Pearls and Irritations

Ian McAuley

  • Ian McAuley. Ignored Budget issues.

    ​Lobby groups and community organizations have provided their take on the Budget – some with a “what’s in it for me” approach, others with a more analytical line.  My contribution from the stands is to draw attention to a few aspects which aren’t getting a great deal of attention.

    1.  Pension indexation.

    I’m surprised that this hasn’t been the subject to outrage. Perhaps people don’t appreciate the difference between indexation to average earnings and indexation to consumer prices.

    As a rule of thumb, earnings rise about one percent faster than inflation. That’s why, over the last 50 years, our material living standards have more than doubled.

    Currently the two person age pension is held to around 42 per cent of average male earnings. If real earnings continue to grow as they have in the past, while pensions are held to CPI, in 30 years time the age pension will be only around 30 per cent of earnings. Someone now 40, contemplating retiring at age 67, and who holds only a small superannuation balance, has suddenly been told his or her retirement living standards will fall by almost a third from what was expected.

    The notion that relative standards don’t matter is bunkum. Social inclusion is about not being left behind.  If you’re old enough, or if you know someone who can recall the 1950s, ask yourself how you would enjoy what in the 1950s was a reasonable standard of living.

    2. Inequality.

    As so many are pointing out, this budget entrenches and extends inequality. Besides the moral aspect of inequality there is a problem well-understood by hard-nosed economists.

    In a few words, if people do not see that the rewards from economic activity are being shared fairly, they will reject the economic system. That rejection won’t be a 1917 revolution – we live in a democracy and people have to be driven to starvation levels before they storm the Winter Palace or the mansions of Mosman.  But the reaction won’t be a move to sensible public policy either, particularly when we have a Labor Party lacking an economic vision and  a Green Party which just cannot understand the needs of anyone living more than a train stop away from the CBD. The reaction will be a move to populist policies – protectionist, anti-enterprise, anti structural change (ironically leading to economic stagnation and therefore worsening inequality).

    3.  Wages.

    The government is determined to get more people into the labour force. Hockey says it’s about getting people into work, but it’s really about getting people into the labour force.  There’s a difference between being in the labour force and having a job – just ask someone who’s unemployed. This policy is on three fronts – making it much harder for young people and people with disabilities to get government benefits, restricting  family tax benefit  B (thereby encouraging women to re-enter the labour force), and incentives (carrots and sticks) for older people to stay in the labour force.

    Unless there is a corresponding demand for labour, the inevitable consequence of an increase in labour supply is a compression of wages.

    If that support for participation were accompanied by investment in skills and education, it would provide a sound path to future prosperity, because while there are few jobs for the unskilled, there is an economy-wide shortage of skilled labour, and as our receipts from coal and iron ore fall away, we will need to rely more on our human capital as a source of competitive strength. But the budget measures, in increasing the burden on young people seeking either trades or university qualifications, and its foreshadowed cuts to school funding, go in the opposite direction. The only compelling explanation for this policy combination is that it is a response to those businesses which see their interests in terms of suppressing wages rather than in innovating and improving productivity.

    4. Foreign aid

    By cutting foreign aid we’re reducing flows to poor foreigners, but in abolishing the mining tax we’re being generous to rich foreigners.

    5. Bulk billing

    The $7 medical co-payment isn’t just about $7. It’s also about removing any incentive for medical practitioners to use direct billing (disparagingly called “bulk billing”).  The attraction of direct billing is that it removes the cost of handling and accounting for cash transactions.  Even a dollar co-payment removes that attraction.

     

  • Ian McAuley. Pay for a GP visit.

    The Commission of Audit’s proposal to charge a $5 or $6 fee for “bulk-billed” GP services has little to commend it. But that doesn’t justify knee-jerk outrage from medical and consumer groups, or from the Labor Opposition, for there is no reason why Medicare should not incorporate fixed and limited co-payments.

