Health costs and policy in an ageing Australia

Gary Banks

Chairman, Productivity Commission

Australia has traditionally been regarded as having a relatively cost-effective health

system. Per capita spending has been below the OECD average, and well below that

of the USA in particular, for comparable or better health system outcomes.

But there is a question as to whether this is likely to remain the case. Over the past

decade, Australia’s health expenditure has grown by about 70 per cent in real terms,

with private sector growth outpacing that in the public sector in more recent years

(though public expenditure is still two–thirds of the total). This rate of growth has

exceeded that of the economy as a whole, leading to a 1 ½ percentage point rise in

the health sector’s share of GDP to its present 9 percent (AIHW 2007)

All components of health spending have grown. While inpatient and outpatient

services still dominate total spending, there has been an acceleration in expenditure

on pharmaceuticals and therapeutic appliances since the late 1990s.

This aggregate growth has been matched or exceeded by other countries, however,

so that international relativities have not changed much (figure 1). For example, we

remain a somewhat bigger spender than the UK and a much smaller spender than

the USA.

This indicates that trends across countries are being influenced by similar forces.

But it also suggests that some countries may have systems that can do better than

others. Most are likely to be severely tested by developments in demography and

technology in coming decades. It is important to understand how these forces are

likely to play out, and their implications for health policy, given the size of the

healthcare sector and its importance to community wellbeing.

1 Health Policy Oration 2008, Menzies Centre for Health Policy, John Curtin School of Medical

Research, ANU, Canberra, 26 June.

POLICY IN AN AGEING

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At a broad level, we can conceptualise the market for healthcare like the markets for

other services in the economy, as being shaped by both demand and supply-side

influences.

the size and structure of the population, its overall affluence or purchasing power

and — related to this — societal preferences or expectations and, of course,

inherent healthiness.

on the nature of health services provided, as well as on who and what can be

treated. The implementation and diffusion of technology over time depends on

the availability of, and access to, skilled people and capital resources.

These dynamic influences are comparable to other markets. But unlike most other

markets, there is a bigger role for governments and only a limited role for prices in

balancing supply and demand over time. Much healthcare is funded by governments

or insurers, rather than being bought directly by consumers, and the provision of

healthcare is constrained by regulation and by the medical profession itself.

There are good reasons for this. Consumers or patients rely to varying extents on the

knowledge of healthcare professionals about which services are most appropriate.

And our society rightly values accessibility to healthcare for all Australians,

regardless of their financial circumstances. However, the former introduces another

layer of decision making — and potential mismatches with the consumer’s real

needs (principal–agent problems) — while universal access and subsidised

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HEALTH COSTS AND

POLICY

provision could potentially mean open–ended demand growth, which would be

neither efficient nor sustainable (and ultimately not equitable either).

Thus while doctors determine the nature or type of treatments, governments play a

significant role in determining access to treatment. For example, there are limits on

subsidised technologies and pharmaceuticals, with 80 percent of all pharmaceuticals

on the PBS being subject to some restriction (other than for medical reasons).

The other important dimension of the supply-side in the healthcare ‘market’ is the

private/public mix. As noted, private healthcare expenditure has been growing

faster than public, reflecting government inducements, together with constraints in

the public system. Privately funded healthcare is highly regulated, and operates as

both a supplement and alternative to public provision.

So while there are some features in common with other markets, these are limited,

and government policy is clearly influential in shaping healthcare expenditure. That

said, the most critical underlying drivers of expenditure going forward will be

further advances in medical technology, the ageing of Australia’s population and

the important interactions between them.

These are complicated and contentious areas, posing significant challenges for

public policy, and with much at stake for the community in ‘getting it right’. This

also makes them suitable areas of inquiry for the Productivity Commission, given

its independence from all stakeholders and its statutory obligations to determine,

through open and consultative processes, what is in the long term interests of the

wider community. Over the past decade, the Commission has been asked by

government to conduct in-depth reviews of private health insurance, medical

technology costs, the health workforce and the impacts of population ageing. In

what follows I will draw on these studies, as well as related research by us and

others.

