Cure Medicare mess

HEALTH "reforms" that shift costs between state and federal budgets, such as the Gillard government's underwhelming plan to increase the federal government's share of public hospital funding from 40 per cent to 44 per cent by 2020, are fiddling at the margins with the Medicare mess, which is far more complex than how much money each tier of government tips into public hospitals.

The focus of health reform should be on how all health dollars are spent, or rather misspent, by governments across the entire health system, and on correcting Medicare's structural flaws which centre on the sacred cow of the health debate: bulk-billing.

In the late 1960s, when there were no long queues for hospital treatment, Australian governments spent $4.83 on hospital care for every dollar they spent subsidising GP and other medical services. In 2008-09, for every dollar the federal government spent on GP and other non-hospital services covered by Medical Benefits Scheme (MBS), state and federal governments spent $1.99 on hospital care.

The cost of the MBS to the federal budget ($15.5 billion) was almost double that of the private hospital system, and half as much as state and federal government expenditure on public hospitals.

The changes in spending reflect advances in clinical practice, such as tests now performed outside of hospitals. But they also reflect changes in government policy and explain why 26 years of Medicare has produced the "hospital crisis".

When Medicare began in 1984, all Australians became entitled to "free" or heavily subsidised GP and other primary care services on demand.

Because consumers either bulk-bill the entire cost to the federal government or receive a rebate covering a significant proportion of the cost, Medicare is enormously popular with voters and has always encouraged overuse of these services.

When three-quarters of GP visits are bulk-billed, three-quarters of national expenditure on non-hospital care is government-funded, and individuals pay for only 12 per cent of the cost from their own pockets, it is impossible to tell how many billions are wasted on unnecessary consultations and tests for people with non-serious and trivial health needs.

Bulk-billing causes systemic problems. To offset the ever-increasing, open-ended cost of the MBS, federal governments have limited their financial exposure to the cost of "free" public hospital care by giving the states fixed hospital grants.

No federal government has financed anything like the 50 per cent of the actual cost of the real demand for public hospital care as the designers of Medicare intended.

The predictable response by state governments, which have limited sources of revenue and large and competing service responsibilities, has been to tightly cap frontline hospital budgets and cut large numbers of beds to contain costs and restrict access to services.

All free and universal taxpayer-funded health systems must restrict or "ration" care because government budgets are limited.

But the way Medicare is structured has exacerbated the rationing of hospital care and the length of the queue at overcrowded public hospitals.

It provides perverse and inequitable "reserve insurance". A sound insurance system should only protect against expensive, exceptional illnesses.

Medicare excessively subsidises the minor health needs, while patients with the most serious, most costly health needs are underinsured against the risk of hospitalisation.

There are no easy fixes for these problems when an entitlement program as popular as bulk-billing is under the spotlight.

The funding federal governments prefer, for political reasons, to spend on the MBS could be better used to meet unmet demand for hospital care. But shovelling more money into the highly bureaucratic public hospital system is no solution.

Moreover, it is mad to persist with a scheme that squanders resources on unnecessary services and bureaucracy when an ageing population will place heavy additional burdens on government budgets in coming decades.

To create a cost-effective system, a complete rethink is needed of the way healthcare is financed.

Bulk-billing should be scrapped and the budget savings used to establish a national system of individualised Health Savings Accounts. Consumers will become cost-conscious and overuse will be minimised when they spend their own money on GP and other non-hospital services.

The rest of Medicare should be replaced with a competitive insurance system, along the lines of the insurance "voucher" scheme proposed in the National Health and Hospital Reform Commission's final report, which should cover only high-cost catastrophic and chronic conditions.

And price signals should be restored across the system. Insurance deductibles and co-payments should apply for non-chronic care and marginal hospital procedures, and be paid for out of people's "health savings".

Greater cost-sharing will control costs, promote responsible use of services, and avoid blunt rationing.

These arrangements would facilitate meaningful public hospital reform. Each hospital could be corporatised under a governing board, which would set the price of its services in competition with other hospitals, and have these prices contested by health funds purchasing hospital services for their members.

Structural reforms that introduce consumer-sovereignty and market forces into the health sector will boost productivity, lower costs and raise quality.

If we clean up the Medicare mess, more and better services will be received for each increasingly scarce health dollar spent.

If we don't, the waste will continue and the queues for hospital treatment will be even longer in 2020 and beyond.

Jeremy Sammut is a research fellow at the Centre for Independent Studies. His report, "How! Not How Much: Medicare Spending and Health Resource Allocation in Australia" was released by the CIS today.