The Coming Crisis of Medicare: What the Intergenerational Reports should say, but don’t, about health and ageing

Jeremy Sammut - 2007    Papers in Health and Ageing (2)

This is the second in a new series of papers published by the Centre for Independent Studies on issues of health and ageing. One of the main reasons CIS has launched this series is that health costs are set to spiral in the next few decades, but politicians show little sign of responding seriously to the problems this is going to cause. In this paper, Jeremy Sammut explains why the current system of providing health care in Australia is not going to cope unless it is substantially reformed.

Peter Saunders - Social Research Director, The Centre for Independent Studies

The 2007 Intergenerational Report2 (IGR2) predicts that over the next 40 years, population ageing will decrease labour force participation, halve the ‘aged dependency ratio’ (or the ratio of traditional working-age people to people aged over 65) to under 2.5, slow economic growth per person, and significantly increase government expenditure beyond anticipated growth in national income. As the baby boomers grow grey, the most important source of ‘fiscal pressure’—of expenditure outstripping revenue—will be federal spending in the ageing-sensitive area of health.

The projected doubling in federal health spending from 3.8 per cent of GDP in 2006–07 to 7.3 per cent forty years later—due to the combined impact of ageing, new medical technology, and rising overall demand—is expected to contribute 3.5 percentage points of the 4.75 per cent rise in total Federal government spending. Health will contribute the most by far to the anticipated ‘fiscal gap’—the 3.5 per cent of GDP by which Federal government spending will exceed revenue in the absence of policy adjustments. In other words, based on current trends, the current policies of the Federal government, especially Medicare, are fiscally unsustainable in the long term. In 2021, in the absence of policy changes, the Commonwealth budget will go into deficit, and net Commonwealth debt will re-emerge in the mid-2030s and rise rapidly to around 30 per cent of GDP by 2046–47.3

As the baby boomers retire, stop paying tax and start to draw heavily on government services, the proportionally smaller number of taxpayers of tomorrow face having to pay considerably higher taxes to fund the healthcare of the Australian community. The Minister in the Howard Government who has been the most vocal about the unfair intergenerational implications of the looming ‘ageing crisis’, and the need to ensure that ‘future generations of taxpayers do not face an unmanageable bill for government services provided to the current generations’, is the Treasurer.4

Peter Costello has acknowledged that the ‘long-term structural challenge for Australia’ is to ensure that the health system is sustainable into the twenty-first century.5 Yet, arguably, not even the Treasurer has completely acknowledged just how unmanageable the ageing bill in health is likely to be. Given the limits to future tax receipts, moreover, and the potentially limitless demand for sophisticated and expensive medical treatments, the unprecedented ageing phenomenon is not the sole concern. The additional concern is the impact of the medical revolution that is under way, and the effect new high-tech and high-cost medical technology will have on healthcare supply and demand, in combination with ageing. The new medicines and procedures in development to treat diseases and conditions associated with old age have the potential to increase health expenditure far more than anticipated by the IGRs.  The threat this poses to the future of Medicare should not be underestimated.

The tendency in policy circles and among commentators and academics, however, is to underestimate the significance of ageing and the future pressure that this will place on Medicare. Ironically, Peter Costello’s Intergenerational Reports have played an important role in encouraging this complacent attitude, because both reports overlook how important is the interaction between ageing and the medical revolution. Instead, they have indicated that ageing is not the main driver of health expenditure growth and have understated ageing’s potential impact on health spending. The misleading impression that the IGRs have encouraged is that ageing, per se, is not a long-term health and intergenerational problem necessitating urgent health policy reform.

