JOHN MENADUE. Health Reform and cooperative federalism. Part 1

May 29, 2017

In the SMH of May 29, 2017, Adam Gartrell reports that ‘The private health insurtance rebate would e abolished, consumers would be charged more for extra cover and the states would be forced to find more money for public hospitals under radical funding changes being considered by top government officials. Documents obtained by Fairfax Media reveal the nation’s most senior health bureaucrats are part of a secret task force developing a proposal for a “Commonwealth Hospital Benefit” – a new funding formula for public and private hospitals.’

See below, my post from April 12 2016, about a possible ‘Commonwealth Hospital Benefit’.  John Menadue. 

REPOST. A Commonwealth Hospital Benefit.

We have been told many times that our health system is unsustainable. I don’t accept that but I am sure that substantial cost savings are possible, whilst improving the quality of care. One obvious area where we can reduce costs is through abolishing the $11 b per annum subsidy to Private Health Insurance and better integrating public and private hospitals. The main obstacle to that reform is powerful vested interests.

Given the historical commonwealth/state rivalries, the defense of territory and political differences between the states, I am certain that a major adjustment of powers and responsibilities in the health field, although desirable, is unlikely to happen. I am persuaded that what is called cooperative federalism offers the only realistic way forward. Malcolm Turnbull may also think so after his last disastrous COAG meeting.

The COAG Reform Council set up by Kevin Rudd, offered the possibility of greater cooperation. Some good work was done by the Reform Council but unfortunately the Council was abolished by Tony Abbott.

But Tony Abbott did promise a White Paper on federalism. A secretariat based in the Department of Prime Minister and Cabinet issued discussion papers last year on federalism. It was expected that the final White Paper would be released this year. Whether it will see the light of day is not clear.

But the draft discussion paper prepared within PM & C had some options, two of which particularly interested me. The discussion paper can be found at

I will discuss these two options in this and the following blog.

Readers of this blog will be aware of my concern for many years over the very high cost and destructive nature of the $11 b per annum subsidy for the Private Health Insurance Industry. A single public funder is essential with services delivered by both public and private suppliers.

Option 2 suggested that ‘The commonwealth establishes a HOSPITAL BENEFIT.  Under this option ‘the PHI rebate would be discontinued and funding directed to the new hospital benefit ‘. To support this option the discussion paper says:

The Commonwealth would establish a hospital benefit for all hospital treatments and procedures, regardless of whether they are performed in a public or private setting or whether individuals elect to be treated as private or public patients. Similar to the operation of the MBS, funding would follow individuals. The Commonwealth would fund a proportion of the cost of each procedure, with the price determined by an independent body.

The States and Territories would be asked to cover the difference between the Commonwealth benefit and the cost of the service for public patients to ensure they continue to receive free treatment in a public hospital in line with the Medicare principles and international agreements. This would be the public hospital equivalent of bulk-billing in general practice. People choosing to be treated as private patients could take out private health insurance to cover the difference, or choose to pay the gap themselves.

The States and Territories would remain system managers of public hospitals and would be free to make decisions about the delivery of public hospital services and would have the flexibility to commission services from the private sector. They would continue to be responsible for the regulation and delivery of public hospital services. The Commonwealth would have no role in setting operational targets for public hospitals.

The Commonwealth hospital benefit would replace current Commonwealth funding for public hospitals through transfers to the States and Territories and for private in-hospital procedures through the MBS. The private health insurance rebate would be discontinued and funding redirected to the new hospital benefit. Funding for other services would remain the same.

A Commonwealth hospital benefit would increase consumer choice for patients and competition for hospital services, where there are sufficient markets and alternative viable providers of hospital services. Increased competition should drive down costs and improve efficiency, and could lead to reduced waiting times for hospital services. As it would reward activity, rather than outcomes, the risk of over-servicing would need to be addressed in implementation.

This option does not address the fragmentation between primary and specialist care and hospital services, and does not provide an incentive for prevention and early intervention. Additional reforms to support connections between different elements of the health system may need to be considered.

This option could reduce incentives for cost shifting between the Commonwealth and the States and Territories by aliening funding between public and private settings. The Commonwealth’s to the funding of hospital services would remain the same, but would be more transparently and directly linked to the cost of procedures.

This option is likely to improve the durability of hospital funding. Alternate mechanisms(for example block funding) would be required to address thin or nonexistent markets(for example in regional or remote areas).The impact on the private health insurance market would also need to be considered, including the impact on consumers through changes to premiums.

This option improves the accountability and fairness of funding of hospital services. It would be consistent with other Commonwealth benefit payments to individuals.

I have been concerned for many years about the expensive and destructive nature of the $11 b. per annum commonwealth government subsidy to the private insurance industry. See link  . This $11 b. consists of $6.3 b. in direct rebate subsidies; $3 b. foregone by the commonwealth through tax exemption from the Medicare Levy Surcharge and a $1.7 b. cost through the PHI rebate being exempt from tax in the hands of individuals.

I have suggested that the $11 b. subsidy should be abolished and the savings used in two possible ways – part-funding a Medicare dental scheme or funding private hospitals through a hospital benefit scheme that the PM & C draft paper suggests. This is the key feature of option 2 which states ‘The PHI rebate would be discontinued and funding redirected to the new hospital benefit.’

This option makes good sense to me. It would in practice be following the system that we have established for veterans whereby they can use their veterans’ hospital benefit for treatment in either a public or private hospital.

A private hospital benefit scheme would also have the advantage of providing the opportunity for better coordination of care between public and private hospitals.

It would also make much more sense for the commonwealth government to directly pay a private hospital benefit rather than churning money through wasteful and destructive private health insurance . PHI as in the US is a stark reminder of the possible fate that could await our health system if we allow government subsidised PHI to continue.

Getting the detail right would of course be very important. The main obstacle to this proposal for a commonwealth hospital benefit would be the power of the vested interests – PHI and the private hospital lobby that have very close links to the Liberal Party.

It must surely be only a matter of when and how this $11 b per annum feather bedding of PHI by the commonwealth government is brought to a decent end and private and public hospitals can work cooperatively.



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