    As it stands the proposal is poor public policy. It bears resemblance to the ideas in a discussion paper prepared by the Australian Centre for Health Research in October, proposing a $6 charge in order to bring price discipline into service use, but which contradicted itself by suggesting those co-payments could be funded through private health insurance (PHI).

    There is no explanation of principles, no system-wide view, and no consideration of the costs of handling 140 million small transactions each year.

    It’s simply a proposal to save $750 million in Commonwealth outlays over four years. Why four years? Because that’s the “forward estimates” period. Why Medicare services and not all health expenditure? Because that’s the budgetary line item. Why only fiscal outlays and not total health care costs? Because fiscal considerations have taken over from economic considerations, and if the cost falls on state governments through a move to outpatient services, that’s none of the Commonwealth’s responsibility. We have a fiscal system, not a health care system, and a political imperative around the budget bottom line.

    If we had a completely free health care system, the indignation of lobby groups and the Opposition would be understandable, because it would indeed be a wedge into our system.  But we already pay 19 percent of our health care outlays from our own pockets (about the OECD average of 20 percent).  We may have the luck to find a “bulk billing” GP, but if we have to fill a pharmaceutical prescription scrip we have to pay up to $36.10, or $5.90 if we hold a concession card, and if the suggested medication is not on the Pharmaceutical Benefits Scheme, it’s whatever the pharmacist charges. If we cannot find a bulk-billing GP (only 81 percent of GP services are bulk-billed, and they would be disproportionately for card holders), then we are paying on average $29 from our own pockets.

    We don’t know the rationale behind the proposal – this Government is not given to policy openness – but it’s probably driven by the tremendous growth in use of medical services over the years. In 1984-85 we used about 7 Medicare services per head, in 2002-03 we used 11, and in 2012-13 we used 15. Ageing explains some of this, but there has been growth in utilization across all age groups. While half the population uses 7 or fewer services a year, 10 percent of the population uses 31 or more services – more than one a fortnight – accounting for 44 percent of services.  (These figures relate to 2007-08, so they would understate the skew to heavy users. The Department no longer publishes this data.)

    Penny Wong portrayed the proposal as a disaster of Thatcheresque proportions, claiming that a $6 fee would be a barrier to access, ignoring the barriers imposed by long waits at bulk-bill clinics (many people would be spending more than $6 in parking fees), and the closed books at GP surgeries whose capacity has been absorbed by heavy users.

    Oppositions criticize – that’s their job. But they shouldn’t close off avenues for possible reform.  An opposition with a little nous could complain about the process issues mentioned above.  “Yes, we have a problem, and we need some rationalization of co-payments, but this is an inept and counterproductive way to go about it ……”.

    The political reaction is similar to what happened in 1991, when the Hawke Government proposed fixed co-payments.  The squeals from groups supposedly on the “left” forced the Government to a hasty retreat.  “Medicare” became implanted in the political and public mind as a “free” primary care service.  (Earlier, in 1987, the Coalition had abandoned their plans for people to spend $250 before receiving Medicare support, because of similar protests.)  In 1991 the most common protest was that Medicare would become a “safety net” rather than a universal free service.

    The gaping flaw in that protest is that we have never had a universal free health care service.

    In those campaigns of last century the “left” exhausted its political energy defending free Medicare services.  But what has developed, a resurgence of private health insurance (PHI), is far worse by any reasonable criteria of equity or allocative efficiency.  As for the protests about a safety net, a safety net would be far better than our inconsistent arrangements which leave people, particularly those with chronic illnesses, bearing open-ended liability for uncapped expenses.

    There are three ways to fund health care – direct consumer payments, a single national insurer, and competing private insurers. Two of these mechanisms, one a market mechanism, one a countervailing power mechanism, can keep health care costs in check and assure there is universal access to affordable services. The third mechanism, private health insurance, fails to achieve these outcomes and leads to price inflation and inequity. Its elimination should be the focus of consumer and Opposition energies.

    Why should any consumer group or a party aspiring to government rule out one of the two mechanisms that actually have a chance of working?

    Ian McAuley is a researcher and teacher in the fields of public sector management and public policy.

