An Industry Economist looks at Australia’s health industry

Earlier this year I was asked to describe Australia’s health care arrangements to a gathering of industry economists at the Korean Development Institute. Such an explanation had to be in a framework familiar to industry economists, covering matters such as industry structure, markets, assessments of efficiency, productivity etc – in the way one may describe and assess the performance of any other industry.

When we examine health care from such a perspective it looks weird. We find an industry:

• with an anachronistic structure, organized almost entirely around the interests of suppliers rather than
• in which customers have become conditioned to the notion that someone else will pay most or all of their bills;
• which has been bypassed by the structural reforms and exposure to competition which have transformed almost all other Australian industries over the last thirty years;
• in which, contrary to the trend in other industries, new technologies have been associated with
cost increases;
• with strong quality control on the inputs and procedures, but comparative neglect of gross indicators of quality.

One reaction to such a perspective may be to point out that it is callous to use ordinary industry terms to describe health care, because it is about human services, in which safety has to be paramount. Such considerations hold for many other industries, however, such as airlines and food service. Another reaction is that health care is dominated by highly trained professionals with strong duties of care, but the same considerations hold for civil engineers and airline pilots. Yet another is to point out that there are other industries which depart from textbook models. That is correct, but health care has a concentration of strange practices – practices we tend to take for granted. That’s why we should expose them and examine their relevance. Even if they made sense in the past do they serve any purpose now? Who benefits,who pays? What opportunities are we missing?

Just as the industry itself is strange, so too is government policy. Not only have governments been reluctant to modernize the industry and to expose it to the discipline of market forces, but also they have added their own distortions, most notably the use of private insurance to fund certain aspects of health care, thereby increasing costs and shifting resources from where they are most needed.

*** Ian’s thoughts are more fully developed in the article “Health care – a weird industry” attached below, and first presented to the Health Care World conference, April 2010. ***