Sunday, May 25, 2014

Untangling co-payments: where the Government went wrong

Just when the Australian Government felt that things couldn’t get any worse, it appears that a rise in nickel prices has replenished Mr Palmer’s coffers. Oh dear. Perhaps the Government is going to be watching the Nickel Exchange as closely now as the public opinion polls!

Meantime Leith van Onselen in a piece in Macrobusiness has noted, as I have, the way in which certain sections of the Australian media have regrouped and turned to savage the Budget’s critics. The piece’s title, Media turns on Budget “whingers”, captures the flavour.  I think that you can forget a lot of the commentary at the moment. In the end, with a budget like this, it is the actual way that things work in practice that will determine the Government’s survival.

The starting point here should be not what the Senate might do, but what will happen if everything happened just as the Government intended. Then, too, the issue is not so much the macro-economy, although that might blow the Government out of the water if, for example, China went pear shape. Rather, the key question is the myriad of smaller changes rippling across the country. To illustrate this, this post deals with the health changes. My main sources is budget paper no 2, supplemented by some of the commentary. I am only dealing with major measures. 

Initially I struggled a little to understand the co-payment and I’m still not clear. But this is what the budget paper says:

The Government will achieve savings of $3.5 billion over five years by reducing Medicare Benefits Schedule (MBS) rebates from 1 July 2015 by $5 for standard general practitioner consultations and out‑of‑hospital pathology and diagnostic imaging services and allowing the providers of these services to collect a patient contribution of $7 per service.

For patients with concession cards and children under 16 years of age the MBS rebate will only be reduced for the first 10 services in each year, after which it will return to current benefit levels. A new Low Gap Incentive will replace bulk billing incentives for providers of these services. The Low Gap Incentive will be paid to providers where they provide services to patients with concession cards or children under 16 years of age and only charge the $7 patient contribution ‑ for the first 10 services in a year, or where they charge no patient contribution ‑ for additional services in that year.

The measure will also remove the restriction on State and Territory Governments from charging patients presenting to hospital emergency departments for general practitioner like attendances.

The savings from this measure will be invested by the Government in the Medical Research Future Fund.

Let’s unpack this a little. On the surface, the Government is proposing to reduce the medicare rebate on a standard consultation by $5. Doctors will charge their patient $7. The Government is $5 better off, Doctors $2 better off, patients $7 the poorer.

At this point, I would like to thank regular commenter DG. This post was due to come up first Friday and then yesterday, focusing especially on the industry and structural economics of the proposed changes. In simple terms, what were the likely reactions within the health sector, how might these interact with patient behaviour? I find this type of approach helpful in providing different types of insights compared with the more conventional economic analysis.

In his comment, DG pointed to the earlier US Rand Study, to the Singapore health system and, more broadly, to evidence on the low price elasticity of demand for health services. This led me to change direction somewhat, although my focus remains on the Australian context and the impact of the proposed changes in that context.

Elasticity of Demand

For those who are interested, this Rand paper contains a useful summary of evidence on demand elasticity, this paper provides an introduction to elasticities in general, while this post by Jason Shrafin provides an entry point for other discussion on various types of elasticities.

  To summarise the material, price elasticities for medical services appear low. This means that a one per cent increase in the price will lead to a .17 or so per cent fall in demand. However, there are variations in price elasticity between medical services. For example, price elasticities for preventative medicine are higher since this spend is discretionary. Charging for vaccinations might fall in this class. Falls in demand also appear to work themselves out not so much by falls in visits, I will go to the doctor less, but by falls in the number of people going to the doctor, I won’t go to the doctor at all. Finally, price elasticities are higher in the longer term.

In contrast to price elasticities, income elasticity is positive. As incomes rise, we go to the doctor more. That makes sense, although the income elasticities appear relatively low. Again that makes sense. We go to the doctor more because we can now pay for a wider range of services. However with exceptions, cosmetic surgery might be an example, there are only so many things that we might want done to us. Perhaps now we will have that hip replacement operation rather than putting up with the pain.

If income elasticities are positive, then it follows that if incomes fall expenditure on health services will fall by a higher percentage than the fall in income. My income falls by one per cent, my expenditure on health services falls by 1.5 or 2 per cent. I defer or cancel that hip replacement operation. I put up with my flue for a longer period.

