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The OECD on user pays

February 3rd, 2005

I normally ignore OECD reports on the Australian economy, since they are in essence, a Paris republication of the Australian Treasury policy line of the day. The OECD is largely staffed by officials from national treasury departments on temporary postings, and its primary source in consultations is the Treasury. If there has been an instance of substantive disagreement between the OECD and the Australian Treasury in the past 30 years, I’m not aware of it (corrections welcome on this!). Of course, if you think Treasury is always right, this isn’t a problem.

The latest calling for a renewed push on reform and so on, fits the pattern perfectly. But there was one para that caught my eye, and so I’ll try to dig out the report.

The health system, it said, needed more market incentives and a strong user-pays approach.

Private health insurers should be able to cover risks outside hospitals, while there should also be less reliance on paying doctors on a fee-for-service basis, which encouraged them to over-service their patients.

This seems entirely self-contradictory, but consistent with my general view of the OECD. Fee for service is the only real “user pays” system, since a privately insured person faces exactly the same incentives as someone consuming free public health services. On the other hand, concern about medical over-servicing and support for central planning as a method to control it has been a characteristic feature of the Treasury/Finance view for many years. But, I’ll have to read the whole thing.

Update Treasury is pretty well-informed about the Australian economy, and likes to play its cards close to its chest, so the OECD reports are a useful guide to the way Treasury is thinking. But when Treasury gets it wrong, don’t expect the OECD to correct them. In early 1990, for example, when anyone in the private business sector could have told them a catastrophic crash was under way, the OECD Report said “A severe recession is unlikely … the task for policy is to ensure that the necessary weakening of domestic demand continues”.

This report is also interesting reading for those who now deny that the current account was the policy target driving the credit squeeze that gave us ‘the recession we had to have’.

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  1. Uncle Milton
    February 3rd, 2005 at 07:37 | #1

    Of course it’s contradictory. But then again, most discussion about health system financing is contradictory. In Australia, the discussion goes like this.

    One of the bad things about the Australian health system is that we don’t spend enough money on it, as show up in waiting lists for elective surgery, the difficulty of putting new drugs on the PBS, and so on. This is the ‘micro’ view of the Australian health system.

    On the other hand, one of the good things about the Australian health system is that we only spend 8% of GDP on health, which makes us much better than the United States, which spends 14% of its GDP on health, and where the health outcomes are no better. This is the ‘macro’ view of the Australian health system.

    Often, you hear both the micro view and the macro view put forward by the same people, without them realising the contradiction.

  2. Atticus
    February 3rd, 2005 at 08:42 | #2

    Professor Quiggan, I have a question:

    I’ve always understood that Australia was one of the lowest taxed countries (measured as tax revenue as a proportion of GDP) in the OECD. I’ve seen OECD published figures to that effect (just recently putting us above Japan, the US and, bizarely, Ireland). Hell, ten years ago as a part-time journo, I wrote about the issue for the Fin.

    But I constantly hear complaints about Australian taxes – and not just from conservatives, many of my friend who’ve done the expat thing complain about the tax pain of comming home.

    So what’s the story? Are both perceptions correct? If so, is the explanation that Australia raises more of its taxes from higher income taxpayers so that, whle we have a lower overall tax take, those with the most ability to complain loudly get hit hardest? Or is one of the perceptions innaccurate?

  3. John Quiggin
    February 3rd, 2005 at 09:02 | #3

    Australia has more reliance on income tax than most, and a lot of people don’t notice indirect taxes like GST.

    In addition, many countries, like the US, have a separate Social Security tax on either incomes or payrolls. Conservatives like to ignore this. In addition, expats are often exempt – I didn’t pay it when I lived in the US, so I did indeed benefit from lower taxes.

    The same is true of property taxes, which are more important in the US than are rates here – they’re the main source of finance for schools.

  4. Paul Norton
    February 3rd, 2005 at 09:32 | #4

    Returning to the issue of fee-for-service for health services, I have been reminded of the essay I marked last year which argued that “user pays” had the great merit of eliminating unnecessary demand, and which supported this assertion by suggesting that “user pays” funding of ambulance services would eliminate unnecessary demand for ambulances.

    I recall commenting at the time that in general, price signals were not likely to be a major driver of one’s demand for a ride in the back of an ambulance and for the ministrations of the ambos.