It is widely recognised that technology has a major impact on the health sector and

on health outcomes, but there has been some debate about whether technological

advances will, on balance, serve to reduce or increase overall health expenditure in

future, especially in the context of an ageing population.

Assessing expenditure impacts is not straightforward, requiring an examination of

the cost of the technology for each person treated; whether it is a new treatment;

whether it replaces or supplements existing treatments; its uptake, and its effect on

subsequent use of the health system.

Overall spending can increase — even if unit costs decline — when improvements

in a treatment expands its use. New technologies can have beneficial flow-on effects

in other areas of spending, however, such as by reducing rates of hospitalization or

the duration of hospital stays, or by allowing the aged to remain in their own homes

and thereby reducing aged care costs. On the other hand — and probably only

economists would point this out — if one disease is successfully treated, people

may live on to develop other ailments, which can themselves require expensive

treatment. (I hasten to add that this is not an argument for avoiding better

treatments!)

The Commission has measured the cost impacts of new technologies over a recent

ten–year period (PC, 2005a). The results of the main econometric analysis are

about the sensitivity of demand to income growth, the results suggest that

technology contributed around one-third of the increase in real health expenditure in

the decade to 2003, with the (substantial) income growth experienced by

Australians in this period being the other dominant contributor.

Annual growth rate (per cent) in real expenditure

Some case studies that we conducted provided insights as to why new technologies

were contributing to net cost increases. The story varied in relation to unit costs,

with some rising and others falling, though on average they were greater. The

decisive factor, however, was the expansion of treatment associated with new

technologies.

For example, inpatient/hospital care accounts for some 40 per cent of total health

expenditure. So technologies that serve to reduce the length of hospital stays —

such as improved anaesthetics and less invasive surgery — clearly reduce costs.

There has indeed been a pronounced decline in the duration of hospital stays in

recent years. For example, the average number of days spent in a public hospital by

technologies that have contributed to this reduction in the length of hospital stays —

for example, improved anaesthetics for older patients and improved cataract surgery

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techniques — have typically also led to an increase in the number of patients able to

be (safely) treated.

been the case, for example, with advanced pharmaceuticals, which often have also

reduced the need for treatment in hospitals. However, the prices of these new drugs

(such as new-generation anti-depressants) have been significantly higher than preexisting

treatments.

Moreover, many new drugs have enabled a considerable expansion in the numbers

of people treated for existing conditions. For example, the use of better-tolerated

statins, to reduce cholesterol levels and manage heart conditions, increased from 2

million to 15 million prescriptions from 1992 to 2004 at a cost of nearly $1 billion.

Thus increased costs have occurred notwithstanding unit costs comparable to

previous drug treatments (PC 2005a).

Other new technologies such as coronary (drug-eluting) stents, and cementless

prostheses for hips and knees, cost a lot more than the technologies they replace;

new diagnostic imaging techniques cost more, often are used in conjunction with

old technologies such as X-rays and ultrasound, and generate additional or earlier

treatments.

So what does the future hold? It seems safe to anticipate that further technological

advances will transform our ability to detect or successfully treat diseases, and thus

bring considerable benefits to many people. Genomics is one area showing

considerable promise, having the potential to provide revolutionary biological

treatments, together with increased targeting or ‘personalisation’ of medicine.

Another area showing considerable potential is robotics. Remote control surgical

machines are now in use in Australian hospitals (and have made a number of

procedures easier to perform — such as coronary artery bypass surgery) (Maddern,

2007). But such important further developments are likely to continue to increase,

rather than reduce, healthcare expenditure overall. As in the recent past, the reasons

are the high costs of development (particularly of biological medicines), the

expansion of treatment possibilities, and more ongoing treatment.

The Commission analysed the likely cost impacts of possible medical developments

targeting four key diseases (figure 3). All were assessed as likely to lead to

significant increases in outlays compared with existing treatments (or

non-treatment), because treated prevalence (reflecting better treatment, population

rise, more than offsetting any cost savings elsewhere in the health system.

If anything, the Commission’s estimates tend to underplay the cost-increasing

impacts of new technologies, since they did not take account of the impact of the

health costs of ‘living to die another day’ from some other condition. These costs

can be appreciable.