Finally, health services are not single services. I go to the GP. The GP tells me that I need antibiotics. I go to the chemist. I have to make two payments, one to the GP, one to the chemist. The data suggests that price elasticities for pharmaceuticals are higher for GP visits. Again, that makes sense. I go to the doctor because I am ill. The doctor says that I have flue and should take this medicine. That medicine is costly. I may not be able to afford it. In any case, I am somewhat reassured by the GP, so I choose to not to buy and suffer. And maybe affect others. Alternatively, I am meant to take two courses of antibiotics. I take one, but only one.

Health Minister Dutton’s numbers.

Australian Health Minister Dutton indicated at a forum that Department of Health modelling indicated that the $7 co-payment would only stop one per cent of people going to the doctor in the first year of operation, falling to half a per cent in the second year. This led Joanna Heath in a Financial Review story entitled Dutton disputes health claims to conclude that the modelling undermined claims made by patient advocates that the co-payment would deter many people from seeking medical help when necessary.

I blinked a little when I saw this.  Surely that’s too low? Looking at it against the elasticities data, I thought okay. So this change means that one Australian in a hundred will stop going to the doctor in the first year, falling to one Australian in two hundred in the second year. That would fit with the elasticities data. However, the story doesn’t end there. I actually have no idea how all the changes will work through.    

Looking at the co-payment on its own

It is clear that doctors are presently confused at just how the co-payment system with its safety nets might work in practice. I am too! But just keeping things very simple.

At present, around 88% of doctors bulk-bill, mainly in the big clinics. In these cases, the patient presents their medicare card and the service is charged straight to the Government. The remaining doctors charge the patient direct, setting their own consultation fee. The patient then goes to the Medicare office and claims the rebate back. Doctors who follow this route tend to be independent GPS or practices located in better-off areas who have chosen for personal, professional and business reasons to opt out of medicare bulk billing. On average, they appear to charge more than the scheduled fee.

For doctors who have already opted out of bulk billing, the effect of the changes is to increase the net amount that their patients must pay by $5 per visit, the fall in the medicare benefit. While it’s a significant percentage increase in the cost to their patients, it’s also a small amount that will have little impact on their customer base. They also don’t have to worry about all the special conditions/exemptions intended to soften cost increases. They just charge. It’s up to the patient to claim back.

At the other end of the spectrum, the big company chains that now dominate the mass primary care marketplace as well as certain other areas including pathology services do have a problem. Their income has gone down by $5 per visit. That’s their profit margin. Further, they have to think about how to implement the special conditions/exemptions required to get, or help patients get, the higher medicare benefit in certain cases. That imposes costs.

There are some hard choices here from a market perspective.This is a volume business.

Looking back at some of the reports I wrote in my past consulting life, my reservation about the emerging chains lay in their ability to gain a profit from a corporate service paying its doctors compared with ordinary GP operations. At the time, the corporates were paying large sums to buy practices, older doctors were exiting gracefully. I couldn't see where the profits would come from. The margins weren't there.

I was wrong along several levels. I underestimated the extent to which volume might be increased with given doctor numbers. I underestimated the economies that might be associated with centralised back-office functions. Most importantly. I underestimated the extent to which flow-on business to higher margin areas such as pathology might support low margin services. Still, mass primary health care remained a low margin business. Now what do the chains do? How do they respond?

In the first instance, they have to keep volume up. The full changes don’t come in for a while. Meantime, there appears to have been a drop in GP visits because people don’t know what is happening, are confused. This had led the Australian Medical Association, among others, to issue statements saying don’t worry, things are as they were.

Meantime while keeping volume up, the chains have to address practical longer term business issues. 

At the moment, they simply swipe the patent’s medicare card. Now they need a new system. The simplest system is that already applying in some areas such as dentistry where medicare does not exist, where private insurance is the norm. A bill is calculated. Patients without insurance pay that. Where patients have insurance, the system allows the practice to lodge the insurance claim and then issue a bill with the insurance rebate deducted. The practice still has to either collect cash or lodge a credit or debit card for the remainder.       

My feeling is that this is the system that will be adopted, although there are still problems. One is the Government’s rhetoric, its attacks on bulk billing, for this is bulk billing in a different guise. A second is the costs and complexities associated with the safety nets and other changes.

