Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Public hospital funding

CHAIR —I welcome Professor Jeff Richardson and colleagues. The committee prefers all evidence to be given in public but should you wish to give any of your evidence in camera you may ask to do so and the committee would give consideration to your request. The committee has before it your submission No. 46 and the supplementary information expanding on certain issues in the submission. The committee thanks you for the contribution you have made. Do you wish to make any alterations to the submission?

Prof. Richardson —No.

CHAIR —I ask you now to make an opening statement and then at the conclusion of your remarks we will take questions from the senators.

Prof. Richardson —May I first ask what length of opening statement had you generally got in mind? I have both general points and conclusions or I could elaborate slightly in addition on each of the terms of reference.

CHAIR —If you did the latter, how long would it take?

Prof. Richardson —Twenty minutes. I could push it into 15 minutes.

CHAIR —We would probably think it would be a very good idea for you to take us through that in 20 minutes or so. We have actually got time designated to 5.30 p.m. I would like to suggest that we should be aiming to conclude by no later than 5.15 p.m., aeroplanes being what they are, but if we all collapse before that no-one should be offended.

Prof. Richardson —I will start off with four general points. By the way, they are reproduced on the circulars that I gave you. The first of those is just to emphasise the perspective that we come from as economists and perhaps to contrast that with the perspective of some other witnesses. Firstly we would emphasise the fact that there is choice and perhaps the most important issue when we are making decisions in the health sector is that there is no inevitability. I have stated there that the size of the health sector is extraordinarily flexible. We know, for example, at the moment the United States spends about double what we spend in Australia, but the United States has made projections which would involve a doubling of their expenditure again. That would be four times our expenditure. There is nothing technically or in the theory of economics that says that could not happen. We are quite open to choice.

Similarly with government versus private funding, the mix that we select of that is extremely flexible. If you look at Western countries there is a range of government sectors that are from about 47 per cent up to in the 90s. Australia is in the low end of that distribution. We have a larger private sector and a smaller government sector than most Western countries. That tends to correlate—perhaps perversely for some—with overall lower costs. That is, as the government sector gets bigger in Western countries costs get lower, but the important point is that this does not drive us to any technical conclusion about the optimal mix of government and private sector because that is very largely a matter of social ideals or our ideology, which of course obviously varies between the ideology of communal funding and individual—

Senator CHRIS EVANS —If you are saying that your approach is an economist's non-judgmental approach—if there is such a thing—why wouldn't the suggestion that having a larger public sector is cheaper then drive you to argue for that?

Prof. Richardson —Because there are different objectives in the health sector and elsewhere apart from straight cost minimisation—that is, if you want to give choice. The view that we should have a larger private sector corresponds with the ideology—I mean by that the ideal—that people ought to be given individual responsibility and should be given individual choice. If that in itself is of importance, we trade that off against costs. In other words, for another objective we will pay more. We are not simply in a business of cost minimising. Economics, I should say, claims to be in the business of using our resources for the best possible wellbeing of the community. If that involves spending more to get better health, so be it. It is not an exercise in cost minimising.

As I say, it is an interaction between what is possible and what we want. There are trade-offs there. It is not simply a matter of there being a technical inevitability. I do stress that the health debate in Australia is commonly characterised by a series of vested interest groups asserting that certain outcomes and policies are inevitable and technically necessary. That is simply false. International evidence shows that there are large numbers of ways in which we can do things. That is the first important point—we do have choice.

The second important point is that in the health sector we have quite an astonishing amount of ignorance. What we do not know is just enormous. Again in contradistinction to what a lot of people would actually claim when making a particular case, I have just listed some of the areas, just about the entire spectrum of issues, on which we have inadequate information. The OECD has suggested on the effectiveness of services that about 20 to 25 per cent of what we do has been adequately evaluated. If we look at cost effectiveness, it is almost nothing. As for responsiveness to incentives, when we pull the different levers, how will the health sector respond? Well, we have got some ideas but not very good ones. As for the present allocation of resources, we know it is terrible, I will give you some evidence on that, but we have not researched it. We do not really know.

We have got a situation which some years ago was described by an eminent American epidemiologist, Wenberg, as a situation where there is a crisis in modern medicine. That crisis is that we do not really know how to use our resources very well and yet we are using vast volumes of them. That is the reason why we moved to evidence based medicine.

The further and rather more damaging point is that we do in Australia have an extraordinarily good database by world standards, but we do not use it. Through the linkage of records we could make an enormous impact onto this pool of ignorance about the effectiveness of different services. For example, here in Victoria recently we did a study in which we found that when a patient has a heart attack and is admitted to a hospital, the likelihood of getting an intensive procedure—bypass or angiography—is somewhat greater than double if they are admitted to a private hospital. This information suggests that either private hospitals are doing too much or public hospitals are doing too little, we cannot say which, but the point I am making now is that we do not use this basic information to find out what is going on. So that rather dramatic piece of information was simply not known. We have not used our information well. There are many other examples of that.

I have actually got the overheads out of sequence. I have gone 1, 2, 4. We like to make things complicated at universities. It increases the aura of our authority, that we can understand what we are doing!

Senator LEES —See if the students are awake.

Senator CHRIS EVANS —I had not noticed!

Prof. Richardson —I thought you might not have asked so I ought to say that anyway. The reason was that, after having said that there is so much we do not know, I want to draw on what impacts on me—because it is the business I am in—and that is the particularly extraordinary fact of the amount of research that we do not do in this area. If we take as a benchmark what is spent in industry versus health services research, if we take machinery and equipment, about 2.6 per cent of throughput is spent on research. If we take the medical devices industry in Australia, it is about eight per cent. If we take health services research—that is, not the manufacturing of new products and the clinical interventions that the NHMRC spends most of its money on—and how should we use the existing services to get the best possible value for money, we are spending 0.18 per cent of our throughput.

If you look at what the government is spending, most of this comes from universities' internal sources—about half of it. Some of it is state governments actually carrying out routine functions which require this spending. The Commonwealth government—as I was told just yesterday from the AIHW—spends $6 million. I saw an alternative figure of $12 million, but I have not pursued this. That means that somewhere between one fiftieth and one hundredth of one per cent of the health sector is spent on how to use our services effectively.

This would be understandable if we had an industry where things were pretty well bedded down, there was not disputation, it was never on the front pages of the newspaper, and it was not an electoral issue. But it is none of those things and, in the light of this tremendous controversy, we are not spending even a fraction of what industry would normally spend on working out how we should use the products to the best wellbeing of the community. That is the situation which I described in my supplementary notes as a situation of stupendous foolishness. I have never used that phrase before, but it is stupendous foolishness to be spending that amount in this context.

The result of this situation, of course, is that interest groups are able to make any assertions. Most directly in the context of hospitals, assertions can be made about what is happening in the hospitals, the consequences of what is happening in the hospitals, and we do not know, so these assertions can be made. The reason for the appalling level of the debate over health services in Australia is very largely attributable to the fact that we simply do not document what is happening.

The last general point, the fourth point which I have called `3', is that, of the two types of efficiency, there is one which really needs the greatest attention. Technical efficiency is: if you are going to dig holes, dig them efficiently, with as few resources as you can. If you are going to have X number of people treated in a hospital, do it efficiently. If you are going to use a service, let us do it at minimum cost. We get that sort of efficiency by looking at issues such as privatisation; casemix funding had a big impact. What seems to be very clear in the data is that that is not the biggest challenge to us at the moment; rather, it is what economists call allocative efficiency—deciding what sorts of services you should be giving. Should you be digging holes in the first place? Should you be putting so many people in hospital rather than having preventive care? This got virtually no research into it, but the data we have got suggests that the greatest gains are from that latter activity—working out where we should be putting our services. It is not surprising, because only about 20 per cent of what we do has been assessed properly. So, unsurprisingly, we find tremendous erratic behaviour.

