John Menadue. Health Policy Reform: Part 2 – Why reform is difficult. Health ministers are in office but not in power.

Jan 28, 2015

In Part 1 on health policy reform I outlined the main areas where health reform is necessary. In Part 2 I examine the reasons why I think health reform is so hard. In part 3 I will consider ways in which the necessary path of health reform can be quickened.

There is a major barrier to health reform. It is the power of providers or at least their assumed power. When I was asked by the National Hospital and Health Reform Commission to describe in a sentence or even one word the obstacles to health reform I said ‘power’, the power of providers. I don’t the Commission got what I was driving at!

A succession of Australian health ministers may have been in office but they have not been in power. Aneurin Bevan who launched in the 1940’s in my view the best health service in the world knew a few things about health but more importantly he knew much more about political power and how to exercise it in the public interest. He drew on the strong support of the community, a minority of doctors and the majority of nurses. He won the day and not surprisingly the UK National Health Service was the centre piece at the London Olympic opening ceremony in 2012.

The previous Australian health minister said we needed a conversation on health. The new minister says she will consult widely after the fiasco on co-payments. But if past practise repeats itself the conversation and consultation will be limited to the AMA and the Pharmacy Guild.

The difficulties of sensible reform are obvious in the health field but they are a generic problem in public policy today. It has been most obvious in climate change policy where Ross Gaunaut has described the power of vested interests as a ‘diabolical problem’.

The power of insiders – or the faintheartedness of politicians

Reform disrupts established arrangements. In general, the longer those arrangements have persisted, the greater becomes the pent-up need for reform, meaning that reform is going to be disruptive to existing interests. By the same token, as arrangements become more entrenched, the more do those who benefit from them feel threatened, and the more political clout they develop to resist reform.

That resistance is often based on financial self-interest, but it also aligns with a general fear of change and professional conservatism. It is difficult for those who are “inside” a system – be they administrators, professionals or policymakers – to conceive of other ways of delivering services.  Institutional inertia is a strong force. And in health care it is easy to lose sight of the fact that delivering services is not, in itself, the objective. That objective surely is serving the community by helping to keep the population healthy.

One group with a stake in current arrangements are those who administer health services. Health is a highly technical, large and complex field that is difficult for outsiders to come to grips with. This gives disproportionate power to health administrators on the inside.

“Joined at the hip” with these administrators are much the same vested interests (rent seekers) that batten on the health service and dominate the public debate. These are much the same vested interests who so selfishly and ferociously led the opposition to Medibank in 1975. They are still with us today but in a different guise. The AMA has a long and dubious history in opposing key health reforms going back to its opposition to the Pharmaceutical Benefits Scheme In 1942.

These vested interests include the Australian Medical Association (AMA), the Australian Pharmacy Guild, the private health insurance funds, Medicines Australia and the state and territory health department bureaucracies. In addition, there is a general “pro-business” push to open up all aspects of health care more to the private sector, particularly pathology and radiology.

The AMA in its role as a medico- political organisation opposes reform of the fee for service (FFS) system of remuneration. FFS is an administratively convenient means of remuneration, but it carries perverse incentives because it rewards over-servicing, over-referring and over-prescribing. It is particularly inappropriate for care of the chronically ill.

Even among the most dedicated professionals, financial incentives influence behaviour, and tend to reinforce professionals’ desire to apply their skills to problems – rather than encouraging people to become less dependent on health services.

Where possible, financial incentives should encourage practitioners to keep people healthy, rather than to deliver services to the sick. There is no “one-size-fits-all” method of remuneration – FFS has its place, but it should stand alongside other systems, such as capitation and salaried payments.

The perverse incentives in FFS come to play particularly strongly when health care takes on a corporate structure, where business objectives such as return on shareholders’ funds displace professional service objectives traditionally associated with medical practices. Businesses operate on the basis of expanding their markets, not on the basis of telling customers they may be over-using their services. The AMA, however, is turning a blind eye to the growing corporate takeover of general practise and the associated vertical integration into radiology and pathology.

