Ian McAuley. Cutting waste and costs in health.

Feb 3, 2014

There are three areas of saving to be made in health care – real savings rather than movement of costs from public budgets to consumers.

There can be savings in technical efficiency — savings any engineer or cost-conscious manager seeks in a workplace. A strong example is making better use of information technology.

There can be savings in purchasing.  Australia used to negotiate some of the world’s lowest pharmaceutical prices.  We now pay high prices.

My concern is the third area – improvements in allocative efficiency.  That is, ensuring scarce resources are allocated where they will result in greatest benefit.

The priority should be to remove private health insurance as a source of funding.  Administratively, it does at high cost what the Australian Tax Office and Medicare do much better.

Its big costs are in terms of allocative inefficiency, for it simply re-shuffles queues, allocating resources to those with subsidized insurance, pushing others to the back of the line.

Getting rid of private health insurance would save around $1.5 billion a year in administrative costs alone. The Grattan Institute estimates net savings of $3.5 billion a year.

Other savings in allocative efficiency can be found in making better use of nurses, more careful prescribing of pharmaceuticals, and rationalization of co-payments so that people are not directed to “free” services in preference to more effective and lower-cost services involving upfront fees.  And, of course, there are big savings in all-of-government initiatives to encourage good health.

Ian McAuley is a teacher and researcher in the fields of  public sector management and public policy.

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