I have documented some of that in the submission, and I did put up this figure, which is a bar chart showing various procedures that are done in Victoria. To explain this briefly, each one of these is a well-defined hospital procedure, so we have 100 per cent of the data, in this case for a two-year period. We then take statistical local areas and we rank them from those that are using the least of these services to those that are using the most, and we standardise so that if everyone was using just what you would expect, given the number of people and the age and sex composition, we call that level 100. So if you are at 50 per cent of that, that means you are only giving half the number of services that you would expect, given the age and sex composition of the community.

This shows the variation. This is the group which has got 25 per cent of SLAs, statistical local areas, below them, and this is the level where 75 per cent are below them, but each of these dots represents an SLA. The interpretation of this is to say that, for any particular SLA, if we drop down and ask how much is being spent, and we take the upper and lower limits, we find something like a 500 to 800 per cent variation in how much is being given between SLAs that cannot be explained by population, by age or by sex. That is from the top to the bottom. Those unexplained variations seem to be primarily a response of a series of what should be irrelevant factors—where doctors have located, the individual practice style which they find congenial, perhaps the medical school they went to. They are a series of fairly random factors.

I also put another table, which I will not harp on because it is a little detailed, which is a second run of this same question, trying to illustrate what is happening in a second way. This is using three years of data. Just to give an example of one of the statistics here, if you compare the SLAs, those areas that have only got five per cent of SLAs below them in terms of their service use with those that have only got five per cent above them in terms of their service use—in other words, you are cutting out the real outliers—and you say `How do they compare?' the ratio of service use in this case is 2.6. In other words, the higher SLA is using 160 per cent more of the services than the lower SLA, after standardising for age and sex.

As you go through here you find quite dramatic variation up to—in the case of exploratory laparotomy—a factor of 5.12. There are some areas using 412 per cent more or 512 per cent of the service delivery rate of other SLAs. That is quite stunning in terms of the implications for bad allocation of resources. It strongly implies that either some areas are massively underservicing or some other areas are massively overservicing, and we do not research that in Australia. We have had no particular interest expressed as a result of this.

CHAIR —What are SLAs?

Prof. Richardson —Statistical local areas, small areas.

CHAIR —Is it actually a postcode area?

Prof. Richardson —No, it is bigger than a postcode area and smaller than a local government area. There are 190 or so in Victoria, from memory. It is just one of the standard divisions of the Australian Bureau of Statistics.

CHAIR —Thank you.

Senator TCHEN —Professor, are these statistics on a hospital basis or residential address basis?

Prof. Richardson —This is residential address. It is not that you have a lot of admissions where there is a hospital. Rather, there are some areas that have got use of services that is inexplicable by age and sex population.

Senator CHRIS EVANS —Did you then map those in terms of what that showed about a socioeconomic group or relationship to numbers of doctors?

Prof. Richardson —No. We would like to do that. We have applied for funding for that. We may or may not get it—we have been knocked back once. We have got a second application in but that depends upon the processes of the research committees and, as I said, from Canberra we get somewhere between $6 million and $12 million a year for all health services research. We face something like a one in five probability, when we put in a research application to look at this sort of thing, of actually getting the funding.

Senator CHRIS EVANS —So what would you want to test: socioeconomic status or where doctors are located?

Prof. Richardson —Yes, socioeconomic status, residential characteristics. One of the things we always put in is a prediction of how many doctors ought to be there on the basis of status. We find that high status residential areas have more doctors—all else being equal—and in those areas you have more procedures. What we would then be recommending is that after we have tested every possible explanation in terms of the socioeconomic and quantifiable medical or demographic factors, we would then be identifying those areas and suggesting that we start looking at individual records and at what individual doctors are doing and moving to the hospital records and actually looking at this.

We do know, from talking to individual clinicians, that there are a large number of doctors who carry out some procedures—and you cannot pin them down and say that these are technically necessarily improper procedures because there is so much uncertainty. We do not have protocols, so everything in medicine, of the vast majority of the things done, is subject to uncertainty. At the level of a single patient it is always possible to say, `In my clinical judgment I think this procedure would be good. There is a sign, for example, of a cataract in this eye, so we will do cataract surgery.' Other clinicians will say, `But that has no possible behavioural significance for the quality of life of the patient.' Then it is a question of whose judgment you follow. As economists we fear that the judgment is tipped by the fact that there is a very congenial financial result when you intervene rapidly.

CHAIR —Is the data you are talking about here for Victoria only?

Prof. Richardson —Yes.

CHAIR —I am sure you know, but I just wanted to check my memory, that this sort of data has been divided into socioeconomic areas as in my own state of South Australia and that we could say that perhaps 20 years ago north of Adelaide there was a huge percentage of tonsillectomies as compared to anywhere else in the state. That data being made public, the tonsillectomies ceased and hysterectomies started.

Prof. Richardson —One of the great difficulties I was asked in the supplementary questions was: what is the greatest challenge? The great challenge is to have clinicians agree to best practice medicine, and the reason it is difficult is that this represents income. If you close down one particular area that means a loss of income so you have to move to another area if that income is to be sustained. That is a head-on clash with the vested interest.

It is not that the leaders of the medical profession are resisting this information. They are aware of it, they are concerned by it, they are trying to introduce evidence based medicine, but the people who have to implement this have a very direct financial interest in the outcome of these decisions.

CHAIR —It would be fantastic if you could give us more information about that because certainly the data from South Australia was somewhat perverse in its outcome in that the lowest socioeconomic areas in some situations had the highest number of surgical procedures.

Prof. Richardson —Some of the low socioeconomic areas are in the city centres where there is very good access to doctors. We certainly find a very close correlation between the number of doctors and the number of things that doctors are doing.

CHAIR —Is there a direct correlation there? If there was not, who else is doing it?

Prof. Richardson —You could actually move out of your particular area. It is just that when there are people close to you and you get into the system more quickly, more gets done to you. You really do have to have a multivariant analysis in which you standardise for income, standardise for location, and then say what the other independent factors are.

Senator CHRIS EVANS —Some of the dangers of that analysis, because I have done similar sorts of exercises, is that some of the inner city areas have both the highest and lowest income earners within streets of each other and so it actually gives you a very misleading result if you are not careful.

Prof. Richardson —There are a lot of methodological problems. When you take broad areas, there are statistical techniques for trying to overcome some of those problems. For example, you take not the actual doctors supply which can be contaminated but a predicted doctor's supply on the basis of certain systematic factors. I cannot say why in two minutes, but that actually overcomes some of these problems. But it is telling. Nothing is proven in these areas. All you get is very suggestive evidence.

CHAIR —I am sorry, we are tempted to keep interrupting so I will urge you back to the charts.

Prof. Richardson —I am starting the second bit now, which is the quick comment on each of the terms of reference that we were provided with. Firstly, on current funding and whether or not it is adequate, that is not an area where we are looking at from the ground. Therefore, we can only make a couple of broad comments. The first broad comment is that the desirable level of spending has a trade-off between the short run and long run. In the short run, if you clamp down on spending you can create undesirable outcomes. However, if you take the pressure cooker lid off, in the longer term we get costs blowing out. We have to have an ideal system which in the short run does not result in adverse effects, but in the long run keeps pressure on hospitals. There is that trade-off for achieving the optimal situation.

The next comment we would make is that the absolutely essential data that we really need is information upon the quality of the hospitals and what is happening within the hospitals. In the short run we want to know what the adverse effects are and in the long run we want to know what good practice is. Perversely, putting in quality measurement is probably a good procedure for saving money. The reason for that is that it is desirable to put budget caps on hospitals and squeeze them because they are capable of vast inefficiencies which certainly occurred in the past. We can squeeze the hospitals and what stops us from squeezing them is the fear of quality deterioration. If we have adequate quality assurance mechanisms in place, then it is possible to squeeze hospitals with the full knowledge of what the impact on quality is. So you can squeeze to the optimal level, to the point where you have got rid of inefficiency as your indicators tell you and you are not damaging quality.

