Give the AMA a bypass and privatise public hospitals

Given the evident sense of entitlement, and the self-serving belief that no savings can be made from the health system, it beggars belief some are suggesting taxes should be raised principally to feed the beast that is Medicare.

Many budget experts are calling for a range of tax increases to close the fiscal gap between government revenue and expenditure. But before allowing the nation to be dragged over the cliff of higher tax and spend policies, we should stop, think and understand how acting on this advice would be the antithesis of true economic reform.

The major tax proposals on the table are a 50 per cent GST hike or a proportionate rise in income tax to pay for the rising cost of state health systems.

The problem in health is reckless spending, not a revenue shortfall. This is clearly demonstrated by the ever-increasing amount of taxpayer money absorbed by public hospitals. In 2003-04, combined federal, state and territory funding for public hospitals totalled $22 billion. By 2012-13, this had increased to almost $40bn, with real expenditure having grown at a rate much higher than inflation and economic growth.

Demand for hospital services is increasing in an ageing society, but there is little evidence that productivity improvements have enabled the community to receive more hospital care in return for additional funding. The 2013 Queensland Commission of Audit found that while expenditure on public hospitals in the state had increased by 43 per cent across the previous five years, activity had increased by less than half — just 17 per cent.

This is hardly surprising: public hospitals remain one of the few government utilities that have been untouched by the market-based reform agenda initiated under the Hawke-Keating government in the 1980s.

Like all cosseted public sector industries, public hospitals are inherently inefficient because they are insulated against private sector forces of competition and financial accountability that drives innovation and reduces costs in other sectors of the economy. Analysis by the Productivity Commission has suggested there is a 20 per cent cost difference between the least efficient and more efficient public hospitals, which represents a waste of many billions of dollars across the sector.

Yet this doesn’t mean better performing hospitals are truly ­efficient.

The sweetheart industrial deals struck between state governments and public sector health unions account for the high costs and inefficiency across the entire system. The centralised industrial agreements negotiated by state health departments fix rigid, statewide employment terms and conditions for doctors, nurses and allied health professionals, and include expensive and outdated work practices that prevent the delivery of services more cost-effectively.

Health consumes one-quarter of total state government expenditure, and public hospitals account for about two-thirds of state health spending. The cost of clinical ser­vices represents about 70 per cent of total hospital budgets.

Higher taxes to underwrite inefficient public services is not economic reform. Tax rises to fund state health systems are also a stopgap because, if present growth in the cost of public hospital care continues, health will consume the entire budgets of the states and territories in coming decades.

What state governments should be doing is addressing the structural problems in their health systems by outsourcing the provision of public hospital care to more efficient private providers. For example, the West Australian government has outsourced the operation of the new Midlands public hospital to a private operator, which will save $1.3bn across the life of the $5bn contract compared with the estimated cost of the state running the hospital.

Public hospital reform needs to become a national policy priority just as reform of the energy sector, the telecommunications industry, and ports were in earlier times. Privatisation maybe a dirty word in health, but the alternative is bankrupt state governments.

The best thing the Turnbull government can do is to use the review of federalism and mooted changes to federal financial relations to drive health reform.

Ending all specific purpose payments for health, and instead giving the states one pot of money to fund all responsibilities, would encourage state governments to make more rational decisions about how best to use scarce public resources amid competing priorities — including the operation of public hospitals.

A federalism reform package of this kind would prepare the way for return of income tax powers to the states. State governments that fail to reform their health systems should be made accountable to the voters who are forced to hand over a higher proportion of their incomes to prop up inefficient public hospitals.

Jeremy Sammut is a research fellow at the Centre for Independent Studies. He is the co-author with David Gadiel of the research report How the NSW Coalition Should Govern Health: Strategies for Micro-Economic Reform.