Opinion & Commentary
Spending More on Healthcare is Good For You
Australian health care spending has increased in real terms every year since Medicare was introduced. Rationing, exemplified by the current freeze on elective surgery in Victoria’s public hospitals, is the typical response. But rationing has limits. For example, noting that large medical expenditures often occur in a patient’s last year of life, doctors are being exhorted by health insurers to forego last-minute "heroics" and show some restraint. However, as Charles Morris writing in the Atlantic Monthly points out, doctors do not know which patients are destined to die during the calendar year, so they do not know which ones to ignore.
Realising that rationing is not a permanent solution to the problem of rising health care expenditures, government and private health insurers are encouraging health executives to implement a series of management fads—"casemix" funding, competitive tendering, outsourcing—none of which makes any difference. Health spending keeps going up anyway.
In most industries, this is not a problem. If wine sales increase, treasury celebrates. In contrast, when health care spending rises, this is seen as a problem. This is because, unlike wine, health care expenditures are perceived as a drain on society, like pollution. It follows that health spending must be carefully regulated or it will spiral out of control and threaten the entire economy. Is this correct? Before answering this question, we must first distinguish health care spending from health care costs (or, more accurately, prices).
'Preventing people from having the health care they want by rationing is doomed to fail'
According to Morris, the price of many, perhaps most, health care interventions are not increasing, they are decreasing. It is health care spending that has been rising. And this is only to be expected. Falling prices almost always induce more spending. Think back to when personal computers and videos and cassette recorders were introduced; they were expensive and few were sold. As their price dropped, many more people bought these "luxury" goods. In other words, as the prices of desirable items come down, the total amount spent on them goes up.
Morris gives the example of cataract surgery. Not long ago, cataract removal was not only expensive, it was also dangerous. Patients spent a week in hospital for small improvements in their vision.
Today, cataracts are corrected with minimal pain in a brief outpatient procedure that restores almost normal sight. Who would not wish to have an operation that is safer and produces a better outcome at a cheaper price? Is it really a surprise that the total amount of money spent on cataract surgery has increased? We can see the same pattern occurring in many other parts of medicine—lower costs, better outcomes, and, as a result, higher spending.
To be fair not all health costs are falling; some are rising. New anti-cancer and anti-viral drugs are expensive, and so are genetic therapies. However, their prices will fall as patents expire and competitors enter the market. Given their effectiveness, we can expect demand, and spending to rise.
'For Australia's sake, it is time for all levels of government to admit that health care expenditure will continue to rise'
Preventing people from having the health care they want by rationing is doomed to fail. Everyone wants the best health care available, including people who are in their last years of life. In the next 20 years, the post-war baby boomers will hit their 70’s. Even if the cost of medical procedures continues to decline, medical spending will double. As procedures become more effective, spending may even triple.
This is not necessarily bad. If we value health care more than designer jeans then we should allocate our spending accordingly. Of course, we prefer our resources to be allocated efficiently rather than to be wasted. But the point is that increases in health care have the same beneficial micro-economic effects as increased spending on new cars, wines, or bowling. These benefits include new jobs (which pay higher than average salaries) and the other benefits increased economic activity.
Despite claims to the contrary, rationing access to health care will not contain health spending. Indeed, as interventions become cheaper and more effective, health spending will increase. For Australia’s sake, it is time for all levels of government to admit that health care expenditure will continue to rise in real terms for the next 20 to 30 years. Instead of a futile effort to stem the tide, it is time to for policy makers to give serious attention to how Australia is going to pay the bill.
About the Author:
Professor Steven Schwartz is Vice-Chancellor of Murdoch University, Western Australia and is a member of the CIS Academic Advisory Council.