The single most important development in hospitals is adequate quality assurance mechanisms, routine ongoing quality assurance. So in the short run you know if you have pushed too hard on the hospitals, whether or not you are creating problems, and in the longer run whether or not you are squeezing hospitals, to use a crude term, to the right amount. We have recently set up organisations for looking at quality. I cannot say whether or not these are being as diligent as is possible. That is not my area. Casual information does suggest that we have not gone to world best practice. For example, the United Kingdom goes considerably further in the sorts of measures that they have implemented. I do think any amount of expenditure, virtually, in establishing this quality assurance would probably be well justified, not just from the point of view of quality but also from the point of view of cost. This was an example of where it is possible for the hospitals to make all sorts of claims. We do not know if they are true or false. We need data to say whether it is true or false.

I do think that virtually any amount of expenditure in establishing this quality assurance would probably be well justified, not just from the point of view of quality but also from the point of view of cost. This was an example of where it is possible for the hospitals to make all sorts of claims. We do not know whether they are true or false. We need data to say whether or not it is true or false. I will not make a comment on cost shifting because of time constraints, except to say that cost shifting is not an end point issue—something that would worry us by itself. Cost shifting is only a problem if it actually results in adverse effects for patients. People who are chiefly concerned with cost shifting are the state versus Commonwealth bureaucrats who are trying to balance their budget. That is totally irrelevant for patients or for the community as a whole, firstly, except when it impacts on patients and, secondly, because it can have, and sometimes does have, a debilitating effect upon our bureaucrats, who are very important people in making the system work well. If their energies are channelled into cost shifting, then that is at a very high cost of long-term planning.

Senator CHRIS EVANS —Surely it breeds economic inefficiency. Wouldn't you be worried about that, Professor Richardson?

Prof. Richardson —If it results in economic inefficiency, yes. I was scooping that up in an impact on patient-cum-citizen payer. But if all you have done is shifted the actual payer and nothing changes on the ground, either in terms of the number of services provided or in terms of the quality of the care, that is of some irrelevance to the community and the patient.

Senator CHRIS EVANS —It is a pretty big call to suggest that that is the only outcome. Usually, it does result in changes in practice on the ground. I would have thought you would have been more worried, as an economist, about that economic efficiency aspect of it.

Prof. Richardson —Yes, that would be where I would focus attention. What I am trying to say is that cost shifting per se, and the size of the cost shifting, is not the problem. The problem is when the economic inefficiency of costs rise or the impact upon patient treatment, if that is perverted. Yes, of course, you can cost shift back to the patients by charging co-payments and poor patients will not get into the system. There is a cost in terms of lack of access. You can squeeze public hospitals, and that makes the private hospitals that much more attractive and you will change the pattern of practice. If you have a heart attack, you will now have twice the likelihood of an intensive procedure. That is a form of cost shifting from public sector to private sector and, yes, that has an impact. We need detailed empirical evidence on what those important consequences are. Just documenting the existence of cost shifting and having bureaucrats extremely concerned that their budget bottom line is being jeopardised is not the issue.

Senator LEES —When you look at the economic impact of cost shifting, do you look at the economic impact of readmissions and other problems that patients may have as a result of cost shifting?

Prof. Richardson —As a result of it. Getting the causal effects there are difficult. I do not know of studies that have done it. It would be quite a tricky exercise to actually pin it down properly.

Senator LEES —We were told at a previous hearing that no-one has really done any work on cost shifting because no-one wants to admit that they are actually doing it; there is not really any good analysis of what exactly is happening and what the impact is. Is that an area where we really should be spending some effort?

Prof. Richardson —Yes. I think we should be increasing the one-hundredth of one per cent of the budget that is spent in this area. That would be a good way of spending it.

Senator CHRIS EVANS —You told us you were the one group that was not doing any special pleading today, Professor. It is beginning to sound like that.

Prof. Richardson —There is a reason for that: I was telling a lie. I was just putting the special pleading in by extremely subtle means. I might call it stupendous foolishness because I am affected; you might just call it slightly silly. Yes, that exercise needs to be done. I do not think it is possible to say an absolute number of dollars are being cost shifted, because you get into a legal wrangle about where that spending should have occurred. What you can do is say, `Here is a base year. Let's see how much you would have expected state hospital and pharmaceutical costs to have gone up in the different categories.' How much has it gone up? The difference may then be attributable, as a result of the change in cost shifting. It is often possible to analyse change even though you cannot analyse the absolute levels of something.

On the reorganisation of state responsibilities, the only comments we would make there is that this is something where a lot of people have very strong views on the basis of extraordinarily little evidence. That is because it is very difficult to research this. The debate has been almost entirely at the level of people's gut feeling or ideological persuasion—centralist versus non-centralist and so forth. We have set out some of the general factors that are relevant here. We do not have a good answer to that question. It has not been properly debated. It would be difficult to do quantitative research to inform this, but as an absolute minimum we do need a debate on this issue. It is not a clear-cut question; there are pros and cons with that.

However, it is important that we get evidence on how we can improve coordination of services. One of the big issues is that, rationally, we should be moving services to one level of government or the other because then we can coordinate better. We can get information on the benefits of coordination by looking at things like the coordinated care trials. That is going to enter a second phase. I think they really are very important; they have told us a great deal about the benefits of coordination, though there are a lot of things where they have been disappointing as well because of the limitation on those trials. But that is the sort of evidence which could indicate that we really must take this issue of federal or state much more seriously than we have in the past, although I think the chief obstacles there are political, at the level of bureaucracies as well.

In terms of improvement in coordination within the hospital, again, the broader issue here is allocative efficiency, that very high order issue I was talking about early—the way in which we are not putting resources where we get the best value. I have not been emphasising it in this table, I have been trying to highlight what we do not know—that was one of our themes. In summary, in virtually each of the areas I have touched on, truly we do not have enough information for sensible decision making.

In the area of trying to improve coordination with the community, we have made a series of recommendations. Absolutely with no eye to self-interest, we have suggested more research into this area. Differential medical payments could certainly be considered for those who are adopting, and who are prepared to have their records audited to demonstrate that they are adopting, best practice medicine. There will be tremendous resistance to that, and a financial incentive to adopt it is one way to go.

It is a small issue, perhaps, for this committee, but to get greater competition in the private hospital sector and with private patients would be desirable. To achieve that, we really should be looking again at the default payments which dampen competition in the private sector to the point of it being non-existent—that is, the private sector's one major weapon to get a good deal, to really implement competition, is the exclusion of either hospitals or doctors from their health insurance benefits. You could not have a competitive system in which the person who is buying is forced to buy from everybody. Competition only works if you can exclude people, and the threat of exclusion gives you a better deal. So if our private health insurance must give a default payment to those who have not signed up with a good deal, with discount prices or some other benefit to the patients, if we cannot exclude them, then we have, if you like, emasculated the health funds in their attempts to compete.

Senator LEES —If I can just raise a point there, one of the issues when we were dealing with this legislation, when the default payments were put in, was that for people who were moving around, travelling intrastate or interstate, the fund that they may be with in, say, Queensland may not have any agreements at all in Victoria. When we have so many private health insurance funds and a lot of them do not particularly want to work together—indeed, there are lots of incentives for them not to—how do we overcome that?