Excuse me for dropping names but in a round table I attended with Margaret Thatcher in the late 1980s she was asked, “Now that you have fixed the restrictive work practices of the miners and the printers, what are you going to do about the restrictive work practices of the doctors? She replied that she would leave it to her last term. She never got around to it.” And so far neither have we.

The Pharmacy Guild strongly defends the privileged position pharmacists have gained through political influence. On the one hand the Guild strongly defends the many restrictions on competition enjoyed by pharmacists – prohibition on pharmacies in supermarkets, prohibition on price advertising, restrictions on location of pharmacies and exclusive rights to sell many non-prescription medications. On the other hand it does nothing to encourage integration of pharmacy with general practice. Thus there persists the anachronistic practice of a separation of pharmaceutical from medical services.

It is not only in retail pharmacy that Australians are overpaying. Governments are also generous with taxpayers’ money for the mainly foreign pharmaceutical firms who are able to exploit their power in patents. Medicines Australia, the body representing manufacturers and distributors of drugs, has successfully lobbied the Commonwealth to pay high prices for prescription pharmaceuticals. Twenty years ago Australia stood out as a world leader in using government purchasing power to keep pharmaceutical prices under control. Now Australia pays top prices: for example, Australians pay $2 billion per annum more than New Zealanders pay for equivalent drugs.

The private health insurance companies are expensive financial intermediaries, receiving a $7b annual taxpayer subsidy through the rebate, and additional support in the form of the Medicare Levy Surcharge, which subsidises those with high incomes to hold PHI. Not even at the height of manufacturing industry protection were people actually given cash subsidies to buy Holdens and Falcons.

Private insurers don’t deliver any health services; they are simply high-cost financial intermediaries taking commissions. As I outlined in Part 1, PHI benefits the wealthy and most importantly weakens the power of Medicare to control prices. Gap insurance through PHI has underwritten an enormous increase in specialist fees. Now the private insurers are edging their way into general practice. The Managing Director of Medibank Private also reportedly told doctors that private health insurance policy holders should have priority in public emergency departments. What an outrageous proposal.

Government subsidized private insurance is a major threat to health care in Australia. At first sight it may appear to relieve public budgets and to take pressure off public hospitals, but that’s not the way it plays out. It actually sucks resources out of the public hospitals. The remeration of most specialists in private hospitals are multiples of the remuneration of specialists in public hospitals. And as PHI pushes up costs, governments, still left with funding a large part of health services, find that they become passive players, accepting prices set by private service providers and insurers. As a result, In the United States the government’s partial programs – Medicare and Medicaid – now cost more as a proportion of GDP than do completely publicly-funded insurance systems in the United Kingdom and many other European countries. The cause of this problem in the US is PHI.

Yet, in spite of this economic danger, and the example of the clearly dysfunctional American system, governments in this country – Coalition and Labor – have been reluctant to take on the PHI industry. Before the 2007 election Kevin Rudd wrote to the industry assuring it that their taxpayer subsidies would continue.

In an economy where many traditional industries, from manufacturing through to print media, are facing huge competitive pressure and disruption, health care is seen as one last remaining growth sector, offering easy picking for business – if only the government would get out of the way.

Those are the private interests. We also have eight state and territory health department bureaucracies supported by their ministers. In a nation where state governments feel that more and more financial and political power is accruing to the Commonwealth, it is natural that they defend their shrinking turf. Such considerations override any concern to see an integrated national system. In response, the Commonwealth is reluctant to stare down the parochialism of the states.

Reform is possible

Australian governments have a strong record on economic reform. In the 1980s the Hawke-Keating Government took on vested interests, and negotiated a wide-ranging set of reforms in the manufacturing, transport and financial services industries. Earlier, in the mid-1970s, the Whitlam Government, when it introduced Medibank, successfully stared down the AMA and the health insurers. Although the Fraser Government unwound many of these reforms, the Hawke Government successfully resurrected universal public insurance in the form of Medicare.

