Can the health dials be shifted?

The Productivity Commission this week released the first of scheduled five-yearly reviews of total productivity in Australia.  It’s a commendable initiative from Treasurer Morrison and will complement the Intergenerational Report as a snapshot of ongoing economic performance.

Some 40 pages of the document – Shifting the Dial – address healthcare, and what might be done to address fundamental limits to both efficiency of delivery and actual population outcomes.

In particular, there’s a range of sensible suggestions, including:

  • Increased use of telehealth;
  • Proper integrated care;
  • Reducing the use of ‘low-value health interventions’; and,
  • Reorienting activity-based funding for hospitals, to reward hospital avoidance rather than simply the provision of services.

The PC notes that waiting times in doctors’ offices imposes costs on Australians of approximately one billion dollars annually.   Many of us have experienced the frustration of those waiting times whilst watching the clock and wishing for a speedy return to our offices.  If use of the MBS telehealth numbers could be expanded, many of us could avoid that wait, have our consultation from a place of our choice and, if telehealth was used for just 10 per cent of consultations, contribute to saving over $300 million annually in travel and waiting times.

Likewise, the recommendation to reduce the use of low-value health interventions and introduce ongoing reviews of the Medicare Benefits Schedule.  These are sensible suggestions and it is good to note the PC’s recognition of the work currently being undertaken by the Robinson Review which is progressing well, particularly given the level of consultation built into its methodology, and necessary to its success.

Unfortunately, the ambition of the report may exceed its impact, for two reasons.  The first is the typical problem of political constraints.  As an example, the Report notes:

“GPs are the clinicians that Australians most frequently see and are highly trusted.  They will often deal with people who have already acquired chronic conditions or have their time diverted readily into reassurance work – treating people who have minor ailments, many of which would resolve without any treatment.  Yet the aspiration for primary care is that GPs play a prominent role – within the broader, primary health care sector, in preventing chronic conditions.” (p.46)

Well said, but the quickest way to raise the hackles of any medical or allied health college is to suggest that lines be blurred between different healthcare franchises.  It’s a curious phenomenon, because we expect people entering medical training to seek the opportunity to practice at the top of their profession, rather than at the more mundane maintenance end, but it’s a real problem.

Some solution to this does need to be found: it’s beyond contest that the largest return on medical investment is preventing chronic disease – both in the first instance as well as stopping progression to hospital ‘frequent flyer’ status – but the community naturally remains focused on timely treatment of illness and injury in the present, not the future.

The second limitation in Shifting the Dial lies in glossing over some of the economic realities of retail healthcare.  In particular, on pharmacy, it finds:

“A new model of pharmacy would adopt now-available technology – for example, e-scripts and machine dispensing of drugs – and recognise retailing as incompatible with a genuine clinical function for pharmacists.” (p.72)

There are some inevitable and sound objections here, which go to what pharmacists do and might do.  The first is that vending machines are unlikely to contribute to quality use of medicines, or to identify where there is poor compliance: pharmacists are key players in ensuring people understand how and when to take their medicines.

And second, the complementary retail business of pharmacies has an important role in reducing pressure on medicine prices either to consumers or the government.  Separating the two would be a source of upward pressure.

The two issues we’ve raised here have an important intersection: pharmacists could be as important as GPs in preventive health – particularly smoking and alcohol.  And they could take some of the basic work away from GPs – for example simple wound care.

But none of this is a simple as the PC would like it to be.  Integrated care requires fundamental change to training of all professions at the tertiary level.  It also requires more flexibility in healthcare finance in order to introduce indifference to who is the primary care leader.  That requires a political risk appetite we haven’t seen of late, but perhaps this report is a start.

Alastair Furnival and Catherine McGovern

Is it efficient to subsidise private health insurance?