This then raises a another question, the extent to which doctors will opt out of bulk billing, joining the 12 per cent of doctors who do not participate. I think that the chains will stay in the system since that makes the best commercial sense in the short term. However, I would expect a significant percentage of independent clinics to opt out.

In this context, the Government’s rhetoric is unfortunate.This Government has the habit, as indeed did the Rudd Gillard Governments, of speaking as though it expects people to obey. It doesn’t work like that. It simply cannot compel doctors to comply. They will do what they will do. They will opt out. Their role is to deliver medical services in the way that they see best, taking their own personal values and considerations into account. They are not servants of the Government.

If a significant proportion of doctors do opt out, then a new equation comes in. The elasticities analysis is based on price, not cash flow. A $7 co-payment is one thing, a $38 or $40 charge a second thing. Even if you can claim back, you cannot go to the doctor if you do not have the cash. The price point is not $7, but the higher amount. That could lead to significant drops in demand. 

Looking at the co-payment in context

The Government has introduced a major series of interconnected changes.

On the cost side, it has increased costs across a wide spectrum of medical services, each with its own price elasticity. Keeping it simple, a patient may now pay $7 for a visit to the doctor, but also has to pay more for medicines prescribed following the visit. The drop in the demand for medical services will be the combination of the two.

The Government had also introduced benefit cuts that will lower the income of many lower income people. The drop in demand for medical services is now the combination of the price effects for primary consultations plus the price effects for medicines plus the income effects of lower benefits. Who knows how all this will play out?


The really annoying things about all this is that it was unnecessary. I actually support the idea of a low co-payment because it keeps people honest.

If I was introducing it, I would have worked out my systems first. I would say something like people need to make a contribution for their health care. This will cost you a small amount of money, but it will be easy for you, it’s not complicated. This is what will happen. We, the Government, are going to save some money that we can then invest back into health care so that you are better off.

But what did the Abbott Government do?  It introduced so many changes that not a bloody person, and I include the Government itself as well as myself, can understand them!  Is it any wonder that people are reacting?    

Update One

Neil Whitfield pointed me to this piece on the financial impact of the medicare changes on doctors’ incomes. I had not picked up the impact of the removal of the bulk billing incentive. Ironic, really. As I remember it, that incentive was introduced because the proportion of doctors bulk billing had dropped significantly to the point that it threatened the success of bulk billing. There is not much point in maintaining a bulk billing incentive if you want to do away with the practice!

Looking at comment threads across sites, there is not a lot of sympathy around for the affect of the changes on doctor incomes. I suspect that misses a key point.  It is not clear to me that the changes will affect doctors’ incomes, although it will affect the economics of the health care companies that employ doctors. 

In a comment, Janene wrote:

I don't know if Armidale is typical of other regional cities in this regard, but here doctors do not bulk bill unless you have a health care card due to being on a very low income. I took my son to the doctor last week and paid $65 for a 5 minute consultation, of which I can receive $36 back. I have no idea why doctors here feel it necessary to charge almost twice as much as their city counterparts.

One of the interesting subtexts in all this is that it was Tony Abbott as health minister who effectively restored  medicare as a mass service. This piece in the Conversation from September last year, FactCheck: were just 67% of GP visits bulk-billed when Tony Abbott was health minister?, provides a useful historical perspective. By the time Mr Abbott became health minister in October 2003, the decline in bulk billing had become a significant political problem. The changes then introduced helped reverse that decline.

Even now as first marcellous then Janene noted, the incidence of bulk billing varies greatly across space. Not everyone has access to it. If, as appears to be the case, we are at the end of bulk billing, then everybody can now enjoy the Armidale experience. To the degree that demand for medical services is price inelastic, there would appear to be scope for doctors to compensate for volume declines through higher prices.

DG used the term moral hazard in the context of GP fees and bulk billing. However, it was always the case that those going to the doctor then had to buy the drugs where co-payment was alive and well. To the degree moral hazard existed, it wasn’t really a patient issue, but one linked to over servicing, especially in pathology, and that was a corporate issue.  

Concluding, one of the difficulties with the multiple changes is they way they feed into each other. Patients face increases in GP costs plus increases in drug costs. Oh, and by the way, optometry benefits have also changed. Welfare benefits are down.

