Trimming the fat: how we could save billions in the health system

Australia’s health network is cheap and effective by international standards, but powerful vested interests are rorting the system.


Cervixes are the surprise new battleground in the fight to curb rising health costs.

Just before Christmas, the federal government unveiled a plan to save public coffers $650 million a year by scrapping a bulk-billing incentive for pathologists and diagnostic service providers.

The incentive paid providers between $1.40 and $3.40 a service and had done little to achieve its stated aim of boosting bulk-billing rates.

Facebook lit up with headlines women would soon be charged $30 a pap smear. The president of the Royal College of Pathologists of Australasia, Dr Michael Harrison, claimed that, in addition to charging customers for the forgone incentive, pathologists would have to add $20 or so to bills to cover the cost of mailing them out. Harrison warned the move would have “untold effects … leading to premature deaths”.

In the business world, when a firm loses a revenue stream, its ability to jack up prices is constrained by the disciplines of a competitive market. It must cut costs, or profits will take a hit.

But the health sector is different, according to Jeremy Sammut, a health policy analyst at the Centre for Independent Studies. Sammut accuses the medical profession of being guilty of “typical closed shop behaviour”, enlisting scared consumers to lobby on their behalf to maintain their government subsidy.

“What you have got is a provider captured system, where the political economy of getting anything changed is nearly impossible,” Sammut laments. “They just close ranks, because if one part of the system’s fiscal rorts gets addressed, God knows where it will end.”

It is a view backed up by Stephen Duckett, a former secretary of the federal health department and now a health analyst for the Grattan Institute. Duckett calls it “shroud waving”.

“Every dollar of health expenditure is a dollar of someone’s health income,” he says. “They are very, very powerful and they can mount significant public campaigns.”

We’ve been here before.

In 2009, then health minister Nicola Roxon proposed halving the Medicare rebate for cataract surgeries. Improvements in technology had reduced the time and effort it took to perform the vital surgery. Ophthalmologists were able to see more patients in a day, collecting more rebates. The top 10 per cent of ophthalmologists pocketed more than a million dollars a year, Roxon said.

The response from the Australian Society of Ophthalmologists was swift.

Elderly and blind patients were told they would be forced to shoulder hundreds of dollars more in out-of-pocket costs. The website “Grandma’s not happy!” was born. The Coalition opposed the measure and Roxon was forced to drop it. Today the website bears a correction: the words “not happy” are replaced with “much happier”.

Australians are constantly told that Medicare is in crisis. Health spending is unsustainable. Universal access to healthcare is about to crumble under the crushing weight of an ageing population, the rise of chronic disease and new expensive technologies.

In 1990, 15¢ of every dollar collected through taxes – state and federal – was spent on health. Today, that figure is 24¢.

Annual government spending on health has risen to 9.7 per cent of total economic output, up from just 6.5 per cent a quarter of a century ago.

Australians now spend $6637 a year on healthcare, more than double the level of spending two decades ago, even after taking account of inflation. Governments pick up two thirds of the tab, with patients footing the rest of the bill, either through private health insurance or direct out-of-pocket payments.

But Australia’s health system is cheap and effective when compared internationally, despite the headline figures, says Duckett. “One shouldn’t assume that additional spending on health is necessarily a bad thing. By and large, Australia has a great health system,” he says.

The average health spend for advanced nations in the Organisation for Economic Co-operation and Development is 8.9 per cent of economic output. The United States spends 16.4 per cent.

“We spend less as a percent of GDP and we get large outcomes in terms of life expectancy,” Duckett says.

But costs are climbing, and not just because of an ageing population.

The main driver of health expenditure increasing is doctors doing things differently, Duckett says. “A person who is 30 is getting treated differently from a person who was 30 two decades ago. It may be that doctors are ordering more pathology tests than before, or that they’re doing more procedures than before. They just treat the same diseases differently than before. It’s partly because there are new things they can do, like new genetic tests.

“As countries get wealthier across the world, they tend to spend a lot more on health because people tend to value healthcare.

“That being said, there’s lots of ways you can save money.”


By far the biggest area of health spending in Australia is hospitals, costing taxpayers $45 billion a year. In recent years, the introduction of activity based funding – paying per procedure, not a predetermined lump sum – has improved efficiency in hospitals.

But huge disparities still exist in the cost of delivering the same service across different hospitals. A common gall bladder treatment can cost $4000 more in the most expensive hospital compared with the cheapest. The difference for a hip replacement can be more than $16,000.

Some of this is due to differing wage costs and the divide between rural and city healthcare.

But a Grattan Institute report in 2014 estimates about $1 billion a year could be saved if the most expensive hospitals are brought into line.

