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Public sector reform begins with health
Ross Gittins
July 10, 2006


IF YOU want a snapshot of the future of government spending, don't think ageing, think health. It should be top priority for the micro reform that focuses on the public sector.

All the exercises we've seen in recent years examining the likely budgetary impact of the ageing of the population - the Intergenerational Report of 2002, a more recent exercise by the Productivity Commission, and now the NSW Treasury's report on Long-Term Fiscal Pressures - have come to the same conclusion: the cost of pensions and aged care will be quite manageable, while the really big growth will be in spending on health care.

Of course, the ageing of the population will contribute significantly to the growth in health spending. But much of that growth will be quite independent of ageing, arising from the high cost of advances in medical technology and the public's rising expectations.

On unchanged policies, the Intergenerational Report projected a "fiscal gap" in the federal budget rising to 5.3 per cent of gross domestic product by 2042. Spending on health care accounted for 77 per cent of that gap.

The NSW Treasury's exercise projected a fiscal gap in the state budget rising to 3.4 per cent of gross state product by 2044. Growth in health expenses contributed more than three-quarters of the gap.

In consequence, health's share of the state's total recurrent spending is projected to rise from 26 per cent to 37 per cent.

The first thing to understand about this massive growth is that it's not a bad thing. Like various of the services provided by government, health care is a "superior good" - as we get richer, we devote a higher proportion of our income to spending on things that will prolong our lives and keep us in good health.

If the additional health services were being provided directly by the private sector, no economist or conservative think tank would give it a passing thought. And, in principle, the fact that we choose to deliver health care largely via the public sector - mainly so as to ensure equitable access - is no cause for concern.

If we want to devote more of our rising incomes to health care, we'll simply do so via higher taxes. Why's that a crime?

In practice, however, we know that the public sector delivery of health care lacks cost-efficiency. So if we're pouring a lot more taxpayers' money into health care, we'll be pouring it into a very leaky bucket - with a lot of the extra funds simply wasted and a lot syphoned off into medical specialists' pockets.

What we need is fundamental reform of health care financing, aimed at achieving a better trade-off between equity and efficiency. This would involve designating a single budget holder responsible for all dimensions of a particular citizen's health care.

This is why, if the nation's treasuries and finance departments were doing their jobs properly, they'd be putting a lot of pressure on their political masters to accept that the next big area in glaring need of micro reform is health care funding.

In theory, it could be achieved with a high degree of goodwill and co-operation between federal and state governments. In practice, it probably requires the feds to take over the one major element in the system they don't already control: public hospitals.

The present scope for endless cost-shifting, responsibility shifting, overlap and its opposite - people falling between the silos of federal and state responsibility - is considerable.

Of course, divided responsibility is by no means the only problem. I suspect, however, it's the one we should tackle first. Fix it and all the other problems become more solvable.

(This is why, when Peter Costello says fixing federalism is vitally important, but then says he wants to take over the states' taxing powers but leave them with hospitals, I find it impossible to take him seriously.)

But even if we set fundamental reform aside - assuming it will be a long time coming - there's still much our econocrats could be doing to raise the cost-effectiveness of health care spending.

For instance, I see little evidence that treasury and finance types are exploiting the potential offered by investment in health promotion and prevention. Any fool knows prevention is better than cure.

So why are so many opportunities to reduce long-term human suffering and save money into the bargain going unexploited? Mainly because prevention runs contrary to the hip-pocket interests of most of the powerful players in health care.

The main people with a vested interest in prevention are the keepers of the purse strings, acting as agents for reluctant future patients and taxpayers.

So why are they allowing opportunities for prevention to go unexploited? Because they're not trying hard enough. Because they don't get into that degree of detail about the merits of spending proposals, leaving it to the health specialists.

Because they're still locked into the lazy, short-sighted, old-fashioned mentality of opposing all new spending proposals no matter how ingeniously they're argued for. Because they fail to recognise the most creative part of their role: seeking out and promoting those new recurrent-spending proposals that are more about investment (in future cost saving) than consumption.

Now, the keepers of the purse strings will tell you there's a small class of (mainly non-medical) health bureaucrats with a vested interest in health promotion and, if you were mad enough, you could spend a fortune on virtuous but half-baked, ineffective advertising campaigns.

True. Which is why the treasury and finance types should be promoting rigorous public evaluation of health promotion and prevention programs to build up a body of evidence on what works and what doesn't.

But I see little sign they are. Why encourage people to spend extra evaluating spending programs when your goal is simply to minimise spending? No reason - if you're myopic.

One instance of the huge potential of prevention to save taxpayers a fortune - or cost them a fortune if the opportunity isn't seized - is the obesity epidemic. Here the threat to life and limb is so great it may well stop or even reverse the lengthening in life expectancy that's been occurring for more than a century.

The trouble, of course, is that the epidemic won't be halted merely by inoffensive advertising campaigns and making school kids get more exercise. An effective response will have to acknowledge the existence of market failure and accept the necessity of market interventions such as restrictions on advertising.

Leaving aside the courage this requires of politicians in facing down powerful commercial interests, it creates ideological qualms for econocrats schooled in neo-classical economics.

Perhaps this is why, to my knowledge, econocrats prefer to leave the advocacy of such sinfulness to unregenerate health bureaucrats. But that's not good enough. It's not doing your job properly in the 21st century.

There are, of course, prominent examples of extensive prevention-oriented market intervention leading to incalculably huge savings in human misery, not to mention dollars: the anti-smoking campaign, the success against road deaths and occupational health and safety.

But these cases are a reminder of a hard truth: particularly in health care, no amount of prevention and no amount of avoidance of waste will lead to a decline in spending. The demand for longer life and better health is insatiable, so the growth in spending would continue unabated.

So when you eliminate inefficiency you don't end up saving a cent. What you do is ensure patents and taxpayers get better value for money. If you find that disillusioning, you've touched on the truth so many of our treasury and finance types find so hard to embrace.

More is required of them than merely keeping their finger in the spending dyke. They must be working actively to raise the quality of government spending.

Ross Gittins is the Herald's Economics Editor.