Further, as noted earlier, such technological advances will require complementary

investments in skill development within the health workforce, together with changes

in modes of delivery of care. These have additional cost implications, the size of

which will depend on the adaptiveness of the healthcare delivery system, including

in relation to roles within the health workforce.

So it seems clear that rising demand fuelled by income growth, and increased

service possibilities from technological advances — which have together dominated

expenditure growth in the past — will continue to be important into the future. But

an emerging additional influence — of significance in its own right, as well as in

combination with the others — is the ageing of Australia’s population. This

inevitable, pervasive force will fundamentally change the outlook, compared with

any simple extrapolation of the past.

The story of population ageing has already been told many times, and indeed has

become a frame of reference for thinking across a range of policy areas, akin to the

role of globalisation in policy discussion a decade or two ago. That said, elements

of the story and their policy implications have not always been well understood,

particularly in relation to health, and therefore bear repeating.

The facts are that after WWII the age profile of our population resembled a

pyramid, with a wide base of young people and progressively fewer old people (PC,

2005b). Today it looks more like a beehive (fewer young, more old) and, by the

middle of this century, it will (ominously) resemble a coffin (figure 4).

Reduced fertility has contributed to this transformation, but the overwhelming

driver of population ageing is simply that we are, on average, living longer — in

part due to medical advances themselves. For example, the life expectancy of a 50

year old man in 1950 was 73 years; today his life expectancy has increased by 8

years to 81 years. Some of this is due to better nutrition, and a lower incidence of

smoking, but better healthcare has played a major role. For example, a recent

Australian study suggests that new pharmaceutical treatments alone may have

accounted for 65 per cent of the two year mean change in the age at death from

1995 to 2003 (Lichtenberg and Duflos 2008). Sustained beneficial effects on life

expectancy have been found for the United States over longer periods.

That we are today living longer on average than our forebears is a symptom of

success — a cause for celebration! But this phenomenon also poses considerable

policy challenges for governments, particularly in the financing of healthcare.

In short, the pronounced ageing of Australia’s population will reduce the (per

capita) growth capacity of the economy — by shrinking the proportion of the

population in the workforce — while simultaneously expanding the rate of

government spending. The second Intergenerational Report (Treasury 2007)

projected that the resulting impacts on the spending of the Australian Government

Males Females

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would amount to around 5 per cent of GDP by the middle of this century. Throwing

in the spending pressure for State Governments will push this to around 6 per cent

(PC, 2005b).

This is a projection, not a forecast; and indeed it will need to be addressed in some

way by policy before it eventuates. The point that is most relevant here is that

further substantial growth in health expenditure will be the dominant cause of this

fiscal blow-out, with population ageing being a key underlying contributor.

Now I am conscious that this view about the impact of ageing on health spending in

the future is not universally shared, including among health economists and

government officials. That is concerning, because it may blur policy focus within

government and necessitate costly reactive policies down the track. So I would like

to spend a little time outlining the basis for our conclusions.

Perhaps the best starting point is what we already know empirically about how

health costs vary by age groups. Cross-sectional data for public hospitals, the PBS

and medical benefits are shown in figure 5. The escalation in costs for progressively

older age brackets is striking. For example, the average PBS costs for a person aged

65–74 are more than twenty times greater than for an 15–24 year old And public

hospital costs are on average five times greater for the older group. (Treasury 2007)

A similar story applies for other services so that, for health services as a whole,

average expenditure on those aged 65 and above in 2002–03, at around $5 200 per

person, was three times greater than for those aged under 65. (PC 2005b) And the

ratio gets progressively greater for older age groups. When this age–cost profile is

combined with the much higher projected demographic growth rates for older age

groups to the middle of this century (figure 6) we start to get a sense of what lies

ahead.

Pharmaceutical benefits

Medical benefits

Hospitals

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Index of spending (average = 1)

Against this interpretation, it has been argued that cross–sectional aggregate data on

health expenditure provides a false basis for projecting the impacts of ageing,

because the data is merely revealing the higher incidence of deaths in older age

brackets, and the relatively high proportion of lifetime health costs incurred in the

period just before death. On this view, if people on average live longer, a large

share of their health costs will simply be deferred, and lifetime costs won’t increase

much.

