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Report by Access Economics Pty Limited for the Health and the 2007-08 Federal Budget
Health and the 2007-08
EXECUTIVE SUMMARY
Federal Budget
Government finances remained in good shape in 2006-07 with strong revenue, constrained spending, and an effective Budget surplus of nearly $18b (massaged down to $13.6b by the immediate expenditure of $4.2b of 2007-08 Budget measures). The claw forward of spending likewise massages up the budgeted $10b surplus in 2007-08. Overview of the 2007-08 Budget
A hallmark of the Budget is the enthusiastic spending on both sides of the ledger (tax cuts and new spending). Spending (accruals basis) rises by 6.3%. Despite the $5b in tax cuts, the Government expects revenue growth of nearly 5% in 2007-08 (banking bravely on a bonanza of company profits and superannuation fund earnings). This Budget suggests an underlying complacency as though the good times will just roll on (so it is safe to spend up in an election year). In doing so, the Budget takes some risks with inflation and interest rates given the capacity restraints in the economy, the lack of productivity growth and a slow pace of structural reform. The Health Budget in 2007-08
The 2007-08 Budget holds health spending about constant as a share of total outlays. The forward estimates predict a falling share (a tough call). Health spending is dispensed from a magic bucket which never overflows no matter how much new funding is poured in (in this budget alone, $4.6b of health and aged care over 5 years). The forward estimates of health spending no longer have much credibility. More than half the new health measures are remedial in character. Remedial spending is not bad. It is essential. It just cannot be “sold” as new money. The remedial programs are well judged save for Aboriginal and Torres Strait Islander health where the wind-up in spending is taking far too long. This health Budget scores high marks for realigning health spending priorities to better meet the needs of an ageing population suffering more chronic disease. A number of individual new spending initiatives also score high marks for their design and their intelligent focus on areas with real opportunities to improve health outcomes. Yet some others must be regarded as down payments only, with rather more effort Disclaimer
While every effort has been made to ensure the accuracy of this document, the uncertain nature of economic data, forecasting and analysis means that Access Economics Pty Limited is unable to make any warranties in relation to the information contained herein. Access Economics Pty Limited, its employees and agents disclaim liability for any loss or damage which may arise as a consequence of any person relying on the information contained in this document. This report is an independent assessment commissioned by the Federal Secretariat of the Australian Medical Association (AMA) for the information of the AMA Federal Council. It does not purport to represent the views of the Council or the Secretariat and may not be construed as an AMA view. Health and the 2007-08 Federal Budget
Health and the 2007-08
THE BUDGET IN OVERVIEW
Federal Budget
THE YEAR ENDING (2006-07)
Despite the tax expenditure (tax cuts) in last year’s Federal budget and the drought, revenue growth was solid in 2006-07 (up nearly 6% on a cash basis). The commodity boom helped. The Government scooped up quite a lot more revenue than expected, much if it from income tax collected from individuals, companies and superannuation funds. Spending (cash basis) was less than $2 billion above the Budget estimates. Plenty of new spending was announced as the year rolled on, but little of it started up in 2006-07. The Budget outcome, an underlying surplus of $13.6b, would have been closer to $18b save for new spending of $4.2b brought forward into this year. Government finances are now in even better shape than the official figures show. The flip side is that the $10b surplus budgeted for 2007-08 has been window dressed by the bringing forward of new spending into 2006-07. All told, the Government has good reasons to be satisfied with the 2006-07 Budget outcome. THE YEAR AHEAD (2007-08)
The Reserve Bank was widely interpreted (misinterpreted, perhaps) as giving the Government the green light for a bigger spending budget. The spending has been enthusiastic on both sides of the ledger. The tax expenditure includes $5.3b of personal income tax cuts (rising to $9.1b by 2010-11) with immaterial offset from other new revenue measures. The expenditure side accounts for another $6.4b in 2007-08 (rising to $11.2b by 2010-11). Much of the new spending was formally announced (or leaked) before the budget. The jam has been spread over many slices of bread but some of the bigger ticket items are defence toys, roads, education, water, aged care and Medicare. Spending (accruals basis) rises by 6.3%. Despite the tax cuts, the Government is still budgeting for revenue growth of nearly 5% in 2007-08, banking bravely on