Prof. Richardson —There are several different lines. I am sure that when you throw it to the private sector they are good at finding solutions to problems of this sort when it is in their self-interest to do it. One immediate approach is that if they are going to increase their membership by a nationwide network, they will overcome their reluctance to talk to other health funds because it is in their self-interest to do so. Secondly, with the computerisation of services at the moment, the costs outside one scheme can be brought back to that scheme. That is what has happened with coordinated care at the moment: if somebody goes outside the network, we have a system which records that, it is computerised, it is a low-cost information system, and those bills can be sent back to their scheme. I think there is very little doubt that they would be able to overcome that problem. It is the incentive.

CHAIR —This must be the meaning of default in PHI default payments. I am not sure I completely understood that.

Prof. Richardson —When the private funds approach private hospitals to try and get a special arrangement, such as the private hospital giving no out-of-pocket expenses, they may also negotiate to ensure that the doctor's payment and the hospital payment are combined. There will either be no or a known fixed payment. Those sorts of arrangements improve private health insurance. They are the way in which health funds can compete by getting good arrangements. The default requirement at the moment states that, if a patient does not go to one of these hospitals and goes to another hospital, you have to pay 80 per cent of the standard payment. That other hospital then has very diluted pressure to enter into a special contract with the health fund. Why is that? It is because if they do not bother they still get 80 per cent of the fee. Without the default payment people would not go to that hospital because they would be out-of-pocket for the full expenditure.

Senator CHRIS EVANS —And because consumers do not have good knowledge, often they do not know that until after they have had the operation, even if it is not a participating hospital apparently.

Prof. Richardson —It is very common in the United States to do this with the preferred providers. A lot of the funds already have special arrangements. They simply inform their patients. You will get a list each year of their recommended hospitals from a number of the funds here. They will actually state to you that, if you go to this hospital, there will be no out-of-pocket payment. That is for the funds to send this information to their customers.

Senator CHRIS EVANS —You get constituents who come to you after the event who did not know that. It comes as a nasty surprise afterwards.

Prof. Richardson —Yes, people make mistakes, but markets can never eliminate mistakes. All you can have is error learning.

Senator LEES —But this comes back to known gap. As of this month, you can get a leaflet at Medicare offices that explains it. You should know if you are going to get a gap payment. If you were to get rid of the default payments, it would mean another education campaign for those who are privately insured. There would have to be some requirement. You are saying that it is quite acceptable for funds to force private hospitals out of business because that is what they are doing even today with only the 80 per cent.

Prof. Richardson —It is very difficult to conceive of sensible competition where there is not the threat of being thrown out of business. This is not something you may want to do in the public sector because of a series of other public responsibilities. In the private sector, the basic philosophy is that they will achieve their objectives and their efficiencies by competition. You cannot have competition without the threat of extinction. You could not have a small business sector where there was an underwriting of every small business that entered the market with a guarantee that, whatever mistakes they made and however poorly they negotiated with their subcontractors, they would be guaranteed existence.

Senator CHRIS EVANS —Some suggest that is what we do with the 30 per cent rebate, but I will leave that argument for another day.

Prof. Richardson —On the impact of private health insurance on public hospitals, I guess the broader issue we are pointing to is that, firstly, we need to know what the role of private health insurance is from an ideological perspective. Referring to your comment just then, Senator, the 30 per cent is not simply paying for access to a hospital. It is also paying to keep alive a system that is independently valued because it gives choice. This is what I was saying in my opening comments. It is not simply cost minimising for health. There are other objectives. With private health insurance, there clearly are other objectives, otherwise we simply have put all of the money into the public hospitals because it is self-evidently demonstrable that you would get more throughput in the short run by putting your resources into the public hospitals.

Senator TCHEN —The fundamental issue here is not to keep the private health insurance industry alive but to ensure that there is a choice?

Prof. Richardson —There are many dimensions of choice. This is choice of health scheme and health insurance and that appears to be valued in Australia. In that case, you have to keep that industry alive if that is a choice you value. If you are looking at choice between doctor's choice of services that is a different dimension of choice.

Senator TCHEN —I understand.

Prof. Richardson —Concerning public use of private hospitals, the broader issue here is whether or not we get a better deal if the public uses private hospitals. The unknown factor here is whether or not that is of any benefit at all. We simply do not know the quality and the costs of the public versus the private hospitals. In fact, because of the lack of research in this area we have engaged right around Australia in privatisation with virtually no evidence to suggest that that will actually give the benefits that are claimed.

Senator LEES —Sorry to keep interrupting, but as we go through this, now is perhaps the best time to argue or to ask questions. Looking at the costs of various procedures, and in particular remuneration to doctors, certainly anecdotal evidence seems to suggest that the private is more expensive if you take out from the public all the teaching and additions that the private do not have. Are you saying there really has not been any proper work done on all of that?

Prof. Richardson —To really tie it down you need to standardise for the size of the hospital, the casemix at the hospital. You need to get very detailed costing data from the private hospitals. We have that data from the public hospitals but we would need the private hospitals to be giving it to us. Yes, there are a lot of indicators that suggest the private hospitals would be more expensive. For example, the heart attack study that we did said that if you go into a private hospital the cardiologists say that this has no lifesaving significance given these high-tech procedures. Quality of life we do not know about, but if there is no difference there then that simply means we are doing more for the same outcome. That is costly. If that is indicative of the entire private hospital sector, not just heart attacks, then yes, they are going to be a lot more costly. Perhaps you would want to be arguing that the public may or may not have a preference for high tech. I think the evidence would suggest that the doctors decide that rather than the public.

Senator LEES —On another matter, it was a few years ago now, before this government's time, but there was some attempt to get the private hospitals to actually treat public patients and they did not want to. When I asked one particular CEO, he said: `Our private patients would not like public patients in the wards with them. Our hospital is moving to all single rooms anyway and that is not suitable for public patients.' Is that something you also need to look at in terms of cost effectiveness? If you have all got private wards throughout an entire hospital compared to four-bed wards, et cetera, that surely must have some influence on cost. As well as the fact that the private hospitals may not want public patients, there is the actual structure of the hospital to be considered.

Prof. Richardson —I do not think you would go about that by actually looking physically at the structure, you would actually be getting the data on the rental value of the property, the number of nurses, the number of drugs, the details of all of the inputs. It may or may not be more costly to have the private rooms. All else being equal, yes, you would expect that the nurse has to walk around the corridor a little bit more, but that is a fairly trivial cost. There are quite well-known techniques for doing it, but the difficulty is getting the data from the private sector for reasons of commercial confidentiality. At least that is what they will say. They may not be too keen on the outcome just in case it was adverse.

But the private hospitals could still survive even if they were more costly. The reason for that is that they are the mechanisms by which people can jump queues. The private health insurance system in Australia is saying that Australians have decided collectively that we want two schemes, one of them public and one of them private. When you look at the benefits of the private scheme, we do not know of life saving and we do not know of quality of life. But it does mean you do not have to get into a queue, and it does mean that you may not get the resident who is only two years out of medical school, but that you can get somebody who your general practitioner has told you is better. It really is a method for channelling people to a more secure doctor and for jumping queues. People may still be prepared to pay for that even if it is technically more inefficient because once again it is not just about minimising cost, there are other objectives. Queue jumping is an objective in Australia.

CHAIR —I would appreciate your comments on two statements, if you have no objection. I understood in times past, when money was provided or set aside to assist with running down waiting lists by asking for private hospitals to assist in operations, that some places—Illawarra was one that ran down the pensioner waiting list for eye operations—were extremely successful, but in other parts of Australia, while the private hospitals could not wait for it to happen, the doctors would not cooperate. Certainly, in my own state of South Australia, the hospitals all ticked off. They had the beds, they were ready and rearing to go, and the surgeons just refused to participate. You may care to comment in terms of what the hell you do about that; perhaps the incentive was not enough or operating for medical benefits assessed funds was not enough for them. Do you care to comment on that point?