We appear to be moving from a universal care system to a safety net system. If we are to maintain a universal care system with increased co-payments, then the system design elements become critical. The same holds true if we are to go to a safety net system.

The Commission of Audit provides a salutary lesson here. Some of its recommendations were simply stupid, unworkable, because they ignored systemic interconnections. The recommendations on rent assistance are a classic case.

All this will be winnowed now through the political process. That is the way the Australian system works. You get compromises that are then tested through experience. Things actually tend to balance themselves.


Anonymous said...

Jim, immunisation (vaccination) is a "public good" and, in the case of those immunisations listed on the government Schedule, should be provided at zero charge to everybody (with grounds for conscientious objection tightened).

Re- the dental refund arrangements you describe as likely to be adopted for Medicare - this arrangement has long been in place and is much used in specialist practice.

I've commented elsewhere to-day on income elasticity data inconsistencies.

The AMA hates the co-payment because Medicare, inter alia, is a doctor income support system.

Re- medical chains the two largest chains are owned by the two largest laboratory service companies. Their shares have recently plunged.


Janene Carey said...

I don't know if Armidale is typical of other regional cities in this regard, but here doctors do not bulk bill unless you have a health care card due to being on a very low income. I took my son to the doctor last week and paid $65 for a 5 minute consultation, of which I can receive $36 back. I have no idea why doctors here feel it necessary to charge almost twice as much as their city counterparts.

Anonymous said...


In van Onselen's piece that's not really "the media" - it's The Australian, the Institute of Public Affairs and Tony Shepherd.

Janene, doctors only bulk bill everyone if the market demands it (unless they are ideologically so disposed or have such a prevalence of bulk billers amongst their clientele that collecting the cash isn't worth the fuss). When I moved to Perth for 2 years from 2000 from Sydney I noticed how much less bulk billing there was in Perth which I ascribe to these factors. Same for remote areas where you can't go elsewhere to find the bulk billing practice.

Jim, whether the government "survives" depends, as we all know, on how this plays out in another 2 and a bit years. Unfortunatel,y Tony Abbott has written the book on how to stick to an early-term "negative" and I think we can expect an unedifying next two years as a result.

I'd say Julia's carbon tax "lie," given that the actual effect of transfer pricing wasn't really much different from the temporary tax, pales into insignificance between Abbott's "no surprises" line (to use a neutral term for his mantras), but, as I said, it all really depends on how the punters feel about the outcome down the track.

Jim Belshaw said...

Good afternoon, DG. It appears from reports that co-payments apply to vaccinations. I agree with your public goods argument. Where did you comment on income elasticities? Would be interested to read.

Janene, the Armidale case and your experience is an interesting one. Even though the numbers show a very high percentage of bulk billing, this is concentrated in particular areas where volume is involved.

marcellous, looking at the time, I have to go and watch Clare play hockey. Will respond to you later.

Janene Carey said...

Am not sure that the volume argument stacks up. The doctors here seem to gave no shortage of patients. You can wait a week to get a consultation if your situation is not dire. Maybe they have all just agreed to be greedy.

Anonymous said...

Like most petit bourgeois businesses, doctors are wont to charge what the market will bear (any pretension to noblesse oblige notwithstanding).

Jim, re- my comment on elasticity yesterday, refer to your blog of 19 May.


Jim Belshaw said...

My apologies, DG. I hadn't caught up with your latest comment in our conversation on the other post.

Anonymous said...

immunisation (vaccination) is a "public good"

While I completely agree that general population vaccination programs are of enormous benefit, and should be promoted/encouraged etc. I am still puzzling over how these fit within the specific economic term of "public good" - particularly where inclusion can be sometimes enforced, or at least penalised, if one does not participate?

Would have been unremarked if stated as public benefit.


Evan said...

Are you suggesting that it would have been more sensible to reduce people's incomes (through say a Medicare Levy?) as a way of affecting demand for services?

Perish the thought!

Winton Bates said...

You wrote, regarding the government:
"It introduced so many changes that not a bloody person, and I include the Government itself as well as myself, can understand them! Is it any wonder that people are reacting?"

