Will an Albanese government fix the mess in health? Or not?

Some things we know.

We know the whole health system has moved beyond crisis to an apparently permanent state of declining function.

We know it has become much worse over the past decade. Federal funding for health has consistently failed to keep up with rising costs and increasing demand. Five years of freezes to the Medicare rebate have rendered it increasingly irrelevant.

We know that billions of dollars in health costs have been transferred from governments to patients. We know that people in the bottom half of the income ladder now have to choose between going to the doctor or dentist, filling a prescription, paying the rent and eating.

We know the people who work in public hospitals are exhausted, dispirited and sometimes desperate. They cannot do the jobs they signed up for.

We know we are witnessing a collapse. It’s in slow-motion, happening over decades. But it’s still a collapse.

And we know the present federal government will do nothing of significance to improve the system and that, under them, it will continue to worsen.

But will a Labor government be willing – or able – to rebuild this crumbling structure? What will they need to do, how long will it take, and how will it be paid for?

Let’s take the main elements of the nation’s health system, piece by piece.

 

THE MONEY

It’s never all about money – but without enough of it, chaos ensues. These two charts show the realities of the federal government’s downgrading of health as a fiscal priority.

The first shows how much each of the two main government sectors – federal and state – spend as a proportion of tax revenues. It gives us a good idea of how much they could afford to spend if they wanted to. Overall, state governments have kept to the same priorities. The Commonwealth has not.

 

If the federal government was now spending the same proportion of revenue on health that it did a decade ago, federal health funding would be $7 billion a year higher than it is. That’s not enough to fix the system – but it would be a decent start.

Increasingly, the funding gap has fallen on individuals. This is a long-term trend and has happened under both Labor and Liberal governments. Over the decade, health spending by individuals increased by 42%.

 

MEDICARE

Medicare is not a national health service in the British sense. Because of a clause cunningly inserted into the Constitution by Robert Menzies in 1946, this country can never achieve such a comprehensive system. Despite the rhetoric, universal health care is denied to us.

Instead, Medicare was designed as an insurance system, a more efficient and equitable alternative to private insurance. Practitioners could take it or leave it – as the Constitution demands – but it was hoped that the incentives to bulk-bill would open access to health care to everyone who needed it, regardless of income.

In some areas, that worked. Most GP consultations were, and are, bulk-billed. Pathology and diagnostic imaging providers have based their business plans on bulk-billing and have done very well out of it.

Overall, though, if you want a private-practice specialist, you’ll probably have to pay. Nationally, only around 35% of out-of-hospital specialist services are bulk-billed – but the pain isn’t spread evenly. Rates varied widely across the states:

 

 For each out-of-hospital specialist consultation, patients paid an average of $93 on top of the Medicare rebate. Again, it was not spread evenly:

 

Specialist bulk billing rates have risen over the past decade, probably in response to patients’ increasing inability to pay, from 27% in 2010-11 to 34% in 2020-21. But the amount paid by each patient who was not bulk-billed rose steadily:

 

General practice

Although overall bulk-billing rates in general practice remain high – and indeed have increased over the decade.

 

But the raw data hide a more complex reality. Relatively few practices now bulk-bill everyone; most bulk-bill some patients. The people most likely to be bulk-billed are those with concession cards and with chronic illness, but there is no consistency and little or no predictability. Even within the same practice, there can be wide variations between doctors.

 Nevertheless, those patients likely to be bulk-billed go to the doctor, on average, much more often than the general population. This skews the figures. Anyone without a concession card – and that includes almost anyone with a full-time job – will probably have to pay. On average, going to a GP will cost them over $40 for every visit. For families, where more than one member may be ill at once, this quickly mounts up.

 

 

Because the Medicare rebate has fallen so far behind costs, GPs protect their incomes by charging patients. Average out-of-pocket costs have risen 58% in a decade.

 

So even though nominal bulk-billing rates are high, most Australians have to pay to go to the doctor. Those who can afford it, do. Those who can’t may not.

Over the decade, an average of 4% of Australian adults delayed going to a GP, or avoided going altogether, because of cost. That’s 932,000 people every year.

 

CAN MEDICARE BE FIXED?

The short answer is no. There are too many structural and constitutional problems ever to allow Australia to have universal health care. Decades of neglect and under-funding will not be corrected quickly or cheaply. But major improvements are possible within the first year or two of a new government.

