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?
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.