John Menadue. Health Policy Reform: Part 1 – Why reform is needed.

I will be posting three articles on health policy.

This article outlines the priority areas where reform is necessary.

Part 2 will explain why reform is so difficult but not impossible. The key issue is power and how it is exercised

Part 3 will be about processes and governance issues that are necessary to move us beyond the present inertia, incrementalism and tinkering, with suggestions for policy directions. I will not be proposing specific policies. 

The Rudd-Gillard Government – lost opportunities

Traditionally, in Australia and elsewhere, Labor and similar governments have been the initiators of health reform. Conservative governments, in general, have opposed or wound back health reform.

In Australia the Labor Party, guided by principles of universalism, equity and economic efficiency, gave us publicly-funded health insurance – initially through Medibank and then through Medicare.

In spite of high expectations in health reform, however, in its 2007-2013 period in government Labor really did little more than muddle through. Kevin Rudd promised to take over state hospitals if the states continued to stonewall, and polling suggested that the public agreed with his approach. But in the end he gave way: fragmentation of services between the Commonwealth and the states continued, as did the practices of cost and responsibility shifting between those two tiers of government. He focussed on hospitals and not on primary care.

The Rudd Government established a National Hospital and Health Reform Commission (NHHRC), but it was composed largely of health insiders who seemed to be incapable of seeing health policy from a broad perspective, and who failed to grasp the basic economics of health care. The process achieved very little and chewed up a great deal of time and money. It was a wasted opportunity.

To its credit the Rudd and Gillard Governments had one major policy achievement – plain-packaging of cigarettes, and before it lost office was making progress on other aspects of public health. The success of these public health reforms, in contrast with the minor achievements of health care programs, is consistent with the possibility that reform of these programs is impeded by institutional inertia and the power of rent-seekers, a point taken up in Part 2. The tobacco industry is well-heeled, but it does not have friends in health departments.

Case mix funding to improve hospital efficiency was also a useful reform

Indigenous, mental and rural health all remain in a parlous state. Health programs operate in isolation from one another. The funding of health care through multiple public, corporate and private channels results in serious inequities. And, in general, there are administrative inefficiencies and a poor allocation of scarce resources.

Since 2013 the situation has worsened. The Abbott Government has abolished the Australian National Preventive Health Agency and Medicare Locals, has foreshadowed deep cuts in funding for state hospitals, and has put up ill-considered proposals for GP co-payments.

Getting the most from what we have

In considering health reform, we need to start with an appreciation that we have one of the best health services in the world in both efficiency and equity, thanks to Medicare. But Medicare was established over 40 years ago. It is now a bits and pieces operation – some parts added in good times and with cut-backs in difficult times. Some additions have been made by Labor governments and some by anti-Labor governments. There is little coherence or consistency in what we have at the moment. Our health care arrangements could not be called a ‘system’. They have no clear and underlying principles or philosophy.

As a result of that lack of coherence and fragmentation there is waste in our health care arrangements. Nurses, doctors, paramedics and others are all working hard and professionally, but there are managerial inefficiencies and high bureaucratic costs in both the private and public sectors: I have estimated that reforms would result in a saving of at least ten per cent of our health bill or about $15b in today’s costs. Abolition of the taxpayer subsidy of over $7b per annum to private health insurance would represent about half of these savings.

But a big waste is in misallocation of scarce resources. Capacity to pay often overrides consideration of therapeutic needs. Governments seek savings in public health and primary care – savings which are more than offset by higher needs for hospitalization and high cost specialist care. Demarcation rigidities result in overwork for some and under-utilisation of skills for others such as nurses. In all, the whole is far less than the sum of its parts.

Seldom do we stand back and ask the central issue: what do we need and expect from a health system? That question should be a starting point for reform.

The concerns of health policy – a system approach

Incremental reforms addressing real or perceived shortcomings in particular programs, even if they achieve some economies, are going to do no more than to perpetuate existing problems. Reform needs to cut across programs, and concerned with the following six issues.


1. Primary care. Primary care has been largely ignored in health reform. It should be the starting point for any consideration however of preventive health and chronic care. Early interventions and health check-ups can head off costly and debilitating illnesses.

Specialist care has become very expensive. We have an obsession with hospitals. But hospitals should be the last resort rather than the first. Countries such as the United Kingdom and New Zealand have high quality care in part because of the philosophy underlying their systems, but also because those systems are grounded in primary care, which is the most efficient and equitable way to deliver health services for all regardless of income. It is where care is best integrated.