‘Health expenditure is projected to nearly double as a proportion of GDP over the next 40 years. This is partially due to the ageing of the population, although nondemographic factor have an even greater effect’. —Intergenerational Report Overview 2007, (Canberra: Commonwealth of Australia, 2007), 12. ‘The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2044–45, with ageing accounting for nearly one-half of this’. —Productivity Commission, Economic Implications of an Ageing Australia, Research Report, (Canberra: Commonwealth of Australia, 2005), xii. IGR2, released in April this year, states that ‘roughly two-thirds of the projected increase in real spending per person is driven by factors other than ageing’. This, it continues, ‘is most notable for health spending, where a significant component of the projected increase is driven by non-demographic factors such as the development of new drugs’.6 IGR2 repeats the conclusions also drawn in IGR1:

Non-demographic growth rather than population growth or changes in the age structure of the population has been the key driver of real health spending over the past two decades … Non-demographic factors (such as the listing of new medications on the Pharmaceutical Benefits Scheme and greater use of diagnostic procedures) are likely to continue to generate the greatest cost pressure in the future… with ageing contributing only around one quarter of the projected increase in health spending over the next 40 years. Factors other than ageing account for the remaining three-quarters of the projected increase in health spending.7

In presenting its findings, the Report separates out the ‘pure effect’ of ‘ageing alone’ on health expenditure.8 The Report’s conclusion that ageing will ‘have a much smaller effect on spending than the growing cost of new healthcare technology’9 depends on the assumption that demand for healthcare in the elderly cohort of the population, and thus future ageing-driven health spending, will grow in line with the historic trend. Crucially, this approach10 to assessing the impact of ageing is valid only ‘to the extent that today’s costs are a good guide to those that will apply over the long term (in real terms)’.11 Because it does not ‘predict the relative cost changes brought about by changes in medical technology’,12 this approach is prone to understating the relationship between ageing and rising health expenditure.13 The ‘real issue is not what effect ageing will have on its own, but what effects ageing and the other strong drivers…will have in combination’.14

‘Contrary to the popular belief that ageing is the primary threat to the health budget over time, population ageing is but one, comparatively small, factor in rising health expenditure’. —Pamela Kinnear, Population Ageing: Crisis or Transition, Discussion Paper Number 45 (Canberra: Australia Institute, 2001), 19. ‘Although it considered ageing to be an important factor, the Treasurer’s Intergenerational Report concluded that other factors constitute the main drivers’.  —Judith Healy, The Benefits of an Ageing Population, Discussion Paper Number 63, (Canberra: Australia Institute, 2004), 29.  ‘The Treasurer’s next piece of disinformation is his implication the projected hole in his budget—the fiscal gap—is largely the product of ageing: cost of the age pension, aged care and so forth. Not true. Read the report and you find that the greatest single factor by far in the expected growth is federal spending on health. And three-quarters of the projected growth in health spending is ‘non-demographic’, such as expensive advances in medical technology. Turns out that ‘roughly two-thirds of the projected increase in real [government] spending per person is driven by factors other than ageing’. Oh.’ —Ross Gittins, ‘Report and the Spin – now read on’, Sydney Morning Herald, 4 April, 2007.

Academics and commentators who deny that ageing will be responsible for ‘skyrocketing’ health expenditure, have been convinced by the IGRs that ageing is not the ‘most important’ problem.15   How can it be said that the health costs of the elderly will inevitably drive up expenditure to unsustainable levels, place enormous pressure on governments, and unfairly overburden taxpayers, when the IGRs state that ageing is ‘only’ going to increase health expenditure by one quarter?

Seizing on this, the harshest critics have repeatedly zeroed in on the Reports’ finding that the effect of population ageing per se on health expenditure is relatively small. Based on this finding, critics, who suspect the ‘ideological’ motives behind the IGRs’ intergenerational rhetoric, have dismissed the reports’ very premise, on the ground that the alleged ageing problem is actually ‘small and manageable’.16

The IGRs have become the centrepiece of the counter-argument employed to challenge the idea that Australia faces an ‘ageing crisis’. Perversely, therefore, the reports have helped to deflect attention away from the key issue—the long-term unsustainability of Medicare.17   For example, in response to the release of IGR2 in April this year, Ross Gittins, in his column in the Sydney Morning Herald, dismissed what he saw as the Treasurer’s exaggerations about the intergenerational impact of ageing. Crucially, the evidence Gittins cited in support of his analysis was the fine print in the government’s own Intergenerational Report showing that ‘three-quarters of the projected growth in health spending is ‘non-demographic’, such as expensive advances in medical technology’.18