Prof. Richardson —I cannot give you an authoritative comment on the extent to which doctors have done that. I have also heard those comments, in fact, from one of our colleagues, Professor Scotton. When he was in the Health Commission here, they attempted such an approach with orthopaedics with exactly that response. It is very threatening for the doctors to have their private patients next door to, or in the next bed as, the public patients. While the private hospitals are a mechanism for queue jumping from the patient's point of view, the private hospital represents a guaranteed source of private income for the doctors. For doctors, the preservation of private hospitals is extremely important and that is the reason why any action that would jeopardise the private hospitals is resisted by private doctors.

What do you do there? In those circumstances the money that is actually being put into the private hospitals is essentially a short-run solution. From a longer-term perspective, we can reopen the wards that have been closed in the public system if we choose to. In areas where they do not exist, you simply build them. That is the long-term solution. We are not always driven by the short-term imperative.

CHAIR —I have always been told that the major stumbling block to running down the waiting list in public hospitals is access to operating theatres and that we do not need to build beds, we need to make sure that those operating theatres are open and maybe running on a line such as, `I will do all eyes,' so you could sterilise the theatre or prepare it more efficiently.

Prof. Richardson —What you say is absolutely true. If we spent more money on that we could actually use the existing ones more intensively. A lot of them are not used intensively. We could build additional ones. That is essentially an issue of money. My very first comment to the committee was the amount of money the public system spends is extremely flexible between countries. Our public system spends less than most countries, so we could increase the amount of spending as you described very significantly in the public system and we would still have a public system that was smaller than that in most other Western countries, but that is a long-term solution. I think the real problem is that people are looking for the six-month solution.

CHAIR —Secondly, Senator Lees and I have both asked questions about this in a Senate debate on the health rebate, as I recall it. As we understand it, casemix should be able to give us some assessment roughly of what an appendectomy costs to do, whether it is done in a public hospital or a private hospital. But on the information that can be provided, these procedures tend to turn out to be more expensive in the private hospital, which does not have the same add-ons as a public hospital. That is, it is kind of counter-intuitive the way it comes out.

Prof. Richardson —My understanding is that it is not true that we would not have the detailed data from the private sector. But could I ask Jenny Watts, who has worked with casemix data quite a lot and worked on the establishment of the actual casemix weights for Victoria using the detailed management information system, if it is possible to extract that information from the private sector.

Ms Watts —We do have a problem with provision of data from the private sector. My first response to what you are saying is that I would not be surprised that the private sector was more costly than the public sector. Some of the research that I have done, which has been presented at conferences but is as yet unpublished, suggests that length of stay represents 80 per cent of in-patient costs. So if there is an extra length of stay in the private sector, which you would not expect, then you could believe that there would be higher costs in the private sector.

Senator CHRIS EVANS —You did say `which you would not expect'?

Ms Watts —You would expect there to be a longer length of stay, yes.

Senator CHRIS EVANS —Yes, don't we have the figures on that? We have the average bed stays.

Ms Watts —The AIHW provide national figures and they collect from the private sector as well as from the public sector.

Senator CHRIS EVANS —And doesn't that establish that—

Ms Watts —There are differences in length of stay in the two sectors. The costs are poorly collected in the private sector and poorly reported.

Senator CHRIS EVANS —We do know, don't we, from those AIHW figures that the average stay for the same procedure is longer in the private sector?

Ms Watts —One of the things you have got to do is look at it either at the diagnostic related group level, which is the DRG, or at the ICD-10 codes. In general, yes, the length of stay is longer, but you need to do research looking at each diagnostic related group.

Senator CHRIS EVANS —Working on generalities, though, if we know that the average stay is longer and we know 80 per cent of the cost factor is length of stay, then—and I am not having a go at Professor Richardson—do we know as little as you are saying we do about the costs or can we draw reasonable conclusions from that?

Ms Watts —We can draw some conclusions from that, but I think there would still be a need to do more intensive research around particular procedures and using more explanatory variables rather than just length of stay, adjusting for other things as well. That has not been done.

Prof. Richardson —This is such a threatening area that if you did anything less than gold standard research, the weaknesses of your design would be pointed out very quickly and discredited.


Ms Watts —International classification of diseases.

CHAIR —Thank you.

Prof. Richardson —Regarding the adequacy of data, I will pass over that with only the comment that, throughout this presentation, I have been highlighting what we do not know. We need data in those areas but, more importantly perhaps, we are not using our existing data very well. We do have some of the best data in the world, but we do not data link that, so we do not know what is happening to patients long term. For example, in our heart attack study we have the technical ability to actually follow patients for as long as we want by linking, say, to Medicare. We could be informing the world of the effectiveness of these alternative procedures, as compared to thrombolytic drugs. But we do not use that data, firstly, because of, I think, misplaced confidentiality sensitivities and, secondly, because there are not people pressing to do it—they do not have the researchers.

Senator TCHEN —I notice you have the benefits of data linkage listed as an unknown factor. We have received from a number of witnesses a fairly strong suggestion that data linkage, even using things like Medicare numbers, would be very useful and should be implemented fairly quickly. Can you comment on that?

Prof. Richardson —That was essentially what I was suggesting. We do have the capacity to data link and the easiest way of doing it is through the Medicare number, so I am agreeing with those witnesses. It is that we have chosen not to do it.

Senator TCHEN —But you are not sure about the benefits?

Prof. Richardson —No, I was saying that I think the benefits would be absolutely immense. We would be able to follow cohorts of patients who have received treatments for which we do not know the long-term outcome.

Ms Segal —The use of the term `unknown' means that we do not have the information, not that we do not know whether it is worth doing, so the heading on that column is perhaps a bit misleading. It is not unknown as in `we do not know that it is worth doing'; it is unknown as in `we do not have that knowledge and it is worth doing'.

Senator TCHEN —Sorry, I thought you meant the benefit is unknown.

Ms Segal —It is just that the heading on the column is a bit misleading.

Prof. Richardson —I have already commented on quality improvements. The greatest benefit that we could possibly bring about in the health sector is the implementation of best practice medicine, for the reasons I went into earlier. There is a massive pool of ignorance. When it is eliminated by data on best practice we can cut out the unnecessary services and the inadequate services at both ends of the spectrum that we have at the moment. I have put: establish a council for health care quality. We have such a body. That ought to be put under very close scrutiny to make sure they really are implementing everything that has been discovered around the world—and a lot has been discovered around the world.

To wrap up, these are the conclusions. The first overall conclusion is a reiteration of what I have just said. A reduction in quality of care is the cost of squeezing hospital budgets. The highest priority ought to be to find out what that cost is. If we can find that out, we can stop hospitals gaining by making assertions that are not true and we can perhaps squeeze even harder.

I extend the coordinated care trials. From the point of view of hospitals that means we should be rationalising the entry criteria into hospitals. Australia has one of the highest uses of hospitals in the world, despite the fact that we have a young population by Western standards. Clearly, we have adopted a style of medicine which is very hospital intensive. That is very expensive. Rationalisation of that by better coordination has obvious benefits.

Senator CHRIS EVANS —What is your rationale for why we have a high use of hospitals, given that we have a larger public-private mix and that we have private GP provision?

Prof. Richardson —Maybe it is because we have the larger private sector and there is a larger income made in hospital work than out of hospital work. I think we are prisoners of history and this is something we have always had. Why we established a particular pattern is an historical rather than a logical question. I have speculated that years before universal insurance we had very good hospital coverage for patients and we had fairly poor medical. From the patient's point of view, and the doctor knew this, to put the patient into hospital was cheaper for the patient and better for the doctor. Maybe that contributed to this hospital orientation of our system—but that is pure speculation. All we know is that it does exist and it is another area we have not researched very well.

Senator CHRIS EVANS —There was a lot of information on adverse outcomes so I guess it looked attractive at the time.

Prof. Richardson —Yes, that is right.