But there has been no significant reform of the health sector since then. In 1977 the Productivity Commission recommended a comprehensive inquiry into health financing, but no government has initiated such an inquiry. Corporate interests have become more involved in health care, and PHI has become established once again.

Governments generally over-estimate the power of lobby groups. They can make a lot of noise – particularly when, as a result of successful rent-seeking in the past, they have accumulated large funds to spend on scare campaigns at the public’s expense, but the capacity to make noise does not equate to a capacity to influence voters. Opinion polls consistently show that the public believe Coalition governments are too much influenced by big business, which means reforming governments should be able to gain electoral advantage from standing up to rent-seekers.

The problem is not just about financial self-interest, however. It is also about the inertia of established practices, and an incapacity of those on the “inside” to imagine any significant variation on current arrangements. Practices such as the separation of pharmacies from medical services, fee-for-service funding, the dependence of private hospitals on private insurance, the separation of medical from hospital services in private hospitals, and so on, have become entrenched in the thinking of policymakers, politicians and many journalists. There is a deficit of imagination, an incapacity to think beyond the present.

A large part of the problem lies in the Commonwealth bureaucracy. Commonwealth Ministers for Health are very dependent on the Department of Health and Ageing, particularly, as is often the case, when ministers are not across the issues and don’t have a clear policy program themselves. Aneurin Bevan showed how important political leadership is.

The Department is ill-equipped to cope with policy reform. Rather, its objective seems to be to keep the peace with provider lobbies, and to keep the minister out of any public brawl or argument.

The Department is structured in ways that reflects the interests of providers such as doctors and pharmacists, rather than on the basis of community interests, such as acute care, chronic care or demography. It has expertise in administering existing programs but it has little economic expertise. Fiscal concerns tend to crowd out any consideration of economics.  One very senior Commonwealth official said to me that the Department does not have any strategic sense in health policy.

In fact the Department doesn’t even effectively integrate the Commonwealth’s own major programs, let alone make any real progress in bridging the Commonwealth and state divide. During the difficult negotiations with the states on health reform during the Rudd Government period, the Department of Prime Minister and Cabinet effectively had to step in because DHA was not up to the job. Even the task or rolling out e-health, a minor but important reform, proved to be a difficult one for the Department. DHA sees Medicare as a funding vehicle and not a policy instrument. Medicare is, in fact, is not even within DHA. Health policy is an after-thought and health reform is right off the agenda.

The Ministerial/Departmental model in health has failed. It is incapable of contesting the power of the rent seekers. The community is effectively excluded.

Unless the health debate is taken to “outsiders”, away from the insiders – the rent seekers and vested interests– we are unlikely to see significant progress in health reform. The vested interests invariably win out over the public interest, time and time again.

Political struggles between the public and rent-seekers are not uncommon, but there are reasons why in health care the public interest has a hard time securing a voice. Most of the public most of the time have little contact with health services. The intense users tend to be the chronically ill (who are reasonably active but do not constitute a majority) and those who are nearing the end of their lives and are not in a position to exert political influence. It is unlike services we all experience such as education or transport, where strong public lobby groups naturally arise. Also, health lobby groups are able to exploit the public’s trust in health care provider’s services – a trust which is well-justified on the grounds of professional competence, but which should not logically extend to trust on financial or political matters.

The media stories tend to be about failures – often in public hospitals because they handle the most difficult cases – and about corporate activities. Press releases from pharmaceutical firms, health insurers and other rent-seekers provide easy material for under-resourced journalists. It is easy for governments and so-called “business interests” to raise scare campaigns about the affordability of government health services. They don’t mention that when those services are privatized they are generally more expensive), but it is very hard to engender a debate about health policy. The superficial slanging match about the Commonwealth’s GP co-payments is illustrative of the paucity of the public “debate”.


In Part 3 I will address governance and issues of process which are necessary to break through the inertia and counter the power of the vested interests that batten on the health system.


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