In 2004, at the request of the Council of Australian Governments, the Productivity Commission began research into the economic implications of the ageing of the population over the next 40 years. The Commission’s report, Economic Implications of an Ageing Australia, broadly agreed with the prediction in IGR1 that the proportion of GDP spent by the Federal government on health would double over the next 40 years. Its economic modelling also confirmed that the change in the age structure—the additional numbers of elderly people as their proportion of the population doubles to 25 per cent—would mean that the effect of ageing alone would increase real government health spending by 25 per cent. But the Productivity Commission found that ageing was likely to have a much bigger impact on health spending than the IGR had suggested.

The Commission made two points. It took issue with the (falsely) reassuring way IGR1 presented the ‘smaller effect’ of ageing, and found that ageing cannot be underestimated as a source of health-related fiscal pressure, because of the impact that ageing also has on economic growth. The Commission also conducted a rigorous review of the local and international research and took issue with the claim that ageing will continue to be only a minor factor in rising health expenditure.  The prudential warning issued to policy-makers was that it is reasonable to assume that the interaction between ageing and technology is likely to lead to considerable increases in health care demand in the elderly cohort, and hence to substantially ‘bigger pressures on the health system than … projected’.19

‘In 2002–03, one third of total government expenditure was accounted for by services to the over 65 group. By 2044–45, this proportion is projected to increase to 57 per cent.  ‘Another measure of the impact of ageing is the difference in projected expenditure with and without ageing. In this case, the without-ageing scenario assumes that population growth and non-demographic growth both occur as projected, but that the age structure of the population (the shares of population of each age) remains at current levels. If there were no ageing, expenditure is projected to reach $169 billion in 2044–45, whereas with expected demographic change it is projected to be 25 per cent higher at $211 billion. Relative to GDP, ageing also increases expenditure just over 25 per cent (8.1 per cent of GDP without ageing compared with 10.3 per cent with ageing). However, this is more significant than it first appears. Ageing contributes

around 2.2 percentage points (or one-half ) of the 4.5 percentage points increase in government health expenditure as a proportion of GDP’.20

It is important to emphasise the point that the Productivity Commission was making. ‘When expressed as a share of GDP, fiscal pressure can be overwhelmingly attributed to ageing’. This is because of the way population ageing slows the growth rate of the economy while increasing real health spending faster than growth in GDP per capita. The relative burden on future taxpayers will therefore rise.21

The ‘ageing effect’ (Figure 1) is therefore far more significant as a source of fiscal pressure than appears from the one-quarter increase in expenditure. When future economic growth and health spending was assessed with ageing and without ageing and the effect expressed as a proportion of GDP, ageing actually accounted for one half of the additional GDP spent on health.22 By comparison, IGR1 and IGR2 analyse only total real expenditure rather than real expenditure per capita as the Productivity Commission did.23 On this basis, the Commission reached an unequivocal conclusion about the relationship between health and ageing: ‘The clear message that emerges is that, whatever measure is used, ageing is likely to have a significant impact on health expenditure’.24

Figure 1: Projected government health expenditure with and without ageing, 2002–03 to 2044–45 Source: Productivity Commission, Economic Implications of an Ageing Australia, 173.

The consensus among many health economists, however, is that ‘an ageing population will not incur significant health costs’, and will have only a minor effect on health expenditure, because older people make big demands on the health system only in their final years of life. In other words, people will stay fit and healthy for longer and will then consume the same amount of healthcare at the end of their lives as they do at the moment.