CHAIR —Would you also allow for the possibility that hospitals did other things besides straight medical procedures or care and that they were actually like an allied health or particularly an almoner, caring for the broken and wounded with a hospice dimension, et cetera?

Prof. Richardson —We certainly had nursing home effective care there but even if you take the use of hospitals by the number of separations per hundred thousand of population which screen out the nursing home care excessive lengths of stay because of hospice, then we are still high. Even screening for these other factors we seem to use hospital services rather intensively. The solution is not to throw people out of hospitals without other systems. What we need is an integrated system. The prerequisite of that is single payer and the prerequisite to that is that we move the system to one level of government. We can experiment with the magnitude of the benefits through the coordinated care trials and, once they have been demonstrated, that brings greater pressure all round to actually achieve a more rational system.

Senator LEES —Do we at least have data on where there seem to be a large number of people admitted? For example, is it rural areas or is it our teaching hospitals? Do we have enough information to know where it is happening?

Prof. Richardson —I have not looked at this for a while. Rural areas do have—tell me if either of you know me to be wrong—higher admissions than urban areas.

Ms Segal —But they also have lower use of medical services. One does not want to look at just the hospital admission data in isolation from the use of other parts of the health system.

Prof. Richardson —Yes, there is an enormously rich data bank there and, for fear of saying it again, we have not yet actually looked at that, which is my next point.

CHAIR —You do not even smile.

Prof. Richardson —We do have this hugely expensive and hugely important system and we do not use the data we have to routinely find out what it is doing and what its problems are. We just keep putting new products in there and wondering why the costs are going up. With regard to the subsidies—it is a bit late now for the suggestion—one of the ways in which we can try to force competition in the private sector is to link the subsidies we give to some sort of quid pro quo so that we just do not give a subsidy without other conditions. For example, you could contemplate giving subsidies or even an increment to the subsidy for inflation or other factors and they could be linked to a demonstrated capacity to find preferred providers and to actually demonstrate that you have negotiated with doctors in a way that does not happen at the moment. You could also link it with fee caps. That is, you will not be giving subsidies where doctors are charging above the schedule fee. That would very quickly build up a lot of pressure from the hospital and from the insurance companies for doctors to do this. If we are going to subsidise insurance as a social policy it does seem sensible to try to get a quid pro quo in terms of other objectives that we would like to see.

Senator LEES —So you are saying the 30 per cent only applies to those policies where there are no gaps? Is that correct?

Prof. Richardson —Yes.

Senator LEES —I would do anything to cut down the—

Senator CHRIS EVANS —I think there was talk of that, but money came first, unfortunately.

Prof. Richardson —You are throwing away your bargaining chips to try and get a difficult policy which universally would be agreed to be desirable.

CHAIR —No gap does not necessarily mean what I understood you to say—you might have argued for no gap based on the medical benefits schedule fee.

Prof. Richardson —I was saying get something, either no payment or a fixed gap payment or something that is negotiated, rather than something that is totally open ended. So whatever your objective is, link it to the granting of the subsidy. I have commented on evidence based medicine, and I think that uses up my 15 minutes. It is exactly the same argument, that we give payments from the public purse. It is a form of quid pro quo here. You demonstrate you are following best practice. You demonstrate that you are using evidence and then you are on a second pay rate.

Senator LEES —I think we have gone through a fair bit of what were going to be my questions. I guess a lot of my questioning was going to be on things like evidence of cost shifting and some of the problems there, but I presume your answer would be that we need to do a lot more research in that area.

Prof. Richardson —That is true.

Senator LEES —It is just that the evidence of cost shifting that we have had as we have been through the various submissions and hearings is that it is like a mesh, it is not just state to federal and federal to state, it is down to the consumer, it is from private to public, it is from public on to the consumer and then back into the Commonwealth system again. Do you have any comments on the extent of the cost shifting and what we could do with that money? Even the New South Wales government says, `We are spending about the right amount on health if you look at international comparisons,' and yet we have got people coming before us saying, `We desperately need more money, particularly in our hospitals.' So we have to go looking for that money. Is it to be found in that area of cost shifting?

Prof. Richardson —I cannot comment on that in the way in which I think you would like. However, I will make a couple of side comments. When we benchmark against other countries we are benchmarking against other systems where the allocation of resources is probably just as bad. It is a worldwide problem—the lack of knowledge about how we should be using our services. So when it is said we are spending about the right amount, okay, Australia does not look out of step, but on the other hand most countries are spending very badly.

In terms of something I did not say about the cost shifting, yes, it occurs in all directions. We are looking rather more like the United States in that respect. One of the factors that is pretty universally agreed is that a contributory factor in the United States with their high costs is that nobody has a strong incentive to control those costs. So, rather than tackle the very difficult process of getting costs down, you shift them because the pay-off to shifting is dramatically more than the pay-off of tackling doctors, tackling hospitals, with all the skills they have.

Senator CHRIS EVANS —That is to do with Medicare, isn't it?

Prof. Richardson —Yes. That is probably the reason why nationally, where you have a large government sector, it is really the fact that you have got a single payer that is critical. If that single payer cannot shift costs then they have the maximum incentive to try and control the costs. The buck stops with them literally, so they have got to get on with the job of cutting costs.

Senator LEES —What is being done now in the area of radiology and pathology to actually cap services and to try and get the whole service to work to targets? What sort of research has been done on the effectiveness of that and everything from quality on to value for money?

Prof. Richardson —In Australia I know of no research. Did I mention how little we spend on research? In Canada and West Germany they have a system where for all doctors in all specialties you have a cap on the amount of spending, and as the number of services goes up the expenditure per service, the fee for service, goes down. That certainly puts caps on in the short run. In the longer run it is difficult to know whether or not that is by negotiation that is offset. So Canada's costs have risen very substantially in their medical spending despite that cap.

In the United States there have been a lot of attempts just to cap fees and the result has been that the number of services has blown out. So while it is probably a step in the right direction to get those caps, it is not the end of the story. When you have a direct financial incentive to spend more, it is very difficult to cap that incentive—to stifle it. I suppose the basic dilemma comes down to the equation which economist Bob Evans keeps making: our costs are the providers' incomes. So when we cut costs, from a national point of view, you are cutting the income of either the hospitals or the doctors. These schemes to cap costs immediately run into a tremendously powerful financial incentive to offset those measures. It would be very difficult. Of course, in Australia, there is the added difficulty that we do not, like Canada, West Germany and, increasingly, the United States, have the capacity to cap costs, at least at the national level, because it is believed that it would run foul of the constitutional prohibition on conscripting the medical profession.

Senator LEES —Has there been any research done—I guess the answer is no—to look at where doctors are? In the second or third of the slides, particularly when you went on to look at the provision of a whole raft of different services and the enormous variance in that, you were saying that even if we got to the point of identifying where there were problems in terms of excessive volume of services, there may be very little that we can do about it because there are a whole lot of other factors at play—for example, whether or not we could limit the number of doctors in the eastern suburbs of Melbourne.

Prof. Richardson —It is certainly extraordinarily difficult. If you start pinpointing individual doctors and surveillance teams look at them, it is likely they will shift their pattern of treatment. It is possible they will shift it to a pattern which is more desirable because there are certainly areas where there is a deficit of services as well. One of the problems would be, even if we were going to keep incomes as they were, spending as it was, with the number of services, we could get an enormous improvement in allocative efficiency and equity by taking the high use areas and putting them in the low use. That would probably mean the physical relocation of doctors.

There is a method of dealing with fee for service which would not be popular—that is, access to Medicare be subject to regulation so that you only give so many billing numbers to doctors in a geographic area. If another doctor comes along, they simply will not have access to Medicare for their patients in that area, which would force them to move to another area. I suspect the government would be in court quite quickly over that. That is what happened in Canada. The Canadian Medical Association took the British Columbia Department of Health to court over that. But, depending on the outcome of the court, yes, you can coerce doctors into particular areas.

