Ian McAuley: Public Finance & Australia’s Healthcare System

As a preview to some of the issues that will be discussed in our upcoming 15^th Annual Health Insurance Summit, we spoke with Ian McAuley, Fellow of the Centre for Policy Development and an Adjunct Lecturer in Public Sector Finance at the of University of Canberra about his research on Australia’s health system.

Can you tell me about your work as a researcher?

As an academic my specialization was in public finance. That is mainly about how and why governments spend money and how they raise it, or to put it in standard academic terms, the economics of the public sector.

Many functions in government go on without much fuss. When it comes to election time we don’t hear much about quarantine services, air traffic control services, weather forecasting or even some big ticket items such as defence.

But health care is always of concern to governments and voters, because everyone is involved (even the fit and healthy seek the assurance that they will be looked after in the case of illness or accident), because no matter how much is spent there is always demand for more (there is no objective measure of adequacy), and because when governments do their demographic projections, such as in our regular Intergenerational Reports, they don’t like what they see.

That means any academic involved in public economics spends a disproportionate amount of his or her time on health care.

My other interest stems from my earlier work as an engineer in a factory (we used to have a manufacturing sector in Australia) and then as a public servant in the industry department. In both jobs my main concern was efficiency – as an engineer trying to make sure we had the right machinery, that we made best use of our raw materials, that what we made was reliable – and as a public servant concerned with industry policy, doing the same at a macro level.

As an analyst in the industry department and as a trade commissioner I was highly impressed by the best Australian firms – including the electric motor firm where I had previously worked. But when I looked at health care I saw something out of another era.  In technology health care is highly advanced, and there are a lot of highly-qualified people, working very hard in both the public and private sectors (often overworking). But it is fragmented. Why, I would ask, are hospitals, GPs, and pharmacies separate? Why, in spite of the importance of their work, involving human lives, are standard techniques of quality management not used to their full? Why are their management and communication systems so outdated? Why is this the only significant industry in which technological advances are not revealing themselves in reduced unit cost? Why is the industry supplier-oriented rather than customer-focussed? Although it is admittedly hard to measure productivity in health care, why is there still resistance to the notions of productivity and efficiency?

I still ask myself those questions.

What do you believe are the key issues with our current funding system in terms of healthcare?

I don’t think we have “a funding system” in health care.

Rather we have numerous channels of funding, with no coherent set of principles. Some payments are out-of-pocket, some are covered by public insurance, some are covered by private insurance. Some insurance cover, for example the PBS, is what I call close-ended, in that the consumers’ liability is limited. Much insurance cover – the MBS, and many private health insurance policies – are open-ended, in that the patient is left taking all the risk above a fixed amount, thus completely negating the basic purpose of insurance which is to cover people against high outlays. (In fact I wouldn’t call such policies “insurance” at all – they’re simply a financial supplement to bill-paying.)

It’s strange, for example, that a week in a public hospital, costing perhaps $10 000, is free, while we have co-payments for out-of-hospital pharmaceuticals. There are areas with the moral hazard of free services at the time of delivery (including “no gap” private insurance) while there are areas where prohibitive upfront costs, such as dentistry, put people off getting important care. In any system with a mix of free and paid services, some measure of resource misallocation is inevitable.

There are too many legacy funding arrangements, with principles reflecting political fashion and the government’s fiscal condition that the time they were introduced.

We need a root-and branch reform of funding involving an expert body such as the Productivity Commission, and also involving basic government engagement with the Australian people, who should be asked the basic question “how much should you be expected to pay from your own pockets, and how much should be paid through insurance?”.

Note that that question is not about “private” or “public”. It’s about the division between the operation of normal market forces and the use of insurance as a mechanism to share the burden and to avoid the harsh discipline of the market.  (I am bemused by politicians on the “right” who with one breath sing the praises of markets and self-reliance, and with the next breath suggest we should buy private insurance. They dislike the “nanny state” that shields us from the discipline of market forces, but they don’t mind the “nanny corporation” that does the same thing.)

I emphasize that “insurance”, be it public (Medicare) or private, is on the non-market side of the divide. Just because private insurers are in the private sector doesn’t mean their operation is guided by Adam Smith’s “invisible hand”. There’s no difference in the thinking “Medicare will pay for it” and “BUPA/HCF/Medibank Private will pay for it”.

We need to break from the idea, as entrenched as the geocentric view of the universe once was, that we have a “private” system and a “public” system. In fact we have a funding system which is government, corporate and individual, and a delivery system, which is largely private through clinics, pharmacists, and private hospitals, and part public in public hospitals. But we have constrained ourselves to think that there is a “private” system involving private insurers and private hospitals, and a “public” system  involving Medicare and public hospitals, leading to social segregation.

When it comes to the balance between markets and insurance I don’t know what people would choose if, as I suggest, they are consulted in a calm, non-partisan way, without the shrill voices of rent-seekers or romantic lefties who yearn for central planning.  Perhaps the Australian people might go for a comprehensive free system, or perhaps they might prefer a system with high co-payments on the basis that their taxes would be lower and there would be shorter queues in the system.  I doubt if they would go for the system we have at present where some people, through access to the $11 billion annual budgetary support to private insurance, are subsidised to jump the queue. I don’t think that’s in line with Australians’ basic values.