The Productivity Commission report disputed this claim. It found ‘no evidence that the rising age-cost profile is generated solely by costs at the end of life’. To the contrary, it found that the ‘limited data available in Australia … support the view that costs rise with age rather than arising predominantly at the end of life’.25

What the evidence showed was that health expenditure per person is significantly higher for older than for younger people because the incidence of sickness and disability rises with age, and so does demand for healthcare in all developed countries. The ongoing cost of providing healthcare to elderly people who are not close to death accounts for the bulk of the health spending on the elderly. If, as is likely, this continues to be the case, the ‘strong age-related spending patterns’ combined with ‘rapidly increasing numbers of older people’ led the Commission to conclude ‘that, all things being equal, ageing will increase health expenditure significantly’.26

The Productivity Commission emphasised that while non-demographic rather than demographic factors had been the main source of growth in real health expenditure over the last twenty years, this pattern will change in the future as the rate of ageing begins to accelerate. The sheer number of elderly people will have a big impact on healthcare expenditure by increasing the volume of demand and the proportionate cost of providing healthcare to the elderly. ‘Health costs will inevitably rise’, the Productivity Commission asserted, because although older people may live longer and live healthy lives, ‘in many cases better health is a result of ongoing (and costly) treatment’.27

The Commission also considered another argument that health economists and health industry representatives have used to minimise the cost ramifications of ageing, which is that new diagnostic methods, procedures, and medicines will prevent costly episodes of ill health. Because the larger number of elderly will be healthier in the future—assuming that the benefits of new medicine result in a decline in the prevalence of chronic conditions and acute episodes—the argument goes that health costs will not significantly increase, as there will be offsetting expenditure savings across the whole health sector, such as reduced hospital admissions.28

There are good reasons to think that the arguments of the self-proclaimed ‘ageing realists’ are overly optimistic. The recent worldwide trend has seen shifts away from medical services to more complex and costly medical goods: more advanced equipment, procedures, and pharmaceutical medicines. In Australia, this trend has contributed to health expenditure growing faster than the rest of the economy over the last decade or so, and has encompassed a doubling in the cost to the Federal government of the PBS, with an important driver of cost growth being new and very expensive so-called ‘blockbuster’ drugs, such as Celebrex for treating arthritis.29

The Productivity Commission found that the ‘weight of evidence appears to support the view that better health among older people is not going to reduce health expenditure’.30 The evidence indicated that at present demand pressures associated with new technology ‘are acting to slightly increase—or at least maintain—the current age profile of expenditure across different components of health care’. And there are good grounds to believe that ‘the rising share of older people in the future will compound the underlying growth in health expenditure arising from demand and technology’.31 In a wealthy country, the growing proportion of the population aged over 65 will have rather more political muscle, will expect governments to satisfy their expanding healthcare needs and wants, and will expect the public system to provide them with the health benefits offered by the latest medical technologies, almost as soon as they are available in the private system.

This was the most critical aspect of the Productivity Commission’s report: the idea that ageing will have only a minor impact on rising health expenditure is open to question, it found, because it is more reasonable to expect that ‘in combination with demand and technology, ageing will place significant additional pressure on future health expenditure’.32 The Commission reasoned that the demand for healthcare in older age groups could grow into the middle of the century at considerably higher rates than in the past. As the population ages, there will be larger numbers of elderly people who will consume more high-cost healthcare, because they will demand more and more high tech procedures (such as pacemakers, cochlear implants and hip replacements). The rising prevalence of obesity, the resultant increase in the disease burden, and the expected continual decline in health status according to age, will mean that the elderly will demand more and more costly ongoing care and recurring treatment, particularly to manage lifestyle-related chronic conditions. Reduced disability and improved quality

and quantity of life for the elderly due to the better healthcare available will therefore not mean lower health costs, but will amplify demand for new, sophisticated, and expensive treatments, and mean that ageing will exacerbate the pressure associated with new technology.33