a bonanza of company profits and superannuation fund earnings. Save for the new tax cuts, revenue might have grown by 6.4%. This Budget suggests an underlying complacency as though the good times will just roll on (so it is safe to spend up in an election year). As a strategy for the medium term, so much depends upon the rest of the world. Were the Chinese or US economies to stumble, we’d feel more than a ripple from across the seas. The only guarantee we can give on commodity prices is that, from time to time, they will take a tumble. Little is being set aside for the rainy day (no irony intended in these drought-afflicted days). In the short term, 2007-08 Budget takes some risks. For sure, price inflation has eased of late but it is too easily rekindled. The key issues for the economy are capacity restraints (skilled workforce and infrastructure), lack of productivity growth and a slow pace of structural reform. Skilled workforce is certainly an issue in the health sector and the health budget includes a number of workforce measures. The Budget includes a package of measures for the education and training sector that might help address some of these structural issues. The detailed education measures themselves are not assessed in this report which focuses on health economics. Despite the extra $3b, education spending is still expected to fall as a share of total outlays. The $5b Higher Education Endowment Fund (HEEF) is a transfer of money that would otherwise have gone to the Future Fund. Health and the 2007-08 Federal Budget
Health and the 2007-08
A VERITABLE REVENUE BONANZA
Federal Budget
The first key to understanding the Government’s Budgetary complacency is to understand the sheer scale of the revenue bonanza they have enjoyed in recent years. In the 2003-04 Budget, revenue was forecast to grow in the budget and forward estimates years by 4.2% per annum on average. Now we can look back with the benefit of hindsight and see that the actual growth achieved over that same period was 7.4% per annum on average. The law of compound interest is a wonderful thing indeed. That difference in revenue growth rates is enough to add an extraordinary $82b to the Government’s revenue coffers over the four year period (including nearly $30b extra in 2006-07 alone). The Government's Revenue Bonanza
First estimates (2003-04 Budget)
Now estimated (2007-08 Budget)
AN ALMOST CHEERFUL IGR2
The second key to understanding the Government’s Budgetary complacency is the very
different portrayal of the longer term outlook in the second Intergenerational Report (IGR2).
The first Intergenerational Report (IGR1) was released in 2002 (which, we note, was not an
election year). Two key assumptions dominate the difference between IGR1 and IGR2
projections, namely that:
the policy changes to the Pharmaceutical Benefits Scheme introduced after IGR1 have been sufficient to wind back the growing increase in spending on pharmaceuticals by 1.3 percentage points of GDP; and about half of the recent leap in the terms of trade continues into the future meaning that the high expenditure of the future can be spread across a bigger base of national income. The latter assumption slices an additional 0.3 percentage point of GDP off the projected future fiscal deficit. In addition, there are changed assumptions regarding faster than expected increases in participation among mature aged Australians, a small lift in birth rates, a lift in expected migration, and (adding to expected future costs) a further lift in life expectancy. As the chart over the page shows, the impact is very significant, both delaying and reducing the effect of population ageing on the fiscal balance. Health and the 2007-08 Federal Budget
Health and the 2007-08
Per cent of GDP
Federal Budget
THE ECONOMIC OUTLOOK UNDERPINNING THE BUDGET
The Federal Treasury forecasts that Australia’s GDP will accelerate in 2007-08 (3¾%) after a drought-constrained 2006-07 (2½%). Inflation is forecast to ease back to 2½% p.a. and earnings to remain steady around 4¼% p.a. Employment is forecast to grow slowly (by 1½% p.a.) and the unemployment rate stays low at 5%. The current account deficit is forecast to widen to $66b (and to increase as a percentage of GDP). That means a growing debt to the rest of the world. The investment in mining is expected to generate increased exports but these are anticipated to be outpaced by imports and the benefits shaved by a falling terms of trade. High imports are correlated to high business investment (capital goods are highly import-intensive). The Treasury expects strong growth in the world economy (5% a year for 2007 and 2008) with the horsepower coming from China, India, Japan and the Euro area. All told, the Treasury assesses that the risks confronting the Australian economy have become “more evenly balanced” in recent months. In terms of the economic cycle, the identified risk factors are the drought, the adjustment to the commodity price stimulus and household debt. Structural factors do earn some mention, in particular the capacity restraints which could “constrain output growth and place greater-than-anticipated upward pressure on prices and wages”. Budget paper number 1 includes an extensive discussion of labour productivity (but without once quantifying the extent of the slump in productivity growth in recent years). The Treasury may not agree with our assessment that there has been, for some time, a lackadaisical effort on structural reform of the economy. That said, there are some changes in this Budget that will assist structural reform in the years ahead. Health and the 2007-08 Federal Budget
