Published in Healthcare Management Forum 2021, Vol. 34(4) 225-228, 24 Feb 2021
The Australian healthcare system has it all: universal publicly funded hospital and medical care, alongside private funding and private delivery, overlaid with a complex marble cake relationship between the Commonwealth (federal) government and the states. In this article, I will focus on one aspect of the Australian healthcare system which is quite different from the Canadian system, namely the role of private payments for healthcare.
A critical choice in healthcare policy is what should be in the public benefit package—known as Medicare in both Canada and Australia. It is common in all high-income countries for some services to fall outside this publicly funded package. In most countries, cosmetic procedures— surgery for purely aesthetic reasons—fall outside the public program and are fully privately funded. Dental services are not covered in some countries, nor are some medications, especially “over-the-counter” medications.
Services outside the public program are deemed unnecessary for public coverage so most people would accept that private payment for such services is inevitable and reasonable. Problems arise when payment is required or allowed for services within the public benefit package, and here there is a sharp divergence between Australia and Canada.
In Australia, there are extensive private out-of-pocket payments for medical services—in 2018 to 2019 they accounted for 8% of revenue of family physician services and 17% for specialist medical services. Private hospital insurance is held in some form by about 44% of the Australian population—and private health insurance accounts for 13% of total hospital revenue (other than from compensable patients such as those in traffic accidents) with a further 4% from Commonwealth government subsidies to private insurance. Private payments, together with the Commonwealth insurance subsidy, account for 88%of private hospital (non-compensable) revenue. Copayments for medications are mandated in Australia, despite a national scheme for subsidized access to drugs, and copayments are rife for privately provided dental care where there are only limited public supported services. In Canada, copayments are mostly only for medications and dental services.
Private payment for healthcare—whether through out-of-pocket payments or mediated by private health insurance—is inherently inequitable.
Out-of-pocket copayments
There is now an extensive literature on the effects of copayments with their adverse equity impacts recently summarized:
… vulnerable groups, including individuals with low income and in particular need of care, reduce their use relatively more than the remaining population in consequence of co-payment.
Although it has been criticized on methodological grounds, including underestimating the impact of copayments on the poor, the classic study of copayments is still the 1990s Rand Health Insurance Experiment in the United States. Three critical conclusions can be derived from this extensive controlled experiment:
- “Use of medical services responds unequivocally to change in the amount paid out-of-pocket”;
- Sicker people were more responsive to price than the healthy and use declined more among poorer people (lowest third of the population income distribution) than richer people; and
- “Cost sharing does not have a differential effect according to the effectiveness of care; it is just as likely to lower use when care is thought to be highly effective as when it is thought to be only rarely effective”.
The second conclusion from the Rand experiment, also supported by more recent literature, draws attention to the inequitable nature of copayments. In taxation-funded healthcare systems, costs of healthcare are funded in line with the progressive basis of taxation so the rich pay proportionately more. Because of the incidence of illness, benefits of healthcare accrue mainly to the poor and sick, so tax-funded systems achieve a redistribution of income from richer to poorer. Copayments disrupt that, falling mainly on higher users of healthcare, often the poor.
Not surprisingly, these distributional consequences shape the politics of copayments:
Thus, one finds, for example, that people with higher incomes are more likely to favor greater reliance on user charges as a source of system finance, and less use of general public revenues. A priori it should be pretty obvious that, whereas tax liabilities tend to be more or less proportionate to income, illness is not. For any given level of expenditure on health, more will come out of the pockets of wealthier individuals if the system is tax-financed, and less if it is user-paid.
The distributional consequences go further than regressive income redistribution to regressive redistribution of health outcomes as well:
If user charges are as likely to discourage “needed” as “unneeded” contacts, and if they serve not to reduce overall use but to reallocate services from those with less ability to pay to those with more, and if at least some of the services thus reallocated are not only “needed,” as judged by clinicians, but actually effective, then user charges will reallocate health outcomes as well. . . . User fees may redistribute not only money and access to care, but health itself, from lower to higher income groups.
In addition to officially mandated copayments, voluntary copayments—either officially sanctioned or as part of informal payments and bribes—are endemic in many countries. Such payments are almost invariably regressive as richer people are much more able to afford these payments. Even in advanced economies where voluntary copayments are allowed, they are associated with reduced access, especially for people on low incomes. In many countries, including Australia, copayments may be charged by a significant proportion of physicians and so cannot be described as voluntary, as access will be denied, and care foregone in the absence of the patient paying the copayment.