In a follow-up report in 2005, which examined the past and future impacts of medical technology on health expenditure, the Productivity Commission found further evidence that in the future ageing and new technology will prove a ‘potent mix’ as a key driver of health expenditure. The report confirmed that while there may be some offsetting savings—such as lower aged-care costs, if, say, a treatment for Alzheimer’s emerges—new technology would be unlikely to reduce costs across the whole sector because anticipated savings are often outweighed by the high cost of new drugs and expensive procedures.34 Nor will costs simply be offset by substituting old for new treatments, because new treatments often complement rather replace existing ones. Medical innovations also tend to increase applications and utilisations. Innovations (such as advances in diagnostic imaging technologies) tend to increase the number of diagnoses and to generate new ranges of medicines and procedures to treat previously untreatable diseases.35 And not only does new technology increase volumes by expanding the age-range of people who can undergo operations; it can also lead to greater ongoing volumes and costs associated with treating the chronic conditions of people who, as a result of treatment, live longer.36

Figure 2: Medical Advances—What does the future hold?

Source: Productivity Commission, Impacts of Advances in Medical Technology in Australia, Research Report, (Melbourne: Commonwealth of Australia, 2005), L.

Ageing, through its role in determining the future disease burden, is fundamental to this. Of the new technologies already appearing in the marketplace—such as robotic surgery for prostate and heart surgery—and the new compounds in the pipeline expected to become mainstream high cost treatments, the Commission found what was to be expected. Medical research and investment has focused on areas with the greatest potential growth in demand. Many of the medicines already in development are the result of R&D specifically undertaken to discover treatments for the major chronic diseases associated with ageing and poor lifestyle, which will impose the greatest disease burdens in Western countries as the population ages: cancer, heart disease, diabetes 2, kidney disease, blindness, dementia, and arthritis.37 (Figure 3.)

Figure 3: Pharmaceuticals in the international ‘pipeline’, by condition, November 2004

Source: Productivity Commission, Impacts of Advances in Medical Technology, 274.

Rather than rely on uncertain modelling assumptions and projections, the Productivity Commission provided a reasoned, evidence-based interpretation of why population ageing will amplify the medical revolution’s inflationary effect on health costs. In line with an emerging academic consensus about the impact of ageing,38 the Commission’s research confirmed the reasons why we cannot afford to be complacent about ageing, given the capacity for new technology to intensify the demand-side expenditure pressure on the health system, predominantly in older age groups.39

However, as IGR240 and the response to its release demonstrates, the full implications of the Productivity Commission’s warning about the ‘potent cocktail’ of ageing and the medical revolution have yet to be incorporated into the debate about health and ageing.41

Some commentators remain unconvinced. Earlier this year, Ross Gittins saw little reason to be as worried about the projected fiscal gap as the Treasurer maintained we should be. Like other self-styled ‘ageing sceptics’, he argued that the problems posed by ageing are slight, given the expected growth in national income.42

Gittins pointed out that the IGRs assume that living standards will be almost twice as high in 40 years time as now. Only a small part of this increase in national income would have to be used to pay for the increased cost of healthcare, so future generations will easily be able to afford additional health expenditure. The argument is that to provide for the needs of an ageing population, taxes would have to rise only gradually (but not onerously) at the same rate as has occurred over the last 40 years.43 In short, ‘our children and grandchildren have little to worry about’. What is intergenerationally unfair about paying moderately higher taxes so that the entire population can receive ‘better health care’?44

Gittins stressed that higher health spending through general taxation was no cause for alarm. His surmise was that ‘as we get richer over the years’ we have always wanted and will always want to devote a higher proportion of national income to spending on a ‘superior good’ like health because increasingly wealthy communities expect and demand better quality and quantity of care.45

Against this, the ‘Treasury view’ is that we cannot be sanguine about population ageing when this is inevitably bound to impose exaggerated tax burdens on future generations.46 Why will future generations be willing to accept higher taxes, asked the Secretary to the Treasury, Ken Henry in 2004, when ‘our children will experience a slower rate of GDP per capita growth than we have enjoyed, yet our generation has shown considerable resistance to increasing tax burdens? Why should our children be any different?’47 ‘If we are not careful, there is a potential for conflict between generations’, warned the then Governor of the Reserve Bank, Ian Macfarlane, in 2003. ‘The young may resent the tax burden imposed on them to pay for pension and health spending on the old’, particularly ‘if they see the old as owning most the community’s assets’—a reference to the housing boom which has enriched baby-boomers while increasing the barriers to home ownership for young generations.48

