In the first of two Croakey articles looking at how to cut health costs, John Menadue writes:

“Successive governments in Australia have failed to examine and take action to curb rapidly rising costs and inefficiencies in healthcare. To address these problems would involve confronting special interests with their Canberra lobbying power.

The Opposition is now attempting to frighten us over new taxes to fund healthcare.

There are various issues that need urgent attention if we are to fund improvements in healthcare.

  1. Avoidable mistakes. After examining more than 14,000 hospital admissions in NSW and SA, the national cost of harm from healthcare in our hospitals was estimated at $4.17 b pa in 1995-96 (Quality in Australian Healthcare Study, 1995, Wilson et al). That $4.17 b estimate represented 23% of recurrent costs in all hospitals at that time. Assuming the same percentages of mistakes in 2009-10, the cost would now be $11 b. This would be a conservative estimate because complexity of cases has increased significantly since 1995. For example, the ‘re-do’ rate for joint replacements is 25%. The estimate of $11 b does not include mistakes in the non-hospital sector or the cost in the community of death and permanent disability. Given that an estimated 50% of mistakes are avoidable, it is likely that the cost of avoidable mistakes is about 5% of the total health expenditure in Australia ie $5 b pa.
  2. A more productive workforce. The Productivity Commission in its February 2007 report, estimated that a 5% improvement in the productivity of health services would deliver resource savings of about $3 b pa. This is a very conservative estimate. Health in Australia is rife with demarcations and restrictive work practices. For example 5% of normal births in Australia are delivered by midwives. In the Netherlands it is 70%, in the UK 50% and in NZ 95%. We have only 400 nurse practitioners in Australia who can work autonomously as health practitioners. There should be thousands of them. As the Productivity Commission in January 2006 described our 19th Century work structures ‘there are fragmented roles, responsibility and regulatory arrangements … inadequate coordination between governments, planning, education and service providers … inflexible regulatory practices … perverse funding and payment incentives … and entrenched custom and practice.’
  3. The government subsidy to private health insurance. The cost to the government and taxpayers of its subsidy to PHI for the wealthy is over $4 b pa. It should be progressively means tested and savings transferred to direct funding of private hospitals. This would assist the government through the establishment of its hospital networks to access capacity in private hospitals. The subsidy to the wealthy is inequitable, inefficient, has underwritten rising specialist fees, has not taken the demand pressure off public hospitals and has weakened Medicare’s ability to control costs. A golden rule of international health economics is that the more private health insurance a country has, the higher its costs.
  4. Pharmacy costs. The PBS successfully controls cost and quality of pharmaceuticals for the taxpayer. But these benefits are eroded by the protected market position of pharmacists as a result of government decisions. These anti-competitive decisions include a limit of 5,000 on community pharmacies since 1993; the 1.5 km rule for new pharmacies; the prohibition against supermarkets operating pharmacies and the limitation of ‘pharmacy-only’ drugs. The cost to the community of this protection of pharmacies is at least $0.5 b pa.
  5. The glacial introduction of e-health. The delivery of health services is a very labour and information intensive activity. The same is true in finance and banking. But whereas the banking sector has revolutionised its information systems, the health sector is still in the horse-and-buggy age. Estimates range from 5% to 10% as the potential savings that could be achieved by efficient and effective implementation of health IT. A 5% improvement would be about $5 b of Australia’s total health spending. Commonwealth Government leadership has been lacking in this area.

Managing the demand for health services

The demand for health services is increasing rapidly across all age groups and not just amongst the old. We all see our doctor too much. In 1984-85 Medicare services per head were 7.1 pa. In 2007-08, they were 13.1 pa – about double.

We need to

  • Accept that we cannot have all that we want in health and priorities have to be set. Can we afford continuing existing funding levels for IVF and end-of-life treatment at the expense of funding for mental health and indigenous health? We need an informed public debate about hard choices.
  • Rationalise our co-payments to make them efficient and equitable. We should all be obliged to be more careful about the way we use publicly funded health services.
  • Change the perverse incentives such as fee-for-service associated with bulk-billing. Clinicians are rewarded by the number of transactions rather than health outcomes. FFS is particularly inappropriate for chronic care and services with high fixed costs and low variable costs such as imaging. The government should set budgets for general practitioners when they prescribe drugs, order pathology tests or imaging services. Germany is doing some of this already to curb escalating demand. The rapid growth of corporately owned general practice in Australia with vertical integration between GPs and specialists is also significantly increasing demand and costs.
  • Tackle the wide variations in the incidence of clinical practice across Australia, eg caesarean section and cataracts. Medicare should be more proactive in exposing and limiting these very expensive and inexplicable large variations in clinical practice.”

• In the next instalment, Ian McAuley also looks at how to cut health costs…

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