    For other posts on this subject, see ‘health’ category on right side of home page.

     

  • Ian McAuley- Picketty and the gap between rich and poor. Inequality of wealth is the problem rather than the inequality of income.

    The Observer/Guardian carried a recent story/review about Thomas Picketty’s address to the Institute of New Economic Thinking in Toronto. The story was headed “Capitalism simply isn’t working and here are the reasons why” The story draws also  on a recently published book by the French economist Picketty  “Capital in the 21st Century” The newspaper story  asserted “You have to go back to the 1970’s and Milton Friedman for a single economist to have such an impact (as Picketty)”

    The Financial Times labelled Picketty a “rock star economist”. Paul Krugman in the New York Review of Books described Picketty’s book as “awesome” and that it was transforming economic discourse. “We will never talk about wealth and inequality the same way we used to” he said.

    In this blog Ian McAuley outlines Picketty’s thesis that an apparent small gap between the return on capital and the rate of growth can in the long run have powerful and destabilising effects on the structure and dynamics of social inequality.   John Menadue

    Like Marx, Picketty recognizes the consequences of an excessive concentration of wealth – loss of markets, eventual diminution of profit, and social conflict leading to revolution.  His prescriptions, however, for a progressive tax on wealth, are within the field of orthodox capitalist economics.

    He presents convincing evidence that the compression in incomes in the mid-20th century was a unique event. The natural tendency of market capitalism is for concentration of wealth, particularly when there is low economic growth and a high return on capital.  (High growth reduces the relative power of established wealth.)  A tax on wealth has immediate and minor redistributive benefits, but that’s not its purpose, which is to dampen the positive feedback loop of concentration of capital, because a tax on capital reduces its effective return and therefore weakens the positive (self-reinforcing) feedback of an exponential concentration of wealth.

    Picketty puts the unique compression in the mid-20th century down to the events of 1914 to 1950 – an intermittent but destructive war, a depression, and post-war inflation, which combined to wipe out a lot of physical and financial wealth in both the victorious and defeated countries.  The expanding inequalities we are now seeing is simply a return to the natural dynamics of market capitalism.

    His fundamental thesis, I think, does a lot to explain Australia’s history.  We hardly get a mention, but he does point out how the rapid economic growth of the New World (mainly the USA in his examples) made for egalitarianism.  I would like to see his thought on why the same high growth did not make for egalitarianism in Argentina in 100 years ago, or in the Middle East 40 years ago.

    While I find his analysis convincing, I think he attributes too much to war, depression and inflation wiping out wealth as the sole causes of the compression of incomes.  I had the good fortune to be at Harvard when the last of Roosevelt’s liberals were still around – Ray Vernon, Tom Schelling, and JK Galbraith – and they saw the post-war liberalism as a result of deliberate policy, played out domestically in the New Deal and internationally in the Bretton Woods arrangements.  Another strong view, certainly influential to the Hawke and Keating Governments, was that the post-war rise of Germany and Japan, while helped by US anti-Soviet policy, was also helped by the war’s destruction of “distributive coalitions” – groups of rent-seekers blocking economic modernization.

    Picketty is dismissive of human capital theory.  He doesn’t deny its existence (as Marx and Ricardo did), but he thinks its role is overstated.  While he celebrates mass education, he does point out that it has not done much to help distribution – we have simply all moved up a notch or two, and there is something of an arms race at the top.  But he does present strong evidence that high university fees (particularly in the USA) work against intergenerational mobility.

    I find his single prescription somewhat limiting. War, depression and inflation do wipe out wealth, but so too do other disruptions re-allocate wealth.  Galbraith, for example, saw the Australian gold rush as a great social re-distributor (not a leveller, however). New technologies do the same.  In this regard I find the policies of the current Australian Government, in opposing the disruptive technologies of the NBN and renewable energy, as an attempt to freeze an industrial structure to preserve and strengthen the privileges of existing wealth-holders.  Also their policies on superannuation and tax are highly regressive at the top end, and we have a migration program which gives almost free entry to anyone with enough money, regardless of the means by which it was accumulated.  Whether this policy is crony capitalism or a misguided application of Reagan’s “supply-side” economics, the consequences are the same – there is a concentration of wealth and an erosion of meritocracy.

