The health system is still awaiting modernisation

Five decades on from an important speech about fixing Australia’s healthcare system, better policy is still in the waiting room, Philip Clarke and Warwick McKibbin write.

Fifty years ago this year, then-opposition Leader Edward Gough Whitlam made a remarkable speech on the importance of fixing health policy in Australia.

Whitlam began his speech by arguing that when it comes to health, the Australian Government largely plays a passive role. It subsidises a hotch-potch of private medicine, voluntary insurance, private and public hospitals, State and local interests. This is still true today.

Whitlam argued the need for significant expansion of the economic research staff employed by the Department of Health to evaluate the efficiency of health spending. Today health economists, at least at Commonwealth level, evaluate some aspects of funding such as the cost-effectiveness of new pharmaceuticals. However, no Australian Health Department at a State and Federal level employs a Chief Economist or professional economic officers, unlike their counterparts in other countries.

Whitlam was also scathing of the lack of economic data on aspects of the then health care system, citing the inability of successive Health Ministers to provide official statistics on overall health costs. While today the Australian Institute of Health and Welfare does quantify total health care costs, much of the wealth of data collected through Medicare and the Pharmaceutical Benefit Scheme is underutilised.

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While Medicare collects information on the amount that every doctor charges their patients, there is no routinely reported index tracking out-of-pocket costs. Hence the recent debate surrounding the freeze in Medicare payments was mostly informed by anecdote, rather than official statistics.

Most of Whitlam’s speech was devoted to exploring ways to control the growth in health expenditure by increasing the efficiency of the system. His prime focus was on pharmaceutical expenditure, which prior to Medicare was the Commonwealth Government’s main health-related program.

Whitlam cited an early Melbourne Institute of Applied Economics report to argue that comparative pharmaceutical costs were higher in Australia than other countries. His analysis of a key driver of costs was the greater use of high priced drugs when less expensive drugs can be equally effective. Today it is still the case that Australian doctors often use more patented medications rather than generic alternatives, compared with doctors in the United Kingdom, or even the United States.

His proposals to control rising drug costs by promoting efficiency were multifaceted and breathtaking by today’s standards.

Firstly, he argued the need to remove legal barriers that prevented supermarkets owning pharmacies, arguing that the removal of restrictive practices and the introduction of more competition would bring even greater benefits to the consumer and to the taxpayer, who pays so much of the drug bill. Whitlam’s speech noted that there were 5,375 pharmaceutical chemists operating in Australia in 1965. This is around the same number operating today, which demonstrates half a century of bi-partisan policy paralysis.

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Second, Whitlam identified the problem of having a fixed co-payment for pharmaceuticals (i.e. patient pays a fixed amount regardless of the drug’s actual cost) which provides no incentive for either the patient or doctor to use lower cost medications. The main competition was between pharmaceutical companies is in the promotion and advertising of different brands of similar drugs. All of which is still true today.

Third, Whitlam argued that Commonwealth Governments needed to introduce competitive tendering to set prices of pharmaceuticals and promote generic prescribing. Those wanting to look at the potential savings from adopting this approach, need look no further than New Zealand where tenders and preferred supplier agreements are regularly used to dramatically reduce prices of many medications.

New Zealand has gone further in that PHARMAC, the equivalent of the Pharmaceutical Benefits Advisory Committee (PBAC), makes decisions on which pharmaceuticals will be subsidised at arm’s length from the Minister. What the New Zealand Government sets is the overall drug budget, the decisions on how best to spend it are entirely the purview of PHARMAC. This is the health policy equivalent of creating an independent Reserve Bank Board that has the power to set interest rates to manage the economy.

Whitlam concluded by arguing that the health initiatives of a future Labor Government should be within the limits of the existing health expenditures in Australia. The focus needed to be as much on ways to save money by reducing waste, as on how to spend money.

Unfortunately, many aspects of Whitlam’s speech were not implemented by his Government when he came to power. Although his government was responsible for devising health care reforms based on plans developed by two Economists, Deeble and Scotton which we know today as Medicare.

After decades of little substantive health policy change, Australia’s health care system requires modernisation driven by careful economic analysis and the insights of Gough Whitlam from fifty years ago.

This piece was first published in the Australian Financial Review: http://www.afr.com/opinion/columnists/the-health-system-is-still-awaiting-whitlams-modernisation-20171001-gys4o8