Are we spending enough on healthcare?

The government is restraining its spending on healthcare – perhaps by over $2 billion a year. Is that what we really want?

A common assumption is that public spending on healthcare rises faster than GDP. There are three reasons behind this assumption.

First, an aging population requires more healthcare. The over-65s consume more healthcare resources than the under65s (and the over-85s even more so).

Second, is the ‘Baumol effect’, where the price of services such as healthcare rise faster than that of other sectors so even at constant volumes the value share of services in nominal GDP increases.

Third, as they become more affluent people demand more healthcare. That seems a perfectly reasonably decision; as you get richer do you want more knickknacks or a better quality of life from improved health?

Implicit is the assumption that a high proportion of healthcare would be funded by the taxpayer. Some people assume this as a norm. Some think there should be more private funding of healthcare. My conclusion is that private funding, as a rule, leads to unfair outcomes and high transaction costs. (That is another column, but to summarise, I wish we could make greater use of private funding including insurance without greater inequity and inefficiency. I’ve concluded we cannot.)

So I was greatly surprised to learn that in recent years the public healthcare spending as a share of GDP has been falling. The pattern is difficult to describe but, to simplify, Crown Health spending peaked at 6.75% of GDP in 2010/1 but last year (2014/5) it was only 6.26%. That represents a reduction in spending on about $1200m a year relative to the peak. It is almost double that if you allow for the tendency for public spending of healthcare to rise faster than GDP. That total amounts to the government spending over $400 per person a year less than if past trends had continued.

Forgive me if I don’t go on to list the consequences of this. If you are in discomfort on a long waiting list, or having trouble finding suitable care for an elderly relative, or missing out on a treatment because is not available because of its expense, or you or someone you know has been financially crippled because they had to go private, or you know somebody who died when they should not have or earlier than if they had had good care, you know some of the items on the list. Instead, I want to focus on how it has happened. (I’ll come to the ‘why’ after.)

Each year the government budget sets the amount it will spend in each sector. Much is a carryover from the previous year. In addition there are ‘operating allowances for new spending’ (OANS). That is where the additional spending for public healthcare (and many other programs, such as education, defence, law & order, cultural heritage recreation and the environment) comes from.

Now it happens that since the Global Financial Crisis there has been – in the jargon – a considerable tightening of funding for the OANS. That means there has been less for public healthcare and all the other publicly provided services. There is still some additional funding, but not as much as in past. While nominal spending on Crown Health expenses has risen in those four years by $1.3b, it has not been enough to keep up with the rise in GDP. Health, and to a lesser extent education, got the lion's share of the extra, while most other areas got next to nothing, but it has still meant less for health than on past trends.

Why has this happened? You really need to ask the government but let me make a few observations.

It cannot be simply attributed to the GFC in 2008. Certainly economic growth has been slower since then, but I’ve been focussing on public healthcare spending as a proportion of GDP, so the slower growth is already taken into account.

You could explain it by the government’s target of getting a fiscal surplus. As it happens I’m inclined to agree with it for various reasons, not least because a deficit represents borrowing from future generations and I don’t see any strong case for our doing that. I add – it is another column which I may have to write later in the year – that there may be technical reasons for easing on the deficit target but at the moment I think it still a wise economic judgement to aim for a fiscal surplus or small deficit.

I don’t think, incidentally, that the claim that the government can get major productivity gains in its spending is particularly valid. There were such gains in the past; there will be some now. But they are small and already built into the projections.

What is really happening is that the government has chosen to target its deficit by holding back on government spending rather than raising the taxes which provide the revenue to fund the spending.

That is a political decision – in effect we voted for it in 2008, 2011, and 2014, although I do not remember what amounts to cuts in health funding being an election issue. Apparently the government is restraining government spending in order to position itself for a further income tax cut in 2017.

Presumably it thinks that individuals can make up for the restraint in its healthcare spending by private purchase. After all it only amounts to around a weekly $8 a head on average. But that average hides enormous outlays for those in need. Private funding tends to be unfair and inefficient.

I wonder if that is the public’s choice. Of course it will revel in a 2017 tax cut just before an election. But I wonder is it really keen on individuals experiencing discomfort on a long waiting list, or having trouble finding suitable care for an elderly relative, or missing out on a treatment because is not available because of its expense, or dying when they should not have or earlier than if they had good care? For many voters, they and their family and friends are healthy enough to avoid these fates – tomorrow may be different.