This hypothesis is logically appealing — and has been widely accepted — but it is

not supported by the evidence.

one’s life, the bulk of costs still relate to people not at risk of imminent death.

For instance, a Canadian study found around 80 percent of costs were not death-related

(Menec et al. 2004). Even studies estimating high costs of death find that

the growth of health costs occurs much earlier. For example, Gray (2004) found

age led to a 30 per cent increase in costs from age 65 to 85 years.

age-specific expenditure, the projected ageing of the population would still lead

to a major surge in future health spending as a share of GDP. The reason for this

is that the ageing phenomenon is superimposed on the bulging demographic

known as the post–war Baby Boom. As the Boomers reach the end of their lives

(in the period 2025–50) the incidence of deaths in the population will swell

dramatically (PC, 2005b). That in turn would see an escalation in healthcare

spending in that period.

A second and related argument that has commonly been made as to why population

ageing would not greatly increase healthcare costs, is based on the observed fact

that older people are becoming ‘healthier’. If this phenomenon continues, as it

Under 15 13.6

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POLICY IN AN AGEING

AUSTRALIA

should, it is hypothesised that it will serve to flatten, over time, age–health cost

profiles such as those shown in figure 5.

Again this argument is plausible. However, though the issues are complex, the

weight of evidence (such as it is) is against it. While age-specific disability trends

do seem to be improving (though the empirical evidence is not clear–cut) there is an

upward trend in various chronic health conditions. These include diabetes (linked to

rising obesity) and age-related conditions, including diabetes, Alzheimer’s, hearing

loss and Parkinson’s disease. These are being managed by medical (and aged care)

interventions at significant cost.

Such recent trends are more consistent with a scenario opposite to the ‘healthier

oldsters’ one; namely, that ageing and technology are forming a potent expenditure

Indeed, the evidence suggests that this is already happening. For example,

Australians (with the rate growth of private hospital usage exceeding that for

public hospitals); (PC 2005b)

replacement and cataract surgery in Australia;

marked in US data (figure 8). This also reveals that in the 1980s, the incidence

of hip replacements was similar across age groups, despite the need being

greater for older people.

Average annual increase (per cent)

Per 100,000 people

As noted, a key reason for the faster growth in hospital separations for older people

is that more medical procedures can be performed safely and successfully on them

than in earlier years. This of course is not happening by accident. It is inevitable that

even in a market as constrained and distorted as healthcare, areas of greatest

potential demand growth will elicit supply–side responses. The combination of

faster demographic growth and an inherently higher disease burden in older age

brackets, has led to this group’s needs becoming a particular focus for research and

development, and other innovations in care. For example, the Commission found

that, in 2004, of some 550 drugs that were at various stages in the pipeline for trial

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POLICY IN AN AGEING

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and approval, 80 per cent were targeted at what are predominantly old peoples’

diseases and ailments. Cancer drugs alone accounted for about one–half of these.

In considering whether this is likely to continue into the future, we need to bear in

mind that older Australians not only will comprise a much larger share of the

population than ever before, they will be much wealthier on average than any

previous generation. They will also be better informed about healthcare options and

politically much more influential.

In its own projections, the Productivity Commission has been relatively

conservative. For example, we assumed an unchanging age/cost profile, together

with a moderate projection of demographic structural change. Even so, it was

projected that the combined health expenditure of governments in Australia would

almost double by 2044–45, reaching just over 10 per cent of GDP (figure 9). While

all components are projected to increase, the PBS share grows most — more than

tripling — followed by hospital costs.

Proportion of GDP (per cent)

If the ratio of public to private health expenditure were maintained, total spending

would amount to around 15 per cent of GDP by 2045 (greater than currently in the

USA).

Finally, to answer the question at issue, the Commission unpacked the ageing

component from population growth and demand/technology, to assess its separate

contribution as an expenditure driver.

Looking firstly at the proportion of expenditure attributable to those aged 65 and

over, we projected that this would rise from about 35 per cent today, to around 60

per cent by 2044–45; that is, to become well over half the health budget.