Duckett says rigidities in the roles that doctors and nurses perform within hospitals also add to costs.

“There are significant savings to be found in getting nurses to do some of the work that doctors do,” says Duckett. Only history, inertia and industrial fears stand in the way.


After hospitals, the biggest cost in the health system is publicly funded rebates for medical services and procedures. The Medicare Benefits Schedule lists 5700 items that attract a rebate, costing taxpayers $20 billion a year.

Health Minister Sussan Ley has commissioned a review of the schedule, after widespread concern about rebates paid for obsolete and unnecessary procedures.

More than two thirds of MBS items have been on the lists since Medicare began 30 years ago and only 3 per cent of procedures listed have had the evidence for them rigorously analysed.

A literature review in 2012 lead by University of Sydney associate professor of health policy Adam Elshaug identified 156 potentially ineffective or unsafe services on the list.

The Australian Commission on Safety and Quality in Healthcare says numerous Medicare-subsidised procedures appear overused, including lower back pain CT scans, prescriptions for antibiotics, knee arthroscopies and tonsillectomies.

A global movement, “Choosing Wisely”, has formed to encourage professionals and patients to eschew drugs and procedures of proven low value.

Dr Lynn Weekes, the chief executive of NPS MedicineWise, an independent, not-for profit organisation overseeing the local version of the program, says Australia has a “culture of overservicing and over-prescribing”.

“Many people believe ‘more is better’ when it comes to healthcare. Not all tests, treatments and procedures are in the consumer’s best interest. For example, routine imaging, where it is not recommended, can subject patients to unnecessary exposure to radiation.”

The Abbott government’s unpopular GP co-payment fee was designed to curb overservicing. But Stephen Duckett says targeting co-payments at doctors was wrong. Better to get patients into the GP surgery, but not overservice them when they’re there.

There are growing calls for an overhaul of GP fees from “fee for service” to so called “capitation” fees. Capitation – paying GPs a lump sum to see a patient throughout the year, rather than per visit – is designed to give doctors an incentive to control costs. They are not popular with the profession.

The government did score a victory against overservicing recently, saving an estimated $500 million over five years by removing vitamin D testing from the bank of tests GPs usually order when requesting bloods. Money has also been saved by unbundling tests for B12 and folate.


“We pay way too much for pharmaceuticals,” Duckett says. The taxpayer funded program for subsidising drug costs, the Pharmaceutical Benefits Scheme, now comes with an annual price tag of $11 billion, making it the third-biggest health expenditure.

Duckett’s 2013 report “Australia’s bad drugs deal” finds that Australians pay more than $1 billion too much for drugs. At the time, one of the biggest selling drugs under the PBS, a cholesterol-lowering drug called Atorvastatin, cost $19.32 wholesale in Australia versus $2.84 in Britain and $2.01 in New Zealand.

Prices have been coming down, but the system remains beset by the vested interest of powerful drug companies and “lazy policy” from the government, Duckett says.


Initially budgeted to cost $100 million a year, the private health insurance rebate – paid to health insurance policyholders as either an upfront reduction in premiums or a rebate at tax time – is today the fastest growing health cost in the federal health budget.

Despite the policy, less than half – 47 per cent – of Australians have private hospital cover. Economist Saul Eslake says the rebate should be scrapped.

“Subsidising people to do something they would do anyway is a waste of taxpayers’ money. The rebate reduces the discipline on health insurance funds to keep their premiums under control. And it’s a form of middle class welfare that the country can no longer afford.”

The Australian Council of Social Service agrees, arguing that while some people would no longer be able to afford private insurance, they would be well taken care of in the public health system, for lower cost. ACOSS estimates a net annual saving of $3.5 billion to the budget.

If you wanted to design an ideal health system, you wouldn’t start from here, Terence Cheng, a health economist at the University of Adelaide, concludes.

“The system is complex. The incentives are all wrong,” Cheng says. “The whole system revolves around volume, so the more patients they treat the more they get paid.”

But the alternative is far from clear. The delivery of health services will never function as a free market, Cheng says.

“If you talk about the demand for a can of Coke, people can decide for themselves whether they value Coke. They can determine whether they want to choose Coke versus Sprite. They know what they need. They know their preference and they know the prices.

“But you don’t have the same in healthcare. You have providers having more information than consumers. You don’t have a lot of the conditions for market efficiency. That is why you have government intervention.”

However, much could be done to improve incentives and reduce waste in the system.

In doing so, the government faces an uphill battle against powerful groups, including private medical professionals, drug companies, health insurers and hospitals.

But it’s a battle taxpayers can ill afford to lose.