CHAIR —Who won?

Prof. Richardson —I do not know. I could find out.

CHAIR —Thank you.

Prof. Richardson —They went through several iterations. I think the people who won were the lawyers.

Senator CHRIS EVANS —Your point about what we know is well made. The private health insurance thing is the classic example. The department turns up a few months after we pass the bill and says, `You know the $1.3 billion we told you about? It's now $2.2 billion.' You think, `Hang on, this is what goes for national planning in this country in terms of health.' You say to us that other countries are not much better. Are you seriously suggesting to us that there is no international experience any better than ours regarding how to get value for money out of their health systems? Is there no more sophisticated analysis than we seem to have about whether money is well spent in our health system and how you measure that?

Prof. Richardson —Probably the short answer is no. There is variation in the amount of effort put into this. The United Kingdom has implemented quite sophisticated formulas for trying to reallocate resources that can be used at a global level by region. That at least achieves equity. In terms of the actual efficiency and getting the right service mix, the United Kingdom has been setting up a network of health service research institutes throughout the country to look at these sorts of issues. So at least at the fundamental level of research, the United Kingdom has been quite vigorous.

The United States has other things on its mind. The Dutch are tackling the problem with a great deal of vigour. But the real problem is right back at the level of the individual service. There is such a small percentage that have been subject to cost-effectiveness analysis. Most countries have had a similar history to Australia and most countries are limited in the same way. But even the evidence that we do have is not well used because, largely thanks to the United States and the proliferation of protocols associated with their managed care, there are a lot of protocols using what information we have to the best effect. I think you would have to be looking to individual health maintenance organisations within the United States. I hasten to say that this does not mean US systems coming into Australia, but just looking at best practice and use of evidence based medicine in the best practice health maintenance organisations of the United States to find what you are asking about.

Senator CHRIS EVANS —I assumed it was just that we were behind and had missed the boat on this sort of analysis. We spend so much of our national budget on health but we seem to know so little about why we spend it, where we spend it and what we get for it. One of the things we have become aware of during this inquiry is the absence of any sophisticated IT in the health sector. They have a lot of data, but no one seems to be able to pull it together to use it effectively.

Prof. Richardson —History in a nutshell is that, historically, doctors ran the system. There was a belief that there were a series of fixed symptoms and set procedures to cure them; there was a mechanistic approach to what should be in the health system and that doctors would look after this. It is only in recent years we have found that that is not true. The United Kingdom set up its NHS in the belief that they could provide those services and that illness and inequalities would cease. It was only, I guess, by the late 1960s and early 1970s that we began to get an inkling of what a mess we had. Then research was slow. Vested interests are extremely deeply entrenched, and most countries tended to do what they did in the past, plus a little bit of marginal change. Evidence shows that most countries have been in this position.

Senator CHRIS EVANS —The danger, I suppose, in the logic of your position, Professor, is that it is almost an argument to do nothing until we get the research. I am not trying to put words into your mouth, but a lot of people have come along to this inquiry and said to us, `We actually know what we need to do. There have been lots of reports'—putting the research issue to one side—`Don't tell me there are more coordinated care trials,' or `We have had all the trials. People who work in the system know what is wrong, but we never seem to be able to make the hard decisions.' I suppose the other side of that is your argument that we do not have enough research to know what to do. I am a bit concerned that if we go too far down this track, it could become an excuse for doing nothing until we get better figures.

Prof. Richardson —I think there are a number of things that can be done—for example, shifting the health sector to one level of government or to the other. We need a debate about a number of the principles. I do not think there is a great deal of quantitative research that is needed there.

Senator CHRIS EVANS —It almost looks like you have ducked that issue in the submission. What do we need to debate?

Prof. Richardson —I have listed a number of points, but it is not necessarily an exhaustive list of the points. I suggested there is an ideological element there—for example, do we allow diversity between the states for experimentation? That is good on the one hand; on the other hand it means you are treating different people differently. So you fall foul of the equity objective. You would at least need to know what the country feels and what different parliaments feel. It is not an economist's task to tell you that diversity is a good thing and forget about equity.

Senator CHRIS EVANS —What is the best model—the Commonwealth as the funder and the states as providers?

Prof. Richardson —That is a viable model, but there are a number of other issues there. If the Commonwealth is the funder, that means you will have a single model in Australia. That means you get comparatively little experimentation and diversity, that you cannot benchmark against other states. So there are counterarguments.

Senator CHRIS EVANS —Do we have a lot of experimentation now, though?

Prof. Richardson —Some of the important changes we have had—and I am thinking particularly of casemix—were driven through because of particular states. New South Wales has experimented with regionalisation and finding the problems there. In Victoria, we have had other types of experiments. There have not been a lot, but they have been important. We can also benchmark between the states—the Productivity Commission does that—and that is quite valuable. But the more general point is that these are not things that economists can tell you, because they are matters of relative importance with different objectives.

Senator CHRIS EVANS —What do you say to the argument about the age of the population? We have had a lot of evidence, in the last few days in particular, that very elderly patients occupy a lot of our public hospital wards. I am not talking about this nursing home list problem. I am talking about actual people in for medical or surgical treatment. They represent a very high proportion of the client base of our public hospitals. We have also got the statistics on the ageing of the population. People have rightly said we are living healthier lives and are healthier later but obviously if they are a large part of the public health system that is going to be a huge issue for public hospitals, is it not?

Prof. Richardson —That is in fact an area where we have done research. I was asked to do work on that for the Productivity Commission. The result of that research was that the issue of ageing and its impact has been exaggerated quite significantly. The basic argument that drives people to the conclusion that we are going to have massive costs in the future is in fact based upon straight bad logic. The reason for that is that if we look at use of services at a particular point in time we see the distribution of those resources of course being disproportionately allocated to the elderly. That does not mean that through time the nation is going to follow exactly the same curve as we observe cross-sectionally at a given point in time. If you think of people's age on a graph with total cost, you have this U-shaped curve, high when very young, dropping in middle age and then rising sharply in old age. A nation does not have to follow that curve but the entire curve moves up, or in principle could move down as we spend more. The evidence seems to be that the amount of resources we devote to health is determined by other factors and then the age distributes those resources at a given point in time. Part of the evidence for that is that if we look cross-nationally there is no correlation between the amount nations spend and their age structure. Through time there is no correlation between the ageing of different countries and the increase in the health budgets. Whatever has caused their spending and the growth in spending it has been unrelated to ageing. Ageing certainly gives you an excuse to put in more machinery if you choose to do so. But the correct approach to this would be again to get evidence based medicine and try and put in not capacity, because capacity is the wrong argument, but to determine on other criteria.

Senator CHRIS EVANS —I accept that and I understand that argument. But it still seems to me that if the largest consumers of public hospital services are the elderly then the ageing of the population must have implications for the public health system. For instance, it has been put to me that we could have spent the $2 billion used on the private health insurance initiative much better by actually spending the $2 billion on health initiatives for the elderly.

Prof. Richardson —The elderly will have to be accommodated but the question is how they are going to be accommodated. If we build more public hospitals we will be accommodating them in public hospitals. If we build systems that involve ambulatory care, home care and so on, they will have ambulatory care and home care. The question is what is the best structure for them. If we put in extremely generous facilities such that each elderly person with a headache can have a CAT scan in case, we will use that capacity. If we have guidelines that do not involve CAT scans for headaches then we will not do that. How much we use on the elderly depends upon the structure that we put in place.

Senator CHRIS EVANS —I raised that with someone today because there does not seem to be much debate. A lot of evidence we have had is that we are actually doing a lot more surgical and medical intervention on the elderly than previously.

Prof. Richardson —We appreciate that and we are doing it.