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Hospital Medicare PBS Other Total

Of course, not all the increase in spending arises from ageing. So we conducted a

thought experiment in which we froze the population age structure and allowed the

other expenditure drivers to vary over time. Ageing alone is estimated to push up

health expenditure from $170 billion to $210 billion by 2045, an increase of 25 per

cent (figure 10). As a proportion of GDP, the increase is from 8.1 per cent to 10.3

per cent. Expressed differently, ageing is projected to account for one half of the

total increase in (public) health costs as a share of GDP over the next four decades.

Projections of government health expenditure

Projected health expenditure growth of this magnitude will clearly create a problem

for governments, even if only because it will need to be financed. There are three

broad policy choices.

First, governments could take a reactive role, cutting services or inputs into the

health sector (lower quality staff, older technologies, longer waiting periods, greater

rationing of treatments). This might avoid a fiscal deficit, but it would soon create a

service deficit — more insidious because it is less visible, with the potential to

adversely affect people. It would also be pushing against the tide of demand for

services generally. Health is what economists call a ‘superior’ good — demand for

it increases with income. That latent demand is concealed by the largely free, but

rationed, supply of publicly-funded services, but is manifest in the 30 per cent

growth in the share of household expenditure accounted for by household-funded

POLICY IN AN AGEING

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health spending over the past decade. Community pressure, including the ascendant

‘grey’ lobby, would in any case make excessive rationing politically unpalatable.

accommodating expenditure pressures through public financing. This avoids any

worsening of rationing, but as noted it creates a burgeoning fiscal deficit that must

be financed. It can’t realistically be financed by cutting back other budgetary

demands —like aged care, education, infrastructure, and R&D. So addressing fiscal

deficits imply the ‘T’ word — taxes now or later. Some increase may indeed be

inevitable, and our wealthier society of the future would be better able to bear it.

But fully offsetting the health-induced fiscal pressure would require an increase in

taxes of some 16 per cent. Apart from the politics (again) the costs and potential

inequities of extracting more through our imperfect taxation system make this

choice problematic.

improve its financing or functioning — looks far more attractive. But reform is

easier said than done.

When considering how to give effect to this proactive option it is useful to ask

‘what would an ideal health system look like?’. Many would agree that both equity

and efficiency would need to be integral, such that:

a) clinically required services would be available to all;

b) only services for which the benefits exceeded costs would be provided, and

c) there would be no opportunities for producing more from existing inputs.

Fantasising for a moment that health services were like, say, the restaurant industry

— supplied by a myriad of producers in approximately competitive markets and

dealing with well-informed, demanding consumers — the above goals could be met

by markets, supported by cash transfers to the disadvantaged (to meet goal (a)).

Fully-informed consumers would buy services that were worth the cost (satisfying

goal (b)). If the price were too high for a particular health service then consumers

would not buy it, but consider alternatives, including those that might mitigate the

health risks in the first place (for example, better diet and exercise). That can be

contrasted with the current system, where most services are free or highly

subsidised, and choices about treatment rarely take account of cost tradeoffs or

options outside the system (like preventive initiatives).

In such an ideal market, competition between private providers would drive them to

be productive (satisfying goal (c)). A hospital with low productivity would be ripe

for takeover — or closure. Doctors with poor treatment records would have few

patients. Salaries would be set to attract the right people to meet the needs of users

of the system. Again this can be contrasted with the current system, where

budgetary and professional compartmentalisation, monopolies and oligopolies, cost

shifting, high adverse event rates, and excessive clinical variety are persistent

features.

The reality, of course, is that health services are not like restaurants. And more

‘market-like’ systems, such as in the United States, produce outcomes that appear to

be more expensive and less equitable than most universal systems. But some of the

features of markets that achieve efficiency and consumer empowerment might be

Returning to our earlier framework, we can consider options on the demand and

supply sides of the ‘health market’, and the institutional arrangements that connect

them.

Prices play a central role on the demand-side of most markets. They inform

consumers about the relative costs of supplying different goods and services and

they enable consumers to decide which good or service best meets their needs,

given their relative costs. In health markets — whether private or public — full

pricing for all services would never occur because consumers are willing to pay for

insurance (through taxes or premiums) to avoid catastrophic risks. The issue is

about the right level of insurance, and therefore, the right level of co-payments.

