by Tony Harris, Professorial Fellow: University of Wollongong.
Presented at the Manning Clark House conference, Public/private balance in health and education, October 27, 2000
In 2002-03, all Australian governments spent about $89 billion on health and education. This accounted for nearly a third of total government spending, and that share is rising. The Commonwealth spent over 20 per cent of its budget on these activities and the states and territories expended over 44 per cent.
This is not unexpected because voters regularly attach more importance to these activities than most others. Nor should we get too upset at the idea that spending ' especially on health ' is rising inexorably. As the nation's annual income increases we should anticipate that an increasing share will be spent on improving the longevity and quality of life of Australians.
What is unexpected is that government policies on education and health are a mish-mash. They illustrate nicely how illogical governments can be. This paper suggests that if governments were more interested in consistency and efficiency, they would give consumers more say in spending public monies - rather than providers of these services - and would they reduce the share of funding provided from the public purse.
Some Current Health Policies
Commonwealth and state health policies require that public hospital treatment be free whether treatment is for life-threatening illnesses, for important improvements for quality of life or for cosmetic and religious purposes (such as circumcision).
Visits to the general practitioner might also be free to the patient but they need not be free, even when local doctors offer treatment which hospitals might otherwise provide. The coalition government wants to reduce Medicare's emphasis on bulk-billing and has instead introduced a safety net when household annual expenditure on doctors outside of hospitals exceeds $300 and $700, for concessionary and regular patients. Above these amounts, the Commonwealth provides 80 per cent of out-of-pocket expenses.
Although general practitioner services might be provided free-of-charge, filling prescriptions issued by the local doctor will initially involve a charge of $23.70 or $3.80 for regular or concessionary users. A safety net which covers all or most of the costs of additional prescriptions applies for those whose annual prescription costs exceed $727 or $198 (for regular and concessional patients). These limits apply to individuals, not households. The safety net reduces payments to $3.80 and zero for regular and concessionary patients.
We thus have three different pricing policies - and three different subsidy levels - for the three most commonly used of our health programs. Even where safety nets are provided, the arrangements differ substantially between the two schemes.
The Opposition's policies proposed at the last election involve more inconsistencies. Although they encourage bulk-billing, they do not require it. And the opposition would dispense with one of the two safety nets.
Some Alternative Health Policies
Safety nets for the costs of general practitioners and pharmaceuticals make sense. But they should be consistently directed to household expenditures. By comparison with the Medicare safety net, the pharmaceutical safety net fails when more than one person in a household is dependent on prescribed drugs.
Similarly, the safety net schemes for drugs and doctors should have a consistent approach to meeting additional spending once the initial annual limits have been met. The Pharmaceutical Benefits Scheme requires regular patients to contribute a fixed payment for each additional prescription; the Medicare scheme requires patients to meet a fixed proportion of excess costs. The latter approach at least requires patients to have some interest in the scale of costs levied by health providers. Under the PBS arrangements, regular and concessional patients who have become eligible for the safety net need have no financial interest in, for example, whether the pharmacist supplies cheap generic or expensive branded drugs.
The Hawke government changed the PBS by requiring pensioners to make a contribution ' albeit, very small ' towards the cost of filling prescriptions made by their local doctors. That government even increased the pension to balance the cost of this impost. This policy was seen as important because surveys undertaken at the time found that when drugs for pensioners were free of charge, up to 25 per cent of filled prescriptions were not used.
One of the existing differences between the PBS and the general practitioner component of Medicare concerns the setting of prices. Under the PBS, the government negotiates with pharmaceutical producers the price which the government is prepared to pay for listing a drug on the PBS schedule. Government also sets the price it is prepared to pay pharmacists for filling prescriptions and for administrative tasks associated with the PBS. However, the government has eschewed negotiating a price which doctors might charge patients for the provision of local services. But there is nothing in principle that would prevent governments for negotiating prices - they might differ from practice to practice, where there is good reason for those differences - which doctors would charge if they are accredited suppliers of Medicare services.
To avoid over-consumption of medical resources and to ensure that the consumer has a financial interest in the cost of medical services, concessional patients should be expected to make a contribution to the cost of treatment by local doctors. And instead of paying zero, pensioners should also make a payment, even if it is a very small one, for filling prescriptions even when they have met safety net conditions.
Because public hospitals are the providers of last resort, it would be hard to argue that patients admitted for emergency treatment should first be obliged to contribute to the costs of that treatment. But there are fewer difficulties in arguing that patients should be obliged to make some contribution for elective treatment provided by public hospitals.
The models used for paying for pharmaceuticals and general practitioner services could be followed. Households might meet the first tranche of annual costs of public hospital elective treatment, say, $1,000, and meet, say, 80 per cent of additional annual costs.
