eMJA: Deeble, Medicare's maturity: shaping the future from the past

eMJA The Medical Journal of Australia

Looking Forward

Medicare's maturity: shaping the future from the past

John S Deeble

MJA 2000; 173: 44-47

By any objective standards Medicare has performed extremely well

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There are almost as many suggestions for reform of Medicare as there are participants in the system. Depending on the perspectives, ideologies and interests of the proponents, these calls for reform range from its extension and consolidation under either Commonwealth or State management, through various permutations of private and public operation, to relegation of Medicare to a welfare safety net. Some people hold any universal program to be "unaffordable", although for whom is rarely made clear. Some see Medicare's open-ended medical insurance as wasteful, while others (and often the same people) view any limits to hospitalisation as a major fault. Doctors complain about fee levels, the Commonwealth and State governments argue over funding shares, and consumers blame "the system" for the fragmentation of their care.

None of these viewpoints are surprising. Medicare is an insurance program, but all of the delivery systems it supports are also seen as part of it, and these will rarely meet all the demands of funders, providers and patients. Given the different perspectives of each group, no system ever could, and Medicare's ability to respond is often limited by factors outside the insurer's control.

Political scientists like to point out that in public policy the relevant question is rarely "where do we go?" but more often "where do we go from here?". So first we need to explore where we are now.

Medicare since 1986

The summary data for Medicare and the services it covers for 1985-86 and 1997-98 (the most recent year for which full information is available) are shown in Box 1. Expenditure for all health services has risen from 7.5% to 8.4% of gross domestic product (GDP), and most of the increase was in the recession years 1990-1992. However, for Medicare-covered services (medical, public hospitals and optometry), the rise has been very small -- only 0.2% of GDP. In 1995, Australia's health spending as a proportion of GDP was in the middle of the range of health spending of comparable First World countries.

Medical services: On the medical side, average benefits paid per person rose by 31% (in constant 1997-98 prices) and the number of services increased by an almost identical amount (30% per person).¹ Average fees per service were therefore almost constant in relation to general price changes, and fell by only about 2% when compared with consumer prices (ie, much less than is often argued). On average, fees charged were lower than the schedule level in every year,¹ despite the common impression of widespread over-schedule billing. The latter is mostly by specialists, largest for insured patients in private hospitals, and a greater problem for private health insurers than for Medicare.

Hospital services: Overall hospital admissions per person rose by nearly 50% over the 12-year period. That was an extraordinary rate of growth, mostly occurring after 1992, and all a result of same-day treatments; overnight admissions per person were almost unchanged (Box 2).

Total hospital outlays per person increased by 52% in 1997-98 prices, but the public and private sector experiences were quite different. Per person, public hospital expenditures rose 39.5%, comprising a 34.5% increase in admissions and a rise of about 4% in real costs per admission.¹ Nearly all of the increases in admissions were in public patient use (Box 2).

In contrast, private hospital outlays per person rose by 115%, the product of a 90% increase in admissions per person and a 13% rise in unit costs. About half the increase in usage was a result of private patients switching from the public hospitals to private hospitals. The underlying growth in private hospital admissions was nevertheless substantial, particularly since the proportion of the population covered by private insurance fell by 18%.

Financing

Apart from complaints from doctors over fees, the main issue has been the roles of the Commonwealth and State governments in public hospital funding, with each party blaming the other for any perceived shortfall. The details are complex, but the essential data are summarised in Box 3. This shows annual changes in public hospital expenditure and changes in the Commonwealth Government's share. The three time periods shown are the five-year Medicare agreement periods, which set the level of Commonwealth funding. There were clear links between the two variables -- when the Commonwealth share was less than 50% the growth in total outlays fell -- and, despite all the rhetoric, that division in source of funding still underlies the system's behaviour. The level of Commonwealth grants is therefore crucial and their inadequacy in one particular period (1988-1993) has been the main destabilising factor.

The other and more popular issue is the role of the Medicare levy, which is often criticised for funding only a small proportion of Medicare's costs. But no one ever claimed that it should do otherwise. It was intended to cover only that part of the medical benefits side, which had previously been met by private insurance -- about half of the total amount paid before Medicare was introduced in 1984. The politics of the time demanded a demonstrable linkage between new outlays and the Medicare levy. This still applies. In 1997-98, the yield of $3760 million was almost exactly half the Medicare benefit payout. The hospital side had always been funded from general taxation via grants to the States and that continued, ironically funded partly by the withdrawal of a 30% tax concession on private insurance, very similar to the subsidy reintroduced last year.²

Medicare today

By any objective standards Medicare has performed extremely well. As I have said elsewhere,¹ in any other context an industry which increased its output by 30%-35%, with almost no increase in its share of the national product, would be acclaimed as a major success story! Costs have risen almost exactly in line with prices generally and, except for pathology and imaging, growth in medical service use has stabilised since 1994. All of this was achieved in a healthcare system which gives patients and providers more freedom than almost any other system worldwide.