Health and the 2007-08
THE HEALTH BUDGET
Federal Budget
HEALTH SPENDING IN 2007-08
In 2007-08, the Budget provides for health outlays to grow by 7.1% to be 18.2% of total budget spending (18.1% in 2006-07). In the budget year health outlays grow faster than total outlays. In the forward estimates period, health spending is projected to grow by less than 4% a year on average, implying that by 2110-11 health’s share of total outlays will have fallen to 17.6%. While the Government has seen fit to give health spending a nudge in this election year, in the medium term its focus is elsewhere. Although the government has rediscovered education spending as an investment in the economic future of the nation (as well as a civilising influence), spending on education also falls as a share of total spending. Defence spending will continue to roar ahead (those toys for the boys are very expensive). Roads get a boost and (the absence of) water has grabbed priority. It is an open question as to whether health spending could end up as low as the forward estimates suggest. Increases of 4% a year barely cover health inflation. The demands for health care from an ageing population are building steadily. Growth as low as 4% per annum would necessitate shifting some of the burden of health spending off the Federal Budget and onto household budgets. We doubt that the forward estimates of health spending are serious statements of the Government’s real intentions. This health budget spreads the new money more widely than most previous health budgets. In terms of major program areas, aged care, Medicare and the PBS claim nearly 70% of the new spending, not surprising given they are the biggest fish in the pond. LONGER TERM TRENDS IN HEALTH SPENDING
Following the wild gyrations from the 1970s through to the mid-1980s, health spending as a share of total budget outlays settled into a steady growth trajectory (rising from 12% to 18% over the initial 20 or so years of Medicare). Federal Health Outlays: % of Total Federal Government Outlays
Medibank
(Whitlam)
Medicare
estimates
Series break between
1998-99 and 1999-00
with the introduction of
accrual accounting
Health and the 2007-08 Federal Budget
Health and the 2007-08
The reasons for steady growth have changed over time. Early on it was mostly from Federal Budget
increased access and the lifting of patients’ expectations. New health technologies have also played a hand, increasing possibilities and again, feeding patients’ expectations. In recent years, the ageing of the population has made a larger contribution. It should be noted at this juncture that health function outlays in the budget context do not include some aged care programs administered by DoHA. Residential aged care subsidies are classified as “assistance to the aged” and reported in the social security and welfare function. The growth in health spending as a share of total budget outlays pulled to a halt in the last couple of years reflecting the IGR1-inspired PBS cost-cutting measures and the focus on other functions (eg. defence). The forward estimates have health’s share falling. History is against that outcome. The next section helps explain why so. THE MAGIC BUCKET
In the past decade, we have witnessed some very significant new health spending initiatives. These range over the PHI rebate, rural and regional initiatives, workforce initiatives, new PBS listings, new AHCAs, Medicare Plus, mental health, medical indemnity, immunisation and Aboriginal and Torres Strait Islander health. The following table summarises health function measures over the decade to 2007-08. Key points to note are: Net additions in eight years and net savings in two years; The lumpiness in the pattern; The average net new spend over the ten years is nearly $1.4b per annum; and $10b in net new spending over the last four years alone (2004-05 to 2007-08). New health spending measures, 1998-99 to 2007-08
spending
measures
measures
How is that the forward estimates have health spending growing relatively slowly (and falling as a share of the total) despite net new commitments of $10b in the last four years? We all know about the magic pudding where you can keep cutting off slices without the pudding getting any smaller. Health spending is like the “magic bucket”. It seems that you can keep pouring new money in, but the bucket never overflows. Why is this so? As noted earlier, health’s falling share of total expenditure is partly explained by the very rapid growth in other functions. That doesn’t answer the question. Health and the 2007-08 Federal Budget