While I’m fairly sure healthy Australians are comfortable with the idea of supporting those with high needs – after all we never know our own future needs – I am sure many younger people rightly feel hard done by as a result of our various tax and transfer arrangements which favour older people – superannuation concessions, a permissive tax environment for investment properties, higher education fees and so on. The “lifetime health cover” arrangements, whereby on average those aged from 30 to 55 subsidise those who are older, add to that intergenerational distortion. We haven’t yet woken up to the reality that many older people are well-off – on average people in the 55-75 age groups live in houses with half a million dollars in financial assets and very few liabilities.

For that part we choose to pay through insurance we need to ask is there anything – any value-added – that private insurers can do that the Australian Taxation Office and Medicare cannot do as well or better? Private health insurance, particularly when it is (necessarily) highly regulated, is essentially a privatised tax.

You have previously commented that Private health Insurance is high in cost and low in equity. What does this mean?

One aspect of its high cost is its administrative overheads. While about 95 cents of every dollar that passes through the Australian Tax Office and Medicare goes to health care, only about 84 cents of what passes through private insurance is spent on health care.  I’m not suggesting private insurers are greedy or exploitative. Rather, it’s that the business model within which they must operate is intrinsically high cost. They must tout for business, pay a commercial rate of return to shareholders, pay private sector salaries, and so on.

But that’s only part of the cost story. The main problem relates to the moral hazard and weak market power of multiple insurers dealing with comparatively powerful service providers and the moral hazard of patients and doctors seeking cures. There are too many incentives for over-servicing and too few incentives to keep costs under control. As studies of health care financing in high-income developed countries reveal – all countries with good health indicators – the more they rely on private insurance to fund health care, the more does health care cost as a percentage of GDP, without any benefits in outcomes.

Finance ministers often claim that publicly funded insurance schemes like Medicare are unaffordable, particularly when they look at long term projections based on ageing and on people’s expectations of improved treatment. But we should ask “unaffordable to whom?” If, as a result of the government handing over health care funding to a mechanism with higher bureaucratic costs and with less capacity to control usage and prices paid (i.e. multiple private insurers), surely it means health care becomes less affordable.  There is no point in saving the citizen $1.00 in tax if, as a result she has to pay $1.15 or $1.40 in private health insurance.

Is there anything Australia can learn from overseas models, and how can we go about incorporating these lessons into our current system?

First, from the Nordic countries – Sweden and Norway in particular.  There is virtually no private insurance in these countries. In both countries, particularly Sweden, private and public hospitals compete on the same basis for funding from government budget holders.  (I know that for a while last year the Commonwealth was considering something similar for Australia, with funding for public and private hospitals to be on payment of 40 percent of the “efficient price” on a DRG basis.)

The main feature of these countries is that they have co-payments built into their arrangements, and they apply to almost everyone, but they for equity reasons they are capped. They can do that because they pay high social security transfers, while our transfers are more carefully directed, Given the sensitivity of even a small copayment as attempted by the government that may not be possible here – unless there can be some assurance that it will be capped.

But the main point is that all people use the same facilities, public and private, avoiding social segregation. Social segregation of health and education, as Miriam Lyons and I point out in Governomics (Chapter 12), results in the quality of the public providers being run down, as the private providers suck resources away from the public sector. In the Nordic countries there is no notion that the private system is for the well-off, while the public system is for the also rans – a situation that has arisen in Australia because private hospitals have hitched their fortunes to private insurers.

We could easily accommodate one shared delivery system, with private and public hospitals drawing from the same national insurer, competing with one another and providing services to all comers, but with those who are better off subject to copayments.

Second, from the USA. When I was studying there 30 years ago I was horrified by their arrangements. Because health insurance premiums were usually paid by employers most employees were unaware of the cost of insurance, and they were unaware that its high cost meant their wages were lower than they might otherwise be.  Farmers and the self-employed were largely priced out of insurance, which meant that enthusiasm for entrepreneurial startups was diminished. (The absence of a safety net social wage is one reason the US has a low rate of self-employment.) US firms found themselves at a competitive disadvantage compared with firms in countries with national health schemes. And about 15 percent of the population was uninsured.

The irony of America’s scheme is that its government programs, Medicaid and Medicare, while providing poorer service than our Medicare, by now are costing public budgets around 8-10 percent of GDP, comparable to the percentage countries such as Canada, the UK, Norway and Sweden devote to payment for a comprehensive single national insurer. That’s because Medicaid and Medicare are price takers in a market where prices are set in the market dominated by powerful providers and insurers who feel free to pass their costs through to contributors.

Obamacare should attend to at least part of the problem of people being uninsured, but it could see costs go even higher.

The main lesson for Australia is to avoid reliance on private insurance, particularly employer-funded insurance.

Are there any presentations at the Health Insurance Summit that you would like to see and why?

All of the first day’s sessions, which are concerned with funding and policy matters, are of strong interest.

Ian McAuley will be discussing public policy and private health insurance at the 15^th Annual Health Insurance Summit. For more information, including our current agenda, please head to our website.