But the clamour for change continues. Not all of the exploding demand for hospital admissions has been met and the impact of that demand, plus the costs of upgrading private hospital technology, has threatened private insurance viability. The 30% premium subsidy for private health insurance introduced in 1999, and recent changes from community rating to risk rating, attest to this -- no funding system, public or private, could long sustain an annual growth in hospital admissions of 3.5% per person, nearly twice the growth in GDP. The problem is a medicotechnological one, not one for Medicare alone. People do not admit themselves to hospital, doctors do -- and that is where the explanations must be found. However, some groups have contrived to present it as a crisis on which governments must act and which threatens the whole existence of a universal insurance scheme.

What should be done

As might be guessed, I am not among those supporting major structural changes to the present system. Special interests apart, the most substantive criticisms concern division of responsibilities for management and funding between the Commonwealth and State governments, institutions and professionals. All these predate Medicare. Its acceptance of the delivery systems, payment methods and reward structures of the time has also been criticised. Badly coordinated care, wasteful cost-shifting and weak incentives for efficiency are held to result. For many people, timidity rather than excessive zeal would be the main complaint.

There is truth in this contention, although the Australian experience is not unique. No national insurance scheme has greatly changed the culture and practices which preceded it. The historical and constitutional divisions between the Commonwealth and State governments over medical and hospital services, insurance powers and revenue raising are so deeply intrenched that they could never have been resolved within the time frame which political action required, particularly in the circumstances of 1973-75 (see the articles by Scotton, and Hayden). Almost all proposals for payment change have met strong opposition from the medical profession, although some very modest progress has been made with program-based payments to general practitioners.

How much this matters is debatable. The governmental (Commonwealth-State) division is certainly complicated, sometimes irrational and the source of much angst over cost shifting. The latter fascinates the bureaucrats and absorbs a disproportionate amount of their time. However, it works both ways, and I am not convinced that divided financial responsibility has as much effect on the fragmentation of services as many critics claim. The recent coordinated-care trials have shown that, at the operational level, pooling funds is not a sufficient condition for high-quality, efficient care.³ Poor management skills, rivalries and professional myopia are equally important problems. At a higher level, it should be possible to separate "desirable" cost rearrangements from stratagems, although distrust between the Commonwealth and States does not help.

It would be naive to expect any major realignment of governmental roles in the foreseeable future. However, the climate could be changed if the Commonwealth Government were to take responsibility for all medical costs, including those in public hospitals and medical training. It would mean no more than setting the Federal-State financial division slightly differently, with no immediate implications for budgets or administrative responsibilities -- existing public hospital appointments would continue with only cost-neutral grant adjustments. That would be much more logical than the present situation in which the Commonwealth supports medical costs directly in the private hospitals, but has no role at all in the public sector. Separate government funding for all medical costs is standard practice in the Canadian system, and there are considerable advantages in it. Among other things, it would change much of the debate over cost shifting, but that would be only one of the anomalies addressed. Commonwealth funding of in-hospital medications has already been mooted on the pharmaceuticals side.

The efficiency arguments are more fundamental. For the most radical reformers, any system in which providers both select and deliver services must be inherently flawed. In theory, competitive markets achieve efficiency by separating these two functions. Emulating their operation should therefore be the aim, at least as far as possible. The practical manifestations are schemes for separating purchasers from providers (even funder-purchaser-provider splits) with arm's-length dealing and varying degrees of competitive behaviour. Governments are entitled to mandate insurance and how its costs should be borne, but both the insurance function and the supply of services should be diversified. State hospital systems and single insurance authorities like Medicare are incompatible with such models.

These are the same arguments and issues as were traversed 25 years ago, and, like most debates in which the evidence is a mixture of empirical data and behavioural assumptions, they can rarely be settled. My view is that, while there are some supporting services in which standards and outcomes can be sufficiently defined and measured for arm's-length dealing, they cannot be applied to healthcare as a whole. The basic problems of uncertainty and inequalities of information between users and providers were first explored by the Nobel Prize-winning economist, Kenneth Arrow, nearly 40 years ago.⁴ For patients, they imply a level of trust and delegation to providers unparalleled elsewhere, and the same is ultimately true for purchasers on their behalf. The United Kingdom and New Zealand were the first countries to embrace purchaser-provider separation and internal markets within their public systems. Their experience has shown that, at a general level, it is impossible to write contracts which sufficiently define the obligations of each party, and that the information costs of trying to monitor such contracts have been extremely high for very modest gains. Both systems have now been modified considerably.

I am therefore sceptical about most market solutions, and equally doubtful about isolating funders from both user and provider contact. In the Australian context, that doubt is particularly relevant to proposals which would create more "independent" authorities outside the present system. It might be worthwhile, but it could also serve to simply shift responsibility. As it is, Medicare depends for adequate funding on a network of political obligations -- on the Commonwealth in return for money collected through the levy, and on the States in return for Commonwealth grants. These commitments could easily be avoided if government contributions became discretionary and there was someone else to blame.

