Health Challenges: Efficiency

The successful performance of our health system has come at a price. At 9.7 per cent of GDP, we are now spending above the average of the OECD countries in both public and private spending. The challenge for our health system is the likelihood of that increasing significantly over the next 40 years. The Productivity Commission has projected growth in public spending on health (excluding aged care) from 6 per cent to over 10 per cent of GDP, and on aged care from under 1 per cent to around 2.5 per cent.

So the issue of efficiency — of value for money or cost effectiveness — is now critical. We have an international reputation for expertise in applying cost effective requirements for listing and pricing pharmaceuticals, and we are expanding this to medical services. As the Productivity Commission has advised in its September 2005 report on health technology, we should take this further and in a more coordinated way.

We have also developed some clever techniques to encourage efficiency in the hospital sector, particularly through case-mix based purchasing. However, this has not been applied universally throughout all states and territories, which has caused significant problems such as an uneven playing field and inappropriate incentives for private insurers and public hospitals. There is therefore room for better competition for both public and private patients in the hospital sector. We are also reluctant to use sophisticated purchasing techniques and competition in other parts of the health system.

Perhaps the most significant contributor to inefficiency in the health system today is not the lack of technical efficiency within particular functional areas such as hospitals, residential aged care or general practice, but allocative inefficiency where the balance of funding between functional areas is probably not providing the best value. This is due in part to the limited ability to shift resources between functional areas at local or regional levels, and to link services to individuals across program boundaries.

A recent study of Kaiser Permanente in California and the British NHS suggests a major difference in allocative efficiency, with Kaiser achieving considerably better results with similar total resources because they invested significantly more in primary and preventive care and information technology. I suspect that the problem is greater here than in the UK, because of our stronger demarcation of programs particularly through having different funders with strong incentives for cost shifting and blame shifting, and the UK’s greater experience with integrated purchasing mechanisms such as GP fund holding and primary care trusts.

In health, this raises the thorny issue of federalism. The main problem of multiple funders is the arcane division of responsibilities between the Commonwealth and the states within health and aged care. In the long-term, my strong preference would be to have the Commonwealth accept full financial responsibility for the whole system, but I appreciate that this will not be easy. It would take a long time with dedicated effort, and would not deliver better outcomes or greater efficiency unless we also took action to set up regional purchasing arrangements, strengthened primary care and developed appropriate patient information systems.

The latter measures could be pursued ahead of any major change in federal arrangements through ‘cooperative federalism’, and there are encouraging noises coming out of the current Council of Australian Governments (COAG) process. This approach amounts to an extension of the ‘connected government’ discussed in the Management Advisory Committee (MAC) report.

Cooperative federalism, if the National Competition Policy is a useful guide, also requires national leadership from our political leaders, particularly in Canberra; a strong and competent bureaucratic process to develop firm details; the sharing of any costs and the sharing of any fiscal rewards; and some independent or auditable process for measuring efforts and performance.

As mentioned earlier, one of the obstacles to greater efficiency in the health system is also the poor use of competition. Given the range of market failures and public goods involved, and the important role of professions and beneficent organisations, however, competition in health systems is not a simple issue. But there is room to improve efficiency if we had a more even playing field and if we made more use of contracts and tender processes in the delivery of medical services.

Again, health is not entirely unique. Other areas of public policy have had the scope to apply competition more widely, and we have seen developments since the National Competition Policy reforms in such areas as employment services. But the next stage will be more complex, whether in transport, the environment or the labour market. New opportunities are arising as technology makes it possible to turn some public goods into identifiable and measurable private benefits; for example the use of expressways or water or greenhouse gases with appropriate pricing and property rights. In a number of these areas a national approach is essential as the relevant market no longer has any respect for state boundaries (if indeed it ever had). Furthermore, market prices can radically improve both allocative and technical efficiency, such as modes of transport or the use of water, but as we can see with Sydney’s toll roads, getting this right in practice is a formidable challenge.

Can we develop guides for appropriate policies in these areas, ensuring that remaining public goods are not ignored and deal with the frequent sharing of responsibilities across jurisdictions?

This is an extract of a speech given to the IPAA National Conference in Hobart on 4 November 2005

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