Earlier in the year, there was much talk by the government about the ‘unsustainable’ growth of health funding. In July, the premier of NSW, Mike Baird, joined the party suggesting that the
GST should be raised to 15% to help cover rising health costs. But how bad is the situation?
In 2012‒13, the most recent year for which
full details are available from the Australian Institute of Health and Welfare (AIHW), total expenditure on health in Australia was $147.4 billion, about 9.7% of GDP — commonwealth government spending on health was about $61 billion. Overall spending had grown from $68.8 billion in 2002‒03 — or $90 billion in 2002‒03 in constant (2012‒13) prices. The average annual real growth of health spending over the decade was 5%.
Australia’s health expenditure as a proportion of GDP is very near the average for the OECD and most countries also saw their health spending rise over that decade (Iceland, Turkey and Israel were the exceptions).
There are a number of players in Australia that contribute to meeting those health costs, not just the commonwealth and state governments — and even in considering the commonwealth government we need to include the Department of Veterans’ Affairs which contributes over $3 billion a year. Private health funds obviously contribute a small amount, as do insurance companies through injury compensation payments. And, of course, so do each of us as individuals, through out-of-pocket expenses and co-payments (at present, the latter is mostly for pharmaceuticals).
The proportion contributed by each group at the start and end of the period was as follows:
| Agency |
2002‒03 |
2012‒13 |
| Commonwealth government |
43.6% |
41.4% |
| State and territory governments |
24.4% |
27.0% |
| Health insurance funds |
7.9% |
8.0% |
| Individuals |
16.6% |
17.8% |
| Other (largely insurance companies) |
7.3% |
5.7% |
Those figures show that state governments and individuals have seen their contribution increase since 2002‒03, and that was in 2012‒13 before the Abbott government was elected and proposed measures to further increase state government and individual contributions. Despite abandoning the GP co-payment, the government has acted to achieve the same result by
freezing Medicare rebates until 2018.
There are many different areas of health expenditure, including dental (three-quarters of which is paid by health funds and individuals), patient transport services and community health (largely met by the states) and aids and appliances (largely met by individuals). They each add a few billion dollars annually to overall health expenditure. The main areas, however, are:
- hospitals, public and private: In 2012‒13, about $56 billion was spent on hospital services, 78% in public hospitals and 22% in private hospitals. The commonwealth government provided $16.2 billion and the states $23.7 billion for public hospitals and individuals contributed $1.3 billion. For private hospitals the health funds provided $5.7 billion but the commonwealth government also paid $3.6 billion and individuals $1.5 billion. Insurance companies also spent $1.8 billion in public hospitals and $760 million in private hospitals.
- primary care (unreferred) services and referred medical services: ‘Unreferred medical services’, about 90% of which are visits to GPs, cost the commonwealth government $8.3 billion in 2012‒13 out of total expenditure of $10.2 billion (with insurance companies contributing $1.2 billion). The commonwealth government paid $11.4 billion for ‘referred’ medical services, health funds $1.3 billion and individuals $2.4 billion. (When individuals contribute almost twice as much as health funds for referred services, there is a basis to question the real value of health insurance.)
- pharmaceuticals: For subsidised pharmaceuticals there are only two groups who pay: the commonwealth government ($8.4 billion in 2012‒13) and individuals ($1.5 billion). We also spent, as individuals, another $8.7 billion on other medications. Those are the AIHW figures for 2012‒13. The payments made by the PBS are lower because the overall government figure includes immunisation programs and some direct payments to pharmaceutical wholesalers. In 2012‒13 PBS reported 197 million prescriptions of subsidised medicines for which it paid just over $7 billion and $1.5 billion was paid by patients (the same as the AIHW figure). For 2013‒14, there were 209 million prescriptions at a cost to the PBS of $7.3 billion and patients again paid a little over $1.5 billion. It is interesting that the average cost (including the patient contribution) actually fell from $43.49 in 2012‒13 to $42.19 in 2013‒14.
There have been slight changes, between 2002‒03 and 2012‒13, in the proportion of overall health expenditure that these main areas represent:
| Area of expenditure |
2002‒03 |
2012‒13 |
| Public hospitals |
30.4% |
31.6% |
| Private hospitals |
8.5% |
8.7% |
| Unreferred medical services |
7.9% |
7.3% |
| Referred medical services |
10.6% |
10.9% |
| Pharmaceuticals |
9.4% |
7.2% |
While a greater proportion of health funding is being spent in hospitals and on referred medical services, we are spending a lesser proportion on unreferred medical services and pharmaceuticals. One of the bigger areas of growth is our own expenditure on non-subsidised and non-prescription medications which rose from 5.1% to 6.7% of health spending in those years.
All of the expenditure I have referred to above is ‘recurrent’ costs, that is the price of services and consumables. There is also capital expenditure, mainly the building and refurbishing of hospitals, including the purchase of major equipment, but this tends to be only a few billion each year: $8.6 billion in 2012‒13 of which the commonwealth government provided only $72 million. Almost all of the capital expenditure comes from state governments ($5.1 billion) and private providers ($3.4 billion).
