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Is Australia’s Health System Financially-Sustainable?

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One of the great social policy achievements of Australian governments was to establish a health system that is able to deliver world best health outcomes at relatively modest cost to almost all Australians. According to the Organisation of Economic Cooperation and Development (OECD), Australian life expectancy is the 6th highest in the OECD at 82 years at birth in 2014. This cost Australians the relatively modest amount of 9.1% of GDP (21st highest in the OECD), which compares favourably to the OECD average of 9.3% in 2012. As impressive as this success is, is it financially sustainable? Can Australia continue to achieve these impressive health outcomes for a relatively modest amount? Or will Australia’s demographics and emerging health challenges force Australians to spend more of their tax and income on the health system?

How is Australia’s Health System Financed?

Australia’s health system is financed by three main sources: the Federal (or Commonwealth) Government, State and local governments and non-government (i.e. private health insurers or out-of-pocket expense for individuals). In 2012-13, this breaks down to 41% Federal, 27% State and local governments and the remaining 32% to non-government. The different levels of governments adds to the complexity of confronting future health challenges because of frequent attempts by all sides to shift responsibility and funding to other levels of government. According to the OECD, the annual growth of public health expenditure is the 13th highest in the world at 4.4% during the period 2000-2012. If such rates continue, health expenditure will grow as a proportion of GDP given that current GDP growth is around 2.5%.

There are several reasons why health expenditure has been increasing above GDP growth. First, much of the health expenditure is demand-driven through the Medicare and Pharmaceutical Benefits Scheme (PBS). This makes it difficult for governments to forecast and manage. The scope of these benefits are determined administratively by public servants who may or may not have an in-depth knowledge of the most appropriate medical practices to maximise health outcomes. This can lead to health expenditure on unnecessary or redundant procedures while more beneficial (but newer) practices are unfunded.

According to the Grattan Institute, another source of waste in health expenditure are the prices Australians pay for pharmaceuticals. Under the PBS, the Australian Government negotiates with pharmaceutical companies on the price that the government pays on behalf of health consumers. Around $1 billion per year could be saved if Australians paid the same price that the rest of the world does.

What does ‘Financial Sustainability’ Mean for the Health System?

Given these drivers of health expenditures, what is a ‘financially sustainable’ level of health expenditure? Like beauty, the sustainable level is in the eye of the beholder. Some one who is relatively healthy and has a high taxable income would probably want public health expenditure to be as low as possible. Whereas, some one else who is less healthy and has lower taxable income would probably want more public health expenditure. They’re probably not going to agree on what a ‘sustainable level’ of funding would be. But one thing they may agree on is that expenditure is delivering the highest level of health outcomes possible.

Even if they agree on this, assuming they do not want to see a deterioration in health outcomes, health expenditure is likely to increase in an absolute and relative sense. This is partly driven by demographic factors such as ageing. But according to the Australian Treasury, 80% of the growth of health expenditure will be ‘non-demographic’ factors such as obesity and the increases in chronic conditions such as diabetes. Australians will have to accept that health expenditure will rise if they want to maintain the current system’s effectiveness.

Is it Sustainable into the Future?

According to the Australian Treasury, even under what the current government has labelled as fiscal mismanagement by their predecessor, Federal (not total) health expenditure would grow to 7.1% of GDP by 2054-55 from 4.2% in 2014-15. Extrapolating this to total health expenditure would see it grow from 9.1% to 15.4% by 2054-55. Over 40 years, this is an annual growth rate of around 1.3%. It would hardly seem to be getting out of control. Nevertheless, it will grow into the future but the all levels of government have time to moderate the growth rate.

Whether or not it is sustainable would depend on how well future Australian governments match revenue with all their competing demands for expenditure. This will depend on the form of tax policy into the future which is very much a dynamic process. Currently, Australian tax collection is heavily dependent on the economic cycle which in turn has been dependent on the commodity price cycle. Introducing a taxation system that matched funding needs with revenue would be ideal.

According to the Intergenerational Report 2015, Australia’s dependency ratio (the ratio of people of working age (15-64 years old) to people over 65) ratio declines into the future. This means the income tax base of Australia will fall. Shifting Australia’s tax system from income to assets needs to be seriously considered to maintain a sufficient revenue base.

So, the total mismatch of Australia’s taxation system to the needs of the population is probably a greater threat to the financial sustainability of the health system then behaviour of the users. The debate over expenditure misses the critical element that Australia’s revenue base may not be able to ensure the sustainability of this world-class health system. This is one reason more of us should be interested in tax reform, not as a way of saving money but to ensure that we can continue to access the benefits of one of the best health systems in the world well into the future.


  1. Indrani Chakma says:

    Interesting analysis and suggestion for shift of tax payment based on income VS assets. Interested to learn about sustainability of Universal Health Coverage with existing health system structure in developing countries where out of pocket expenditure is high as more than 60%.

    • arthurchha says:

      Thanks for the comment. It will be hard to give a general answer given that each developing countries’ fiscal situation will be different from the other. Generally, it will depend on the balance of revenue now and into the future, expected health expenditures and also other competing demands. It isn’t just a question of the fiscal impact now but it is more of a question for the future and would require some educated guesses. Sorry, I can’t be more specific. If you have a specific example, would be happy to discuss.

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