Funding health care - a principled approach

In many aspects we have combined some of the worst of all possible arrangements. We have large bureaucracies, not only in governments, but also in health insurance funds - whose administrative overheads are now about $1 billion a year.

For many health needs there is a mixture of “free” and paid services. When there is such a mix there is a natural drift to the free services, even though some paid services may offer better value. In some cases the free services are publicly funded, but in many they are funded through private insurance. The Coalition Government fails to understand (or does not want to understand) that private insurance carries the same incentives for over-use that Medicare carries, but without the strong market power which gives single national insurers the capacity to control use and to keep prices under control. (For an explanation of the economy-wide costs of private insurance, see the InSight article “Paying for health care”.)

In terms of equity, we have developed a “two tier” hospital system, thanks to the generous subsidies for the well-off to use private insurance (particularly the 1 per cent tax break, which more than pays private insurance premiums for anyone with an income above about $70,000).

When public hospitals become a “charity” or residual service, there is no guarantee that their quality will be preserved. (And, conversely, the linking of private insurance to private hospitals ensures that they never come to compete alongside public hospitals.)

Cleaning up the mess

A case can be made for a universal, “free”, tax funded system of health care. And a case can be made for a system in which most people pay for most of their health care for most of the time - essentially a competitive market system, with safety nets for those with very high needs. The former could be classified as “socialist”, the latter as “free enterprise”. Private insurance is neither, for while it is private, it carries all the distortions, and more, of bureaucratic systems.

Nowhere in the developed world is health care left entirely to the market. Even the most “dry” economists accept that there are market failures in health care, and even the most rational and disciplined consumers cannot plan for their health care needs. We all opt to share the costs of our health care to some degree, and the most efficient and fair way to do that is through the taxation system.

On the other hand, a universal, free system has drawbacks - in particular an imbalance between supply and demand. Long queues are an inevitable outcome of a free system, and there often has to be a heavy hand of intervention to ensure scarce resources are applied where they can do most good.

But a universal system doesn't have to be free. “Universalism” in health care essentially refers to equality of access (in contrast to the two-tier hospital system we have now). Co-payments serve a function in that, if well-structured, they can convey some price information, and can help direct resources more efficiently, particularly around the borders of health care. At present, services such as physiotherapy, podiatry and similar therapies tend to be under-used in comparison to other services which are higher cost but free at the point of delivery.

Nor does universalism mean all services have to be provided by the public sector. The private health insurance lobby has been very effective in a scare campaign, suggesting that without private insurance we will not have private hospitals, but private hospitals can easily be placed on the same funding basis as public hospitals. Indeed, competition between private and public service providers can be quite healthy.

Most of those who have contributed to the CPD's policy development accept that Australia can have a universal health care system, with carefully structured co-payments. The underlying principle in such a system is collective insurance, helped by some use of market signals to the extent that they do not cause hardship or deprive people of necessary care.

Some have argued for an entirely free system, and it is possible that Australians would be willing to pay the extra tax and to tolerate the extra management which that would entail. That question is one to be resolved through community engagement.

Rationalisation of financing, of course, would be part of a larger process of reform, in which the presently disparate elements of health care are brought together in one integrated system, designed around the needs of consumers.

Such a reform process would break from the bipartisan tradition of incremental change, referred to above (known by the political scientist Charles Lindblom as “muddling through”).

Sceptics may wonder if such change is possible, pointing to the extreme caution the Labor Party is showing in relation to health policy. But Australia has a good record in achieving change, such as tariff reduction, tax reform and financial market deregulation. There would be few losers from any basic reform of health care. Perhaps some bureaucrats may have to find alternative employment, and the private insurers would have no role, but they are only a high-cost overhead. Those delivering health services will always find their skills in demand, in both the private and public sectors.