    Be that as it may, for the past couple of years the Queensland Government has funded ambulance services through a flat State levy, replacing the previous system of private ambulance subscriptions coupled with an expensive fee for service for non-subscribers. Is there anyone from Queensland Health who can enlighten us on whether the Beattie Government’s pie-in-the-sky socialist economic irrationalism has led to a statistically significant increase in the numbers of people in Queensland using ambulance services?

  5. Atticus
    February 3rd, 2005 at 09:46 | #5

    Thanks Professor.

  6. February 3rd, 2005 at 09:46 | #6

    Would a part user pays be the solution? Charge a fee each time, with some of the cost born by government, dependent on user’s income.

    Even someone on the dole or pension would pay a notional fee, say $5 for a GP visit, $30 for an operation. Someone on a regular income might pay $200 towards an operation- much more than they contribute if they go public at present, but a lot less than the private fee.

    This would avoid 2 tier systems, while addressing the impossibility of publicly funding an 100% free system, and removing reliance on insurers who have shown they cannot be trusted not to pass on unrelated costs (like 11/9 or the collapse of Lloyds or HIH).

    I thought of this when I had a knee op recently. I was public, and on the whole was happy with the process. But I’d have rather picked my surgeon (they did the public shuffle at the last minute). To go private and pick a surgeon was upwards of $2000 for a 20 minute arthroscopy. Public it was $0. I didn’t have $2000, but if for example I’d been asked to pay $200-300 I could have done that, with my only expectation in return being consistency.

  7. Declan Trott
    February 3rd, 2005 at 11:12 | #7

    Maybe not self-contradictory, if fee-for-service refers to payments from Medicare or private insurance companies rather than patients. Given that full out-of-pocket fee-for-service is not an option, insurers should pay the service providers on some other basis (capitation? all sorts of problems with this too, but at least logically consistent with the first para) which would give more of an incentive to contain costs. So the argument could be: more private insurance, more out of pocket payments,less Medicare, and what is left of Medicare run more like an HMO.

  8. derrida derider
    February 3rd, 2005 at 12:08 | #8

    On the general point of Treasury’s role in the OECD reports, there is some nuance here. Treasury uses it to express departmental views. Often enough the departmental view is identical to the government’s publicly stated view. But if you read them you can often infer where the two diverge.
    Its a bit like working out what was happening in the Kremlin from reading Pravda.

  9. John Quiggin
    February 3rd, 2005 at 14:31 | #9

    This is exactly right, DD. For example, right now, the OECD is disagreeing with the US government and its “Treasury spokesman” over hte budget deficit. You can take it as read that the OECD is saying what the US Treasury would like to say.

  10. Gaby
    February 3rd, 2005 at 15:46 | #10

    Has anyone told the Beezer about this? And Swan?

    They are using the OECD report to justify more tax cuts for those earning greater than $50,000.

  11. Malatesta
    February 3rd, 2005 at 20:32 | #11

    The Australian reprinted some figures from BUPA (health insurer) a few days ago that showed how the private sector is having to pay up to 60% more than public hospitals for the same items of prosthetic hardware.

  12. Geoff Robinson
    February 4th, 2005 at 11:39 | #12

    The American health care system is a major employer of women and minorities and James Galbraith from the University of Texas has argued this has a positive effect on social equity.

  13. alan hopkins
    February 14th, 2005 at 20:27 | #13

    I despair when I read about user pays. in many ways it is a way of transferring the costs of health care from the general taxpayer, where payment is linked to your income to individual users paying insurance which is not.

    so we get a tax cut and lose it all in extra health insurance payments, but those on high incomes get a bigger tax cut but our basic premiums are the same.

    On a related point is there any research into the effects of HECS debt for students on the level of Graduate wages? Surely it would tend to encourage higher wage demands for gradutes.

  14. Alex
    February 15th, 2005 at 11:39 | #14

    “On a related point is there any research into the effects of HECS debt for students on the level of Graduate wages? Surely it would tend to encourage higher wage demands for gradutes.”
    Or, more likely, more widespread salary packaging to avoid having to repay a HECS debt at all.

  15. Alex
    February 15th, 2005 at 11:57 | #15

    Back to the user-pays health system – private health insurance, as used in Australia, does have some elements of user-pays. If you consider the health funds as the users of private hospital services, then clearly there is a user-pays incentive to keep costs down. This is reflected in pressure from health funds on private hospitals to enter agreements on the amount chargeable for services. If the health insurance itself is regarded as a separate service, user-pays again comes into play, with the health funds competing for customers in the usual ways (packaging of products, price, customer service).

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