John Thompson. The costly abolition of Medicare Locals

Even when it had no clear policies or plans to replace them, the Abbott government seemed determined to undo many of the initiatives of the previous Labor government. This was certainly the case in relation to primary health care.

In 2008, the then Labor government established the National Health and Hospital Reform Commission(link is external) (NHHRC) to conduct a comprehensive review of Australia’s health system. The review provided the basis for the National Health Reform Agreement (NHRA) signed by the Australian government and the states and territories in August 2011. The reforms set out in the NHRA had three main objectives:

  1. Reforming the fundamentals of our health and hospital system, including funding and governance, to provide a sustainable foundation for providing better services now and in the future.
  2. Changing the way health services are delivered, through better access to high quality integrated care designed around the needs of patients, and a greater focus on prevention, early intervention and the provision of care outside of hospitals.
  3. Providing better care and better access to services for patients, through increased investments to provide better hospitals, improved infrastructure, and more doctors and nurses.

The establishment of 61 Medicare Locals across Australia was one of the key initiatives taken to address these objectives.These regional structures aimed to strengthen the primary care system (and thereby relieve pressure on hospitals and other acute providers) by integrating Commonwealth and state government health planning and service delivery and access.

Medicare Locals were non-profit companies selected after a competitive application process and funded largely by the Commonwealth with $1.8 billion for the period 2011–12 to 2015–16. While the Commonwealth funding deed specified program schedules and reporting requirements, Medicare Locals were provided with considerable scope to arrange their structure, operations and relationships to reflect their local health environment.

To provide this focus on primary care, Medicare Locals were required “to work with the full spectrum of general practice, allied health and community health care providers and improve access to care and drive integration between services.” They established collaboration with health care services and other community organisations in their region to develop strategies to meet the overall primary health care needs of their communities. Considerable effort was made to ensure that general practice had a central role in the work of Medicare Locals – with varying effectiveness.

Medicare Locals worked at a regional level with state and local government in the planning of primary health care services and in the linking of these services with Local Hospital Networks and aged care programs to deliver improved integration and effective transitions for patients across the entire health care system.

The Medicare Locals program was a contentious one, not just because it was a Labor government initiative, but many GPs saw it as a threat to their primacy in their local primary care market and saw the regional health planning activities of the Medicare Locals as an unnecessary additional layer of bureaucracy. This negative view was reinforced by the AMA, the doctors’ union, that lobbied the Coalition Opposition on the basis of the perceived threat to the GP small businesses. For this reason, the Coalition went to the 2013 election with a health policy that included brief mention of Medicare Locals as follows: “We will also review the Medicare Locals structure to ensure that funding is being spent as effectively as possible to support frontline services rather than administration.” However, the then Opposition Leader, Tony Abbott, made a promise that no Medicare Locals would be closed should the Coalition form government.

About a month after coming into office, the new Minister for Health, Peter Dutton, announced a review(link is external) of Medicare Locals to be conducted by Professor John Horvath. The review was aimed at “reducing waste and spending on administration and bureaucracy, so that greater investment can be made in services that directly benefit patients and support health professionals who deliver those services to patients.” Comments from selected “stakeholders” were invited.

Professor Horvath, previously Chief Medical Officer, was assisted in the review by two consulting firms: Ernst & Young provided advice on the current operations of Medicare Locals and future structure and governance options, and Deloitte Touche Tohmatsu (Deloitte), conducted an assessment of their financial performance and compliance to their Deed.

The conduct of the review attracted substantial criticism, particularly for its lack of transparency. A Senate committee subsequently reported(link is external) that it had not been able to obtain much definitive information about the process and methodology used to conduct the review.

More than 270 submissions were received, indicating a high level of interest in the review, but none was made available by the Department of Health or as supporting documents with the review as is the usual case. Horvath advised that he “personally conducted” interviews with key stakeholders but did not identify who they were. A small number of Medicare Locals were asked for input to the review but were restricted in the amount of information they could provide.

It is understood that the Deloitte audit involved what the Department of Health called “a basic review” of the 2012–13 operations of the Medicare Locals functioning at that time, with a more considered audit of six of the 61 Medicare Locals. As most Medicare Locals had only just begun operating (setting up structures, employing staff, developing IT systems, etc.), it is not surprising that their audited financial and other achievements were not substantial, and the auditors were not interested in the future plans of the Medicare Locals.

The review was completed in March 2014 and was highly critical of the performance of the Medicare Locals. Itrecommended(link is external) that the recently established Medicare Local system (one third of the Medicare Locals were only established as from July 2012) be replaced with a system comprising a smaller number of regional organisations called Primary Health Organisations.

The Senate committee referred to above reported: “With limited information available publicly, and no detailed discussion of methodology in the Review report, it is difficult to understand the Review’s recommendations. Similarly, without the transparency that would have been achieved by the publication of the consultancy reports and the 270 submissions, the Review’s assertions that the Medicare Locals are ‘flawed’ cannot be tested.” The Senate Committee also stated that it could not reconcile the positive evidence it heard of the progress and achievements of Medicare Locals with the highly critical and negative findings of Horvath’s review of the work of the Medicare Locals.