    Picketty’s greatest contribution is in looking beyond income distribution as an indicator of inequality.  (I, for one, have been very critical of the Australian “left” for its narrow focus on income while overlooking wealth.) He looks at the sources of income, and distinguishes between income from labour (which can go up to very high levels of course) and income from wealth.  On the way through he looks at the salaries of “supermanagers”, and points out (as many other researchers do) that their salaries have nothing to do with contribution and that they essentially set their own salaries in a self-referential process.

    But his greatest concern is with the top one percent with incomes greater than $350,000 and whose income comes from wealth.  It is at this level, particularly in the USA, where the bulk of inequality arises – they are taking a huge proportion of the proceeds of economic growth, and damaging any sense of legitimacy in the economic system.  In fact, he points out, the very rich enjoy a certain economy of scale – their return on investment is much higher than is available to lesser mortals with only five or six figure amounts to invest.  Hence their positive feedback cycle is strengthened.  He also points out that the moderately well-off, “petite rentiers”, do very well, while a large proportion of the population has no wealth or negligible wealth.  We, the petite rentiers, should pay more tax – in fact redistribution from the top 20 percentile will be more effective in terms of immediate redistribution than simply taxing the very rich – but it’s hard to convince us when we see the very rich getting off so lightly.

    His main concern is with the very rich, who are on the way to establish an economic and social order, an oligarchy with inherited privilege, similar to that which existed in Europe in the early nineteenth century – an order which Marx correctly saw as unsustainable.  He does not speculate much on our political reaction – perhaps, rather than a revolution, it will be a retreat to protectionism and dirigiste politics.

    Reading his book I have come to ask, in relation to the 2008 crisis, “what would Keating have done?”  Keating, the fellow who talked about the recession “we had to have”.  Perhaps we have been too generous with counter-cyclical levers, thereby accumulating moral hazard in economic systems, while spending a lot of our fiscal ammunition.  To reconstruct a right wing metaphor, a hurricane damages all boats, but the damage to a 4 meter tinnie is easier to rectify than the damage to a 30 meter cabin cruiser.  Can we achieve a destructive re-distribution without the sort of damage that occurred in the 1930s?  My view, taken in part from my time working for the Hawke-Keating Government, and in part from the teaching of Ron Heifetz, is that a task of government is to manage disruption – to steer a policy path between complacency where rent-seekers throttle economic progress as seems likely under Abbott and distress, where the pace of change leads to backlash as occurred under Whitlam..

    It’s a rich work of 700 pages.  If you do buy or borrow it, I suggest you read the first two chapters and the four chapters in part 4.   But be patient. The book is sold out almost everywhere.

     

     

     

  • Ian McAuley. Inequality in Australia.

    A Financial Review article on March 24 claimed “Inequality in Australia has not deteriorated over the last 25 years, according to Reserve Bank of Australia research that undermines claims the gap between rich and poor has worsened”

    The essence of the argument is that while, between 1993-94 and 2009-10, the distribution of income has become more unequal, we have all increased our consumption – what we spend on food, transport, housing health care, recreation etc – by the same amount. Therefore we aren’t becoming more unequal.

    The argument is superficially credible, but it’s a sloppy piece of journalism.

    For a start, the relevant Reserve Bank article, “The Distribution of Household Spending in Australia” in the latest Bulletin, is a carefully qualified study, and in relation to the change in consumption over the 16 years (not 25 years) to 2009-10 it concludes:

    “The top 10 per cent of spenders have experienced slightly faster growth in real consumption than other households over recent decades, though the difference in growth is less pronounced than in the case of income.”