Co-payments can provide a valuable role in constraining inappropriate demand and,

by marshalling private financing, relieving some of the fiscal strains for government

have them — they are already here in GP services, pharmaceuticals and other

services — rather it is about the types of services to which co-payments should be

applied, their level and their structure.

Transitions:

‘big bang’ or

incrementalism

Health workforce

Regulation

Coordination &

interactions

between parts of

the system

Roles of different

System-wide funders

Decision-making

Supply-side Incentives processes

Information &

Demand-side Pricing empowerment

‘Good’ co-payment design is not easy. There are substantial risks and there can be

unintended impacts. The famous RAND experiment of the 1970s in the USA —

apparently still the gold standard for examining the impacts of co-payments —

found mixed outcomes (Brook et al. 1984). Modest co-payments had no apparent

adverse impacts on health for people who were not high risk, while reducing their

demand for services — a good outcome. However, for high-risk, especially low income

people, there were significant adverse health impacts from co-payments,

with people foregoing effective as well as ineffective treatments. That result has

been confirmed in more recent research, especially relating to pharmaceuticals

pricing (Gruber 2006). This underlines the fact that prices work best when people

are well informed about the services (an issue to which I return).

There are other potential problems with co–payments, such as diversion of demand

to unpriced services. But there is also scope to extend their use, such as for services

that are shown to have low cost-effectiveness. The policy challenge is for us to learn

more about where their further use could yield net benefits to the community.

People’s lack of information and knowledge about health and treatment is the

fundamental ‘market failure’ on the demand side that underlies many of the features

of the public health system. But there is scope for policy to promote better informed

consumers and thereby to achieve better outcomes at lower social cost.

One avenue is to provide information, and advertise information sources, that could

enable consumers to be more discerning in their use of the health system. For

example, in the United States, consumer education on antibiotic prescribing for

adults with acute bronchitis and children with sore throats prompted a significant

reduction in unnecessary antibiotic use (Gonzales et al. 2005).

A second step might be to provide information on outcomes by hospital and doctor,

and give consumers more choices about both. For example, in the USA (and now

UK) data has long been available on the individual performance of cardiac

surgeons. Recent changes to the National Health System in the United Kingdom

have enabled patients to choose public treatment among competing hospitals, with

information about their relative performance, including feedback from patients,

available on the web (UK NHS, 2008) Choice of this kind, combined with funding

premiums for higher performing hospitals and recognition of higher performing

health staff can improve quality of services as well as empowering consumers.

Of course, such ‘league tables’ need to be designed carefully to avoid perverse

outcomes such as discouraging surgeons to take on high-risk patients. As in most

areas of health reform, careful evidence-based change, supported by trials if

possible, is the best way of proceeding.

A third step relates to encouraging changes in consumer behaviour to avoid or

reduce health risks — ‘preventive health’. There is evidence that information can

have powerful impacts. (For instance, in Australia, information about the prone

positioning of infants has dramatically reduced the incidence of sudden infant death

syndrome. And the HIV/AIDS campaign has contributed to reducing the incidence

of cases.)

One of the biggest identified priorities in preventive health is curbing Obesity, the

incidence of which has grown rapidly over the past decade (though probably still

short of the Baker Institute’s estimate of 26 per cent of the adult population, which

seems to have been inflated by response bias). Obesity is a significant health and

social issue. It is causally linked to higher prevalence rates of heart disease, stroke,

diabetes II, kidney disease, arthritis and some cancers, as well as social marginalisation.

Share of obese Australians (per cent)

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However, while achieving behavioural change to address this burden of disease is

an appropriate goal, doing so effectively through information provision and social

marketing alone is likely to prove demanding. Evidence about what works and why

in public health campaigns is not as advanced as evidence concerning medical

interventions (Wanless et al. 2004). Information obviously works best where it

targets behaviour resulting mainly from ignorance, that consumers would be

motivated to change. For example, in the UK, campaigns to encourage pregnant

women to have a better diet and take vitamin supplements appear to have been

successful, whereas a major campaign to encourage physical activity (‘Active for

life’) did not (NICE 2004). Given the complex individual and societal influences on

obesity, ‘informational empowerment’ may not be enough. More effective may be

conventional medical interventions, such as new types of drugs. While these will

come at a cost, they may still avoid greater system costs overall. Even if that were

not so — for example, because people lived longer as a result — there would be

societal gains through people’s enhanced wellbeing and productivity.

