WHY WE NEED TO REDUCE
Bristol-Myers Squibb Seminar
Melbourne 19 June 10, 200
As a director of a think-tank that promotes an enhanced role for the operation of private enterprise and for competitive market forces, I sometimes discover that people think that I support a laissez-faire society with little or no government intervention. However, although economic rationalists like myself certainly favour allowing markets and competitive forces to operate more freely than at present, they also accept that governments have an important role to play in regulating both the economy and society.
Two major functions are the provision of help to those on low incomes and action to ensure the provision of services that the private sector might offer inadequately if left to the market-place. These are very relevant to health, where government intervention is certainly needed to ensure acceptable sanitation and to limit infectious diseases. Some government subsidies for medical research are also justified. And there is widespread acceptance of the equitable justification for government action to help meet medical expenses of those on low incomes or who would experience major income loss because of "catastrophic" or very serious illnesses.
However, government intervention in Australias health system extends a long way beyond this. Commonwealth subsidies to medical services under the Medicare scheme and to a high proportion of prescription medications bought from pharmacies virtually hand out large quantities of free or near free goods. With the State Governments, the Commonwealth also funds public hospitals to provide free services to patients. These three sets of services are not only provided at zero or heavily subsidised prices but most of the community is eligible regardless of their personal economic circumstances.
It is difficult to establish a substantive case for this extraordinary government generosity at taxpayers expense, which undoubtedly leads to an over-supply of services and is the underlying cause of continuing waiting lists in the face of increased funding. Indeed, the current system bears comparison with a Soviet-style command economy where bureaucrats determine the quantity of goods and services to be produced, to whom they will be sold and at what prices. There is certainly limited incentive for medical professionals to advise on the less expensive or alternative forms of treatments or cures, while patients who have to make little or no payment have every incentive to demand the most expensive and latest treatment.
This combination of doctors and patients is difficult for the taxpayer to beat because the medical profession in its various forms naturally wants to see an expansion or improvement in the services within its domain. It also constitutes a powerful lobby group that presents cogent arguments on the benefits of the latest technology. The healthy taxpayer has difficulty in rebutting such expertise and gets little help from political parties. Indeed, although politicians have to confront complaints about the waiting lists that inevitably come from offering these free goods, they seem to believe votes go with expansions of services at taxpayers expense - and that there are few votes in making access to such services harder.
Mr Beazley has already outlined one Labor initiative for the next election and foreshadowed more health promises for the election. For his part, Dr Woolridge proudly proclaimed in his post-Budget address to the Institute for Political Science that" weve tried to shift the debate from simply one of financing to one of health outcomes". He then went on to outline the additional specific rebates for GPs provided in the budget while boasting that "we manage to keep health costs roughly in line with GDP, which is something not many other western countries can say". Some may recall that, soon after she was appointed Health Minister in 1994, Carmen Lawrence said "weve kept (health spending) around 8 per cent (of gross domestic product) for about a decade and thats where I intend to keep it".
THE TREND IN HEALTH EXPENDITURE
In reality, Australia has not kept health expenditures in line with GDP, let alone to 8 per cent. Forty years ago health accounted for about half of the current 8.5 per cent of national resources and, as Table 1 shows, there has been an increase of one percentage point of GDP since 1989-90. Moreover, almost all the recent increase in such expenditure has originated in the government sector and has been financed by the Commonwealth Government, that is, by the taxpayer.
Some will argue that this additional health expenditure has been an investment that has been responsible for the continued increase in life expectancy over the past twenty years and the fall in the death rate from almost all diseases (including cancer). External causes of death have also declined, although there has been a slight increase in suicide rates.