Health and the 2007-08
To unravel the apparent mystery, it is important to understand that the forward estimates of Federal Budget
spending typically have a downwards bias. This may be contributed by any number of factors: conservative budget parameters (eg, low inflation); announcing programs for set periods and making forward estimates that allow for no growth, or even no spending, at the end of the set period (until the program is approved for continuation); over-estimating the impact of previous savings measures; and so forth. The end result is that the forward estimates are a very contrived set of figures that do not mean very much at all. Health spending in 2006-07 was first estimated (in the forward estimates in the 2003-04 Budget) to total $35.9b. Actual spending in 2006-07 is now estimated at $40.1b, nearly 12% higher than the first forward estimate. That is a sturdy change in 4 years. Federal health spending ($b)
Budget & forward estimates, 2003-04
Actual spending
The revenue bonanza chart on page 3 of this report helps explain the Government’s capacity to fund a sturdy increase in health spending. The forward estimates, theoretically at least, reflect extant government policy. However, the rates of growth in those estimates do not appear on the face of it to be anywhere near adequate enough. In mathematical terms, nonsense + $4b = nonsense. And likewise, nonsense + $10b = more nonsense. The forward estimates, sad to say, nonsense. They are highly orchestrated figures that cannot be taken seriously as the expected cost of continuing existing policy. They do serve to set the context for the Government to announce new spending measures in most Budgets (eight out of ten on past form). New spending in the Budget framework is, by no means the same as new spending as a lay person might understand it. A good amount new spending in the Budget is remedial. To take three examples from the 2007-08 budget, there is a significant remedial element in the spending on aged care, GP after hours consultations and GP visits to nursing homes. The services are all part of the existing fabric of funded activities. But the sub-programs have been allowed to decay. Sometimes this decay occurs as a result of inadequate indexation of Health and the 2007-08 Federal Budget
Health and the 2007-08
the payments, other times for other reasons. The new spending is really seeking to restore Federal Budget
the programs as originally intended. It is typically very welcome expenditure because the programs have been out of the winners circle for too long. The long term effect of the system of forward estimates, as it has evolved, is to grow a healthy cynicism around it. There is a growing expectation of new spending announcements every year, just as there is now a growing expectation of tax cuts every year or so. The reason is essentially of the same remedial flavour. The decay in the programs makes new spending necessary just as bracket creep (by tax system design) makes tax cuts necessary. Observers will come to see the new spending as a masked way of properly funding what’s already there and will take it for granted. The health spending magic bucket is engineered with holes in the bottom. That’s why it never overflows despite the new money being poured in. The credibility of the forward estimates has been corroded along with the kudos gained for new spending announcements. We assess that $2.7b of the net new health spending of $4.6b over 5 years (just over half) is essentially remedial in nature. So there is plenty of sizzle, but still quite a reasonable amount of sausage underneath. The measures themselves bear some examination. There are far too many of them to address each individually so we have drawn out some themes and examined selected items of potential interest to the AMA. HEALTH MEASURES OVERVIEW
The following table summarises DoHA measures in the 2007-08 budget. This is a summary of the detailed measures table in the Department’s Budget kit. A detailed measures table is included as an Appendix (for the benefit of readers who thirst for fine print). The Department’s tabulation does not separate out health function measures from the aged care items that are classified as assistance to the aged and included within the social security and welfare function. As in previous years, the measures comprise items announced on Budget night together with those announced otherwise since the mid-year Budget review. Health Budget 2007-08 ($m)
Measures
2007-08 2008-09 2009-10 2010-11
total 2006-07
Better access to PBS products & services Health & medical research infrastructure Supporting rural & regional Australians Aboriginal & Torres Strait Islander health spending
771.2 1,007.4 1,144.4 1,255.1 4,178.1 489.0 4,666.5
measures
-4.8 -3.7 -4.1 -6.0
-18.6 -0.5
spending
766.4 1,003.7 1,140.3 1,249.1 4,159.5 488.5 4,647.5
Health and the 2007-08 Federal Budget
Health and the 2007-08