The Australian Financial Review this morning quotes part of a report Evaluate recently undertook at the request of Private Healthcare Australia, looking at the history and economic impact of private health insurance (PHI):

Our report, The Relative Efficiency of The Private Health Insurance Rebate v. Direct Public Health Expenditure looked at four issues around PHI in Australia.  It found:

1.       Far from being either a modern or partisan innovation in the Australian health system, versions of PHI have existed since the 19th century and have been recognised and supported by Commonwealth legislation since 1953;

2.       The cost to the Commonwealth of healthcare supported by PHI is substantially cheaper than healthcare provided via public hospitals.  This is in itself obvious, as the Government contribution to private hospital services is only a fraction of its expenditure on a public hospital separations;

3.       As an allocative efficiency measure, a dollar spent by Government on PHI is up to 15% more efficient than a dollar spent on public healthcare.  The key driver in this is that the economic distortions caused by taxation, or deadweight losses, are more prevalent for healthcare entirely funded by Government; and,

4.       Looking at technical efficiency, a marginal dollar spent via the PHI rebate does more to increase overall consumer welfare, measured as a reduction on public waiting lists, than does a marginal dollar distributed to State hospitals.

The short summary of this is that the PHI Rebate, in its current form, is good public policy.  It does what it seeks to do, and there are benefits for all Australians.

However, a couple of cautionary comments are needed.  First, these conclusions do not support a case for replacing public healthcare with private supply (although they also do not argue against it).  Our research is about healthcare finance and, while we identify some benefits from competition, these are not the main thrust of the paper.

Second, it’s important to remember that this is about a marginal dollar.  There is no argument for putting all of the public health funding into private insurance and good reasons remain for retaining a public hospital model that is universally accessible.

The importance of the marginal dollar is to look at the hypothetical next dollar spent and, in this case, it would be well spent via PHI.

But our overwhelming view remains that an effective health system requires a well-constructed balance, both in supply and finance.  PHI today, and under its current settings, is an efficient component of Australia’s mixed system.

Alastair Furnival and Catherine McGovern

Four wheels good, two legs bad?

As Australia staggers from the April public holiday season to the May Budget, we’re finally seeing signs of a mature debate about debt.

The Treasurer’s view appears to be that the best path to fiscal rectification is to focus on our net operating balance, which reflects deficits to support recurrent government services expenditure, rather than the underlying cash balance, which reflects all debt, including borrowing for infrastructure.

Much of the political criticism of this proposed change in emphasis has been characterised by the assertion that it implies borrowing for people for services such as health, education and ageing is bad debt whilst borrowing for airports and rail lines – and possibly loans to large foreign mining companies – is good debt.

The labels ‘bad’ and ‘good’ may appear judgemental and politically courageous but, from an economic perspective, they’re statements of fact.  Briefly, four issues come into play here.

First, there’s the Iron Lady’s concept of handbag economics.  Borrowing for healthcare services means simply spending more in a given period than the Government earns through taxes and other revenue sources.  It’s debt for consumption, pretty much the Government’s credit card.

Following from that, we have the issue of inter-generational equity.  Asking the next generation to pay for your education debt is unreasonable.  Asking them to pay for a new airport which they’ll use is not.

Third, debt for non-recurrent activities is productive in a way that recurrent debt isn’t.  While getting you back on your feet after an accident – meaning you can return to work – has a productivity element, it’s not comparable with the potentially economy-magnifying effects of a new railway.

And finally, it’s easier to use this kind of debt efficiently.  Government finance can be effectively leveraged by auctioning rights to build and operate infrastructure via PPPs and similar mechanisms.  In contrast, we’ve seen some disastrous and highly inflationary attempts at leverage in relation to childcare, education, healthcare and ageing.

The opening paragraph of the ABS Explanatory Notes to its Government Finance Statistics (5512.0) begins: The main functions of government are the provision of non-market services, the regulation of economic and social conditions, and the redistribution of income between sections of the community. These activities are primarily financed by taxation and are carried out by entities in the general government sector.

This pretty much sums it up.  None of this is sensibly augmented by debt financing, other than for brief transitional moments in the economy.  Borrowing to pay for social welfare outcomes is redistributing tomorrow’s money, not today’s, and it’s easy to predict where that ends up.

There will be challenges here.  It’s important that the principle be carried through to focus on the most productive infrastructure, not simply the most politically important.  In addition, it will require courage to maintain the argument against debt-finance for health and ageing services: the demand to reintroduce indexation on payment systems which already exceed revenue sources is particularly problematic.

All of which said, the Treasurer’s approach is a massive positive step in moving from an incoherent debate about fiscal reform to one which aligns policy with the proper role of Government.

Alastair Furnival and Catherine McGovern

Obamacare and its replacement: Are there lessons for Australia?