    That is, even when consumption is used as a measure of wellbeing, there has been a rise in inequality. That is easily confirmed by comparing the 1993-94 and 2009-10 ABS Household Expenditure Surveys, which shows, in real (CPI-adjusted) terms, that the highest income fifth of households increased their consumption by 41 per cent, the middle fifth increased theirs by 32 percent, and the lowest fifth by only 19 per cent.

    Second, as the RBA article points out, “consumption is not a complete measure of wellbeing”. One reason is that household expenditure statistics cover only what we spend from our own pockets, and do not include our enjoyment of publicly-provided services such as health care and education. If we spend more on these services because we believe, rightly or wrongly, that the quality or scope of publicly-provided services has deteriorated, then we can hardly be said to be better-off.

    For example, between 1994 and 2010, the proportion of Australians with private health insurance rose from  36 per cent to 45 per cent, and between 1996 and 2010 the proportion of students in non-government schools increased from 29 per cent to 34 per cent. Household expenditure data shows that for the households in the middle income band 14 percent of their increase in expenditure was for education and health care, but for the highest income households health and education took only 11 per cent of their increased expenditure. The well-off already had private health insurance and children in private schools.

    Third, while most economists agree that over the long term consumption is a reasonably good measure of material wellbeing, the compelling reality is that it has to be financed. Therefore if consumption and spending diverge for a period, it must be financed by borrowing or running down saving.

    Robert Reich and other American economists point out that in the USA, while real incomes for all but the rich have stagnated or fallen for many years, people have maintained or improved their living standards by going further into debt. Australia’s situation is  similar but a little more complex. Around 2002 we stopped running down our savings and started saving again.  Our officially-measured savings rates in 1994 and 2010 were much the same, at around 10 percent of income. But those figures do not show the increasing tendency over that period to draw on increasing equity in our houses through financial innovations such as mortgage re-draw facilities. Our house price boom allowed us to use our houses as ATMs, a phenomenon eloquently described by a young man caught by a roving microphone on the evening of Howard’s 2004 election victory, who said.  “Of course I voted for Johnny Howard. When he was elected my house was worth only $200 000; it’s now worth $500 000.  Why wouldn’t I vote for someone who’s made me $300 000 richer?”

    That debt, financed by illusory wealth, eventually catches up with us. Indeed, in recent years (since 2009-10) it has been manifest in widespread complaints about the cost-of-living.  Work by Tim Soutphommasane of Per-Capita and research I have done for The Centre for Policy Development shows that although incomes have been rising faster than prices, Australians generally believe it is getting harder to make ends meet.  The most compelling explanation for this apparently contradictory finding is that we are at last finding that we have been living beyond our means.

     

  • Ian McAuley, Jennifer Doggett and John Menadue. The case for government funding of healthcare.

    In our joint submission to the Senate Inquiry into the Abbott Government’s Commission of Audit, we drew attention to the fact that by international comparison, Australia is a low-taxed country. Furthermore, the trend in Commonwealth expenditures has been downwards since the mid-1980s. Our full submission can be found on my website (click above).

    In that submission we made the case for government funding of healthcare as a superior option. Extracts from this submission on healthcare follow.

    The flaw in the “unaffordable” argument (made by the Abbott Government in respect of health care) is that even if the government withdraws from funding, we still have to pay for health care, and all the evidence from other countries’ experience shows that if the government abandons responsibility for funding health care, we will end up spending a greater amount for the same or a lower quality of care.

    In all probability Australians want to share the bulk of our health costs with one another. Across all OECD countries people pay only about 20 percent of health costs from their own pockets – that is through payments at time of service delivery and in amounts not covered by insurance. In Australia, at 19 percent, we are just below that average. In developed countries most health care costs are paid through insurance – either a government insurer or competing private insurers.

    Even if, as is likely, we accept a need to pay more from our own pockets, we will continue to seek insurance cover for large outlays. We may be willing to take our chances in many aspects of life, but when it comes to health care we have little to guide us about our future needs.

    Policies which shift funding responsibility from government programs, such as Australia’s Medicare, on to private health insurance (PHI) have a short-term attraction to a government concerned with containing fiscal outlays. But even the best designed policies to entice or force people into PHI are costly and inequitable.

