Health care reform

Health services administration
Volume 192 - Issue 9

The Rudd reforms: a poisoned chalice in the long run

Author:  Jeff R J Richardson

Med J Aust 2010; 192 (9): 513-514. || doi: 10.5694/j.1326-5377.2010.tb03613.x
Published online: 3 May 2010
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Key arguments of the recent proposal for health reforms are questionable

Prime Minister Rudd is to be applauded for shaking the logjam of federal–state health relations, which for some time has been identified as a stumbling block to improving the health system. But that is all. His proposals as we currently know them have superficial appeal, but from a longer-term perspective they are a poisoned chalice.

The alleged advantages of the Commonwealth assumption of power are, at best, overstated. Although the Commonwealth has greater fiscal power and can ensure stable, long-term funding, it would be better to reform the tax system to meet the needs of the health system than compromise health care delivery to match an antiquated tax system. As noted in two articles in the Journal (recently published online), these reforms will not end blame-shifting.1,2 With a political incentive, some argument will be found. For example, the states will be accused of inadequate capital expenditure on infrastructure, and the Commonwealth of case payments that are too low.

Diagnosis-related group (DRG) casemix payment for hospitals is undoubtedly a good idea. But there is no reason to believe that it will have a major system effect. It will not balance the mix of primary, secondary and tertiary care, ensure quality in hospitals, integrate programs, improve access to services, or even ensure internal reforms within hospitals. Queuing is a function of funding relative to demand, with or without DRGs. In view of innumerable special circumstances, it is very unlikely that the Commonwealth could run such a DRG system without simply replicating much of the work presently carried out by the states. A direct pipeline to federal funds will further maximise the incentive for special pleading and political pressure and, as clearly demonstrated in the 2007 federal election, this can be highly effective. Former Prime Minister Howard’s intervention in the funding of the Mersey Hospital in Tasmania during that election gives a preview of the special pleading and pressure which might be expected under future governments.

However, the chief concerns are the long-run implications of the takeover and the lack of consideration of the relevant arguments and evidence (which were not provided by the National Health and Hospitals Reform Commission [NHHRC]).3 For the past two and a half decades, the major issue in the literature concerning health system reform has been the achievement of a system framework permitting patient choice of scheme (ie, diversity). In Australia, the arguments for this were vigorously promoted by Richard Scotton (one of the two architects of the original Medibank scheme and subsequently a Professor of Health Economics at Monash University)4 and briefly discussed by the Productivity Commission.5 But the discussion of the Scotton plan largely ceased with Scotton’s retirement and his name appears only once in the NHHRC report in a footnote.6

The case for diversity is compelling and draws on insights from the greatest economists, as distinct from the flawed theories embodied in recent orthodoxy. Adam Smith, the father of modern economics, famously summed up the case against centralised control when he argued that:

The man of system ... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board ... but ... in the great chess-board of human society, every single piece has a principle of motion of its own.7

Failure to heed this message led to excessive micromanagement, regulation and control by government, which culminated in the conservative backlash that started in Chicago and led to the Thatcher–Reagan era. John Maynard Keynes — the 20th century’s greatest economist — described a world characterised by uncertainty and unknowability of future context-specific challenges and the need for pragmatic flexibility. He even conceded the possibility of a budget surplus during depression times if, hypothetically, that happened to be the linchpin of business confidence.8 Failure to heed this message gave rise to a theory of finance based on statistical confidences, now discredited by the collapse of world financial markets. The response, at least, was flexible and pragmatic.

The take-home message from these great economists is that in the face of technological and other changes, systems and institutions must be adaptive and that this is unlikely, in the long run, when they are dominated by a “master manipulator”.

Consistent with this, Eric Beinhocker, Senior Fellow at the McKinsey Global Institute, has described the economy as a complex adaptive system, akin to the brain, the internet or an ecosystem.9 The conclusion of his masterly review in The origin of wealth is that the great lesson of the 20th century for political economy is that monopolies fail. Successful enterprise has been characterised by error learning and reinvention. Rudd echoed this conclusion when he argued that “big departments risk becoming less accountable, less agile, less adaptable and more inward-looking”.10 But this was in the context of homeland security.

The historical success of the competitive market has little to do with the static properties taught in economics textbooks and everything to do with creating a flexible, adaptive system characterised by error learning or bankruptcy. Information is conveyed by prices, and price flexibility is the key to long-run dynamic efficiency.

No part of the economy is more complex than health care. However, the health sector cannot duplicate the competitive market in its simple form for technical reasons and because of its social role. The long-run challenge is therefore to devise a system which carries out this role with diversity, flexibility and error learning.

Concentration of power in a monopolistic Commonwealth system is the antithesis of this. Government has, increasingly, been characterised by error suppression and marketing. With the conversion of the public sector into an instrument for fulfilling political goals — driven by short-run contracts and bonuses — government is increasingly becoming the problem, not the solution.

To believe that the federal government is likely to achieve efficiency in the long run requires ideological blinkers and amnesia. A short list of problems which have been known and ignored for decades includes Aboriginal health, quality of care (200 unnecessary deaths per week), geographic and other dimensions of fairness, program coordination, and effective integration of private health insurance into the health system.

The rhetorical rejoinder, of course, is that it is because of these problems that we need a Commonwealth takeover. But in addition to their lack of both experience with running hospitals and knowledge of local considerations, the Commonwealth has had the power and resources to effect major reforms in the past but is on record as preferring to ignore the politically sensitive problems.11 Rudd may be different. However, there is little evidence to demonstrate this. And we must not lose sight of the long-term context: what about the next government, and the next? The track record and trend in government gives no reason to believe that policy will cease to be driven primarily by interest group appeasement, with the public mollified by marketing and spin.

The process that Rudd has followed reinforces this conclusion. The NHHRC report, which the government ostensibly drew on, offers no serious discussion — evidence or argument — to support the new policy.6 The world literature and experience concerning these issues were largely ignored, at least in the published report. The case against diversity and experimentation in primary health care is simply asserted: “Our recommendations for ... comprehensive primary health care ... require one government — the Commonwealth Government ... Thus we recommend that the Commonwealth Government assumes full responsibility for primary health care services”.6

The balance shown in the NHHRC’s judgements may also be questioned. In one of its few references to adverse events, it notes that “admission to hospital is not without risk”.12 It is also true that the Sahara Desert has dry bits.

Alternatives exist which increase the probability of error learning and evolutionary improvement. The key element is a degree of diversity — a non-monopoly. Devolution to large clusters has been recommended, and a model for this has been provided.2 Similarly, I have previously advocated “managed government competition”, in which the emphasis is on de-politicisation and elements largely missing from previous discussions — the creation of governance and information flow that forces error learning and rapid uptake of good new technologies.3 In the long run, these elements are more important than the cash flow and budgetary considerations that dominate much of the present discussion and decision making.

Author

  • Jeff R J Richardson PhD1
  • 1. Centre for Health Economics, Monash University, Melbourne, VIC.

Correspondence: jeff.richardson@buseco.monash.edu.au

Competing interests

Jeff Richardson was Chair of the 2003 inquiry into the Tasmanian hospital system (the Richardson Report).

References

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