THE intergenerational reports have told us repeatedly that escalating government spending on health is unsustainable in an ageing Australia. But despite the warnings about the future of the health system, too little has been done to avert the financial crisis facing Medicare.
Growth in health spending is already the main pressure on state and federal budgets. Howard government reforms - which include the private health insurance rebate and the Medicare levy surcharge - were meant to shift health costs off government but failed to alter the balance between public and private funding.
Non-government health expenditure increased from 2.7 per cent of gross domestic product in 2000-01 to 2.9 per cent in 2010-11. This was far outstripped by the increase in combined federal and state government health expenditure from 5.6 per cent of GDP to 6.4 per cent.
Government health spending (which rose by 80 per cent in real terms across the decade) was mainly responsible for increasing national health spending to 9.3 per cent of GDP (or $130 billion).
If we don't get health policy right, future generations will face invidious choices. The unsustainable cost of Medicare will lead to onerous tax hikes, higher deficits and debts, or to cuts to health and other services that governments won't be able to fund.
State and federal policymakers need to make tough decisions if the health system is to be affordable in the 21st century.
Medicare needs to be cut down to size by boosting the efficiency of public health services, better targeting of public health spending and expanding the role of private healthcare financing.
Bureaucratic overheads should be lowered by devolving full responsibility for the operation of public hospitals to the local level, and competition should be introduced by privatising select public hospital facilities. Local hospital managers should be allowed to hire and fire doctors and nurses on flexible terms, circumventing state-wide employment conditions that restrict public hospital productivity.
Wasteful and inequitable Medicare programs (including the GP Management Plans and Better Access to Mental Health program) should be scrapped and nanny state public health initiatives (invariably non-evidence based) should be defunded.
The entitlement mentality must also be replaced by cost-sharing and user-pays. Bob Hawke's short-lived Medicare co-payments for GP consultations (introduced in 1991 and abandoned by Paul Keating in 1992) should be reintroduced. And Medicare should be means-tested consistent (at the very least) with the means test for the private health insurance rebate. Implementing these policies will create a more cost-effective health system and help governments control spending and reduce budget deficits.
However, conservative estimates suggest that population ageing, advances in medical technology and rising expectations will increase public health spending beyond 10 per cent of GDP by mid-century, exhausting the ability of government to tax and spend on health.
Big-bang reforms that establish large non-government sources of health funding therefore need to be on the national agenda. We need to shift from a pay-as-you-go system (where every tax dollar collected for health each year is spent in the same year) to a save-as-you-go system to enable people to pay for healthcare across time.
One solution would be to allow generations X and Y to pre-fund future health costs by reconfiguring Medicare spending into two new streams of "New Medicare" funding. One stream would fund personal, super-style health savings accounts that would be used to pay for lower-cost medical care. A second stream would fund vouchers for private health insurance covering high-cost treatment.
This would allow the existing Medicare scheme to be transformed into an age-limited program for the present generation of retirees or near-retirees (who have had no opportunity to acquire health savings) that can be abolished when the self-funded system matures.
This is not as radical as it sounds. Thanks to compulsory superannuation, Australia does not face as large an unfunded public pension liability as comparable countries in the OECD. The federal government will increase compulsory superannuation contributions from 9 per cent to 12 per cent of income by 2019, despite a 2007 review by Treasury finding that no increase was necessary to ensure the adequacy of retirement incomes.
These contributions and accompanying tax concessions would be better used to fund health savings accounts instead. For unless we start saving today to pay for the much larger health costs of tomorrow, there will be no saving Medicare.
Jeremy Sammut is a Research Fellow at The Centre for Independent Studies. His TARGET30 report, Saving Medicare but NOT as We Currently Know It was released on Tuesday 2 May.