    For a start PHI involves high administrative costs. In Australia only 84 cents in every dollar paid to PHI is returned in terms of payment for services. The rest goes to administrative costs and corporate profits. By contrast, Medicare has administrative costs of about 5 percent, and another 1 percent in Tax Office collection costs. That means that Medicare returns 94 cents in the dollar as health services – a ten cent difference in comparison with PHI.35 The USA, highly dependent on PHI, provides the standout example of administrative overheads. Only 69 cents in every dollar Americans spend on health care comes back in terms of services.36

    Second, and more important, when there are competing private health insurers they have little ability to control the prices demanded by service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals will simply choose to do business with another insurer. The insurers have about the same power in the market as consumers do when they are dealing with powerful oligopolies such as banks. By contrast a single national insurer, usually a government agency, has the market power to put some discipline into prices and utilization.

    Evidence from international experience bears out these points. When countries rely on PHI to fund health care they pay more for it, without necessarily getting any better health outcomes. To quote at length from the OECD:

    Private health insurance markets have resulted in increased overall health costs in several OECD countries. First, by bringing more financial resources into the health care system, it raises total health expenditure. Second, cost-control measures – such as global budgets, price regulation and capacity controls – have been applied to the public sector in virtually all OECD countries. Conversely, the private financing sector in virtually all OECD countries, except the Netherlands, has not been subject to such centralised, governmental cost controls. This has resulted in less tight control over activities and prices in the private sector. Third, private insurers in most OECD countries do not have the same bargaining powers over the price and quantity of care provided to insurees as public systems do, although within concentrated PHI markets insurers can exert stronger pressure, as in the case of Ireland. Payment options such as global budgets that have helped public systems to contain costs in several countries are hard for private insurers to negotiate – or may not be options at all. PHI carriers have generally exerted little leverage over costs – as they might if they engaged in more selective contracting.

    In the United States, private insurance has been less effective than the public Medicare programme in controlling costs. Growth in per enrolee payments for a comparable set of services in private health insurance outweighed Medicare over the period 1970-2000, reflecting the higher payment rates to providers paid by private insurers. While “managed care” delivered some cost control in the 1990s, PHI premiums have resumed double-digit growth since 2001.

    Cost control is also more problematic to achieve in systems with multiple competing payers, including most PHI markets. Not only their purchasing position relative to providers is weaker, but also shifting cost onto other purchasers, whether public systems or other private insurers, is a more attractive strategy for insurers than restraining cost.

    PHI also risks increasing public expenditure on health. This is because, while PHI may serve as an independent source of health funding, its effects are rarely entirely disconnected from the publicly funded system.

    Subsidies to private health cover, as in Ireland, Australia and the United States, increase public sector expenditure and have an opportunity cost, sometimes increasing overall utilisation levels as well. Even in the absence of direct or indirect subsidies, PHI has given rise to higher public cost in several countries with a significant PHI market because of the way it interacts with the public system.37

    This is borne out empirically by data from the OECD….. The message is clear: the more governments rely on PHI to fund health care the more is the total cost of health care….

    As with administrative costs, the stand-out case is the USA, where health care costs are now almost 18 percent of GDP. (Even when the USA is excluded there is a positive relationship, and it is too big to be considered a statistical aberration.) As a consequence of America’s longstanding dependence on PHI – a dependence which could intensify with Obamacare – its government programs, Medicare and Medicaid, now cost around 8.5 percent of GDP. This is more than the governments of Sweden, Norway and Iceland pay for their comprehensive public insurance programs, and more than the governments of UK and Canada pay for their near-universal public programs.

