Hockey Budget Myths: Unsustainable Health Spending

Australia’s ‘unsustainable’ health spending is a myth

In the absence of evidence, the real reason for cuts to health spending may well be ideological.
The unsustainability of government health expenditure in Australia is a myth that has been carefully nurtured to justify policies to transfer costs from government to the public.

Tomorrow’s budget is expected to introduce co-payments for visits to the doctor and other ways to reduce health spending. The government argues that it must do this because health spending is out of control and the new measures are necessary to make Medicare sustainable.

But evidence contradicts this argument.

A case of bad arithmetic

As a percentage of GDP, Australian government spending on health is the tenth lowest of the 33 countries in the OECD database and the lowest among wealthy countries.

The 8.3% of GDP spent by the US government, for instance, is higher than the 6.4% spent by the Commonwealth and state governments in Australia.

Nor is it true that total health expenditure – government plus private spending – are unsustainable. Australia spends about 9.5% of GDP on health services; the United States spends 17.7%. And while US spending may or may not be good value for money, it hasn’t undermined its economy or sapped the vitality of the country.

The fear that the rising share of GDP spent on health will harm the economy or our standard of living – reflected in numerous reports for the government, including the recent National Commission of Audit’s – is probably a result of bad arithmetic.

It’s entirely possible for spending on health to rise more rapidly than GDP and for the amount of non-health GDP to continue to rise.

If GDP growth per capita fell to the annual average of 1.4% per annum, which occurred between 1970 and 1990, then by 2050 per capita GDP would rise by 65%. And if health expenditures rose to the US level of 17.7%, there would still be a 50% increase in non-health GDP per capita.

The unsustainability myth is created by focusing on percentages and not on the absolute level of resources available.

Inherent flexibility

Health spending probably will rise as a share of GDP, but the economy is flexible. In 1901, agriculture accounted for 19.5% of GDP; today it is 2%.

The composition of GDP varies with technology and demand, and increasingly (as agriculture and now manufacturing, decline in percentage terms), services – including health services – have expanded.

The budget is expected to introduce co-payments for visits to the doctor and other ways to reduce health spending.

The desirability of this trend is more contentious than the non-issue of whether expansion is possible. No strong evidence links additional health spending to additional health. But this is because of the difficulty of the research question, in particular, the difficulty of linking incremental changes in the quality of life to health services.

However, health is one of the chief determinants of well-being and with an ageing population and increasing chronic health problems, the maintenance of the quality of life requires increased health spending.

As life expectancy rises spending patterns will change. But there’s no reason to be uniquely concerned with health spending.

Ideology and the absence of evidence

Of course, it’s desirable that health spending should be efficient and a common justification for co-payments has been that they will eliminate frivolous services. But the evidence for this evergreen argument is almost entirely absent.

A massive randomised controlled trial of health-care costs, known as the RAND Health Insurance Experiment, unambiguously rejected the hypothesis that co-payments eliminated only peripheral services. What the study found is that they reduce the demand for services but the effect is small and falls disproportionately on low-income groups.

What’s more, the co-payments expected in the budget will be imposed on GP services – the low-cost end of Medicare, which provides early detection and treatment of serious illnesses. If ignored, these will progress and need high-cost hospital and specialist care.

So why does the government favour co-payments? Irrespective of the long-term effects, it will save the government money in the short term. But this is the worst way of reducing a budget deficit. Taxes on carbon emissions, higher taxes on minerals and the closure of tax loopholes are preferable strategies.

The contribution to the deficit from co-payments will be small. The “savings” to the government budget from a $6 co-payment was estimated by Terry Barnes from the Australian Centre for Health Research to be $750 million across four years, an average annual saving of about 0.3% of federal spending and 0.14% of total health spending.

The real reason for co-payments appears to be ideological – a dislike of communal sharing even when it is to alleviate the financial burden of those already disadvantaged by illness.