What changes are most likely

For the foreseeable future, the medical side of Medicare will almost certainly remain, although technology and corporatisation will force some changes. The diagnostic services are prime examples. They are the fastest-growing expenditure group and the least satisfactory subjects for fee-for-service payment. Per person outlays for pathology and imaging have risen by 38% over the past five years, compared with a growth of only 5% for all other medical services.⁵ Recent attempts to cap growth have had only a limited effect, and, in pathology, a few corporate providers are now so dominant that their relationship with Medicare is more like commercial contracting than professional fee reimbursement. Imaging is heading in much the same way and commercial interests are making inroads into general practice as well. Potential responses by government and the medical profession cannot be canvassed here, but they can not wait too long.

It is on the hospital side, and particularly the relationship between the public and private sectors, that there is most controversy. Australia is unique in having substantial private hospital and private insurance industries operating alongside a universal public program. Both Medibank and, originally, Medicare provided subsidies to private hospitals. They and the regulated private insurance were seen as supplementary to the public system for people who valued choice of doctor, hospital and time of treatment, but they were still regarded as a part of the Medicare system. As shown earlier, the result has been a slow decline in the proportion of the population holding private insurance, but not in the absolute number of patients treated privately and, paradoxically, a very large increase in private hospital admissions.

Both perceptions and policy have changed significantly in recent years. Rhetorically, the emphasis has been on the competitive independence of private insurance, with a shift in its depiction from being supplementary to Medicare to being first a complement and then, most recently, an alternative to it. That is the thrust of the current recruitment campaign, however obliquely expressed. The purchase of advantage is recognised and an explicitly two-tier system encouraged by such devices as the levy surcharge on uninsured higher income earners and the portrayal of private insurance membership as a civic duty which assists the poor. There are many people who believe that these measures and the $1.7 billion premium rebate are simply precursors to either means testing Medicare or allowing people to opt out of it.

Some realities

It is hard to predict political decisions. But it is also easy to exaggerate the impact of current policies. In reality, all the present activity will not raise private insurance membership to much beyond a third of the population -- the same as in 1996 -- and the best estimate is that, although savings to the public hospital system in the long run might reach about $450 million (still only 3% of its total outlays), that is a long way off. None of the big-picture parameters will change. However, both costs and hospital use will rise.

Costs -- in its rush to facilitate medical gap insurance, the Government's present restriction to "contracting" doctors will be removed. Average charges will inevitably increase (with the 30% Commonwealth funding) and, in the process, challenge the legitimacy of Medicare's whole schedule fee system and cost control. How can two levels of officially sanctioned charges both be right?
Hospital use -- utilisation must rise because unrestricted hospital access is what private insurance offers and is bought for. But Australians are already among the highest hospital users in the world. In 1997-98, our rate of overnight admissions was 159 per 1000 population. In Canada it was 105 per 1000, down from 145 per 1000 in 1986.⁶ In the United States, the 1996 rate was 117 per thousand and falling.⁶ These are very substantial differences. It would be a pity if expediency and the demon of managed care prevented any serious thinking about their justification and how they came to be. As it is, one side of the Australian system is trying to contain hospitalisation as much as possible, while the other is effectively promoting it.

References

Deeble JS. Medicare: Where have we been? Where are we going? Aust N Z J Public Health 1999; 23: 563-570.
Deeble JS. Health care under universal insurance: the first three years of Medicare. In: Butler JRC, Doessel DP, editors. Health economics: Australian readings. Sydney: Australian Professional Publications, 1989.
Department of Health and Aged Care. The Australian Coordinated Care Trials: Interim Technical Report, Canberra: The Department, 1999.
Arrow KJ. Uncertainty and the welfare economics of medical care. Am Econ Rev 1963; 53(5): 941-973.
Department of Health and Aged Care, Medicare Statistics, 1984-85 to December Quarter 1999. Canberra: The Department, 98, 99, 106.
Organisation for Economic Co-operation and Development. OECD health data 99 [on CD-ROM]. Paris, OECD, 1999.

Authors' details

John Deeble is Adjunct Professor of Economics in the National Centre for Epidemiology and Population Health, at the Australian National University. He was a Senior Research Fellow at the Institute of Applied Economic and Social Research (University of Melbourne) when he and Richard Scotton formulated the first proposals for universal health insurance. During the Medibank period he was a Special Adviser to the Minister for Social Security, Chairman of the Health Insurance Planning Committee and Deputy Chairman of the Health Insurance Commission. From 1977 to 1983, he was Director of the NHMRC Health Economics Research Unit and was appointed Special Adviser to the Minister for Health, Dr Neal Blewett, and Chairman of the Medicare Task Force in 1983-84. Subsequent appointments included Founding Director of the Australian Institute of Health and Welfare, and First Assistant Secretary of the Department of Health and Community Services. He was a Health Insurance Commissioner for 15 years to 1999.

National Centre for Epidemiology and Public Health, Australian National University, Canberra, ACT.
John S Deeble, AO, PhD, BCom, DipHospAdmin, Adjunct Professor of Economics.

Reprints: Professor J S Deeble, National Centre for Epidemiology and Population Health, Australian National University, Canberra, ACT 0200.

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