Of course, improvements in health outcomes add to economic and social welfare and are to be welcomed. But it is difficult to disagree with an officer of the Institute of Health who commented in a 1992 paper that "there appears to be little correlation between health expenditure per person and measures such as life expectancy and infant mortality." The 2000 report of the Australian Institute of Health and Welfare also points out that "disease and health ..(are) the result of the inter-action of human biology, lifestyle and environmental factors, modified by health care." The call by the chair of the National Prescribing Service for "a cultural change to think wisely about medicines rather than reaching for the jellybeans every time they dont feel right" indicates that the availability of free or near free medical services is far from being a cure-all. But, by focusing only on "cultural change", it also fails to address the fundamental point that proper pricing of such services is the key to reducing wasteful use of resources.
Of course, health expenditure could be expected to increase faster than GDP even if health services were provided in a more market-oriented environment. As living standards increase it is natural for individuals to spend smaller proportions of their incomes on food, clothing and consumer durables and higher proportions on services such as health. It is in the self-interest of people to purchase such services.
However, while a relatively high rate of growth of health expenditure is to be expected, the level of expenditure is undoubtedly higher than if the majority of consumers had to face prices that reflected much more closely the costs of producing the services. Moreover, the associated subsidization of such consumers extends way beyond those who need economic assistance. Indeed, the extent of this subsidisation is the more surprising given that it has been growing larger and larger even as average Australian real incomes have been surging and as the need for income subsidization has been diminishing.
At the previous peak in the economy in 1989-90 Australians had an average real income of $25,865 per annum but by the last peak in 1999-00 it had reached $32,605. In ten short years that was an increase in living standards of nearly 24 per cent, or 2.25 per cent a year per person. Nor is this is simply a question of playing tricks with averages.
Contrary to the nonsense that is often touted in the media and in some academic circles, analyses of income distribution show no significant change in the inequality of incomes over this period or for that matter since the early 1980s. At all the various income levels substantial real increases were experienced and, although it is often forgotten, most of those on low incomes in the early 1980s will by now also have moved onto a higher income scale.
Those who ardently complain about the gap between the rich and the poor constantly refer to calculations purporting to show up to 20 per cent living below the poverty line. However, the incredibility of such claims is highlighted by the constant raising of the definition of poverty.
THE DISTRIBUTION OF HEALTH BENEFITS
The irrationality of the subsidisation program is emphasised once an examination is made of the distribution of health benefits as between income groups. As Table 2 reveals, over 40 per cent of health benefits, amounting to around $10 billion, are estimated to have gone to the two groups with the highest incomes. The comparison between the proportionate additions to average incomes per head is also striking. For those in the higher income groups the benefits provide relatively small additions but for those in the lower income groups they are relatively large. It does not seem unreasonable to conclude that the deletion of benefits for those in the two upper income groups (other than for those with chronic illnesses) would cause few health or financial problems, particularly as it would offer the potential for large tax reductions.
Table 2 also indicates that, when all direct and indirect benefits are examined (that is, those able to be estimated), the two higher income groups received over $30 billion or about 30 per cent in 1998-99 and benefits to all groups are estimated to total $100 billion or about 17 per cent of GDP. The extent of the widening in the availability of such benefits is revealed in a recent analysis by the Department of Family and Community Services. While that analysis is limited mainly to direct benefits, it shows that they alone now go to about 22 per cent of the working age population compared with "only" 15 per cent at the end of the 1980s. And, as I have suggested, the increase in such expenditure over the past twenty years mainly reflects vote buying rather than need.
Although a minority of those recipients obtain some employment and make some contribution to the economy, it does not require much imagination to see the potential for adverse economic and social effects from this excessive extension of social expenditure, of which excessive health benefits form a major part. It seems clear that this results in:
In short, the excessive extension of social expenditure is having adverse effects not only on living standards but on social behaviour as well. It may even be causing ill-health.
For governments there is an additional major challenge as to how to handle the large increase in social expenditure that will occur if there is no change in existing policies to reduce eligibility for benefits.
