In this comprehensive article below, a health policy analyst who wishes to remain anonymous provides comment on major shifts in health policy and funding in the 2014-15 Federal Budget, handed down today.


“William Foggin” writes:

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Agency amalgamations/cuts

The government is cutting a swathe through health portfolio agencies in the interests of efficiency and reducing duplication. As a long-time observer of the Canberra health bureaucracy, I have to say I agree with some of the proposed changes. But lots of others seem to have been made with so little regard for what the agencies actually do that I suspect the good decisions are the result of good luck rather than good process.

Let’s start with the Australian Organ and Tissue Donation and Transplantation Authority (AOTDTA). For decades Australia has had a very poor rate of organ donation. Government inquiries and task forces and expert committees had wrestled with the problem for years, but the rate stayed stubbornly low.

Then in 2008 the Rudd Government introduced a package of measures, including a new agency to implement and monitor progress. According to the agency:

“Since 2009, there has been a 43 per cent increase in the number of organ donors in Australia (354 in 2012 compared to 247 in 2009) and a 30 per cent increase in the number of transplant recipients (1,053 in 2012 compared to 808 in 2009). So far in 2013, there has been a further 18 per cent increase (334 donors to end October compared to 285 last year).”[1]

The enthusiasm and energy that a dedicated agency can bring to the task must be an important contributor to this performance. But the agency is now to be merged with the National Blood Authority (NBA) to create a new independent agency on the basis that the two agencies have similar expertise.

The NBA is essentially a procurement and contract management agency. It buys blood collection and delivery services from the Red Cross and plasma fractionation services from CSL, and a range of other blood-derived or analogue pharmaceuticals from other companies. Its only similarity to AOTDTA is that they both have something to do with donated body parts.

Wait for the organ donation rate to start falling.

Then there is the abolition of the Australian National Preventative Health Agency (ANPHA). A government justifying swingeing cuts to health expenditure on the basis of sustainability does not enhance its credibility by abolishing an agency dedicated to improving population health (and terminating the agreement with the states on preventive health[2]). Other contributors to this blog will have more to say about this.

Health Workforce Australia will be wound up and its functions taken over by the Department. The original idea behind HWA was that it would combine Commonwealth and state funding: in practice state funding has not been forthcoming, and the Commonwealth has clearly decided there is little point in maintaining a separate agency to spend its own money. And General Practice Education and Training Limited (GPET) is to be subsumed into the Department – from whence it was originally removed on the basis that it needed to operate more independently.

The functions of the Private Health Insurance Administration Council’s functions are to be split between the Australian Health Practitioner Regulation Agency (AHPRA) and the main Department of Health. While the detail is yet to be made public, APRA is an entirely sensible place for the fiduciary regulation functions.

The Private Health Insurance Ombudsman is to be merged into the Commonwealth Ombudsman, apparently because they have a common word in their titles. Investigating complaints against multinational commercial enterprises such as BUPA has nothing in common with investigating complaints against Commonwealth agencies bound by the Public Service Act, Financial Management and Accountability Act  and so forth. The Commonwealth Ombudsman might learn something!

The flagship of the rationalisation process is the creation of the Health Performance and Productivity Commission by merging the Australian Institute of Health and Welfare, the National Health Performance Authority, the Independent Hospital Pricing Authority, the National Health Funding Body, the Administrator of the National Health Funding Pool, and the Safety and Quality Commission.

Clearly there is a great deal of similarity in the sort of work that the AIHW and the NHPA do. The AIHW was established to report on health system performance, and it could have been asked to expand its role to report at the local level. Instead COAG chose to establish a new agency, presumably because the states didn’t trust the AIHW. While they could readily be merged, merging them into a bigger health focused agency begs the question of what happens to the W – the welfare part of the AIHW. Will it be given back to the Department of Social Services? Will it just be abolished? Perhaps the government doesn’t want reporting on welfare any longer?

It is also interesting that the National Mental Health Commission will continue its separate existence, as an AIHW for the mental health sector. Presumably the high profile lobbyists for the sector persuaded Ministers that mental health was so different and special it could not be included in an agency focused on performance and productivity across the rest of the health sector.

Merging the Independent Hospital Pricing Authority into a bigger Commonwealth agency will be problematic for the states, who currently nominate the deputy chair of the Authority and jointly nominate with the Commonwealth the other board members. States will see any diminution of their control as an attack on the independence of the IHPA, which sets the national efficient price for public hospital services. On the other hand, given the government’s decision to stop paying on an activity basis from 2017-18, will anybody care?