    In an attempt to avoid universal public funding, the USA has developed a system which now incurs higher fiscal costs than they would have incurred had they pursued a single insurer option. That is because the government Medicare and Medicaid programs have become passive price-takers in a market where prices are set by powerful service providers. Even here in Australia, because of the generous way we subsidize PHI, those subsidies are costing more than they are saving government outlays. Reducing subsidies for PHI would result in some reduction in membership and therefore more government expenditure on health care, but there would be significant net public savings.38 The Grattan Institute, for example, estimates that even with offsetting compensation to public hospitals removing the PHI rebate could save public budgets $3.5 billion a year.39 …

    Simply ending subsidies for PHI is only part of necessary funding reform. The whole way health care is funded needs to be reviewed – a task well beyond a body such as the Commission of Audit. As a case in point, there needs to be rationalization of co-payments, so that they can serve to bring the benefits of market discipline into health care, rather than encouraging patients to seek “free” services to avoid co-payments. Our present division between “free” services, covered by Medicare or PHI, and paid service, is haphazard.40 Examples abound: public hospitals are “free” while pharmaceuticals incur co-payments; it can be cheaper for a consumer to leave tooth decay until it needs treatment in hospital than to seek paid preventative dental care early on; PHI and Medicare often cap the number of paid services in areas such as physiotherapy, leaving the patient with open-ended risk. Besides savings from scrapping the PHI rebate, the Grattan Institute estimates there are additional savings of around $6 billion a year to be found without comprising the quality of care.41

    The national insurer, of course, needs to use its purchasing power to contain costs. In this regard the Commonwealth, once highly effective in negotiating low pharmaceutical prices, as a result of a series of concessions to pharmaceutical firms is now paying more than many other countries for pharmaceuticals. Government purchasing and price negotiation are areas with potential savings.

    Replacing PHI with a strong, single national insurer removes incentives for over-servicing and over-pricing, but there are savings in private and public costs if there is less need for health care in the first place, through investing in preventive services.42 Preventive health measures, such as anti-smoking initiatives, deliver high returns, in terms of long-term health outcomes. However, Australia currently allocates less than two percent of the total health budget to preventive health.43 Investing in early childhood health and education is also a proven and cost-effective strategy to prevent the development of a range of lifelong social and health problems, but Australia also falls short in this area:  almost one-quarter of children are developmentally vulnerable at school entry with Aboriginal and Torres Strait Islander children and children in socioeconomic disadvantaged areas most likely to fare worse across a broad range of health and social indicators.44 Failure to fund preventive, public health and early childhood programs adequately represents a wasted opportunity to direct resources to achieve maximum benefit. These are functions which, if abandoned by government, will not be performed by the private sector.

    (Our basic case is that by shifting health expenditures from the public to the private sector will cost more. It will increase total costs)

     


    35.          Figures taken from John Menadue and Ian McAuley Private Health Insurance: High in cost and low in equity. Centre for Policy Development 2012.

    36.          Henry Minzberg “Managing the myths of health care” World Hospitals and Health Services Vol 48 # 3, 2012.

    37.          Francesca Colombo and Nicole Tapay “Private health insurance in OECD countries: the benefits and costs for Individuals and health systems” OECD Health Working Papers No. 15, 2006.

    38.          Terence Cheng Does reducing rebates for private health insurance generate cost savings  Institute of Applied Economic and Social Research, The University of Melbourne, July 2013.

    39.          John Daley Balancing Budgets: Tough choices we need Grattan Institute 2013.

    40.          See, for example Jennifer Doggett “Out of Pocket: rethinking health copayments” Centre for Policy Development Occasional Paper 2009.

    41.          John Daley, Grattan Institute op. cit.

    42.          World Health Organisation. Key components of a well-functioning health system. May 2010.

    43.          Australian Institute of Health and Welfare Health Expenditure Australia 2011-2012.

    44.          Australian Institute of Health and Welfare A picture of Australia’s Children 2012.

  • Ian McAuley. Cutting waste and costs in health.

    There are three areas of saving to be made in health care – real savings rather than movement of costs from public budgets to consumers.

    There can be savings in technical efficiency — savings any engineer or cost-conscious manager seeks in a workplace. A strong example is making better use of information technology.

    There can be savings in purchasing.  Australia used to negotiate some of the world’s lowest pharmaceutical prices.  We now pay high prices.