Federal Budget
Remedial spending
As noted in the Magic Bucket section above, we assess that $2.7b of the net new health spending of $4.6b over 5 years (just over half) is essentially remedial in nature. To describe spending as remedial is not, by implication, to criticise it. On the contrary, it is very important that there be a constant process of assessment and improvement in mainstream programs. The government has adopted a more structured approach to program review. The elements of health measures we assess to be remedial span most of the aged care funds, the dental initiative, the new consultant physician item, the extra funding for GP after hours care, the new and revised MBS items, the funding for the Royal Flying Doctor Service, rural retention and rural women’s GP support, and most of the Aboriginal and Torres Strait Islander health items. Since the Hogan report, it has taken more than one budget to adjust funding for high level aged care to more appropriate levels. This year, the Government hasn’t just increased the funding, it has also set about improving the funding arrangements themselves. The remedial areas are well judged, attacking weaknesses in programs that are well understood within the health community. In the stand-out case of Aboriginal and Torres Strait Islander health, however, the Government is seeking to wind up spending over far too long a time frame. The needs in this area are especially urgent and far too long denied the very special attention that is required. That criticism stated, otherwise the health budget scores good marks for the targeting of the remedial spending. Public hospitals could have been given an occasional drink from the dam. That said, the inducements introduced in the 2003-08 AHCAs appear to have discouraged the State and Territory governments from trucking money out the back door. There is still no sign of a solution to the impending challenge of post-graduate education for the much large numbers of undergraduate doctors in the pipeline. This one is a time-bomb that could blow up if not sorted out soon. Changing priorities
Australia’s population is ageing and the prevalence of chronic diseases is rising. Necessarily, therefore, spending priorities have to change over time, not just to better manage older folk with chronic conditions but also to prevent illness and to defer its onset wherever practical. We award this year’s health budget high marks for using new spending to shift the priorities in the required direction. The new aged care spending is an important part of that and the additional emphasis on community care packages is a clear response to the preferences of older people to be supported in their own homes while their state of health allows it. Special mention should also be made of the COAG diabetes initiative, the chronic and complex conditions spending (new consultant physician item), the expanded immunisation programs, the investment in health and medical research, the hearing programs and the health workforce initiatives. Health and the 2007-08 Federal Budget
Health and the 2007-08
SELECTED HEALTH MEASURES
Federal Budget
Health Research Capacity
A report by Access Economics in 2003 identified the very significant returns to the nation from investment in health and medical research. The $435m (which, as noted earlier, will be appropriated this year to massage the Budget surplus and will be warehoused by recipients until spent) is a substantial contribution to the upgrading and expansion of facilities. Manna from heaven is not always used as well as it might be. It will be up to the recipients to spend the funds wisely to obtain the best possible returns for the nation from the investment. Chronic and complex conditions
The structure of MBS rebates for consultant physician items has been a festering problem for at least 15 years. The Relative Value Study (1992 to 2000) should have provided the remedy but was scotched by the Minister of the day. The outcomes were significant access block for patients and significant disincentives for young doctors to train as consultant physicians. This new measure is clearly remedial (fixing a known problem in Medicare), well focussed on the need to increase and improve chronic care, timely in terms of signals to the workforce and one that should improve the quality of care (funding the longer patient consultations that patients with chronic and complex conditions require). COAG diabetes type 2 initiative
The Federal funding for this initiative will be matched by the State and Territory governments. Diabetes is a very expensive disease for patients and health funders alike. There is strong scientific evidence that people at risk of type 2 diabetes can reduce that risk through lifestyle changes. It is commonly the case that health initiatives improve health outcomes for a net cost, one that is well warranted for the money invested up-front. This initiative may more than pay for itself by reducing the need in future for tertiary care (renal, cardiothoracic) as well as producing a rate of return in healthier years of life. Healthier years of life are not just a private benefit to individuals. A healthier population sustains a healthier economy. People can remain in the workforce for longer and can remain independent for longer. There is still more to be done here. The measure is accompanied by some modest spending on physical activity and nutrition in response to the alarming growth in the rate of obesity. These initiatives should be regarded a down-payments only. PBS listings