Fee for service (FFS) remuneration in primary care has encouraged “turnstile medicine”, excessive treatment and increasingly the corporatisation of general practice.  FFS is a major barrier to reform in primary care. FFS may be appropriate for episodic or occasional care for walk-in patients but it is not appropriate for chronic and long term care, particularly mental and indigenous health care. Our governments have failed in this key area.

A major barrier of course to improved health services through primary care is that the Commonwealth funds GPs and other medical services, other than those in public hospitals, while the states operate public hospitals. There are substantial savings in keeping patients out of hospitals but with different funding steams there are few incentives to do so. In fact, when the Commonwealth is more concerned with its fiscal balance than with sound economics, it has every temptation to skimp on primary care, essentially imposing higher costs on the states and poorer health outcomes on the community. The Commonwealth’s fiscal obsession has outweighed any sense of economic responsibility

2. Workforce. Health is the largest and fastest growing sector of the Australian economy. Its structure and workforce are riddled with 19th Century demarcations and restrictive work practices. For example there are several hundred nurse practitioners in Australia when there should be thousands, performing routine functions such as administering regular vaccinations. About 10 per cent of normal births in Australia are delivered by midwives: in New Zealand that figure is over 90 per cent.

We don’t have a shortage of doctors so much as a misallocation of doctors. Nurses, allied health workers and ambulance staff are denied opportunities to upgrade and realise their professional potential and improve services.

Pharmacies should be providing more basic health services for the community and should be active partners with doctors in the front line. Pharmacists are the most underutilised and highly-qualified professionals in our health sector. They need to be integrated into primary health care.

There will never be adequate delivery of service to people, particularly the aged, without radical workforce reform, mainly within primary care. As Minister for Health, Nicola Roxon enabled some nurse practitioners and midwives to access the Medical Benefit Scheme but the access was quite minor. The MBS can be the lever for major workforce renewal.

It is quite remarkable that we have endless talk about the need for workforce reform everywhere but in the health sector. Surely governments could not be frightened of the AMA! In our modern economy the restrictive work practices and demarcations in the health sector are a disgrace.


3. Program structures. Health services are structured and funded around providers – medical services by doctors, pharmaceuticals through big Pharma and the Pharmacy Guild, and hospitals through state governments and private agencies. The structure of the Department of Health and Ageing reflects this provider focus rather than a focus on consumers.

Such a provider-based structure, rather than a user- or customer-based structure, is reminiscent of corporate structures abandoned in the private sector a half-century ago, and is inconsistent with the “outcomes” focus of public sector reforms of the 1980s. Yet it survives in the health sector with the only institutional recognition of consumers is through the Health Consumers Forum of Australia, a body funded by the Commonwealth and which seems more like a marketing arm of the Department of Health and Ageing than a group representative of consumer interests.

We need to progressively change the focus of health programs to serve the community rather than providers. One possible structure would be around types of users – acute, chronic and occasional. It would help reduce the competition between different provider areas for limited resources. The Department of Health and Ageing shows no serious interest in consumers but together with the Minister always seems to have an open door for the rent seekers such as the Pharmacy Guild.


4. Funding. Funding of health services is a mess, resulting in serious inequities, high administrative costs, and misallocation of scarce resources. Some services, financed either through private health insurance or Medicare, are free at the point of delivery, while others can leave consumers with massive out-of-pocket expenses.

We have some of the highest co-payments in the developed world but they lack rhyme or reason. They are a “dog’s breakfast” with the level of government subsidies varying enormously. Some co-payment arrangements work on a safety-net basis, while others, such as for psychologists, leave the consumer bearing open-ended risks. The Abbott Government’s “reforms”, if implemented, would make the situation worse. Medical and pharmaceutical co-payments have little in common, and dental services are much more poorly funded than medical services. The safety nets are unfair and lead to abuse.

Persons on high incomes should pay more for health services through efficient and defensible co-payments. A “universal” service does not necessarily mean it should be free. Subject to a means test, there needs to be more discipline by consumers in their use of health services. Jennifer Doggett at the Centre for Policy Development has proposed workable means-tested reforms in this area with a Health Credit Card. See There is no sign the Commonwealth is concerned about the problem however, even though most other countries have better models to emulate. The Nordic countries, for example, insist on a single public funder and universality but with efficient and equitable co-payments.

