Date created: 7/11/04
Last modified:7/11/04
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John Quiggin

Time to recast health roles

Australian Financial Review

23 September 2004

When being sworn in as Governor of California Ronald Reagan observed “the truth is, there are simple answers – but there are no easy ones.” At least some of the time, Reagan was right.

The health care sector is large, and bound to grow larger over time, along with the services sector in general. Although much of the discussion of intergenerational issues has presented this development in negative terms, it is, in essence a manifestation of structural change, and should be welcomed by supporters of rational economic analysis. Nevertheless, it does pose some problems, and none of them have easy answers.

There aren’t always simple answers either, but for one important question, the answer is simple but difficult. The question is: what level of government should fund health care? The most significant single reform that could be undertaken in health policy would be to end the division of responsibility between the Commonwealth and the States. This division produces duplication, cost-shifting and policy incoherence, wasting hundreds of millions of dollars every year.

While decentralisation of power is generally preferable it is the Commonwealth that must take sole responsibility here. Medicare and the PBS are central to our health policy and cannot possibly be devolved to the states. So the only real option is to hand public hospitals and other state health services over to the Commonwealth.

Everyone knows this. The Government floated the idea of a Commonwealth takeover a few months ago, but quickly pulled back. Julia Gillard has talked about Labor doing something , but in very vague terms. Sooner or later, this issue must be tackled.

The other big question is the role of private expenditure on health. Given that government revenue is scarce, it makes sense to encourage private expenditure on health where this can substitute for public expenditure without compromising basic goals like making high-quality affordable health care available to all.

In relation to the PBS, there is a need to send a signal that medicines are costly. The current copayment does this. As far as GP visits are concerned, the benefits in having a free, bulk-billed service available to everybody outweigh the loss of incentive effects on patients and the greater obstacles to rorting by doctors that are generated by caps or copayments

The real question is whether we should subsidise private health insurance, as at present, or focus on direct private purchases of health services. Under the current government, there has been a concerted effort to encourage people to take out private health insurance. Everyone gets a 30 per cent subsidy and high income earners are effectively compelled to insure by the Medicare Levy Surcharge.

By contrast, support for direct expenditure is limited to a 20 per cent rebate on expenditure in excess of $1500.

This policy is misconceived. Private health insurance is essentially a competitor for Medicare, an attempt to achieve public policy goals of redistribution through the principle of community rating (which means that everyone is supposed to pay the same premium, regardless of the health risks they face).

In the long run, community-rated private health insurance cannot succeed unless Medicare fails, or at least becomes a third-class system, so that people are too scared to opt out of private health insurance if they are paying more than their risk status would justify. Until a year or so ago, it seemed reasonable to say that this what the government had in mind, bolstering private health insurance and undercutting Medicare. But with the buckets of money that have been thrown at Medicare recently and the embrace of bulk-billing in particular, there is no longer any coherent policy.

The best option is to phase out the subsidies to community-rated private health insurance. The money saved in this way (several billion dollars per year) could be divided between support for the public system and an expanded general rebate for direct private health expenditures. This would indirectly reduce the costs borne by insurers, since direct expenditures would fall.

Private health insurers would benefit from the end community rating, allowing new entrants to be charged on a risk-rated basis. There are some transitional issues here, which need careful work, but this is the correct path to follow.

If there is one thing that could really open this campaign up, it would be fundamental reform of the health sector. Labor in particular has the chance to make this a winning policy, but it would require a degree of boldness we haven’t seen from them in many years.

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

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

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