    My concern is the third area – improvements in allocative efficiency.  That is, ensuring scarce resources are allocated where they will result in greatest benefit.

    The priority should be to remove private health insurance as a source of funding.  Administratively, it does at high cost what the Australian Tax Office and Medicare do much better.

    Its big costs are in terms of allocative inefficiency, for it simply re-shuffles queues, allocating resources to those with subsidized insurance, pushing others to the back of the line.

    Getting rid of private health insurance would save around $1.5 billion a year in administrative costs alone. The Grattan Institute estimates net savings of $3.5 billion a year.

    Other savings in allocative efficiency can be found in making better use of nurses, more careful prescribing of pharmaceuticals, and rationalization of co-payments so that people are not directed to “free” services in preference to more effective and lower-cost services involving upfront fees.  And, of course, there are big savings in all-of-government initiatives to encourage good health.

    Ian McAuley is a teacher and researcher in the fields of  public sector management and public policy.

  • Repost: Health care and the budget deficit in the US. Joint blog John Menadue and Ian McAuley

    Repost for holiday reading.

    The political obstacles to these two major problems for President Obama are real and confusing. But the arithmetic is quite clear.

    If the US had a health service like those in countries without heavy reliance on private insurance, such as Australia, it could solve its budget deficit problem.

    Let us explain the arithmetic. US health care expenditure is already 18% of GDP – and on present trends will reach over 20% of GDP by 2020.  It is by far the highest in the world: most developed countries contain their health care expenditure at around 10% of GDP.  (Australia’s health care expenditure is 9% of GDP, of which about 6% is spent by our governments.)

    Of that 18% of GDP in the US, half is spent by government, while almost all of the other half is through private insurance. In rough figures, the USA is now committing as much public expenditure on health care as those countries – UK and the Nordic countries – which for the same public expenditure have comprehensive government-funded single payer systems and with only a marginal role for private insurance.

    The contrast between the experience of America and those countries with single government payers demonstrates clearly how private health insurance causes health care costs to run out of control, and eventually forces up public expenditure as the government is forced to pay prices set in a distorted market where private insurers pass through costs set by powerful providers, called by some the “health care complex” – a reference to the similarly insatiable “military-industrial complex”.

    Imagine if Obama, who has often referred to the “public option”, could convince Congress to put good fiscal management and the provision of affordable health care ahead of the interests of private health insurers and health care corporations.

    The government could simply take over all health insurance and use its strong purchasing power to control prices and usage, as in those countries with single payer systems. That would bring the total cost of health care down 9% of GDP, in line with those countries, and would cost no more in public expenditure.

    The other 9%, presently passing through private health insurance, would be collected as public revenue – in other words a tax increase. Americans would be trading health insurance outlays for a tax increase. They would be substituting an official tax for what is essentially a privatized tax, for most Americans, who are fortunate enough to have good jobs, have little personal choice about health insurance, that choice being made by their employers who essentially deduct it from their pay just as they deduct official tax payments to the Internal Revenue Service.

    With another 9% of GDP in taxation revenue there would be a turnaround in the federal budget, which is presently running a deficit of 7% of GDP. The 2% surplus could be directed to paying down debt or investing in much-needed public investment.

    Are there flaws in our argument?  We have ignored the political hurdles, the difficulty of rolling back entrenched corporate privilege, and the irrational way in which people have become blind to the cost of private health insurance, which trades on the notion that because it is “private” it has some intrinsic virtue.

    It’s a lesson for those in Australia who naively believe that shifting health care expenditure off-budget will save public expenditure.  Beware any in Australia who suggest we go down the route of expanded private health insurance. In the short term there may be some budgetary savings and possibly some tax reductions, but those tax reductions would be more than cancelled by health insurance premiums – we would be paying “taxes” to Bupa, Medibank Private and the other private insurers. In the long term, as is happening in the USA, even public expenditures would rise – we would be paying more taxes to the ATO and to the private insurers. The US disaster in health care is a warning of what not to do.

    John Menadue and guest blogger, Ian McAuley.