The decision to include the Administrator of the National Health Funding Pool in the merged body was clearly made without any understanding that the person holding the office is appointed separately by each state and territory under its own legislation as well as by the Commonwealth. But again, given the government’s decision to walk away from its commitments under the National Health Reform Agreement, will the states bother to continue with the Administrator?

The government has undertaken to consult with the states on these changes. It would be interesting to be a fly on the wall as those consultations proceed.


Co-payments and medical research

One of the big surprises of the Budget for health was the creation of the Medical Research Future Fund.

I can only suppose this was an attempt to convince the public that the government hadn’t really broken its promise of no cuts to health spending, because all the savings will go into the Fund.  But only the earnings in the Fund will be spent on research, not the capital.

And even if the funds were to be spent on research at some future point, the government is essentially raising the funds from patients and service providers who will be making a greater contribution to service costs, thus allowing the government to divert some of its contribution to the fund.

If all health savings accrue to the Fund, it will garner around $10 billion over the forward estimates: $1 billion from the Health and Hospitals Fund, about $6 billion from patients and/or service providers, and $3 billion from the states.

The rationale for an investment fund for medical research is far from clear.  There is no need for the government to be making commitments now to fund medical research in the future.  And putting $10 billion into a fund over the next four years and hypothecating the income to medical research limits budget flexibility in the future.  At some point in the 2020s a government may decide it wants to spend the income on, say, preventive health measures rather than medical research.

Come to think of it, that would be a much better purpose for the investment!

But a government justifying cuts to services on the basis of the sustainability of the health system – while doing away with the agency whose role it is to address long term health issues – would never contemplate anything so sensible.

Dental health

One of the often overlooked areas of the federal health budget is dental health.  The Gillard Government introduced a number of initiatives in this area, including:

  • voluntary dental and oral health therapist graduate year programs
  • a scheme to encourage dentists to move to rural and regional areas
  • a scheme to fund dental infrastructure in rural, regional and outer metropolitan areas
  • a child dental benefits schedule with the impossibly twee name of Grow Up Smiling.

It also negotiated a National Partnership Agreement with the states to support public dental services from 2012-13 to 2014-15, and foreshadowed a second agreement to start in 2014-15 and run for a further three years.

It funded this largesse by securing Greens’ agreement to shut down the Chronic Disease Dental Scheme, which by 2012 was spending about as much per month as the original annual estimate when it was introduced by then Health Minister Tony Abbott in 2008.

Cue the Abbott Government, which gained power promising to “honour the arrangements” under the second NPA, and to “seek to transition… adult dental services to be included under Medicare ” when the NPA expired.

One of its first decisions announced in MYEFO last year was to reverse a proposed expansion of the voluntary dental graduate year program, saving $40 million.

The budget sees a continuation of savings:

  • $229 million from scrapping the dental infrastructure scheme for rural, regional and outer metropolitan areas
  • $15 million by scrapping funding for Charles Sturt University to establish dental clinics on the NSW central coast
  • $390 million over the forward estimates by deferring the introduction of the second dental NPA by twelve months (although the $390 million should be spent in 2018-19, assuming the government will maintain the original spending profile).

In addition, I presume the general freeze on indexation of benefits will apply to benefits under the child dental benefits schedule.

The decision to scrap the infrastructure scheme is disappointing – and one doubts that Senator Nash as a Nationals Senator from a rural area with responsibility for rural health supported the decision.

Rural Australia has about half as many dentists per capita as metropolitan areas, and while subsidised infrastructure alone will not fix the shortfall it will support other measures.

And the decision to defer the second NPA is sensible. The first NPA will deliver $119 million in 2014-15 if all states meet their targets: providing another $200 million under the second NPA in the same year would have encouraged cost shifting as the states struggled to spend the money.

It is surprising that the government did not also decide to reduce the annual spend, particularly in the later years of the NPA. States currently spend about $700 million on dental services, and they will find it hard to absorb the $295 million now planned for 2016-17 or the $390 million for the following two years.

In any event, moving the second NPA a year into the future defers the evil moment when the government needs to think about including adult dental services under Medicare until 2019-20.  If they are still the government, of course…


Hospital funding

The government’s budget decisions on hospital funding, taken as a whole, are a little odd.

