The greatest gains in health have come from improved prevention. The current signs in this area are not encouraging, with rumoured or announced plans to axe the Australian National Preventive Health Agency and withdrawal of funding to the Alcohol and Other Drugs Council.

There is also a looming threat to the future of the Medicare Locals. They face a secretive review that threatens to cut funding and restrict their work to support services for GPs.

Every cut – or shift – in expenditure on health does not just affect patients. It also reduces the incomes of providers, whether doctors or pharmaceutical companies.

Governments setting out to control spending, or move it in more efficient directions, must have strong backbones.

This is part four of The Conversation’s Securing Australia’s future series. Stay tuned for more instalments over the next three weeks.

Part one: Energy and climate change

Part two: Governance and state-federal relations

Part three: Science and research

Part five: Education

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