Fiscally fixing health and Medicare means state income taxes | afr.com – The Australian Financial Review

Cutting the costs of hospitals will be crucial to future state fiscal management.

The old business adage warns there is no such thing as a free lunch. The same applies when it comes to health policy: the notion we can make Australia's 'free' health system sustainable by funding public hospitals on an 'efficient' activity-basis is a myth.

Under the Gillard government's 2011 'National Partnership' funding formula, the states agreed to a national system of activity-based funding that pays public hospitals for each service delivered at the so-called 'national efficient price'. This is a pricebased on average costs across public hospitals nationally.

But a national efficient price is a contradiction in terms. Its impact on the unit-cost of care is biased by less efficient hospitals and distorted by therestrictive workforce practices that are legion in all public hospitals.

Nevertheless, the focus on efficiency is understandable. In all jurisdictions, health consumes around a third of state budgets, and public hospitals account for around two-thirds oftotal health spending. Since the start of Medicare in 1984, the unfulfillable promise of 'free', universal public hospital care has imposed increasingly onerous burdens on over-stretched state finances.

This activity-based funding first introduced in Victoria in 1993 was developed as a panacea for the inherent, unsolvable problem posed by a 'free' hospital system: an ever-growing disparity between public hospital capacity and the demand for 'free' services.

To the extent that activity-based funding encourages hospitals to increase productivity and attain at least average levels of efficiency, it can help reduce treatment waiting times and lower the overall cost of hospital services to governments.

However, it cannot eliminate the rationing of access to services by waiting lists, emergency queues, hospital bed cuts, and budget caps. These remain integral features of all state health systems and are essential to containing the potentially unlimited cost of 'free' hospital care.

Activity-based funding spurs hospitals to treat more patients. Higher service volumes could potentially further increase the total cost of hospital services even if funded at supposedly efficient prices and thereby increase the need to contain costs by further rationing access to services.

The Australian Institute of Health and Welfare has declined to publish figures for spending growth due to lack of year-to-year consistency in the data for recurrent real public hospital expenditure growth over the past five years. This means the cost impact of activity-based fundingis unknown and unprovable.

But even if reliable expenditure growth figures were available, any apparent success of the new activity-based funding system on the overall cost of hospital services is confounded by 'known unknowns': the impact on hospital expenditure of concurrent rationing necessitated by activity-based funding increasing throughput of patients.

Notwithstandingthat, thebottom line is that activity-based funding is no answer for the unaffordable cost of 'free' public hospital care in an ageing Australia.

The Abbott government recognised this when it scrapped the unaffordable Gillard funding deal in the 2014 budget, avoiding the$26 billion increase of federal hospital funding from 2013-14's $14 billion to $40 billion in 2024-25.

That has since been reversed by the Turnbull government, which temporarily restored the Abbott 'cuts' to hospital funding but only until 2020.

With this deadline looming, it is time to confront the undeniable: the fundamental unsustainability of a 'free' hospital system.

Instead of the usual cap-in-hand approach to the federal government seeking a non-existent money tree to fund health servicesstates need to fix their problems in health from first principles.

The reality is that states do not have sufficient sources of revenue from the current division of tax powers under the federation to ever hope to pay for their health and many other responsibilities.

A realistic path towards a state income tax therefore needs to be on the table in the forthcoming COAG negotiations over health, which need to be concluded by September 2018.

A state income tax would kill two birds with one stone.

Winningfiscal freedom wouldrelease states from some of their obligations under Medicare. That's because they would no longer be forced to provide public hospital services for 'free' as a condition for receiving federal health funding.

This would allow states to introduce policies that will ultimately control the demand for, and cost of, public hospital services. Policies such aspatient cost-sharing in the form of a compulsory co-payment for public hospital treatment.

This may seem radical or political poison after Labor's successful Mediscare campaign during the 2016 election, but bold reform in health to end 30 years of financially disastrous federal meddling in state health systems is the only way state governments can save themselves from Medicare.

David Gadiel is a Senior Fellow and Jeremy Sammut is Director of the Health Innovations Program at The Centre for Independent Studies. Their report is Medi-Mess: Rational Federalism and Patient-Cost Sharing for Public Hospital Sustainability in Australia.

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Fiscally fixing health and Medicare means state income taxes | afr.com - The Australian Financial Review