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Funding health care - a principled approach

By Ian McAuley - posted Friday, 17 August 2007

How we got into a mess

Successive administrations have been guided by the (real or perceived) health priorities of the time, their partisan ideologies, the influence of pressure groups, and constraints on government finances. They have tended to build on, rather than replace or overhaul, existing funding arrangements.

Priorities have shifted. In the postwar years the need for affordable pharmaceuticals, particularly life-saving antibiotics, saw the birth of the Pharmaceutical Benefits Scheme. In the 70s and 80s Medibank and Medicare were developed to provide universal cover. Equitable access to medical care was a priority. At present there is recognition of the need for more resources for illness prevention and health promotion, mental health, and the health of the most disadvantaged in remote regions.

Partisan ideologies have played their role. Labor governments have tended to favour universal and free service delivery. Coalition governments, while nominally preferring the use of market forces, have favoured private insurance as a means of funding health care, even though private insurance, in its suppression of price signals at the time of delivery, is no more a “market” mechanism than Medicare. Coalition governments have also tended to see the government's role in health care as a residual or “charity” one, with the well-off encouraged to opt out of any shared system.


Pressure groups have had strong influences. In 1946 the British Medical Association (yes - the British Medical Association) successfully blocked the Commonwealth's attempt to introduce a universal health care scheme along the line of those operating in European democracies.

Retail pharmacists and medical specialists have been particularly influential - the former in terms of keeping pharmacy separated from other health care services, and the latter in terms of restricting the throughput of postgraduate medical schools. Once groups gain privilege, as the health insurers have done, they are able to use some of their gains to mount strong lobbies to sustain their privilege.

Another constraint on policy is set by the vigilant state and Commonwealth treasury departments - guardians of the public purse - who see budgetary constraint as a priority, even to the extent of overriding other economic considerations. Hence Labor in office was never able to implement a comprehensive dental scheme, and governments of all persuasions have always found that funding of established programs, such as hospital care, has crowded out other possible priorities with good returns, such as public health. We cannot have it all, but the dividing line between what is financed privately and out of our taxes shows no coherent logic.

Then there are the Commonwealth-state demarcations, which are the legacies of states' long-standing role in funding public hospitals and constitutional legal battles.

The result is a highly complex set of funding arrangements, illegible to the outsider, and bamboozling to anyone trying to infer any underlying principles - for there are no underlying, coherent principles.

If the reader's patience allows, consider the following partial guide to health funding:

  • we have free public hospitals, but have to pay $30.70 for pharmaceutical prescriptions;
  • if we have private insurance, generously subsidised by the government, some “ancillary” services such as dentistry are covered (only up to a capped amount), but if we choose to rely on our own savings for our ancillaries or private hospitalisation, we get no support;
  • the safety net scheme for medical benefits is on an individual basis: for pharmaceutical benefits, by contrast, the safety net is on a family basis. Then, while safety nets operate calendar years, there is a 20 per cent tax rebate for medical expenses above $1,500 in a financial year, with different definitions of what qualifies as a medical expense.

And that's not to mention concessions for certain disadvantaged groups, such as concession card holders.

The result of these influences is waste and inequity. Although Australia's health care outcomes, on most criteria, are good by international comparisons, particularly in comparison with the USA, we could do far better.

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First published by the Centre for Policy Development on August 4, 2007.

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About the Author

Ian McAuley lectures in Public Sector Finance at the University of Canberra and is a Centre for Policy Development Fellow.

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