On Monday, the House GOP presented a Bill to make good on the Party’s – and President Trump’s – promise to ‘repeal and replace’ the Patient Protection and Affordable Care Act (PPACA), better known as Obamacare.

We’ve seen immediate headlines about “Trump blowing up Obamacare”, but the reality is naturally a little more subtle.

The lyrically-titled Budget Reconciliation Legislative Recommendations Relating to Repeal and Replace of the Patient Protection and Affordable Care Act and its equally poetic companions make a range of significant revisions, including:

  • Removing penalties for those who don’t take out private health insurance: the so-called ‘individual mandate’;
  • Repeals the Medicaid expansion provisions from 2020;
  • Allows States to exclude high-value lottery winners from Medicaid, despite the fact that there may not be a massive saving;
  • Compensation for States who did not expand under Obamacare;
  • Repeals s.1402 of the PPACA which requires insurers to curtail cost-sharing, or out of pocket expenses, by members;
  • Introduces the Patient and State Stability Fund, which funds programs to ensure current high-cost members of insurance plans remain covered, smooths risks to insurers, and funds preventive health.  Allocations for States for years 1-2 of the new regime are US$15 Billion, reducing to $10 Billion for successive years;
  • Permits insurers to charge a 30% premium penalty for a break in continuous coverage;
  • Repeals the 10% tax on indoor tanning studios;
  • Repeals the net investment income tax, which isn’t strictly a health issue, but a supertax;
  • Maintains but modifies tax credit incentives for insurance;
  • Removes a range of other tax measures, including on OTC pharmaceuticals, health savings accounts and medical devices; and,
  • Prohibits funding to most abortion and planned parenthood services.

The details of the Bills are likely to be heavily edited in order to ensure at least 50 of the 52 GOP Senators will support its passage.

This will require a deft hand to maintain the measures which return from the chimera of Obamacare to parallel public and private health insurances, without creating conspicuous losers.  While measures, such as the individual mandate, are decried as threats to freedom, many who have gained otherwise unaffordable insurance via the PPACA will otherwise be in the Trump camp.

And the final form of other health-related promises in the President’s first speech to Congress, most notably: allowing purchase of interstate insurances; and reducing medicines costs by lowering the FDA ‘burden’ will be interesting to see.

As a sidenote, the form of the Bills is interesting.  Despite being healthcare legislation, they come under the Title of Energy & Commerce as Budget Reconciliation measures. This is a form of legislated change introduced late in the Nixon administration, which has been enthusiastically implemented by both sides.

The short explanation is that budget measures are immune to filibuster so, even if they affect other legislation, they can be passed efficiently. It’s an interesting counterpoint to the Australian problem that outgoing Governments of all persuasions pass poison-pill legislation to protect their legacies, knowing that the Senate must pass the budget but can be very obstructive with subsidiary Acts.

Are there other lessons about the proposed changes – or at least the debate around them – from which Australia might learn?

Perhaps the most important is that the US has retained a genuine – and in many ways useful – tension between social and private insurances. While Obamacare’s main thrust was universal coverage, it did this via cost-shifting: placing a substantial burden on private insurances and penalties to higher-income individuals.

In response, the Republicans will retain part of this social goal – at least for those already enrolled – but will return much of the public good cost to the public purse.

We lack this debate in Australia. Leaving aside the increasingly inefficient tax penalty for high-income earners without private health insurance, there is no discussion of how universal coverage might be better managed via a more granular public-private mix. Medicare is the most immovable element of our social compact.

Given our increasing debt situation, looking to a model which distinguishes social insurance for those in need from authentic private subscription for those who can afford it is critical.  Politically, this is unpalatable but, without this debate, Medicare and our current system of universal healthcare will inevitably become increasingly unaffordable.

The US debate is also one about market completion. President Obama’s instincts to address significant gaps in coverage was admirable. But it diluted the capacity of efficient insurers to cover their membership. How far the final response goes remains to be seen but it will permit a more competitive market.

Curious as it is coming from contemporary US politics, this is an adult conversation about what is affordable versus what is desirable. In addition, US markets permit private coverage of adjuncts to medical care, such as pharmaceuticals and aged care, contrasting with the tendency of Australian Governments to crowd out market solutions through well-meaning universal schemes.

We need to have an adult conversation about affordability and sustainability in Australia. We simply can’t afford not to.

Alastair Furnival & Catherine McGovern

Can we safely privatise the public good?

