Sustainable funding of health care: challenges ahead

Amanda Biggs, Social Policy

Key issue
A number of reports highlight the growing burden on governments to fund health care services. This is being driven by population ageing, expensive medical interventions, community expectations and the rise in the incidence of chronic diseases. While Australia has a good health system by international standards, rising health costs represent an obstacle to future reform.

It is widely recognised that despite some failings, Australia has a good health system. Life expectancy of 81.5 years is among the highest in the world, while expenditure on health services (totalling $130 billion in 2010–11) as a percentage of GDP (around 9%), is below the average for comparable countries (see Figure 1).

Figure 1: Health expenditure, 1990 to 2010 Figure 1: Health expenditure, 1990 to 2010

Source: OECD.

In its favour, Australia is a relatively wealthy country, with well-developed public health programs (such as immunisation) and good infrastructure (water supply, food quality). There are numerous other positive components which contribute to the Australian system – world class medical researchers, low smoking rates, a population that is generally accepting of health promoting regulations, such as seat belts and random breath testing, and the existence of political leadership and bipartisanship on big health issues such as HIV-AIDS.

Still, it is recognised that the Australian health system has room to improve, particularly with regards to Indigenous health, quality of care and affordable and timely access to services.

Some challenges in health care

In addition, new health challenges are emerging: the baby boomers are ageing – the number of people over 85 years old will increase from 0.4 million now to 1.8 million in 2050. Risk factors for chronic diseases like diabetes are increasing – many people are overweight or obese and do not get enough exercise. Meeting community expectations of ever higher health standards is also a challenge. While medical research is providing better drugs, devices and interventions to keep people healthier and living longer, subsidising these is increasingly expensive.

There are concerns therefore that the level of funding for health care will soon become a significant burden for governments.

Treasury’s Intergenerational Report 2010 (IGR) estimated that spending on health care by government as a percentage of GDP will nearly double by 2050. A recent report from the Committee for Economic Development of Australia (CEDA) warned that current health funding arrangements are not sustainable; new models will need to be considered. Independent think tank the Grattan Institute has also expressed concern over the future sustainability of health funding.

The universal Medicare rebate, high levels of bulkbilling (where consumers pay nothing) and free public hospital care means that there are limited price signals which can act directly to moderate demand for subsidised health services. Similarly, fee-for-service payments to doctors encourage them to provide more services, which in turn increases the use of services.

Out-of-pocket spending on health care by consumers is also growing, but much of this is for non-subsidised health care, such as over the counter medicines, or areas with limited subsidies, such as dental services and those provided to private patients. Hence, it has limited impact on government spending (for further information see ‘Out-of-pocket payments for health care – finding a way forward’).

How much a country spends on health reflects its social priorities, as well as its capacity to pay. While richer countries tend to spend more on health services, there is variability in the amounts each spends. For example, Japan is one of the few countries where people live longer and have healthier life expectancy than Australia, but Japan spends less per capita on health than Australia.

The IGR predicts that Australian GDP per person will grow by 1.5% per year. Whether this will be enough to sustain an expanded health system and meet the health costs of the future remains an issue for debate.

Some argue that a dramatic shift in thinking about how health care is funded is required if government finances are not to be overwhelmed by increased demand for health services.

Prospects for further reform

In recent years, a number of reform options have been discussed, examined and implemented. The National Health and Hospitals Reform Commission (NHHRC) established by the Rudd Government recommended a number of reforms, around hospitals, prevention and primary care. Some of these, such as the establishment of Medicare Locals have been implemented, and it appears they have widespread support.

But health reform is not always easy. Both the Pharmaceutical Benefits Scheme and Medicare, which now have bipartisan support, faced considerable opposition when they were first introduced, and this persisted for some time.

A major dilemma for government is developing effective approaches while maintaining wide-spread support for reforms. There are a number of obstacles to achieving these aims: political lobbying from vested interest groups, for example, is a problem, as a recent proposal to introduce a star food labelling system illustrates. While the labelling system has the potential to help address obesity, it is facing industry opposition, despite widespread support among health groups.

Former chair of the Council of Australian Governments (COAG), Paul McClintock, warned that a lack of clarity between levels of government over responsibilities hampers reform. Writing in the Australian Financial Review McClintock expressed frustration with the political processes surrounding COAG meetings and the ways in which these derailed proposed health reforms.

Recent controversy over hospital funding arrangements in Victoria illustrates how the issue of health care funding remains subject to bitter disputes between governments. Although a new hospital funding formula has been agreed in that state, it remains to be seen if this can operate without recourse to the frequent disputes which characterised previous arrangements.

These examples suggest that future reform efforts may face considerable obstacles. Yet unless political machinations are set aside, and vested interests overcome, genuine long-term reform of health funding may remain an elusive goal.

Further reading

A Boxall, What are we doing to ensure the sustainability of the health system?, Research paper, 5, 2011–12, Parliamentary Library, 18 November 2011.

R de Boer, A Boxall, A Biggs, L Buckmaster, J Gardiner-Garden and R Jolly, The interim report of the National Health and Hospitals Reform Commission—a summary and analysis, Research paper, 24, 2008–09, Parliamentary Library, 19 March 2009.

R de Boer, ‘The missing billion? Revisions to health funding not unprecedented’, FlagPost weblog, 1 February 2013.

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