So where to start?

Out-of-pocket expenses must be reined in as an absolute priority. In 2020-21, patients paid $800 million out of their own pockets at the GP – and that doesn’t include those who didn’t go because they couldn’t afford the cost. In the context of total Commonwealth annual health spending of almost $100 billion, it’s not a lot of money. That could be relatively easily corrected.

But it will be essential to use any extra money wisely. Doctors have become used to charging their patients, and patients have become used to paying. Simply increasing the rebate without conditions would risk the practices pocketing the extra money but not reducing patient charges by as much, or even at all. Increased rebates must be given only for bulk-billed services. And to make this work, the increase would have to be substantial.

Overall, last year patients paid $6.5 billion out-of-pocket for out-of-hospital services only partly covered by Medicare. That too must be addressed, though it will take longer and will need very intelligent planning and negotiation.

There are many other things wrong with delivery of medical services. Many of these are about the workforce – more people are getting towards retirement, not enough new ones are starting, and demand rises all the time.

But the remedies will take decades. Producing a fully qualified doctor takes ten years and the basic training for a registered nurse is three years. Experience and seniority takes a lot longer.

We urgently need to expand training places and to make these professions more attractive. Too few medical graduates choose general practice, preferring specialties where the money is so much better and the demands, arguably, fewer. Nurses urgently need higher wages. Everyone needs less chaos at work, particularly in public hospitals.

Few of these issues can be fixed in a parliamentary term. But in that time we can move decisively towards making health care accessible to those currently shut out of the system by cost.

 

THE PBS

Increasingly inadequate and inequitable access to medicines is a major element in Australia’s retreat from universal health care.

Each year over the past decade, an average of 7.2% of Australian adults have delayed or avoided filling a prescription because of cost. That’s 1.7 million people annually. Safety-net arrangements, introduced in 2003 by Tony Abbott, then health minister in the Howard government, are clumsy, bureaucratic and ineffective.

Non-concessional patients – basically, that’s almost anyone with a job – must pay $42.50 for every prescription drug covered by the PBS. For concessional patients, it’s $6.80. And for the main PBS list last financial year, co-payments were $1.5 billion, or 14% of total cost.

But of the 50 most-prescribed drugs on the list, only five cost less than the non-concessional co-payment. For anyone without a concession card needing these medicines, the PBS was irrelevant and was not involved. Those top 50 drugs included the most frequently prescribed medications for cholesterol, blood pressure, depression, pain relief, nausea and vomiting, and antibiotics.

So the total out-of-pocket cost for prescription pharmaceuticals is far higher than the $1.5 billion noted in the official statistics.

None of this is necessary. Intelligent reform of the PBS pricing system would save more than enough money to eliminate co-payments altogether.

Twenty years ago, the cost of the PBS was rising by between 10% and 20% a year. At that time, there was legitimate concern about the future of the system – and this was used by the Howard government to increase the existing co-payment by 28% in a single year. And it has gone on rising.

None of this was necessary. Back then, most high-volume drugs were still covered by patents and were therefore expensive. But as these drugs came out of patent, generic manufacturers stepped in and costs plummeted. And new blockbuster drugs – the sort that had sent PBS costs rocketing for decades – did not eventuate. So the PBS, far from becoming unsustainable, is very sustainable indeed.

But Australia still pays too much, both for patented and generic medicines. The PBS pricing mechanism, introduced 30 years ago, sets the price of any new drug on how its cost-effectiveness compares with that of an existing one. This system has saved Australia many billions – but when drugs came out of patent, the PBS went on paying the same high price.

Eventually, the government moved to take some limited advantage of lower generic prices. But the new system (which involves manufacturers having to tell the government what they charge pharmacies) is cumbersome and means we still pay far too much. A Grattan Institute report in 2017 reckoned that the PBS still paid 3.7 times as much for its drugs than the best international prices.

There are two possible approaches: benchmarking, which sets prices according to the best world price; and an annual tender process, which would force manufacturers to compete on price in a way they never have.

We also need much more competition in retail pharmacy. Two industries – pharmacies and newsagencies – have protection from consumer law that exists for no other business. Rigid rules about who can own a pharmacy, and where they can go, eliminates other players. The Chemist Warehouse franchise has got around these restrictions – but it’s the only one.