The ‘Treasury view’ also questions whether the ‘tax and spend’ solution is realistic in the context of the globalised economy and a fluid international labour market. Higher future tax rates will have real implications for national competitiveness. Australia will be competing with neighbouring Asian countries that do not face the same demographic and fiscal challenges, and against other countries—particularly the United States—to retain and attract skilled workers.49 If policy action is taken today to prevent substantial future tax increases tomorrow, Australia could gain a considerable advantage over other OECD countries condemned by their demography to endure higher taxes, lower economic growth, and the expenditure burdens that previous governments lacked the courage to tackle.50

Treasury Secretary Henry, Treasurer Costello, and Governor Macfarlane have all highlighted policies which encourage higher economic growth as the best way of avoiding either higher taxes or slashing public spending. All have called for a renewed round of economic reform to increase productivity and participation as the least painful way of offsetting the effects of ageing.51 But given the potent cocktail of ageing and new technology, it is imprudent to believe that by boosting economic growth we will be able to afford the increased cost of Medicare.52

‘The forces that have driven up health costs over the long haul are, if anything, intensifying. The staggering fecundity of biomedical research is increasing, not diminishing. Rapid scientific advance always raises expenditure, even as it lowers prices’. —Henry Aaron, ‘The Unsurprising Surprise Of Renewed Health Care Cost Inflation,’ Health Affairs, ‘Cost Containment: Commentary Web Exclusive’, 23 January 2002: http://content.healthaffairs.org/cgi/content/full/hlthaff.w2.85v1/DC1‘… the overriding pressures on future costs will be due to the demand side of the health care market. Undoubtedly, supply factors also play a role … But the major drivers of increased future costs are very likely to be the ability of medical care to improve health, coupled with rising consumer expectations that these treatments should be made available’. —Thomas Rice, ‘Addressing cost pressures in health care systems’, Productivity Commission, Health Roundtable, Conference Proceedings, (Canberra: AusInfo, 2002), 68–69.

‘Medical technology developments occur in response to anticipated demand, which in turn largely reflects the projected disease burden. The anticipated accelerated ageing of the population is expected to be the major driver of the projected disease burden over the next few decades. Thus technological advances affecting diseases of ageing could be expected to have the greatest impact on healthcare expenditure in Australia in the next five to ten years’. —Productivity Commission, Impacts of Advances in Medical Technology, 276.

In the lead-up to the release of IGR2, there was some anticipation that the ‘surging cost of medical technology and rising demand from the ageing population [would] be a centrepiece of the second intergenerational report’.53 The expectation was that IGR2 would pick up the themes of the 2005 Productivity Commission report on the impact of medical technology.

But IGR2 did not even mention the work of the Productivity Commission on the potential growth in health costs due to ageing and the medical revolution. The explanation for this is probably political. The Productivity Commission reports show that ageing is a policy problem because the elderly are going to increase demand for better healthcare in the future. The implication is that demand-side reforms (sometimes called demand-side conservatism) are the appropriate policy response—for instance, using more price signals such as user charges or some other form of self financing to limit government expenditure. But to canvass such policy alternatives is to challenge the bipartisan commitment to the ‘free and universal’ principles of the Medicare system. The politics of Medicare—a determination to avoid political backlash and not to set the political hares running by casting even the slightest of electorally-damaging shadows over the future of Medicare—probably explain why the Intergenerational Reports present the challenges ahead as predominantly supply-side issues and downplay ageing.54

While the Treasurer has insisted that the intergenerational effects of ageing need to be on the national agenda, the Federal government has conspicuously refused to use the Intergenerational Reports to set that agenda in health. Instead, IGR2 reiterates the relatively reassuring message that the government’s marginal supply-side reforms—higher PBS co-payments and changes to generic drug pricing—are controlling the growth in costs, improving the ‘sustainability’ of Medicare, and even creating the ‘headroom’ needed to allow new drugs to be listed on the PBS.55 In addition, by continuing to endorse in the IGRs the idea that ageing will increase spending by ‘only’ one quarter—without providing the qualifications that are readily to hand—the government has let the critics of the IGRs enjoy an almost uncontested victory in the debate about the significance of ageing.

