This week I focus on the future of commonwealth government health funding and begin with consideration of the role of the Medicare levy in commonwealth government spending.
While health expenditure may increase so does revenue from the Medicare levy so long as wages and the workforce continue to grow. In constant (2012‒13) prices, the revenue from the Medicare levy grew faster than the growth in government health expenditure for six of the eleven years between 2003‒04 and 2013‒14. The levy revenue increased by 57% in that time (from $6.5b to $10.2b in constant prices) while commonwealth government health expenditure increased by 61.5%. In the early half of those years the levy provided around 17‒18% of commonwealth health spending but since 2009‒10 has been around 15‒16% and is currently about 16%. What the year-by-year figures actually suggest is that the Medicare levy covers a greater proportion of health costs when the economy is doing well and falls when the economy is performing poorly, so changes are not just a result of increased health spending. It is a concern currently that unemployment has increased and wages growth has slowed, both of which will impact Medicare levy revenue in the short term.
The fastest growing area of health spending by the commonwealth government is actually the subsidy for private health insurance. The private health insurance rebate cost the government $5.5 billion in 2012‒13 having risen from $1.4 billion in 1999‒2000 and in the Hockey 2014‒15 budget it was predicted to grow faster (by 5.9%) than Medicare costs (3.5%). What does the government get for that? The AIHW figures for 2012‒13, remembering they were for total health spending, show that private health funds contributed about $11.8 billion but the government spent $5.5 billion to achieve that, leaving a nett benefit of $6.3 billion. But private health funds also pay for dental, optical and other services and actually contributed about $8 billion to the major commonwealth costs of hospital and referred medical services (under Medicare, private health funds make no contribution to unreferred services) — so it could be argued that the real nett benefit to the commonwealth government was $2.5 billion. The Grattan Institute has estimated that the extra cost to public hospitals
, if the private health insurance rebate was abolished, would be $2.5 billion, leaving the government $3 billion in front, which is $500 million more than the real nett benefit it currently achieves.
Treasury and the Intergenerational Reports (since 2002) have been continually arguing that the rising health spending in the coming decades is due to the ageing of the population. The 2010 Intergenerational Report
(IGR) suggested that 40% of the projected increase came from ageing and population growth: the balance was through technology changes and demand for higher standards in health services. The 2015 IGR
, however, suggested that non-demographic factors will actually account for 80% of the increase in health spending — ageing alone contributes only 10%, with the other 10% simply from population growth. If that sort of reduction in impact is repeated in the next IGR, ageing may not contribute at all to increases in health funding!
The other issue to consider in relation to meeting rising health costs is that government revenue generally grows, as a result of growth in GDP and wages, and it is usually just the speed of that growth that varies. Since 2003‒04 the only decline in revenue came in the years 2008 to 2010 when we were affected by the GFC: the final budget outcome was $4.8 billion lower in 2008‒09 than the previous year and another $6.2 billion lower the following year. Long term studies suggest that we can expect such short-term economic downturns about once every 8‒10 years.
As I pointed out in ‘Abbott continues to tell porkies
’ government revenue has been revised downward on a number of occasions in the past three years. Despite that, the total revenue has still been slightly higher each year: $360.2 billion in 2012‒13, $374.0 billion in 2013‒14 and estimated to be $384.1 billion in 2014‒15 (the last figure is that included in the 2015‒16 budget papers, not the original budget figure). Earlier forecasts had suggested that revenue could be as high as $407 billion in 2013‒14, so there has certainly been a considerable slowing of the growth of government revenue and programs introduced on the basis of those earlier forecasts are now causing fiscal problems.
It is that ‘normal’ growth that allows governments to implement new programs as well as meet rising costs. Problems arise, as at present, when growth slows and those programs that have been introduced earlier, based on the previous forecasts of growth, still require increased spending — that is when expenditure starts to exceed revenue. But it also suggests that it only takes a few years before that revenue rises again at a faster pace to cover expenditure. It is interesting that the 2007 IGR predicted long term ‘real’ GDP growth of 2.5% (below the historical average of about 3.3%) but the 2015 IGR now places that long term GDP growth at 2.8%. Calculating from the size of the current economy, the cumulative difference of that apparently small 0.3% in the two projections is enormous: a difference of about $500 billion in the size of GDP in 40 years. And, of course, such a large difference also makes a significant difference to the government’s revenue — a difference of about $120 billion in 40 years (at the current revenue share of GDP). So very small differences in parameters make significant actual differences in GDP and government revenue and that is important in considering whether we can meet future health costs — remembering that this is based on ‘real’ growth after inflation.