In both Australia and Canada, the effect of copayments is real—with people missing out on, or deferring, care because of cost, with people on lower incomes more likely to do so than people on higher incomes.
Private health insurance
In some countries, such as Australia, private health insurance provides insurance for the same services as are covered in the public benefit package. In this case, private payment is claimed to act as a substitute for public funding: that is, if it were not for the private payment, these services would be funded from the public purse.
However, the reality is that private hospitals, underpinned by private payment, have different thresholds for admission—that is, treatments might be provided with private funding that might never be prioritized for admission with public funding. In these cases, private hospitals and private funding do not substitute for public funding at all. A key argument for private funding is a libertarian—and somewhat hedonistic—one: people should have a freedom to spend their own money as they wish:
People typically feel good about being able to choose and, conversely, feel frustrated when they are being barred from a choice between alternatives that could have been offered to them.
The marketing of substitute insurance might emphasize a choice of better amenity or faster access to care, bypassing public-sector priority setting. Private payment for improved amenity—a bigger room or better food—does not impinge fundamentally on equity. In contrast, paying for faster access is, almost by definition, inequitable.
Why do private payments exist?
Private payments exist because of the disjunction or asymmetry between the established institutional processes in the health system and informal norms, values, and cultures. There is a significant difference in the role of private payment for substitute services in Canada and the United Kingdom on the one hand, and Australia on the other. There is very little private payment in the first two countries, and indeed in Canada private payment for substitute services is strictly limited, and in most provinces, prohibited. A recent legal challenge to this prohibition was rejected.
The informal norms, values, and cultures in Canada and the United Kingdom, and the formal policies about Canadian Medicare and the UK National Health Service are closely aligned. The public systems in both countries are strongly supported—there is an expectation in both countries of equitable access, with preferential access or requirements to pay out-of-pocket being neither part of the informal nor the formal systems. In both countries, the public system was initially disputed but was quickly accepted by the medical profession and consumers.
In Australia, in contrast, private payment for substitute services is widespread and even encouraged, especially by conservative (Liberal) governments. Australia’s Medicare system was only introduced after vociferous and bruising fights. It was originally introduced in 1974 and then dismantled shortly thereafter. It was reintroduced in 1984 and the Liberal Opposition continued to oppose it in election after election, promising to abolish it, for the next decade.
Even though the medical fee schedule in Australia was based on the prevailing “most common fees,” a significant number of medical practitioners, especially specialists, view the fee schedule as illegitimate and charge above the schedule fee.
Although charging a higher fee might connote higher quality, there is no Australian evidence of an association between out-of-pocket payments and quality, and the limited United States evidence suggests an inverse relationship between provider price and quality.
In Australia, there is a significant difference between the informal values, norms, and cultures, of the medical profession on the one hand and the formal health system provision under Medicare on the other hand. This leads to a culture of significant out-of-pocket payments and private health insurance, for services in the public benefits package.
The existence of private payments inevitably involves the creation of a two-tier health system, although the French- Canadian expression `a deux vitesses may be a better phrasing given what is often purchased is faster access. A two-tier or two-speed health system is antithetical to social justice. It also undermines commitment to solidarity and weakens support for the stewardship function of the health system. Preferential access for those who can afford it weakens support for a universal health system and undermines the legitimacy of public priority setting.
The intersection of a parallel private health system saps resources from the public system, and contrary to the argument of advocates, does not reduce waiting times for those in the public sector, so private payment is more likely to harm than help public systems.
Finally, as well as creating inequity, private payments may also be inefficient. International evidence shows that healthcare in multi-payer systems consumes a greater share of gross domestic product than healthcare in single-payer systems.
Advocates of private funding and private provision often point to the Australian health system as a model. However, the role of private financing in the Australian healthcare system is quite problematic and Canada should not emulate this dual funding and the dual speed health system it creates.
Policy-makers in Canada should therefore resist the siren calls that private funding is a magic panacea for the current woes of the health system—calls that are often self-serving. Similarly, health system managers should be wary of claims that private funding for an element of care is a safe source of additional revenue, with no detrimental long-term impacts.
Finally, during the initial stages of the COVID pandemic, some people eschewed testing because they would lose income while waiting for test results or self-isolating. Policy-makers and managers therefore need to be aware of hidden financial barriers too—travel costs to care and the need to take uncompensated time off work.