Social Policy Whisper: Eroding Medicare by stealth? Indexation and the decline of public provision

Subtle policy changes, such as changes to indexation rules, competition, and payments to providers, can be similar to direct attacks on public provision. Dr Ben Spies-Butcher (@SensibleBSB) looks at the example of the 'unwinding' of Australia's universal health system.

With the 2015 federal budget almost upon us, a number of unfinished issues from the last budget are likely to resurface. One of those is the attempt to introduce co-payments to medical visits currently received without a direct payment via bulk billing. The nature of this debate, and the changes that have now occurred, offer some insight into a growing trend in social policy – to seek to erode rather than retrench public provision.

This is most obvious with indexation rules. Many of us are aware of large differentials that are gradually created by indexing payments to different formulas. Newstart, indexed to the grossly inadequate benchmark of inflation, has fallen well behind the age pension, which has been indexed to the higher of three indexes: general inflation; wage increases; and changes in prices experienced by those on the payment.

The differences were highlighted in the recent Inter-Generational Report (IGR). Unlike previous versions of the IGR, this year Treasury included three different projections, showing the (supposed) consequences of holding policy constant at three different settings: those left by Labor, those enacted since, and those that would be enacted if the Senate passed government legislation.

However, the differences appear to have been too dramatic for the government. The projections showed the long term consequences of reducing indexation for the age pension, which was projected to fall from 28 percent of average wages to just 16 percent. This seems to have led those putting the IGR together to switch the indexation rate back half way through (in 2028/29).

The IGR’s assumed changes highlight the power of compounding indexation – and potentially the absurdity of projections that assume constant policy settings with no government response over 40 years. The same logic applies to bracket creep from constant tax rates with rising incomes, and indexation for both benefit rates and means-tests for family payments and other benefits.

But the logic of gradual change adding up to significant restructuring applies in a more subtle way to other programs too. And Medicare is a prime example. When Medicare was introduced (for the second time) in 1984, bulk billing rates were just 30 per cent. By the mid-1990s they were over 70 per cent.

That’s because bulk billing is relatively efficient – reducing administrative costs for doctors – and because it benefits from competition between doctors, as patients seek out bulk billing. Nor is this likely to increase costs for government, as bulk billing tends to increase the competitive pressure on doctors to lower fees.

The same thing has happened with private insurance rates, which initially stabilized at about 50 per cent of the population in the mid-1980s, but then gradually fell to 30 per cent by the late 1990s. As patients became familiar with Medicare, they decided they didn’t need the extra benefits of increasingly expensive private cover.

While universal, Medicare has never been the kind of complete public system that the National Health Service is (or was) in the UK. Private practice and private insurance remain central. But over time, the design of Medicare has gradually expanded public provision.

That has generated an ongoing partisan contest around health. Australia is one of the few countries to have had a universal health system unwound (as the Fraser Government did with Medicare’s predecessor, Medibank). Throughout the 1980s and early 1990s, the Coalition remained opposed to Medicare.

Since the Howard Government the Coalition has pledged support to Medicare, but has consistently introduced measures to shift the balance back towards private provision. Subsidies for private health insurance, penalties for high income households without private cover and changes to increase premiums for those taking out insurance later in life saw coverage rise back above 40 percent.

Likewise, restrictions on indexation of the government payment for bulk billed services coincided with a decline in bulk billing rates in the early 2000s. As the rebate became less adequate, doctors shifted to charging fees. Political pressure eventually led the payments to be lifted.

Having backed down from a co-payment, the current government has now said it will make savings by freezing the indexation of payments for Medicare services. This gets around the need for legislation, and the public opposition generated by requiring a co-payment. But history suggests it may have similar results.

It reflects the growing importance of more subtle policy change. Direct attacks on public provision are politically difficult, especially if most citizens use public services. But changes to indexation rules, competition and payments to providers can achieve similar results over time.

Some social policy scholars argue this has been the primary mechanism for achieving pro-market reforms in social policy. Changes to encourage middle class households to leave public systems can then make it harder to defend public provision. It suggests we need to also look to how policies change the balance of forces over time.

Posted by John van Kooy.