Three interesting moments intersected in the past week: our Health Minister announced the latest wide-ranging review of aged care, to be led by former Finance Secretary David Tune; the Productivity Commission released its preliminary recommendations for competitive supply of human services; and the Human Services Minister stated:

“Every single aspect of Medicare which is currently operated by government will continue to be operated by government, including the processing of the Medicare rebates” (SMH, 25 September)

The last of these is entirely understandable following the so-called ‘Mediscare’ during the election campaign, though it rather feels like a declaration that the Government is committed to shuffling the paper while private operators provide the actual healthcare.  Put that one down to the perversity of politics.

Elsewhere in recent times, the prominent economist John Quiggin has asserted that international opinion has turned against private provision of health, education and criminal justice (Guardian, 12 September).

He cites issues in the NHS, Serco’s troubles in NZ, and the gaming of our Federal vocational education finance rules by some of the more unscrupulous providers. We presume Harvard University, St Vincent’s Healthcare and a raft of other local and international private successes didn’t fit within the prescribed length of the article.

But this is not to say that the general argument lacks merit.  There have been failures, and it clearly irritates the community more if a private company in receipt of public monies drops the ball as opposed to incompetence within Government itself.

The issue here is profit, and whether it is an efficient substitute for the purer and more esoteric motivations of the public service.

The Productivity Commission’s Human Services Review is clear in its response:

“With some exceptions, the user of the service is best-placed to make choices about the services that match their needs and preferences.  Putting this power into their hands lets individuals exercise greater control over their own lives and can generate incentives for services providers to be more responsive to users’ needs”. (Overview, p.7)

This flows from the original Harper Review recommendation to introduce greater competition and choice in human services in pursuit of efficiency, quality and responsiveness and to enhance competitive neutrality.  It’s really about consumer choice, with competition as a necessary consequence.

The Commission does note limits, particularly in the case of information asymmetry, where it is difficult to imagine appropriately-informed choice.  Nonetheless, it identifies six areas for increased private provision, viz.: social housing; public hospital services; palliative care; public dental services; remote Indigenous human services; and ‘grant-based family and community services’.  A broad and ambitious list, given the sensitivity of the issues covered.

We should remember that this is particularly about services, rather than infrastructure.  It’s often the case that those preaching competition and those protecting the public good are speaking different dialects: the former is interested in consumer-facing services; and the latter in the anchoring infrastructure.

And this is difficult to reconcile.  We can simultaneously understand both: the Government’s enhanced capacity to regulate services from ownership of a regional base hospital; and the public benefiting from competing specialists operating within that structure.

Historically, this has been a core challenge in aged care, which the Tune review will likely seek to address.  While the Howard Government’s original aged care finance scheme was theoretically limited to the provision of care services, it all too rapidly became clear that there was an implied subsidy for bricks and mortar.

While the private (both for-profit and NFP) provision of aged care infrastructure has delivered vital benefits to Australia, it has also at times skewed the priorities between community and residential care.  Translating policy goals into finance rules is always tricky.

So is there a guiding principle for policy delivery?  Back in 1984, the sometime public servant and diplomat JWC Cumes considered the question.  After 40 years of public service, he predicted reforms wherein:

“The implementing agencies would be separate from day-to-day government.  Their structure and framework, scope and work will be defined by the government, where appropriate through legislation.

“They will have something of the nature of our present statutory corporations but preferably will be modelled, to the extent possible, on our great public, limited liability corporations.  Those at the head of the implementing agencies will be quite differe3nt from our present public servants, and more like the senior management of our private enterprise corporations …

“In effect, they would handle all the implementing aspects of government.  They would not make macro-policy but they would be independent in its implementation …

“Their efficiency would be judged, to the extent possible, in market terms, according to market criteria”. (A Bunch of Amateurs, pp.194-5)

Cumes wasn’t just talking about healthcare and education, but services such as the issuing of passports and collection of customs duties.

It feels like an overdue vision.  While Cumes didn’t anticipate the fever of asset recycling or the extension of the Trade Practices Commission’s remit via the ACCC, he described the defining shift: efficiency judged according to market criteria.

This can’t be done without the creation of a market.  But competition means winners and losers which, in social policy, often means the Government picking up the pieces.