They involve:

  • walking away from the National Health Reform Agreement (NHRA) guarantee of an additional $16.4 billion in payments to the states over the six years from 2014-15 to 2019-20, with a saving of over $600 million over the first three years, but
  • honouring the NHRA undertaking to meet 45% of growth in hospital costs for the three years 2014-15 to 2016-17, but
  • dismantling the NHRA activity based funding structure from 2017-18 onwards, and returning to a block grant indexed by CPI and population growth, with a saving of $1,163 million in 2017-18.

The government has also decided:

  • not to make any ongoing contribution to the operating costs of the 1300 additional sub-acute beds it funded under the National Partnership Agreement (NPA) on Improving Public Hospital Services
  • to terminate the NPA without making make any further payments, including reward payments attributable to performance in 2013-14 against elective surgery and emergency department targets, saving $201 million
  • to allow public hospitals to charge patient contributions for “GP-type” emergency department services analogous to those to be charged by GPs.

I have previously argued in this blog that the NHRA guarantee ought to have been done away with, as it essentially involved paying the states more money even if they reduced public hospital services.

The decision to cease all funding for the additional sub-acute beds is harsh, especially as the NHRA envisaged at clauses A82-A87 a process for determining adjustments to baseline activity such that the Commonwealth would have funded 45 per cent of the cost of those beds from 2014-15. It is unclear if that process has been followed.

On the other hand, the funding levels under the NPA were very generous indeed, and the states have enjoyed the benefits of that generosity for four years.

The decision not to provide further reward funding under the NPA is also harsh, although the government is seeking to justify it on the basis of the states’ very patchy performance to date against the targets.

And the decision to allow Emergency Departments to charge for GP type services is the first significant move away from the Medicare Principles since they were introduced in 1984.  It will be fascinating to see whether states take up this opportunity: if they do there will be some significant implementation costs to amortise as they install cash handling and EFT facilities.

The really odd aspect of the decisions is the schizoid approach to activity based funding under the NHRA.  The government’s election policy committed it to:

… support the transition to a more transparent funding model through activity based funding

and went on:

 A Coalition government will support the transition to the Commonwealth providing 50 per cent growth funding of the efficient price of hospitals as proposed.  But only the Coalition has the economic record to be able to deliver .

So we now have the government supporting transparency through activity based funding, but only for three years.  After that transparency can go hang.

The government is justifying the move away from activity based funding and back to a block grant in 2017-18 on the basis that the growth in public hospital spending under the NHRA is unsustainable. Apparently the Coalition no longer has “the economic record to be able to deliver” on the NHRA increases – but only after it has been running the budget for three years!

And while it was committed to “work[ing] with the states and territories in delivering a world class health system”  I imagine that relations with the states and territories are about to go into deep freeze.

Indexation of the Commonwealth’s contribution to public hospitals on the basis of CPI and raw population growth ensures that the contribution will not keep up with growth in hospital costs.  Over the last decade total public hospital expenditure has grown by around 9 per cent per year in nominal terms, reflecting a range of factors including;

  • price growth;
  • population growth;
  • population ageing (with older people using more services); and
  • utilisation growth (as technological advances allow more services and more expensive services to be provided).

While the rate of growth has abated a little in recent years (mainly reflecting lower price growth from both domestic CPI and also the stronger $A), the long term trend in the cost of hospital services is likely to be CPI and population growth plus several percentage points.

So while for the next three years the Commonwealth’s share of public hospital costs will increase, it will then start to decline again.

The Commonwealth government does not seem to appreciate that the while the health system may not be very systematic, its parts are symbiotic.  Cutting its contribution to hospitals on the basis that the States are system managers and are responsible for funding the shortfall in Commonwealth dollars may encourage States to become more efficient.  But it will also encourage States to renew their efforts to shift costs to Commonwealth programs as quickly as they can.

A feature of the NHRA is that the Commonwealth pays a discounted amount for privately insured patients. In 2014-15 the Commonwealth will pay about the same (through Medicare benefits, the private health insurance rebate and a discounted NHRA payment) for a privately insured patient in a public hospital as it will for a public patient under the NHRA.

If the States encourage additional patients to use their private health insurance the Commonwealth will pay more in Medicare benefits and private health insurance rebate, but less under the NHRA.

From 2017-18 the Commonwealth’s block grant will not vary according to patient numbers, but every additional private patient will cost more in MBS and insurance rebate.  Depending on the States’ success in promoting health insurance utilisation, the savings in public hospital funding may be wiped out by increased costs elsewhere.

In that event the government will have incurred criticism for cutting funding, without actually saving any money.

“William Foggin” is the pen-name of a health policy analyst who wishes to remain anonymous.

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Peter Fray
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