This challenge arises from the ageing of the population. Analysis by the Treasurys Retirement Income Modelling Unit projects the proportion of 65 year olds and over to those aged 18-64 to increase progressively from 20 per cent in 2005-06 to 39 per cent in 2059-60. As aged persons absorb much higher levels of social expenditure per head, this suggests that, even assuming no further political liberalization of existing policies, expenditure on health and other benefits will continue to increase at a faster rate than GDP. RIMs analysis suggests there are potentially very significant implications for the proportion of GDP allocated to health.
It shows, for example, that if the annual growth in health costs per person of a given age above inflation continues at the same rate as over the ten years to 1994 - that is, 2% pa - that proportion would increase to 13-16% by 2031 and 15-19% ten years later. That would be about equivalent to doubling current expenditure levels and, assuming it was all financed from taxation, would require taxation to be increased by about 25 per cent to finance the additional health expenditure. If, however, the annual growth in health costs were reduced to only half that over those ten years, the health proportion would be contained within the 9-10% range. However, given no change in existing policies on access to health benefits, the higher RIM projection is the more realistic. On past experience, the savings from improvements in health productivity do not reduce the rate of growth in health costs above inflation because they are offset by higher volumes of treatment of one sort or another.
This analysis strongly reinforces the need for policy action to limit access to government health benefits to those in lower income groups or who have chronic illness and to require higher income groups to meet the full costs of their health treatments. The resultant savings in government expenditure should be used to finance commensurate reductions in taxation for those in middle-higher income groups who experience higher health costs. A competitive market in medical insurance should also be allowed to develop.
Given the likely political difficulties of making such a major change in one go, a start could be made by introducing or increasing charges to be paid by middle-higher income groups for each of the three major services. One obvious move would be to return to the "co-payment" for Medicare doctor visits introduced in 1991 by Deputy Prime Minister Howe but abandoned by Mr Keating as part of his program to obtain the Prime Ministership. A co-payment for meeting the cost of the first day of hospital treatment would be another option. And, subject to providing a safety net for those with chronic illnesses, the general subsidy for prescriptions should be abolished.
HEALTH SERVICES EXPENDITURE
* Including individuals
Source: Health Expenditure Bulletin, No. 16 Australias Health Services Expenditure to 1998-99, Australian Institute for Health and Welfare, Canberra, June 2000.
Non-Government covers health insurance fund payments on claims and expenditure on health services by Workers Compensation and Compulsory Motor vehicle Third Party insurance cover as well as expenditure by individuals, which cover "above-schedule" doctors, hospital and pharmaceutical fees/charges
GOVERNMENT BENEFITS - Estimated Distribution 1998 - 99
Sources: Estimates by author based on Household Expenditure Surveys for 1993-94 and 1998-99, ABS Catalogue Numbers 6531.0, 6537.0, and 6523.0
1. Benefits for 1998-99 are estimated by taking the average gross income per head for each quintile from the Household Expenditure Survey, 1998-99 (ABS 6530.0) and assuming that benefits were the same proportion of income per head as in the Expenditure Survey for 1993-94.
2. "Gross income" includes employee income, own business income, government pensions and allowances and "other" (government pensions and allowances include cash payments only). The average gross income pa in the 1998-99 Survey for each quintile was (respectively) $5,460, $9,160, $13,469, $19,084 and $31,173, with the average income for Australia being $17,584 compared with $27,352 for gross household income per head in 1998-99 as shown in the national accounts. The latter covers a wider definition of income than the estimates derived from the HES (for an explanation of the differences, see Income Distribution 1997-98 Appendix 3, ABS 6523.0) but ABS advise that this does not necessarily affect the estimates of income distribution.
3. "All benefits" include direct benefits paid in cash (such as government pensions and allowances) and selected indirect benefits such as for education, health and housing.
4. "Health benefits" cover hospital care, medical clinics, pharmaceuticals and "other". As the Household Expenditure Survey only covers households in private dwellings, benefits paid to those in institutions (such as nursing homes) are excluded.