The next phase of the PC review, along with the Tune Review and the plethora of other social policy inquiries and debates, will offer arguments on both sides.  Undoubtedly, the key lies in better constructed rules for access to public finance, but the limits will continue to be tested.

Alastair Furnival & Catherine McGovern

What’s in a CBA?

In yesterday’s House of Representatives Question Time, we learnt from the Treasurer that the cost-benefit analysis (CBA) into the relocation of the Australian Pesticides and Veterinary Medicines Authority (APVMA) cost $272,000.

And that it’s a matter for Cabinet, not imminent public release.  Previously, the Minister responsible for the Authority, Barnaby Joyce, has also conceded that the CBA may not directly endorse the move.

While it was refreshing to encounter a QT question of actual policy and fiscal substance, the associated media coverage has done little to inform readers of what the CBA might cover.

The term is commonly abused.  In the first instance, there is a significant difference between CBAs and associated business cases in the public sector, and those prepared for corporations.

The source of the difference is obvious: Government seeks to maximise welfare; businesses seek to maximise profit.

This is why the typical criticism of a mining economic impact analysis (nominally a species of CBA) focuses on its lack of attention to public goods, rather than on the economic activity it generates.

Admittedly miners and other developers tend to gild the lily, assuming the total value of the project and its jobs as an economic increment, and minimising the externalities.  But there’s rarely virtue on either side of the fence.

In contrast, a Government CBA should be straightforward, particularly for a scientific agency.

The direct costs of relocation (and presumably redundancies) are measured, as are the likely savings from renting in Armidale rather than Canberra.  

Indirect benefits may well increase.  The flow-on impact of demand from the APVMA in a small market such as Armidale may be greater than in the dilute ACT economy.

But what of the public good?  After all proximity to the Minister is a potentially transient benefit, given the demonstrated whimsy of the national electorate.

Three potential items stand out here, each difficult to quantify.  First, there will be an increase in regional employment, which is more difficult to create than in an urban area.  Previous attempts by Ministers to move Departments into their leafy suburban electorates would not have delivered the same.

Second, there is a demonstration of capability.  Decentralisation has been tried with more trivial agencies at a State level, but moving an important Federal body will provide a powerful case study.

And third, collocation near UNE will provide a valuable fillip to both organisations. The most challenging growth goal for regional Australia is to create a multi-level economy. Siting regulators next to leading educators may be the bait required to relocate some corporates within the area.  A town-and-gown outcome for Armidale would be a massive achievement.

As we say, difficult to quantify.  But the converse question remains: where’s the risk?  Is there an actual downside to having a scientific agency outside a capital city?  It doubtless offends Canberra’s sense of pre-eminence, but some might see that as just one more collateral benefit.

By Alastair Furnival and Catherine McGovern

Are we gambling with Medicare?

The missing and obvious response to the ‘Mediscare’ campaign last month should have been: “Privatise what”?  It would have been instructive to have the Opposition and others describe exactly what constituted this apparently saleable edifice.

It’s possible that Australians believe Medicare resembles the UK or NZ health systems where most doctors are effectively employees of the public payer, so the service provision would be on the block.

In reality, the tension which continually inflates the price of Australian healthcare is that we have combined a predominantly private supply with a public finance source.  Somewhat risibly, we describe Medicare as a ‘social insurance’.  But the essence of an insurance is that it is priced to manage risk.  Medicare is an uncapped and loosely guarded pot of money.

The Government does set the base price of medical services (the MBS rebate).  But this is increasingly unrelated to the retail price of medicine, which is affected by alternative AMA and College schedules, as well as the market power of individual specialties and specialists.

There’s nothing inherently offensive about a market price for medical services.  What would be offensive is if we granted access to essential and urgent medicine according to wealth.

And yet, that’s the gamble we’re currently taking.  If Medicare continues to be the Shibboleth of access to the Treasury Bench, then continual growth in the tax base is also required or substantial cuts elsewhere.

Neither seems likely, so where does that leave us?  The most fertile options lie with better alignment: we might more steeply means-test the need for health subsidies to ensure the social welfare goals of the system remain paramount; and/or we might explore more extensive private finance options that introduce authentic insurances to the health system in place of the current model.

Evaluate will be working extensively on the issue of matching private finance to private services, and public finance to public goods.  We’re interested in your thoughts.

By Alastair Furnival and Catherine McGovern