I think an article by Ian Marsh in the AFR this morning provides a good explanation of the reasons for the confusion. I am copying a substantial part of the article below:

<<Tony Abbott’s fall from grace has been precipitous. But it is not unprecedented. Its causes are much more fundamental than poor political judgment. How so?

Take the precedents. The Resource Super Profits Tax was released in May 2010, and was followed by a public opinion firestorm which unseated Kevin Rudd. WorkChoices led to the downfall of John Howard’s government. Refugees and climate change destroyed Julia Gillard. Earlier, John Hewson was undone by Fightback and sponsorship of indigenous reconciliation and a republic contributed much to Paul Keating’s defeat. In all cases, an unprepared public opinion delivered a populist verdict.

As opposition leader, Tony Abbott stoked these populist fires. But to stop the discussion there is to focus only on the surface theatre of politics.

The frequency of these episodes points to a more fundamental problem. It involves a slow-burn crisis of legitimacy. This will afflict any government trying make bold reform. At its heart is a disconnect between the formal political system and the public.

There is no infrastructure through which more complex political narratives can be aired or debated. Political leaders have almost no capacity to build a supportive public opinion for significant policy change.

There is only one recent exception: John Howard’s sponsorship of the GST. He won the ensuing election but lost the popular vote. It was a dangerously close call.

The origin of this gridlock lies in profound changes in Australian society. A key decade was the 1970s. Before then two major parties, backed by large and powerful party organisations, attracted the rusted-on loyalty of the majority of Australian voters. Party brands were potent in cueing broader public opinion.

Now these party organisations are hollowed-out shells. They appear powerful only because they dominate the formal structure of the political system.

The social movements of the 1970s were the cause of this collapse. The women’s, gay, environment, animal rights, consumer, indigenous and ethnic movements all emerged at this time. They created new agendas and agitated for their take-up by the formal political system. Class identity, the former sheet anchor of political engagement, was fractured.

By the 1970s, the parties were relegated to a brokerage role for the bigger social movements. Another example of agenda-setting happened after 1983. The big parties broadly adopted the same economic rationalist program. Bipartisanship was the unacknowledged political condition for these radical changes. These were implemented in the short period between 1983 and 1993.

After 1993 the crisis receded, and normal politics resumed. But differences between the parties had narrowed. So how were they to distinguish themselves? Opportunism and manufactured difference were the new currencies of debate. This was reinforced by the decline of the party organisations, leaving media as the conduit between political leaders and their public. Tony Abbott was a master practitioner of these dark arts. There is thus poetic justice in his present predicament.

In both cases, the primary channel for the leaders was the media. There was no systemic ability to develop a public conversation except short-term sound bites. ...

(Ian Marsh is a visiting professor at RegNet, Australian National University.)

Jim Belshaw said...

That's an interesting if somewhat depressing take, Winton. I think that the rise of special interest politics is an issue, although its not new, of course.

Still, when you look at the two really big changes, the biggest to my mind, that took place after the end of the Second World War you see a different process in place.

The first was the end of the White Australia Policy, the second the end of the old protection regime. Both involved fundamental shifts, both occurred incrementally over decades.

If we take protection where we both involved, I suspect that I adopted different positions to you. Yet the policy stuff I was writing in Industry and Commerce where the special interest groups were strong started from the basis that protection had to go. The only thing being debated was the process.

Mr Keating lost his way in many ways, but in the case cited, reconciliation was lost when he went for the republic. It sucked the political oxygen out of the reconciliation discussion.

What the Government has done this time is just plain silly independent of the measures. Its two top messages were budget reform and the ending of the age of entitlement. They are in fact separate issues, although linked by the discussion. Both have to be argued separately.

In going the route it did, the Government destroyed any chance of creating an evolving consensus.The things that might make sense are lost in the atmospherics. Debate is now fragmented on the detail of individual measures. Its a bit like that political stupidity called the Lynch razor gang. As I listened to the responses in a crowded public meeting in the Armidale Town Hall, I wondered just how a Government had managed to design a package that would upset everyone!

Anonymous said...

It's funny how two people can read the same piece and have completely differing takes upon what was written, and what was implied.

Winton's reference, for me, was a commentary upon the reduced influence of the major parties arising because (or posited by the writer as arising because) of their inattention to their previously rock solid support base. The writer seemed to be saying that the parties have forgone, or been forced to forego, the careful disemination of policy ideas via their loyal supporters - instead are now more directing their attention to the sound-bite battleground.