The other great funding distortion in Australian health care arrangements is private health insurance (PHI) – essentially a high-cost mechanism which allows some, particularly those with high incomes, to jump the queue for health services, thus worsening waiting times in public hospitals and diverting resources to private hospitals, contrary to the claim that it takes pressure off public hospitals.  It penalises country people because there are few private hospitals in the bush. Australia’s arrangements also mean that private and public hospitals operate on different funding streams and with little integration of services.

The government, through means testing rebates for PHI, has removed some inequities, but PHI remains a costly and inequitable way to do what the tax system and Medicare do much better. Also, PHI is administratively inefficient with bureaucratic costs about three times higher than Medicare.

Private gap insurance promoted by PHI has facilitated enormous increases in specialist fees. Most importantly, the expansion of PHI progressively weakens the ability of Medicare to control costs. The evidence world-wide is clear that countries with significant PHI have high costs without any better health outcomes.

The stand-out example of PHI causing high costs and poor outcomes is the United States.  President Obama may have substantially achieved universal coverage, but PHI with its lack of cost control will ultimately cripple and finally destroy his reforms. Warren Buffett has described PHI companies as the “tape worm” in the US health sector.

The Commonwealth already has a sound model of a single payer operated through the Department of Veterans Affairs – a model which retains the strong control of a single payer accountable to the community whilst allowing private practise involvement in service delivery.

The Commonwealth has failed to understand the damage that PHI is already doing in Australia. PHI is a Damocles sword hanging over Medicare. We must assert the key importance of a single public funder.

It is interesting to note that the $7b plus per annum taxpayer subsidy to PHI is more than would be required to fund a Medicare dental scheme!


5. Defining Medicare. This great Labor monument needs a review. Medicare has become a passive but efficient funding mechanism, providing a partial subsidy for certain health expenses, rather than the public insurer it was intended to be. After all, it is still called the “health insurance commission”, but it is nothing of the sort, and it is not even within the health portfolio.

Medicare has a remarkable database which should be used to highlight and inform policy concerning over and underutilisation of services across the country. Why for example do rates of caesarean section vary enormously across the country and why are Australian rates very high in world rankings? There are many other large variations in clinical procedures that must be made public and explained.  Medical services should be subject to the same rigorous cost-benefit examination as pharmaceutical services. Medicare is not doing it.

Even more potential lies in the use of that database for research into efficacy of treatments. This was an intention of Medicare’s designers, who envisioned the day when computing power could extract clinical information from that database. That day has arrived, but the government, although willing to invest billions in some areas of medical research, shows no interest in using this valuable resource, or in the integration of MBS and PBS data which would provide rigorous pharmaceutical evaluation at a tiny fraction of the cost of clinical trials.


6. Cost and blame shifting. Governments, more concerned with their fiscal balances than with economic efficiency, try to shift costs on to other governments, Commonwealth to state and vice versa, on to individuals, or on to future generations for example in neglect of public health. Attempts to resolve the Commonwealth/state blame and cost shifting have been largely unsuccessful and certainly expensive with the Commonwealth succumbing to state political pressure without fixing the lack of integration.


In Part 2 I will be looking at the major obstacles to health reform, including the influence of the vested interests who are concerned to protect their own territory rather than serve the public interest.


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6 Responses to John Menadue. Health Policy Reform: Part 1 – Why reform is needed.

  1. This first article is hard hitting and succint It explains the lack of real Reform in Health in Australia I really look forward to the next two–which I am sure will offer up some meaningful solutions to what is really a national disgrace

  2. Michelle says:

    Very honest post on some points…

  3. Jennifer Doggett says:

    Great article on the challenges facing our health system – clearly there are some tough decisions to be made (as the article points out these have been ignored by successive governments). Health is too important an issue to leave to governments and bureaucrats – we need input from consumers, researchers, health care professionals and others to find solutions.

  4. This is a great outline of some of the system’s key problems. There are structural, financial and political challenges to change and we need to have an honest discussion about them, just like this. I’m going to the next instalment now … as should we all.

  5. Roger Henderson says:

    I worked for 35 years as a specialist anaesthetist. One big cost saving would be in risk management. Most institutions are focused on risk elimination, rather than risk reduction. Hospitals generate reams of paperwork that is only ever looked at in the unusual event of litigation. Therefore far greater costs of generation, than the amount of litigation that actually occurs.

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