Cuts to primary services not the answer

The government's latest attempt at Medicare reform is a review of Medicare-funded items. The aim is to improve and modernise clinical practice by de-funding low-value and ineffective health services. Savings will go to fund the promised medical research future fund.

But it seems likely the Coalition is also motivated by a long-term imperative to constrain Medicare spending growth.

A policy that has already been enacted is the Medicare rebate freeze, which was introduced in 2013 and extended by the government last year for a further two years. The freeze is a real-terms cut that grows over time as costs rise and rebates don't keep up. It is a very crude policy measure, treating all Medicare items as equally deserving of cuts.

However, some rebate cuts and freezes will have more of an impact on patients than others. We therefore need to look closely at the components of Medicare spending to inform more targeted savings measures.

Medicare Benefits Schedule (MBS) spending has a range of small categories but is broadly divided into four main parts:

  • GP attendances (A$6.4bn, 33%)
  • pathology and diagnostic imaging (A$5.5bn, 28%)
  • in-hospital specialist procedures (A$3.7bn, 19%)
  • out-of-hospital specialists services (A$2.4bn, 12%).

Cutting rebates for GP services (including the current rebate freeze) will hit all Australian patients, including those on low incomes and in the worst health. Bulk-billing rates will surely fall (although there is no evidence of this as yet) and out-of-pocket payments will increase.

In contrast, other areas of the MBS do not benefit everybody equally and in fact tend to favour the better off.

Take the A$3.7bn spent on in-hospital specialist services as an example. This area of Medicare spending goes towards subsidising treatment of private patients, mainly in private hospitals. As such, this spending does not benefit us all but overwhelmingly the 47% of Australians with private health insurance. Public patients are funded through a different funding channel via the state government budgets.

To explore this point further we can use Medicare data to explore the contrasts in private health insurance coverage and Medicare spending in different small areas of the country using data from the Public Health Information Development Unit.

The affluent Inner-East Melbourne Medicare Local, for instance, has one of the highest rates of private health insurance coverage at 63% and attracts A$135 million in Medicare spending on in-hospital specialist procedures, 26% of its total Medicare spending.

In contrast, just a few kilometres away in the less affluent South-East Melbourne Medicare Local, there is below-average private health insurance coverage of 38%. This lower-coverage area attracts only 9% of its Medicare spending, A$32 million, on in-hospital specialist procedures.

For anybody who knows Melbourne suburbs, this is a part of the Medicare budget that benefits well-off Camberwell and Kew more than lower-socioeconomic Cranbourne and Dandenong. This pattern is repeated across the data; wealthy areas with high levels of health insurance coverage have larger amounts of Medicare spending on in-hospital specialist procedures.

So cutting MBS rebates for in-hospital specialist procedures could be preferred to cutting GP rebates on equity grounds, but there could be efficiency reasons too. We know that more than 80% of GP services are bulk-billed, as opposed to around 40% for in-hospital specialist services.

One reason is that GPs operate in relatively competitive markets, in metropolitan areas at least, and can only make small profit margins. Rebate cuts are therefore very likely to lead to GPs being forced to charge higher co-payments to more of their patients, leading to higher out-of-pocket fees for everybody.

In contrast, the market for in-hospital private specialist care seems much less competitive. Patients are often uninformed about the final price of their treatment in hospitals and are usually allocated to doctors on the recommendation of a GP, or through default if an emergency admission. This removes the market incentive for specialists to keep their prices low to attract patients.

Another complication is health insurance. Private health insurance usually covers some or all of the gap between the Medicare rebate and the price specialist charge. This also removes the incentive to keep prices low.

Overall, it's reasonable to assert that the market for in-hospital specialist procedures is less "competitive" than for GP services. Economic theory tells us that in this situation, when their subsidy is reduced through a cut in the rebate, specialists will increase their prices by less than GPs.

While the Medicare review should consider many strategies for an efficient reform of the system including the role of incentives and a culling of ineffective treatments, the big differences in equity and efficiency across the categories of Medicare spending should be of paramount importance.

Medicare's dual roles in funding universal primary care and in subsidising private patients in secondary care are not of equal benefit. The latter should shoulder the burden of cuts more than the former.

* Medicare spending figures quoted in this article come from the Department of Human Services Medicare Australia Statistics website's 2013/14 financial year data.

This article was originally published in The Conversation.

Peter Sivey is a Senior Lecturer in the Department of Economics and Finance.

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