Overall, patient co-payments can and should be abolished. Co-payments make no more sense for the PBS than for Medicare – and eliminating them would be relatively cheap.

 

HOSPITAL FUNDING

In our complex, federated health system, hospital funding comes from three main sources – the Commonwealth government, state and territory governments, and the non-government sector. Of the three, only the Commonwealth has the money-raising capacity to meet constantly increasing costs and demand.

Although the Commonwealth started taking serious responsibility for public hospitals from 1975, and although free public hospitals were a core element of the original Medibank and Medicare agreements, the states – despite their constrained capacity to raise money – continue to bear most of the cost burden. Over a decade, under both Labor and Liberal administrations, there has been no significant change to that relationship. Nor are public hospitals free: patients pay around $5 billion a year, either directly or through various insurances. We can see what’s happening in this chart.

 

No state government can build substantial hospital infrastructure without borrowing. Some states, such as Victoria, are prepared to do so. Others, like Tasmania and New South Wales, are not. This explains a major part of the differences in capacity and performance between the states.

In 2011-12, the Labor government contributed $881 million towards health infrastructure, almost all of which was spent on public hospitals. This was cut in the Abbott government’s 2014 Budget and has never recovered. In 2019-20, under the Morrison government, it had fallen to $193 million.

But even this has made little practical difference. Almost all the burden falls on the states, which are ill-equipped to bear it.

 

	2011-12	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18	2018-19	2019-20
Fed	4.09%	1.37%	1.00%	1.90%	1.74%	1.25%	2.95%	4.10%	2.42%
State	95.89%	98.63%	99.00%	98.10%	98.23%	98.75%	97.05%	95.90%	97.58%

 The present situation is both inequitable and unsustainable. States like Victoria which borrow to build cannot go on doing so forever. And states which won’t borrow, like Tasmania, condemn their citizens to hospital systems that are incompatible with the needs and expectations of a rich-world liberal democracy like Australia.

When Kevin Rudd became Prime Minister in 2007, he promised to fundamentally reform the health system and to make the Commonwealth the dominant funder of public hospitals. It didn’t happen. This promise eventually shrank to a new system of activity-based funding (ABF) for recurrent expenditure, without fundamentally changing the Commonwealth’s responsibility for hospitals.

Now, the federal contribution is 45% of the National Efficient Price for providing a particular service. And the NEP is, in turn, based on average actual costs. The idea was that it would penalise less-efficient hospitals and encourage them to cut costs, and reward those with the lowest costs.

But there are problems. The first is that 45% of the NEP is nowhere near enough. In 2019-20, the states still provided 56.5% of recurrent hospital funding, against 43.5% for the Commonwealth. Raising that to 50-50 would have cost the federal budget just over $4 billion. Raising it to 60% – in line with Kevin Rudd’s promise of 15 years ago – would have cost $10.1 billion. If that was provided, it would begin to make a real difference. Anything less would not.

 

THE UPSHOT

For at least the past 80 years – ever since the Curtin government tried to introduce a national health service – health has been a fundamental issue for Labor, and its strongest electoral advantage. But it has a habit of promising big and delivering small.

Yes, they gave us Medicare. But the health system is far more than that single program – and Medicare isn’t working as promised either. It never has.

So what can we reasonably expect a new Labor government to actually achieve – given that there are so many other demands on the budget. Think about cost of living, climate change, defence, education, child care, aged care …

We can reasonably expect some improvement in the Medicare rebates, and perhaps a move away from out-of-pocket costs, particularly at the GP.

Similarly, there may be some relief from the PBS co-payments which, as we have seen, aren’t really needed any more.

We can expect funding of state public hospitals to increase from 45% of the National Efficient Price to the 50% that was promised by Julia Gillard over a decade ago. And a reinstatement of some limited assistance for hospital infrastructure would be affordable and electorally popular.

All of those things can be done within the first term of government, and even within the first year. They aren’t that hard or that expensive.

But the system needs more than that. We really do need the Commonwealth to become the dominant funder of health and of hospitals. We need a Labor government to keep the promise Kevin Rudd made way back then.

And we need major changes to the way the system runs – to wages, employment conditions, training, governance.

There’s always a note at the bottom of ads spruiking investment products: past performance is not indicative of future results. With the past littered with so many broken promises, let’s just hope so.