The AIHW report states that for seven out of the ten years up to 2012‒13 health prices actually increased by less than the rate of inflation and that much of the continuing rise in expenditure was a result of an increase in the volume of goods and services. The year 2012‒13 was a bit of a hiccup with the volume of services declining but the price increasing. Based on Medicare data, the volume of services did resume rising in 2013‒14.
The commonwealth government’s main areas of funding are ‘medical services and benefits’ (largely Medicare payments but the private health insurance rebate is also included under that heading), pharmaceutical benefits, payments to support state-run public hospitals, and for ‘other health services’ (which incorporates mental health, hearing services, blood and blood products, and research).
In the decade to 2012‒13 the commonwealth government’s health expenditure usually required around 17% of government revenue. [That figure and many of the following figures up to 2013‒14 (including in Part 2) are my own calculations using ‘final outcome’ figures for each budget.] It fell as low as 14.6% in 2007‒08 and reached a peak of 18.8% in 2011‒12: in 2014‒15 it was forecast to be 17.6% but was projected to fall back to 17.1% by 2016‒17. The increase in recent years was mainly a result of the slow rate of overall revenue growth for government.
In the
last Wayne Swan budget the commonwealth government was projected to spend $280 billion on health between 2013‒14 and 2016‒17. The 2014‒15
Hockey budget reduced that to $271 billion, the largest reductions being for pharmaceuticals (‒$4.5 billion) and payments to the states for public hospitals (‒$2 billion). Treasury indicated that most of the reduction in pharmaceuticals was related to more accurate information about the cost of medicines, as the government now requires pharmaceutical manufacturers to provide the actual price at which they sell to wholesalers and pharmacies.
Under the Abbott government there will be
further reductions in payments to the states for public hospitals because it will abandon a number of agreements, that were made under the Rudd and Gillard governments. Under the
National Health Reform Agreement 2011 the Commonwealth was applying:
… an activity based funding approach to determine an ‘efficient price’ for hospital services. The Commonwealth pledged to meet 45 per cent of the growth in the efficient price initially, rising to 50 per cent after 2017. The states and territories will meet the balance.
When that agreement now ceases in July 2017, Commonwealth funding will revert to the old model linking CPI and population growth.
Abbott and Hockey also abrogated the
National Partnership Agreement on Improving Public Hospital Services as from July this year. That agreement was meant to help improve access to elective surgery, emergency care and subacute care. It will save the commonwealth government $201 million over the forward estimates but the states may have to reconsider what they can fund.
A lot is said about the Medicare levy and whether there is a need to increase it. In 2012‒13 it raised $10.2 billion, $10.5 billion in 2013-14 and was forecast to increase to $14.1 billion in 2014‒15 but that includes the additional 0.5% for the NDIS. Although the Medicare levy is simply paid into consolidated revenue, we can estimate that about $10.6 billion should be available for health, as opposed to disability funding.
Medicare statistics show there were 356 million services provided in 2013‒14, an increase of about 12.5 million on 2012‒13 (about 38% of those services were non-referred, mainly GPs). Benefits paid increased from $18.6 billion to $19.1 billion. So the Medicare levy covered about 55% of benefits. It more than covers the cost of non-referred visits, which amounted to $5.9 billion in 2012‒13 and $6.4 billion in 2013‒14. It is the referred services, which include specialists, obstetrics, pathology and diagnostic imaging (amongst others) which cost the most: referred services increased by almost 6.7 million in 2013‒14 (about 54% of the total increase in services), and cost $146 million more but that was after a reduction of $594 million in payments for ‘
allied health’, so the real increase was more in the order of $740 million; non-referred services increased by 5.8 million and the payments increased by $411 million. Doubling the Medicare levy would certainly cover all benefit payments: if the levy had been 3% in 2013‒14 it would have raised about $21 billion, almost $2 billion more than Medicare payments. But is that necessary? The original aim of the Medicare levy wasn’t to fully cover costs but to make the cost-sharing
equitable. It is also notable that the average cost per service for Medicare fell slightly, from $54.03 in 2012‒13 to $53.69 in 2013‒14 (or a saving of $116 million if the number of services did not increase).
Health costs a lot but the above figures indicate that health prices aren’t rising all that fast, and have actually fallen recently. We could have cheaper health but at what cost to our health! Our health services are highly regulated for obvious reasons: we expect that the people who examine us and operate on us are properly qualified; we expect our medications to be safe and efficacious; we expect our health services to be available to us in a timely manner. That all adds to the final cost of health services.
The issue is who pays? The commonwealth government is trying to reduce its contribution but that doesn’t necessarily reduce overall health expenditure — it just moves costs elsewhere, to state governments and individuals. Under the Abbott government, it is easy to believe that it may actually be a way of achieving greater privatisation of medicine by putting pressure on public hospitals, shifting costs to individuals, and so encouraging greater use of private health funds and private hospitals.
Next week, Part 2 will look at the commonwealth government’s future health funding issues.
What do you think?
The Abbott government is insisting that it cannot continue to meet the rising cost of health services but, as Ken points out, someone still has to pay. The data presented by Ken suggest that there has already been a shift in health costs to state governments and individuals since 2002‒03 and now the Abbott government seems intent on accelerating that transfer.
Come back next week for Part 2 of ‘Funding health’.
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