Abbott needs to revisit ‘sustainable’ health spending

Medical politics

By Jane Hall and Kees Van Gool

3 Mar 2015

The Abbott government “reset” provides a valuable opportunity to reconsider health policies based on the idea that Australia’s health system is unsustainable. But first it will need to embrace a new understanding of what a sustainable health-care sector actually is.

The idea of sustainability has spread from ecology to apply to most aspects of human endeavour. In the context of health care, it can mean many things. The English National Health Service (NHS), for instance, launched a strategy for a sustainable health system in 2014 with emphasis on reducing environmental damage and promoting healthy lifestyles.

But discussions about Medicare’s sustainability under the Abbott government have only concerned how much we spend on the health sector.

Understanding sustainability

One way to think about sustainability is to examine the amount of resources devoted to the sector under consideration and compare it with the nation’s overall capacity to pay. A commonly used measure is expenditure as a percentage of gross domestic product (GDP), or total economic activity.

Latest OECD data shows the health sector accounts for 9.1% of Australia’s economic activity. That’s below the OECD average of 9.3%, as well as being lower than other countries. The United States, for instance, devotes 16.9% of the national income to health.

Over time, this percentage has steadily increased in all countries. But between 2000 and 2011, the growth rate was substantially smaller in Australia when compared to average OECD growth.

In fact, the most recent local figures show health spending growth has actually slowed to the lowest rate recorded since the mid-1980s. As previously argued on this site, there’s no real evidence that the Australian economy is unable to accommodate likely growth in health spending.

Sustainability could also be seen through a more narrow government perspective, by taking expenditure and total tax revenue into account. In 2012, 25.9% of tax revenue was devoted to health care, whereas in 2002 this figure was only 20%.

At first glance, these figures present some cause for concern, particularly if this percentage is expected to continue rising. But government revenue is strongly linked to economic activity and there was considerable volatility around 2008 because of the global financial crisis. Tax collection plummeted and, as a result, health expenditure as a percentage of tax revenue peaked at 27.4% in 2009. As revenues picked up, this percentage declined.

An even narrower view of sustainability is to look at health expenditure as a percentage of revenue for different levels of government. The various inter-generational reports, for example, focus heavily on the federal government’s contribution to health spending. Abbott government policies about price signals appear to have adopted this narrow perspective.

Policies announced in the 2014 budget have attempted to shift health-care expenditure away from the Australian government’s ledger and onto patients and state governments. These policies include the impending $5 rebate cut for GP visits, for instance, as well as cuts to hospital funding.

But recent experience shows state and territory governments are coming under considerably more strain than the federal government. In 2012, 27% of state, territory and local government tax revenues were devoted to health (up from 17% in 2002), whereas the federal government contributed 25% of its tax revenue to health (up from 21.6% in 2002).

The right kind of sustainable

There are two sides to the sustainability coin.

The first is the tax revenue side. While governments cannot be held responsible for external factors such as the end of the mining boom, they do determine tax policy and have the power to compel tax payment.

The 2014 budget introduced a (temporary) 2% tax rise on incomes over $180,000, while the Howard government made a series of tax cuts during the resources boom. So, a great deal of the revenue side is clearly the direct result of government policy.

The second side of the coin is expenditure. Here, the Abbott government has proposed very blunt policy instruments that do not guarantee a fall in expenditure. Patients may respond to the co-payment for GP visits by seeking care elsewhere – for instance, the emergency department.

And providers may increase referrals to protect incomes, by inviting more patients to come back for repeat consultations, or by undertaking additional diagnostic tests that require pathology services – particularly when there are financial links between GPs and pathology providers.

There are other important demographic issues to consider. With Australia’s ageing population and the rise of chronic diseases, good access to general practice has become essential to prevent people from going down the path of ill health and high costs.

All governments have a duty to maximise the benefits of health-care funding to the population, as well as ensure there’s sufficient funding for other social priorities such as education, social welfare and defence. Let’s hope the Abbott government will now embrace a health-system perspective rather than a narrow view of what it means to have a sustainable health system.

This article originally appeared on The Conversation.

About the authors:

Jane Hall, is Professor of Health Economics and Director, Centre for Health Economics Research and Evaluation at University of Technology, Sydney.

Kees Van Gool, is a Health economist at University of Technology, Sydney

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