Alternatively, governments could combine all of the safety net thresholds - general practitioners, pharmaceuticals and elective public hospital treatment - into one annual health threshold of, say, $1500. After a household has expended that amount, government could fund 80 per cent of additional health costs incurred in the year.
Lastly, governments should take more advantage of the opportunities provided by private hospitals for reducing pressures on public hospitals and for fostering useful contestability or competition with public hospitals.
The public sector typically finds it difficult to foster increased efficiency in government activities where agencies have monopolistic characteristics. Even audit offices have to be careful to ensure that employees do not abuse the monopoly they have over government audits. Although private sector and public sector audits are not identical, there is much more emphasis in the public sector audits on accountability and on compliance, private auditors provide government audit offices with useful benchmarks to ensure that audit office costs are reasonable. Indeed, most government audit offices tender out a share of government audit work to the private sector so that costs can be monitored and assessed.
There is no in-principle issue preventing governments from taking similar advantage of private hospitals. Governments could allow private and public hospitals - with their accredited doctors - to tender for elective surgery opportunities and to direct patients to competitive providers.
An alternative scheme would be to provide eligible public patients with a voucher for elective treatment. The voucher would entitle medical providers to be remunerated to a specified sum and could be redeemable at the hospital of the patient's choice.
These suggested changes would not only bring greater consistency between the different components of our health system. They would also allow consumers a greater exposure in and thus a greater interest in the costs that society faces for the provision of health services. And they would establish some modest element of contestability to ensure that
Public hospitals are more conscious of the relative costs of the services they provide.
Some Current Education Policies
State and governments have problems in closing schools, especially inner city high schools, with less than optimum student numbers. The NSW government failed in its attempts some years ago to close several schools marked by reducing enrolments. Accordingly, the per capita costs of educating students in state schools vary considerably, irrespective of the educational needs of students. Parents of students who attend these high-cost schools do not face the financial consequences of their lobbying to cause the schools to remain open.
Already state governments - and seemingly a number of parents - have accepted that private funds are needed to supplement public resources dedicated to school education. The NSW Audit Office recently reported that non-government funds accounted for about 8 per cent of revenues available last year to schools. It is a major political step, but a small policy issue, to charge families who wish to benefit from keeping high-cost schools open that would otherwise be closed.
One of the major reforms of the Greiner government was to allow schools to accept students who lived out of the school's district. This allowed modest competitive pressures - for example, product differentiation - to influence state schools. The government's requirement that government schools publish information to enable parents to assess schools could also have sharpened competition between schools had it been more than half-hearted. Limitations in the design of the policy, however, have meant that these reports are not useful.
Different universities have different student appeal. This can be seen from differences in the fees charged of private students. Even the same university will have different fee structures for different campuses. But the Commonwealth charging arrangement for university students (the Higher Education Contribution Scheme) makes no distinction between university courses. The perceived best courses in a discipline cost students the same as perceived inferior courses.
Similarly, universities whose locations are not as convenient to students as others (Arguably, the University of New England is not as well cited for students as, say, metropolitan universities) levy the same charge for the same courses offered by more convenient suppliers of higher education.
Some might not see this (in economic terms, an inconsistency between utility and prices) as a problem. That is, there is an argument that prices should play no part in the allocation of scarce university places. Thus, students with high University Admission Indices will not only be able to win a (largely subsidised) place at a university, they will be able to choose the university of their choice, with its attendant locational and other advantages.
However, a number of students - even those with high UAIs - might not value these advantages as much as students with lower UAIs.
Some Alternative Education Policies
To allow these utility issues (and indeed, efficiency differences) to be reflected in students' university choices, governments could issue vouchers representing the share of average costs for the discipline which it would wish to subsidise students. Any additional costs that a university might wish to recoup would be a matter for negotiation between the student and the university. Similarly, more efficient universities could offer a lower fee allowing some students to benefit from these vouchers. They would have less to contribute in their HECS charges.
Such a scheme has advantages over the current one size fits all. It would allow competitive and efficiency issues to play a larger role in university management than is currently the case.
There are a number of other issues of concern about the commonwealth's administration of universities. One commentator has described this administration as Trotskyite, because it is so closely bounded by bureaucratic rules. There is considerable scope to allow market forces a greater role in university management, while preserving the basic subsidy arrangements provided to Australian university students.
Micro-economic reform has played a considerable role in the ability of the Australian economy to survive international financial crises and to prosper. Health and education offer considerable scope for further reform, even while maintaining the basic values which Australians hold to be important in these activities.
Without such reform, Australia's measured relative standard of living, which has improved considerably in recent years, will slide down the tables as it did for much of the last half of last century.