New CIS paper calls for overhaul of diagnosis-driven mental health system

Australia’s mental health system is failing those most in need — not because of neglect or underfunding, but because of overdiagnosis and misallocation, a new Centre for Independent Studies paper warns.

In Drowning in a Sea of Diagnoses, Emeritus Professor Steven Schwartz reveals a stark paradox: despite decades of soaring government spending on mental health, outcomes have barely improved. Suicide rates remain high, psychiatric drug use is at record levels, and ever-growing numbers of Australians are classified as mentally ill.

The paper shows that programs designed to expand access to care — including Better Access and the National Disability Insurance Scheme — have unintentionally created a system that treats ordinary distress as pathology, encourages diagnostic expansion, and rewards long-term dependency over recovery.

“Australia has built what I call a diagnostic-industrial-government complex: a self-reinforcing system that produces patients rather than health,” Prof Schwartz says.

“Ordinary human experiences — exam stress, grief, loneliness — are increasingly treated as disorders. This medicalisation diverts resources away from people with severe psychiatric illness while drawing millions into treatment pathways they don’t need.”

The research highlights how institutional incentives reward diagnosis and ongoing service use rather than recovery. Clinicians are paid to generate diagnoses. Families access support by acquiring labels. Schools and universities trigger funding through diagnostic pathways. The result is a feedback loop in which rising demand justifies ever-greater expansion without evidence of population-level benefit.

According to the Productivity Commission, roughly half of all Medicare-subsidised mental health services now go to people with mild or moderate symptoms, while those with severe, enduring conditions often receive fragmented care or none at all.

Prof Schwartz argues the system treats all distress as points on a single continuum, forcing people with schizophrenia and stressed university students to compete for resources from the same pool. “This is compassion without proportion,” he says.

The paper calls for fundamental reform built on five key principles:

1. Replace diagnosis with functional assessment. Allocate support based on what people can and cannot do, not on whether they meet criteria for a psychiatric label. This reduces diagnostic inflation and ensures those with serious disabilities receive priority.
2. Reward recovery, not retention. Fund providers based on how many people return to work, education, or independent living—not how many remain in ongoing treatment. Success should be measured by exit, not enrolment.
3. Address contextual causes before medicalising them. Many difficulties labeled as disorders—depression tied to unemployment, ADHD diagnoses driven by inflexible school-entry policies—are better addressed through housing, employment support, and policy reform than clinical intervention.
4. Handle problems outside the mental health system wherever possible. Strengthen families, schools, workplaces, and communities rather than defaulting to professional services for normal developmental and life challenges.
5. Collect data that measures what matters. Track functional recovery, duration in care, and whether resources reach those with greatest need—not just spending and service volume.

The paper points to the federal government’s $2 billion Thriving Kids initiative, announced in August 2025, as a critical test case. “Its success will depend on whether it supports developmental catch-up without diagnostic labelling, or simply becomes another pipeline into lifelong dependency,” Prof Schwartz says.

“The goal of reform is not to deny suffering or dismantle care. It is to restore proportion and effectiveness. A mental health system should be judged not by how many people it enrols, but by how many people no longer need it.”

Emeritus Professor Steven Schwartz AM is a Senior Fellow at the Centre for Independent Studies and former Vice-Chancellor of Murdoch University, Macquarie University, and Brunel University London.