I think the writer has a very valid point; and it explains how sometimes what should be clear policy explanation gets lost in the 'noise' of the minute by minute 'reaction grabs'.

There are lessons in the article, from which we could all benefit. This present process is simply too chaotic.


Winton Bates said...

Thanks kvd.
I take Jim's point that special interest politics is not new, but I reject his examples. How can ending privilege bestowed by government on people with a particular skin colour be advocacy of a special interest? Surely, it is advocacy of equality before the law.

There has been special interest politics in Australia in the past associated with particular religious, ideological and occupational groups, but the major parties were dominated by people who represented broader interests in the community, who pushed back against those special interests.

It was easier for Gough Whitlam and Malcolm Fraser to seek prior endorsement of their policies than it is for the current crop of political leaders.

Jim Belshaw said...

Hi kvd, Winton.There are different issues mixed in here.

Marsh's point was about the difficulty of change. Both the White Australia Policy and protection are examples of major changes. Why did they happen? Over what period? What were the impediments? What has changed?

On special interest groups. What are they? I don't think that they were especially relevant in the White Australia case, although student protests played a part. White On protection, they were clearly defined special interest groups opposing the changes.

To my mind, one of the changes is the rise of issues based groups. Again, they have always been there. However, they have proliferated and become better organised. On any issue now, health is a classic case, you will find an organised group saying that Government should do this or not do that. Governments respond.

kvd, when I was active in the Country Party, it had some 33,000 members, most inactive but central to Party funding. However, the Party did not focus just on its rusted on base. It had to respond more broadly while maintaining the membership base.

I don't think that its true that it was easier for either Malcolm Fraser or Gough Whitlam to seek prior endorsement of their policies except in the sense that they didn't have too! To a degree Mr Whitlam had to because of the importance of the platform; in some cases he had to change that to do things. Mr Fraser was under no such constraint. I don't think that either man saw prior endorsement of their policies as a constraint. Prior? By whome? Cabinet yes, to some degree the Party room. Beyond that?

kvd, the present process is far too chaotic. That was part of my point. Why? I just don't think that the good professor has identified the key reasons.

Winton Bates said...

I think the points that Ian Marsh has raised deserve further consideration. I might try to write something on my blog in a few weeks time.

Jim Belshaw said...

I look forward to it Winton.

Anonymous said...

Not a conspiracy theory, but I must admit to wondering about the proposed charging of interest on HECS debt?

It seems to me this makes the 'sale' of same very much more attractive. And if you add in the 'tame' Future Fund as a cautious buyer of reasonably performing assets, I think you are possibly setting the scene for a rather easy $20+Bn fix for budgetary problems - maybe in the budget before the next election.

Of course, you'd need to assume Finance, Treasury, and the pollies were playing a rather longer game than presently presumed.


Jim Belshaw said...

Interesting point, kvd. The extra charge, if levied, would clearly increase the sale value of the existing HECS debt. So the Government can recoup; essentially selling the present risk adjusted value of what is a tax change. Maybe we can do more of this. From memory, the Romans did.

Anonymous said...

Jim, re the $5 medicare reduction being put towards the proposed $20Bn research fund:

Is my maths wrong, or does that mean you'd need 4 billion doctor visits to generate that sum?

That seems an awful lot of waiting around in waiting rooms by the 22 million of us...


Anonymous said...

Never mind; did my own "fact check" from here:

- which seems to suggest for the 23 million of us, the yearly average is 7 visits (services), as against the Commission of Audits 11 per year.

So, to do the math using the higher (unsupported) figure of 11, the $5 cut would generate $(23m x 11 x 5) annually. Which comes to $1.265Bn.

Therefore to produce $20Bn will take 20/1.265 years - 15.8 years.

Using the same logic, but on the linked estimate of an average of 7 visits not 11 the number of years to produce $20Bn goes out to 24.8 years.

Time for a coffee!


Jim Belshaw said...

Good morning, kvd. I hope that coffee was nice! I haven't attempted to do the maths on the fund, but if you look at budget statement two, you will find that the co-payment is not the only money going to the fund. Then, presumably, there is accumulating yield as well.