John Menadue. Cutting waste and costs in health.

Feb 20, 2014

Last night on lateline, the Minister for Health Peter Dutton called for a public debate on health reform. I therefore have taken the liberty of reposting a blog of February 3 on ‘Cutting waste and costs in health’.

The Minister for Health, Peter Dutton, has said that we must reduce waste and reduce costs in health. I agree. In 2011/12 total health expenditure in Australia was $140b up from $83b in 2001/2. Costs are rising rapidly, partly due to population increase.

In a paper in July 2007 I estimated that there was at least $10 billion in possible savings and productivity improvements in health. That represented about 10% of our total health costs in that year. I have spoken and written extensively on the matter. See my web site.

It is important however that as we work to reduce waste and costs we do it in a way that is fair to all and does not prejudice quality care.

But to reduce waste and costs requires political will to stare down the powerful interests and rent seekers that are determined to protect their territory and their high costs –e.g.  the AMA, the Private Health Insurance firms, the Pharmacy Guild of Australia and Medicines Australia. In the past no governments has been game to tackle these vested interests.

The lack of accountability in health

Despite the rapid increases in costs and escalating demand in the healthcare industry, there is no accountability in any meaningful way for what the health industry produces. Doctors are accountable for malpractice but not for their overall performance particularly in general practise. This is despite the fact that taxpayers pay 80% of doctors’ incomes. Taxpayers have a legitimate reason to ask – ‘Are we getting value for money?’  In a survey a couple of years ago by the Health Council of Canada, 97% of over 1,800 senior respondents said that healthcare providers should be required by law to reach certain service benchmarks in such areas as patient outcomes , the use of preventive strategies like screening and waiting times.

The Council also asked the group ‘Do you believe healthcare in Canada will improve if the government spends more money on healthcare?’  58% said ‘no’. There is the same lack of accountability in Australia.

Managing the demand for health services

The demand for health services is increasing rapidly across all age groups and not just among the old. We are over-diagnosed and over-treated. In 1984-85, medical services per head were 7.1 per annum. In 2007-08 they were 13.1 per annum – about double. The trend continues. We need to address this over servicing particularly by GPs and specialists such as pathologists and radiologists.

  • We must accept that we cannot have all that we want in health and that governments, in consultation with the community, have to set priorities. Can we afford continuing existing levels of funding for IVF and end-of-life treatments at the expense of funding for mental health and indigenous health?
  • We need to rationalise our co-payments to make them efficient and equitable. We all should take more responsibility for the way we use health services, particularly as we are now much wealthier than we were 30 years ago when Medicare was introduced. A universal health scheme does not have to be free. But it must be fair and efficient. But co-payments are a dog’s breakfast! We pay about 18% of health costs out of our own pockets, but there is very little rhyme or reason in how this is done. The $6 GP levy would make the confused situation worse.
  • We need to change the perverse incentives, such as fee-for-service, which is associated with bulk-billing. Clinicians are rewarded by the number of transactions rather than health outcomes. FFS is particularly inappropriate for chronic care like mental health and services with high fixed costs and low variable costs, such as imaging. The government should move away from fee for service and set budgets for general practitioners when they prescribe drugs, order pathology tests or imaging services. We need more doctors on salaries and capitation payments for caring for patients-not on a service by service basis.
  • We need to tackle the wide variations in the incidence of clinical practice across the country, e.g. caesarean sections and cataracts. Medicare should be much more proactive in exposing and limiting very expensive and inexplicable variations in clinical practice.

Getting costs down

  •  The government should abolish the subsidy for private health insurance which costs all up about $6-7 billion p.a. This subsidy favours the wealthy, is inefficient, has underwritten rising specialist fees through gap insurance, has not taken the pressure off public hospitals and has weakened Medicare’s ability to control costs. The immediate abolition of this subsidy would do more to improve our health system than almost anything else. This is corporate welfare big time-more even the welfare to the motor industry.
  • We need a more productive workforce. Health is the largest and fastest growing sector in the Australian economy. Despite all the talk of improving productivity in Australia no-one has been game to take on the entrenched privileges in the health workforce.Where is the honesty and consistency here? The blue collar workforce is fair game but not doctors and lawyers. We need expanded roles across the board particularly for nurses, pharmacists, allied health workers and ambulance officers. The Productivity Commission in its February 2007 report estimated that a 5% improvement in the productivity of health services would deliver savings of about $3 billion p.a. This is a very conservative estimate. The health sector in Australia is rife with demarcations and restrictive work practices. eg 5 % of normal births in Australia are delivered by mid wives. In the Netherlands it is 70%, in the UK 50% and in NZ 95%. We have a few hundred nurse practitioners when there should be thousands. The work practices at Holden, Toyota and Ardmona are light years ahead of the work practices in the health sector.
  • We could save about $2 billion p.a. in drug costs if we paid drug suppliers the same prices that are paid in NZ. See my blog of January 17.We also pay a high price for the protection of  pharmacists through the 5000 limit on the number of community pharmacies and the restrictions on where new pharmacies can be located. Pharmacies cannot be established in supermarkets.
  • We need to raise productivity in our hospitals. The Productivity Commission suggests that the productivity gap from best practice in public hospitals ranges from 3% to 89%. In private hospitals the range is 22% to 37%.  There is major governance problems in many hospitals with a dis- connect between management and clinical functions. Running hospitals is very difficult with clinicians coming and going from private practise like the cottage industries of old.
  • The Commonwealth/State fragmentation in healthcare results in blame-shifting, the evasion of responsibility and higher costs. If for example the Commonwealth Government or a joint Commonwealth/State body had responsibility for all health care in a state, there would be a clear incentive for focus on treatment in the community and in homes to ensure that the high cost hospitals are really a last resort. They are now often a first resort.
  • The real elephant in the room in health care cost reduction is avoidable mistakes, including deaths. They are euphemistically called “adverse events”. But Ministers, clinicians and managers do their best to avoid the issue. Based on earlier surveys in NSW and SA I estimated, very conservatively the cost of avoidable mistakes in our health sector at $5b pa (see my blog of June14, 2013). Despite a great deal of money and effort there is no sign of improvement. Insiders won’t solve the problem Good people are caught in a bad system

We need to address waste and cost-cutting in a measured way. We should not panic, but we should get it done.  Australian healthcare costs are 9-10% of GDP. This is not high by world standards. It is below the OECD average. A major reason why we have been able to do better than others is that we have Medicare as a public insurer. One lesson is clear all around the world. The countries that have high levels of private health insurance, like the US, have high costs.


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