The PBS illustrates the tensions around funding health for an ageing population. Relying on the Book of Doom (IGR1), the Government took a machete to the PBS in the 2002 Budget (although, given the then lack of control in the Senate, it was not until 2005 that the increases in patient co-payments and the safety net threshold were finally implemented). Based on the new Book of JB-P Wisdom (“Don’t you worry about that”, otherwise known as IGR2), the Government now feels able to add a number of new pharmaceuticals to the schedule at a not insignificant cost to the taxpayer. At the same time, doctors report that some of their patients (those without access to the concessional scheme) are seeking advice on which essential medications to cut out. In short, the cost of the community getting access to the new drugs is partly carried by patients Health and the 2007-08 Federal Budget
Health and the 2007-08
who have poor outcomes because the new co-payment structure puts essential medicines Federal Budget
out of their reach. This illustrates the tradeoffs that often have to be made in public policy. At the same time, it must be recognised also that some patients cannot afford their essential medicines because they will not forego their cigarettes, their third schooner at the pub at night or the harder substances of abuse that, too often, condemn people to poverty. The government cannot be expected to carry the blame for all the mistakes that people make. Is there a better way through this maze? The system of concessional access to the PBS needs remedial action. It is a very crude system with a large poverty trap for lower income people who do not qualify for the concessional scheme. It has the virtue, of course, of simplicity. A simple system for a nation of simple people, perhaps? We think Australia has the wits to improve this system. Nursing home residents’ access to medical services
The government has a made a small investment in better MBS rebates when GPs visit nursing homes. This is another remedial measure, sorely needed. A very small proportion of GPs now visit nursing homes. The disincentives are stark. Nursing home visits can produce total benefits insufficient to meet practice outgoings (staff wages, rent, telephone, etc), let along provide any remuneration for the doctor. GPs often carry on providing loss-making services for a while because of loyalty to their patients but ultimately they cannot serve their patients by going broke. The pre-existing items were based on patient contact time. The MBS fees failed to acknowledge the much longer non-patient contact times that this type of care generates. The measure is necessary but the extra funding committed is simply not enough to change any spots. It has taken the Government several moves to sort out GP after hours rebates. It may take several in this area also. The health bureaucracy struggles desperately to make administered price schemes work and is terrified of over-stepping the mark and paying too much (not that it happens often). Health and the 2007-08 Federal Budget
Health and the 2007-08
Federal Budget
APPENDIX—MEASURES TABLE
New measures ($m)
2007-08 2008-09 2009-10 2010-11 4-yr total Assist survivors of torture & trauma PBS listing extension Fosomax & Alendo PBS listing extension Ezetrol & Vytorin 12.1 PBS prescribing rights for optometrists 2.0 National nutrition & physical activity survey Prevention of sexually transmitted infections Indigenous communities illicit drugs program Streamlining human research ethics reviews Enhance national joint replacement registry Aged care - simplified income tested fees Aged care - introduce funding instrument Aged care - more community care packages Aged care - funding former government places Aged care – ensuring quality in community care Aged care - community care workforce development Aged care – assistive technology in community care Aged care - health to residents in homes Aged care - day respite demonstration schemes Health and the 2007-08 Federal Budget
Health and the 2007-08
Aged care - better access for diverse communities Equity of access for nursing home residents Federal Budget
Multidisciplinary case conference continuation Safety & quality of health care continuation Voluntary annual health assessments older folk Total new spending
771.2 1,007.4 1,144.4 1,255.1 4,178.1 489.0 4,666.5 Total savings measures
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Source: http://www.ama.com.au/system/files/node/4096/Health_and_the_2007-08_Federal_Budget.pdf