‘The available evidence indicates that population ageing will only have a limited effect on healthcare costs, and there is no evidence that population ageing will cause chaos for our health system. Policy making in Australia would be improved if this was more widely acknowledged’.— Michael D Coory, ‘Ageing and Health Care Costs in Australia: a case of policy-based evidence?’ Medical Journal of Australia,

Figure 4: ‘Small and manageable’? Why ageing and new technology will have a substantial effect on expenditure—estimated net expenditure impacts of selected advances in medical technology

Source: Productivity Commission, Impacts of Advances in Medical Technology, 307.

Future Australian governments are being counted on to supply an expanded range of expensive, state-of-the-art medical treatments, while maintaining ‘equity’ and therefore only minimal restraints on demand, at a much greater—indeed, unknown and potentially limitless—cost to the taxpayer. The taxpayers of the future are being counted on to fund at least half of the additional percentage of GDP spent on health (and probably much more) to provide superior healthcare to a much larger and much older, and very fortunate, generation of elderly people.

Defenders of the status quo maintain that any move to limit the social entitlements of the elderly will be intolerable because this will break the social contract at the heart of the welfare state. Current social policy settings should not change, so the argument runs, because retirees who paid taxes throughout their working life to support the elderly should receive the same intergenerational transfers in retirement, lest younger generations perpetrate a gross intergenerational injustice on the elderly.56

What those who make this case ignore is the way population ageing in the twenty-first century will itself rewrite the generational social contract. Far from being cheated, as it presently stands, the baby-boomers are set to expect future generations of taxpayers to pay for an expanded range, level, and quality of life-enhancing and life-prolonging medical treatments that they did not have to pay tax to provide for the present generation of elderly. As Governor Macfarlane warned, the emergence of a generational wealth divide over the last 15 years has set the stage for real intergenerational conflict, if a rising tax burden reduces the ability of Gen X and Gen Y to accumulate wealth.57

The ‘free and universal’ health systems of the twentieth century were created in an age when medicine was relatively rudimentary and inexpensive, when the old died relatively young, and when doctors mainly saved people from misadventure rather than from the consequences of their lifestyle choices. It is intergenerationally unfair to insist that younger taxpayers preserve in aspic, to the considerable benefit of ageing baby-boomers, a health system intended to provide cheap, basic healthcare to a far younger and healthier population. This is not going to be the case in an ageing Australia, given the medical realities of this new century. Accessing the high-tech care will substantially enhance and prolong the lives of the elderly—and save more people from the disease consequences of their lifestyle.58 A more hard-headed approach to the intergenerational politics of Medicare is required.

Without reform, healthcare in the 2040s is likely to be increasingly about rationing. The questions will include whether people who suffer from lifestyle-related diseases should be entitled to receive all available health care, or whether resources should be conserved to do more to help people suffering non-self inflicted conditions. Ageing and the medical revolution also mean that far more people will live beyond 80, when frailty, debilitating illness and demand for greater care dramatically increase. Should the elderly patient nearing death receive the same level of treatment as the young person expected to live a long time? Given increased calls on government to fund a wide range of new treatments and procedures, hard decisions will be called for. Informal practices— the type of rationing that already occurs in public hospitals—and even formal policies may be developed by health authorities to determine the circumstances which justify the withdrawal of intensive ‘life-saving’ medical intervention from the very sick very old, in favour of giving younger, healthier patients priority of access to scarce beds, theatre slots and other therapies.59