From a policy perspective, the obvious alternative approach is regulation.

Many successful public health interventions have in fact been based on regulation,

rather than information provision. Well-known examples include safety belt

regulation and drink driving penalties; smoking bans in workplaces; addition of

fluoride to water and removal of carbon monoxide from domestic gas supply.

(Suicide by gas accounted for 40 per cent of British suicides in 1963 and none by

1975. Substitution to other forms of suicide was low, with total suicides falling by

around 2000 people per year (Clarke and Mayhew 1988).)

However regulation is potentially a more fraught route to societal improvement, to

the extent that it overrides individual preferences. For example, rules about what

foods can be advertised on television, made available in school tuckshops, or sold at

supermarkets, involve progressive encroachment on an individual’s right to choose.

In some cases that may be warranted, in others not. The calculations are not

straightforward and political judgement will inevitably be called upon.

Therefore, as in the case of public education campaigns, it will be very important to

subject all new regulatory proposals to careful analytical scrutiny in advance and

subsequent formal evaluation following implementation. This is rarely done well;

and sometimes the latter is not done at all.

When people think of the health system, they mostly think about the supply side;

doctors, hospitals, chemists and pharmaceutical components, health bureaucrats and

systems for public financing. This preoccupation with the supply side is in itself an

indication of the currently attenuated role of the consumer.

In normal markets, the costs for consumers are the rewards for suppliers. That price

nexus is all but severed in the heath system. Instead, the most important incentives

provided to suppliers come from governments.

A well-functioning health system should have strong incentives to maximise

productivity as well as to attain appropriate quality (as occurs routinely in the

business world). In its recent report on the National Reform Agenda, the

Commission found evidence of sizeable productivity gaps in the supply of existing

services around the country (PC, 2006a). We estimated that the gains from even

partly closing these could amount to nearly $2 billion a year.

As noted above, information about performance, combined with a degree of

consumer choice and financial incentives, can stimulate performance improvement

by competing services. The role of such demand-side incentives on the supply-side

is increasingly recognised. Indeed, Australia has taken some innovative early steps

in that direction with the introduction of the casemix funding system (initially in

Victoria in 1993-94). Under casemix, hospitals are now funded for specific

diagnosis-related groups, so that differences in the funding of hospitals reflects the

nature of their outputs rather than their negotiating capacity, past funding, politics

or merely populations served.

Nevertheless, there are some jurisdictions where this has still not caught on.

Moreover, Australia does not appear to be as innovative in its use of incentives as

the United Kingdom (which in many other respects has similarities to our system).

In May 2008, the UK Government outlined a system of payments to UK hospitals

that would be linked to patient satisfaction and health outcomes. The experience

with this could provide valuable lessons.

As arises for co-payments for patients, there are tricks and traps associated with

incentives for service providers, especially where patient characteristics and

outcomes are hard to measure. One potential problem (cited with casemix) is

premature discharging of some patients. Another obvious problem is ‘cream

skimming’ — seeking patients who, within an identifiable health category, are least

costly to treat. Complex systems can be administratively burdensome, with much

time spent by clinicians filling in forms and by administrators auditing them. As in

other areas, careful evidence gathering is a key to learning whether any new

arrangement produces benefits.

In part, higher productivity may be achieved by simply adopting better processes,

such as avoiding wasteful cost shifting between parts of the health system funded by

different parties, and the application of evidence-based treatment protocols to

reduce adverse events and unnecessary clinical variation. Structural changes, such

as re-organising the system to realise economies of scale and scope may also offer

gains.

