Singapore has the right prescription

The Abbott government’s $7 Medicare co-payment appears certain to be blocked in the ­Senate. If the escalating burden of Medicare on the budget is to be contained, a Plan B will be needed. One way is to give Australians greater choice. Individuals should be allowed to opt out of Medicare and assume more responsibility for funding their own care, by ­emulating Singapore’s low-cost and cost-effective, savings-based health financing system.

Compared with other developed nations, Singapore’s distinctive health financing delivers comparable First World standards of care and health outcomes at much lower cost. Singapore spends 3.6 per cent of GDP on health — less than half the amount spent in Australia (9.5 per cent, Britain (9.1 per cent) and New Zealand (10.3 per cent). Yet Singapore’s life expectancy exceeds that in each of these countries. What makes Singapore’s health system unique is the Medi­save system of Health Savings Accounts. Similar to our super­-annuation system, all citizens make compulsory, aged-based income contributions to their tax-effective Medisave HSAs.

Funds accumulated in HSAs pay for hospital care, chronic care, some specialist treatment, and hospital insurance and deductibles and coinsurance. Minor health costs, such as GP visits and most prescription pharmaceuticals, are paid directly out-of-pocket like other goods and services. Greater personal responsibility is the secret to its success in containing health costs.

Public health spending accounts for 41 per cent of total health expenditure in Singapore compared to 70 per cent in Australia and above 80 per cent in New Zealand and UK. More importantly, over 50 per cent of total health expenditure is paid out-of-pocket in Singapore, compared to 19 per cent in Australia. Private insurance in Singapore covers less than 9 per cent of health costs.

Conventional health policy wisdom is that low public spending and high private spending leads to higher health costs and lower health outcomes. In the US, private insurance accounts for 41 per cent of health spending.

Singapore shows that low public health spending, low private insurance spending, and high out-of-pocket spending contains costs and enhances affordability without diminishing health status and quality. It has encouraged Singaporeans to make considered and informed choices; providers deliver quality services efficiently to price-conscious customers.

The Medisave system could provide a blueprint for Australia by linking HSAs to the superannuation system. Individuals could be allowed to opt out of Medicare voluntarily in exchange for opening an HSA attracting the same 15 per cent concessional tax rate as superannuation. Those opting out would trade their Medicare entitlements for an annual health voucher (indexed) for ­deposit in an HSA linked to an ­existing superannuation account. The voucher would be worth average per person government health spending, about $4300 in 2011-2012. HSA funds would be used to meet the cost of specified health expenses. These would include paying for an approved list of GP services and other non-hospital care and for health insurance premiums and coinsurance and deductibles to cover hospital care and other chronic and catastrophic treatment costs. As in Singapore, upon retirement, HSA balances would merge with, and become indistinguishable from superannuation balances.

Health vouchers would cease when pension eligibility age is reached. HSAs would yield long-term savings to government by establishing other sources of funding for old age health costs. Giving people a choice is politically viable, as it sidesteps obstacles that impede the co-payment proposal. Those who want to remain with Medicare could do so.

But the financial advantages of opting out would make HSAs an attractive alternative. Benefits would include more cost-conscious use of health services and more efficient provision of health care. It would also lower the cost of health insurance, as premiums would no longer be inflated by the problem of moral hazard (the overuse of services paid for by third parties) that plagues poorly designed payment systems such as Medicare. These savings would eventually accrue to individuals as higher superannuation balances and retirement incomes.

HSAs would contribute to the sustainability of Medicare. In the 1990s we began to move from dependence on taxpayer-funded public pensions to self-funded superannuation. Medicare opt-out HSAs would replicate this transition for health services. Using HSAs rather than taxes to pay for health services will relieve future budget pressures.

David Gadiel is a senior fellow and Jeremy Sammut is a research fellow at The Centre for Independent Studies. Their paper, Lessons from Singapore: Opt-Out Health Savings Accounts for Australia, is released today.