Date created:27/8/04
Last modified:27/8/04
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John Quiggin

Don't just stop at hospitals

Australian Financial Review

11 March 2004.

The quasi-campaign atmosphere of the last few weeks has produced a string of leaks and semi-announcements of policy on both sides. By far the most interesting is the report that the Prime Minister may propose that the Commonwealth should take on full responsibility for public hospitals.

If correct, this would be welcome news in a number of respects. Although some critics have suggested that it would undermine the Mr Howard's federalist credentials, nothing could be further from the truth. A clear allocation of Commonwealth and State responsibilities would strengthen the federal system. not weaken it.

Australian governments have been struggling to come to grips with the problems of health policy for decades. As I observed just after the Howard government was elected, 'we could start to resolve the problems of the health sector if the Commonwealth took complete responsibility for health. This would go a long way towards eliminating the present cost-shifting and duplication. More important, voters would be faced with a clear choice between lower Commonwealth taxes and better health services', Commonwealth must take responsibility for services AFR 7/8/96.

The problems of cost-shifting are obvious and have become steadily worse as policies such as case-mix funding have encouraged hospitals to exploit the arbitrage opportunities created by multiple sources of funding. The key idea is to perform services that attract a high casemix return, while shifting high cost components on to Medicare

On the other side of the cost-shifting equation, the Howard government has taken funds from the state hospital systems to finance its private health insurance rebate. Most independent analysis suggests that the costs of the rebate exceed the resulting savings to public hospitals. If the Commonwealth government had responsibility for hospitals it would have a much greater incentive to get the balance of costs and benefits right.

Shifting responsibility for hospitals to the Commonwealth would also go a long way towards fixing the problem of vertical fiscal imbalance and would enable the elimination of a large class of specific payments as well as much of the remaining general purpose grant.

Going further along the path of clarifying responsibilities, the states should withdraw completely from the university and TAFE sectors. Although they get almost no state funding, most universities operate under state acts of Parliament. As a result state governments have both responsibilities for financial supervision which they have a limited capacity to fulfil, and powers to interfere in the running of universities with no responsibility for the consequences.. The funding of TAFE is an even more confused mess.

Conversely, the Commonwealth should completely get out of school funding. With two funding sources, one giving disproportionate assistance to private schools and the other giving disproportionate assistance to public schools it will never be possible to achieve a coherent outcome.

The most important benefit of Commonwealth responsibility for hospitals would not be administrative but political. As long as the Commonwealth raises most tax revenue and the states provide most services, Commonwealth governments will always have a political incentive to cut taxes and pass the pain on to states. The Commonwealth's role as paymaster leads to the adoption of the view that health expenditure, as a proportion of GDP, should be kept as low as possible.

Economic analysis supports the opposite view. Thanks to rising incomes and innovations in medical technology demands for health expenditure are bound to rise over time both in real terms and as a share of national income. It was this increase, and not the much-ballyhooed aging of the population that has been the real concern in the continuing debate over intergenerational equity.

If the Commonwealth government has full responsibility for health, voters will have a clear choice. They can vote for lower personal taxes and either do without improved health care or pay for it out of their own pockets. Alternatively, they can forgo tax cuts, and perhaps accept some tax increases, in return for high-quality publicly-funded health care.

If survey results are anything to go by, the latter option is currently more popular. But even opponents of an expanded public health care sector should welcome the opportunity to have the choices put clearly before the public instead of being buried in a morass of intergovernmental bickering.

As might be expected, the voices of caution are urging Mr Howard to leave this 'poisoned pill' alone, and his public statements so far have been noncommittal. Having been raised, though, the issue is unlikely to go away. There are times for boldness, and this is one of them.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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