The biggest danger to future commonwealth government revenue, as claimed in the IGR, is that the ageing population will lead to a relatively smaller workforce. Whereas in 1974‒75 the ratio of workers to aged people (the ‘dependency ratio’) was 7.3:1, it is projected to be 2.7:1 by 2054‒55. On the other hand, that was one reason the GST was introduced so that those who are not in the workforce are still contributing to revenue — except all that revenue goes to the states. But the IGR still predicts a 62% participation rate in the workforce and a much larger population with that average 2.8% real
increase in GDP — so where is the problem?
What does that mean for health funding? Since 2002‒03 health funding has actually fallen slightly as a proportion of the commonwealth government’s total spending: from 17.4% in 2002‒03, reaching a peak of 18.2% in 2004‒05 to 2006‒07, a low of 15.1% in 2008‒09, and is now 16.1% — if it was still at 17.4% an extra $5 billion would have been available in 2014‒15. So there is a clear argument that it is not rising health costs that are impacting overall commonwealth government spending. On the basis of the proportional fall in health funding, it could actually be argued that funding that would otherwise have gone to health has been diverted to other programs.
As the data in Part 1 indicated, health costs
aren’t out of control but the number of services is climbing and an ageing population may contribute to that rise: the most recent IGR, however, as stated above, considers that only 10% of the increase in costs will be a product of the ageing population. There will be other increases in health costs unrelated to ageing: for example, AIHW has projected rising rates of diabetes as a result of obesity. Dealing with obesity, and hence avoiding future costs associated with diabetes, is a matter that relates mainly to primary care.
The cost of GP services (non-referred) is already fully covered by Medicare and it could be said that it is the referred services that are causing the shortfall in the Medicare levy but individuals already contribute 16% of the cost of referred services — and that is the additional out-of-pocket contribution over and above the contribution through the Medicare levy and general taxes.
If ageing is the problem it is made out to be, the problem it gives rise to is some level of increased services and Abbott’s new ‘price-signal’ by stealth (the freezing of the Medicare rebate) will not significantly change that. Most people don’t go to the doctor simply because they can but because they need to and, in that regard, it is probably true that an ageing population may lead to some increase in the use of health goods and services (but, I repeat, even the government’s own report says only 10%). To the extent that people do put off seeing a doctor, it may lead to late identification of conditions, thus allowing them to develop into chronic conditions and so a greater burden on the health system and health funding. Alternately they will attend emergency rooms at public hospitals where they do not need to pay, only increasing the burden on public hospitals. Either way, it will not be beneficial nor cost efficient.
All in all, the Medicare levy works well for what it is intended — an equitable
distribution of costs — and it works well when the economy is working well. The private health insurance rebate could be abolished and the government would be better off — keeping it is ideological, in support of private enterprise (privatised medicine). As pointed out previously on TPS
, there is considerable scope for raising revenue by addressing tax expenditures, without directly raising GST, income or company taxes, or even the Medicare levy. There are many ways of meeting future health costs.
Basically health funding appears to be an economic issue, not simply a fiscal issue, and rising costs can be covered in a vigorous economy. The economy will continue to grow, even with an ageing population, just not quite as fast as we have been used to. Governments have a major role in encouraging a strong economy, including promoting new industries, promoting full employment (noting that unemployment costs the government twice, by reduced taxation revenue and increased expenditure on unemployment benefits) and ensuring good health so that people can remain active participants in the workforce for so long as they choose. Meeting health costs really requires the government taking more initiatives to promote economic activity, not tightening the purse strings which stifles economic activity.
In my view, increased health spending arising from an ageing population is not as big an issue as the government makes out, particularly when one remembers that we had a problem at the opposite end of the age spectrum in the 1950s and ‘60s — the need for more schools and teachers for the then young ‘baby boomers’ — and we managed to get through that. I think that older people are being used as scapegoats for inaccurate forecasts, ideologically-driven fiscal policy and to justify subtle attempts to push a greater share of health services to private enterprise.
What do you think?
Ken admits that, as an older person, he may have a vested interest in presenting this piece. Whatever the reasons causing increased health costs, should they be met by increasing taxes or should governments better manage the economy and rely on normal revenue growth to cover costs? Are there other ways? Is this government even capable of making the right decisions? Or is it no more than another Liberal battle in its ongoing war to introduce a privatised health system into Australia?
Next Sunday 2353 returns with his look at ‘The challenge of renewables’.