Notwithstandinga clear public statement by Tony Abbott that no Medicare Locals would be closed should the Coalition form government, when his government brought down the 2014-15 Budget in May 2014 it was announced that all Medicare Locals would cease operation on 30 June 2015 and a new network of Primary Health Networks(link is external) (PHNs) would be established.

There have been substantial costs incurred in the closure of the 61newly established Medicare Locals, both financial and in terms of disruption or termination of valuable health services. In a relatively short time, boards had been established, staff had been recruited, premises and operating resources were acquired, relationships and collaborations established with local health organisations, and services and programs initiated. On the basis of government commitments, the Medicare Locals had entered into contracts, leases and employment obligations.

The costs of winding up the Medicare Locals have been estimated at between $112 million to $200 million. The Health Department admitted that closing Medicare Locals would cost $112 million but refused a Freedom of Information request for details of this estimate claiming it would not be in the public interest to release these figures because it could jeopardise “its good relationship with Medicare Locals.” However, many Medicare Locals showed no reluctance to publicly announce their wind up costs at the Senate Committee hearing. The Barwon Medicare Local estimated their costs at $2 million; the North Adelaide Medicare Local’s estimated costs were $2.2 million.

Skilled, and often very scarce, staff were lost as they became aware of the uncertainty of their future employment. These staff losses were felt most keenly in non-metropolitan areas where health workers are often difficult to find.

Perhaps more crucially, many highly needed health services that had been recently begun were terminated.Although in their early stage of operation, Medicare Locals had established or funded a range of vital services, made important advances in population health, identified and filled key gaps in services, and begun the critical task of integrating primary care with hospital services. This momentum was lost and many communities lost the gains made. Furthermore, key health staff were lost, a particularly important factor in rural and remote areas.

The Department of Health then announced that the new PHNs would be selected on the basis of a public tender process so that the new organisations could begin operations on 1 July 2015. This tender process was very poorly managed by the Department.

The notice of tender for the PHN Program was issued on 28 November 2014, almost a month after the previously advised scheduled release date. The tender period was very short and conducted over the Christmas–New Year period with tenders to be submitted by 28 January 2015.This was an absurdly short time for major organisational relationships to be established and business structures and financial decisions to be made, particularly as the minister encouraged new private sector interests to participate.

Although broad guidelines were provided to potential tenderers at the start of the process, major decisions and criteria such as the geographic boundaries of the proposed PHNs were drip fed to interested tenderers as the tenders were being prepared.

State government officials advised that there was very little consultation with the key state health agencies to recognise and capitalise on existing health planning and coordination bodies.

Information meetings for prospective tenderers were conducted in each state by Department of Health officials but the information provided was no more than that which already available on the Department’s website. The Department even refused to provide notes of the meetings or lists of attendees (which would have been of assistance to facilitate collaboration in the preparation of tenders).

Horvarth’s review criticised Medicare Locals for focussing too much on service delivery, not entirely coincidentally a concern of GPs and other providers. His report recommended that PHNs “should only provide services where there is demonstrable market failure, significant economies of scale or absence of services”. However, he did not define “market failure” and the Department clearly had difficulty in providing potential tenderers any reasonable clarity on this matter. This certainly made the preparation of submissions very difficult, especially for tenderers in rural and regional areas where Medicare Locals had provided services to meet significant gaps in services.

In summary, the tender process was very deficient. The Senate Committee noted the confusion surrounding the tender process and considered “flaws in the government’s PHN tender process raises doubts regarding any outcome of the tender process.”

It is not surprising that about this time a poll of more than 1100 doctors across Australia conducted by the AMA declared the Minister for Health, Peter Dutton MP, the worst Minister for Health for 35 years.

In April 2015 the Commonwealth government announced that 31 PHNs would be funded as from 1 July 2015. They would be required to establish Clinical Councils involving GPs, and Consumer Advisory Committees. Announcing the successful bidders, the Minister of Health, Sussan Ley, said the new PHNs would replace “Labor’s flawed Medicare Local system,” yet almost all PHNs selected (24 of the 28 PHNs) are either consortia of former Medicare Locals or have a Medicare Local as the lead applicant.

The new PHNs will be responsible for populations and geographic areas that are much larger than those of the Medicare Locals. (For example, one PHN will now be responsible for all of Western Australia except the Perth metropolitan area.) Medicare Locals had an average population of 355,000; PHNs will service an average population of 738,000. Six PHNs will service populations of more than one million. Many health experts doubt the effectiveness and efficiency of such very large organisations, citing the failure of the NSW government’s establishment of mega health services.

The substantial costs of establishing these new organisations are not known and it will be interesting to discover their operating costs when their first financial reports are made.

The concerns of the Senate Committee that the inadequate Horvarth review and the Department’s inept tender process could lead to a poor result appear to be justified. Now, several months after the PHNs were formally established, there has been little progress in developing any useful operations. Many in the health system are of the view that the whole exercise is a very expensive ideological move that, despite very substantial financial resources and lengthy disruption and dislocation, may not achieve the results that the fledgling Medicare Locals were beginning to realise.

John Thompson is an economist with experience in primary health. This article was first published in Australian Policy Online on 23 November 2015.

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