The desirability of good processes also extends to ‘technology assessment’, which

provides the basis for approving the (subsidised) use of new technologies, including

new PBS drugs. Assessment should consider the full benefits of any new

treatments, including reductions in work absences or reduced side-effects. Once in

use, new technologies need to be subject to greater systematic review of their

efficacy and cost effectiveness. In its research into medical technologies (PC,

2005a), the Commission also found a need for greater procedural transparency and

community involvement in health technology assessment. This could help foster

greater acceptance of technology funding decisions and limit the risk that

technology assessment is used as ‘soft’ rationing at the cost of (greater) benefits foregone.

Australia’s health workforce is highly regulated. Much of that regulation is

appropriate. Occupational certification of surgeons, general practitioners and other

health professionals is an effective way of signalling their competence to patients.

But there are also some rigidities in workforce regulation and fragmentation in

processes that frustrate innovation, raise costs and put strains on a system where

workforce shortages are growing across the country (PC, 2005c). To use

economists’ jargon, it is not clear that ‘comparative advantage’ prevails in who does

what, or that the system is responsive to changing needs and capabilities over time.

The Commission proposed a set of national structures to this end, with COAG now

pursuing some of these, including changes to national accreditation and registration.

The question of how remuneration systems might be modified to create better

incentives for effective utilisation and workforce change, without jeopardising

quality of care, is also on the table.

Pharmacists’ remuneration — and indeed the complex structure of regulation

throughout the pharmacy industry — has proved remarkably impermeable to policy

reform. Pharmacies are generally required to be owned by pharmacists, and there

are locational restrictions, price controls, and ‘ethical’ restrictions on advertising.

While there are good grounds for certification of the profession of pharmacists —

and potentially valuable extensions to their clinical role — it seems hard to justify

key parts of the existing regulatory structure on either clinical or consumer welfare

grounds. At the threshold of an unprecedented escalation in health costs, we need

finally to conduct a rigorous re-appraisal.

depends on policy settings in others. Indeed, the health system is more even than the

resources and structures devoted to health care. The complex causal factors behind

persistent Indigenous disadvantage provide a vivid illustration of this. Having a

good health clinic in a remote Indigenous community is unlikely to achieve better

health outcomes if there are barriers to access, if housing is overcrowded, diets are

poor, and substance-abuse is widespread.

The notion of health as an interconnected system is becoming better understood,

both in the extreme case of indigenous health policy and in the mainstream. This is

illustrated by the piloting of coordinated primary healthcare. This has been

suggestive of significant benefits through more integrated service provision; though

it also has revealed considerable underestimation of the administrative complexities

entailed (Department of Health and Ageing 2007).

In its report on Private Health Insurance, the Commission advocated a major public

review of the health system as a whole, and it has since reaffirmed that view (IC

1997, PC 2005).While there are obvious advantages in undertaking such a holistic

assessment, the most effective way of implementing changes to achieve system–

wide improvement is likely to continue to be through incremental steps, rather than

any ‘big bang’ reform. The latter is probably too risky, given that we can never

know for sure how people, doctors, hospitals and bureaucrats would actually

respond in a world very different from the one they inhabit, and the downsides from

failed large-scale policy experimentation in this field could be potentially damaging.

The challenge with an incremental approach to reform, however, is to ensure that it

is consistent with a coherent strategy for improvement of the system as a whole.

Recent developments within COAG provide an opportunity to advance reform in an

evidence-based way, such that individual reforms can be devised which enhance the

operations of the system. The relevant COAG working group has the task of

advancing some key areas, and the new National Health and Hospitals Review

Commission has been given a mandate to “report on a long-term health reform

plan”, by the middle of next year. This is a big job, but there is considerable policy

groundwork from a variety of experts over recent years on which to build (including

the inaugural presentation in this series, Podger, 2006).

Any national reform plan needs to be cognisant of the emerging cost pressures

related both to the demand (ageing) and supply (technology) sides of the healthcare

market. Those pressures are inevitable and of major dimensions. They are best

addressed proactively and there appears scope to do that. However this brief

excursion through various areas that are seen as prospective is suggestive of

caution. Ultimately, health policy reform is about changes that can lead to

improvements in people’s wellbeing. While greater cost-effectiveness and

efficiency must be an integral part of this, mere cost containment should not be the

goal.

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