Why Mr Abbott needs this big new tax

Leak cartoon

THERE are two issues with the National Disability Insurance Scheme: how it will be paid for, and how its services are delivered. The NDIS trials seem designed to address the second; but virtually no progress has been made on the first. As a result, regardless of the trials' outcomes, there seems little prospect of the scheme being adequately funded.

That is disappointing but unsurprising. The Productivity Commission, which estimated its proposals would cost an extra $7 billion a year, slated responsibility for the expenditure to the commonwealth but did not specify where the money should come from. Resolutely focused on scoring political points rather than on addressing the substance, Julia Gillard dismissed the Liberal premiers' proposal of a levy without suggesting any alternative.

Once the trials are over, thousands of disabled Australians will therefore be back where they are today -- struggling, and all too often failing, to make ends meet. According to recent estimates, 45 per cent of people with a disability are in or near poverty, a rate almost three times that in the general population.

It is difficult to believe a country as wealthy as ours cannot ensure a decent standard of services for those who suffer crippling disabilities. But that is only the most shocking facet of a growing problem -- the problem of under-insurance.

In theory, our health and welfare system should provide for those who, by brute bad luck, cannot provide for themselves. After all, faced with the possibility of being the parent of a severely disabled child, debilitating mental illness or unaffordable medical expenses, most of us would willingly pay a modest but certain insurance premium to avoid potentially catastrophic losses. We are, in other words, risk-averse, and hence value insurance.

Yet there are major risks for which our present arrangements provide coverage that is manifestly inadequate. Disability and mental illness are extreme cases. But they are far from being the only ones. For as healthcare costs keep rising, so do the charges individuals are being asked to pay for themselves. And with out-of-pocket fees now accounting for 18 per cent of total health spending, Australians directly cover a significantly greater share of their medical outlays than do Americans, despite more than 50 million Americans being uninsured.

That out-of-pocket fees are substantial is not necessarily undesirable. Were co-payments and other charges set so as to sensibly steer demand, discouraging unnecessary use of healthcare services while not deterring their use when needed, they would be amply justified. In reality, however, they are poorly designed to support efficient health outcomes.

This is apparent when payments are examined for complete episodes of treatment, rather than in terms of the silos that comprise our healthcare system. Seen over the course of such an episode, charges to consumers are made for primary care and diagnostic tests that vary from provider to provider, co-payments for pharmaceuticals, and gap payments on visits to specialists and private hospital services. Those charges hit patients with severe conditions, as well as those for whom treatment is discretionary. And to make matters worse, some charges, such as gap payments, can be unpredictable.

The charges therefore act as random taxes on the ill rather than as rational price signals. True, there are safety nets in place for out-of-hospital services. But they merely limit the total amount any patient pays, rather than helping guide patients' decisions in desirable directions.

And even then, the complexity of the safety nets reduces their efficacy as a ceiling on the costs consumers incur.

Low-income households react to this multiplicity of charges by restricting their use of healthcare, even when doing so aggravates illness. For example, increased co-payments have been shown to materially reduce use of anti-epileptics, combination asthma medicines and insulin, none of which is likely to be prescribed merely to satisfy patients' whims.

And in a recent study in western Sydney, 86 per cent of GPs surveyed by the Menzies Centre for Health Policy estimated that at least some of their patients had deteriorated in health, been hospitalised or died as they failed to take prescribed medicines because of cost.

Higher-income families are obviously better able to cope. Moreover, the increase in the Medicare levy surcharge gives them little option but to take out private health insurance. To that extent, they are compelled to carry more insurance than they might choose. But even with private health insurance, they face a bewildering array of charges, going from primary care to aged care, for which insurance is simply unavailable, though many consumers would value it at more than its cost.

We are consequently in the paradoxical situation where nearly 50 per cent of Australians are obliged to have two health insurance policies (Medicare and PHI), but no consumer has, and no supplier is allowed to offer, full coverage for healthcare risks.

The fact that charges are increasing twice as rapidly as incomes makes the resulting welfare losses all the greater.

The promise successive governments have held out of universal, comprehensive, insurance against the costs of poor health is therefore frayed and fraying, as the welfare state, faced with budget constraints, giveth much less surely than it taketh away. With cost pressures continuing to rise, that gap between promise and reality will only increase further.

To its credit, the National Health and Hospitals Reform Commission, established by Kevin Rudd, attempted to start a debate about how the system could be fixed. It pointed to a model in which every Australian would choose among competing insurers, with those insurers covering the full range of health-related risks. Moreover, as with other forms of private insurance, the contracts between citizens and insurers would be spelt out in advance and enforceable, unlike the aspirational commitments governments too readily make. Unfortunately, its proposals were ignored by government and opposition alike.

But we cannot keep our heads in the sand forever. And that is why Tony Abbott, in marked contrast to the Prime Minister, should embrace the Liberal premiers' proposed NDIS levy: not necessarily as a solution, but as a first step in a national discussion about placing social insurance on a sustainable basis. For unless we do so, it will be impossible to meet our moral obligation to the disabled and the mentally ill, while helping families protect themselves from the costs of falling sick. Those goals speak to core Liberal values; here is the Opposition Leader's chance to show how they can be achieved.