CHAIR —I would be interested in your comments on this. A while ago we looked at one of the arguments in relation to the ageing on the increased cost of people over 65 with private health insurance. When people went and had a long hard look they discovered that you really ought to shift that out to at least over 75, that people over 65 were not too different in their use of health services than people who were 50, so they have shoved it out another decade.

Prof. Richardson —When people are looking at these sorts of demographic issues a common approach is to take years till death, rather than years from birth, because there is a close relation between how much you spend and how close to death you are. So as you get older, the point at which you start falling to bits gets pushed out.

Senator CHRIS EVANS —It is easier to work out one than the other, though, isn't it? I know how far from birth I am, but I am not sure—

CHAIR —You do not know how far from death you are but you do know when you start falling to bits. That is a shocking line, Professor—I love it!

Prof. Richardson —If you just think of yourself as a statistic then it is very easy to predict.

Senator CHRIS EVANS —Or an accident waiting to happen.

Senator TCHEN —Today is the seventh day the committee has had hearings on this inquiry. We have had a range of opinions—as you said, vested interest opinions—and some of them have been more persuasive than others. You have come along today and basically debunked every one of them. Unfortunately, this being a Senate committee, I suspect that, when we come to report, the vested interest will still be in there.

CHAIR —Never mind. We have got that comment of yours on the record, Senator Tchen. We are very grateful for it.

Senator TCHEN —I would like to look at some of your suggestions. You have them very well set out. They are usually very cautiously worded suggestions that we do not know enough and we should know more, except for a couple of points. One is on the ending of default payments, for which you explain the reason. I accept that. The other one, where there is a bit of a leap of logic in your process, is your recommendation that there should be a stronger regional focus of funding and health service delivery, with emphasis on health service planning. Basically, this is talking about a complete rearrangement of the government funding system away from the current one, the federal-state shared responsibilities. Can you tell me how you justify coming to this conclusion?

Prof. Richardson —That is a suggestion for one of the important areas of experimentation. There are a lot of potential benefits in that and I could say the reasons. It is not saying that that is the correct answer; it is one of the answers that ought to be looked at very carefully. In brief, the reason for it is that to get allocative efficiency—that is, to be putting people where they get the best health—you should not be having financial impediments to getting the best health. The decision ought to be made on the basis of the best health care, rather than on the fact that there is an arbitrary budget barrier there so you can get that service but there is no budget here. If you have a single payer, then those financial artificial barriers are broken down. The regional level is an attractive administrative level because you can take into account the idiosyncrasies of the area, the relative supply or deficit of services, and you can plan more easily. So that is a very attractive model; it is not saying that that is the only model or the correct one.

Senator TCHEN —Also, in terms of quality improvement, basically you are looking at our terms of reference, and you just referred to quality improvement to reduce adverse events. But we heard one suggestion that, in fact, improved quality management can actually result in substantial savings as well, so that in itself recommends this approach. Can you comment on that? Have you looked into that situation?

Prof. Richardson —I cannot say whether better health care is going to be cheaper—

Senator TCHEN —Better managed?

Prof. Richardson —There are certainly examples where coordination has resulted in cost reduction. Leonie, can you recall the Merryland experiment—

Ms Segal —It was equivocal. I think the evidence is equivocal.

Prof. Richardson —I think you come across some suggestive examples. In principle it is plausible. In practice, with some of these plausible ideas you find that if there are the services people like using them. So I do not think we can give you a definitive answer there.

Senator TCHEN —More research.

Prof. Richardson —I do not think we would necessarily need research to say that quality assurance measures are a good thing. We may need to scour the international experience but I think that is unambiguously a good thing from either the point of view of quality or cost. The impact on cost, I think, which we can be more confident of, is not that healthier people will cost less but that we will be able to squeeze the hospitals which are the biggest spenders of the system rather harder than we could otherwise do because we are confident that we are not hurting them if our indicators of quality say we are not hurting them. For that reason, I suspect, you are saving money by installing good quality assurance programs.

CHAIR —With the Australian Health Care Agreements and an agreement between the Commonwealth and the states it was agreed that if they were not happy they would put in an arbiter and get him to come up with some kind of alternative figure. Mr Castles did. The government will not pay. Could you comment?

Prof. Richardson —No, I cannot comment on that. I do not know the circumstances well enough to be able to.

CHAIR —I cannot tell you all the answers but I do know that the Commonwealth has offered an amount to the states which is less than Mr Castles' amended figure, so the states are now spending some considerable time complaining bitterly about that. They have done their figures. They say that they have been squeezed dry, that there is not much more fat in the hospital system. If it is agreed that their population will age and we will have all these variations and inflator factors, the arbiter says it should be CPI plus 0.5. The government says that comes to X and they will give you X minus an amount. Is that what you are telling us?

Prof. Richardson —Yes, I think who pays for the hospital bill is, from the point of view of the community, a separate issue. This is a bun fight between bureaucrats at different levels who are trying to achieve their bottom lines most easily. Each level of government is being used as an excuse for the other so we have cost shifting and blame shifting. I do not think that is a substantive issue for the allocation of resources except that, because each has got an excuse, nothing actually happens. That is the reason we need the health system at one level or the other so we cannot have blame shifting.

CHAIR —Do I understand you to be saying it is really not exactly a coin flip but that you will choose one level or the other? The argument is very strong for, say, one level rather than the split level we have now. But if you choose one or the other it is a question of whether you come down on a variety of criteria that are not economic or whether you value equity and some kind of similar distribution across the country compared to—in your case—innovation or the opportunity for innovation, and so on.

Prof. Richardson —There are economic factors in there which have not been fully articulated—I am talking without having listed these or thought about them at length—such as which level of government is likely to be able to negotiate contracts most effectively. For example, when you are taking on the medical profession, a state may simply not be big and powerful enough to be able to tackle the immense power of the medical profession.

Senator CHRIS EVANS —The Commonwealth do not have a very successful record either, do they?

Prof. Richardson —No.

CHAIR —What the states can do though, seeing that you have opened the batting with that very good example, is determine payments to doctors.

Prof. Richardson —Yes. They are not held by the constitutional impediment. That is another factor and which would dominate is not clear. If we take Canada as an example, there is no doubt that having each of the provinces negotiate individually has led to leapfrogging. Fees go up in one province and that is used to increase fees in the next province and the next. If you stand in a circle and increase when the person on your right does, and one person starts the ball rolling—to mix metaphors—that can be inflationary. But that is an economic factor. There are economic implications here. But I emphasise the non-economic because throughout this presentation I have tried to say that persons who give you technical solutions and inevitable outcomes are not telling you the truth or the full story. This is not purely an economic issue because there are other factors.

CHAIR —Let us presume that we have the Commonwealth as a single level of funder for the next five years or the next Health Care Agreement; it is going to be all from the Commonwealth and nothing from thee. Under the current arrangements would you presume that meant the states would have to pay the Commonwealth? At the moment the way we pay for health is under the old Medicare agreement, plus about another 50 per cent from state bags of money—FAGs, allocations and all. But if the funding of health went to one level of government, and it was the Commonwealth, either the Commonwealth would retain an amount equivalent to what they think the states were putting in or else the states would have to then pass that back again. If the states are going to be collecting all the GST they may have to do that. Are you nodding agreement that my understanding of how that might happen is correct?

Prof. Richardson —Yes, but there are multiple ways in which it could be done. It would mean intense bargaining, but there is no principle of economics on which we can say one approach is better then the other. I do not think that is something where I could make any particular useful comment.

Senator CHRIS EVANS —Do you say that a single funder is desirable?

Prof. Richardson —Yes. That is necessary if you are to cut down the artificial boundaries that we have at the moment. You may want one sort of service and that is being squeezed because that particular budget is running dry, whereas you can still get treatment somewhere else which may be considerably less effective because that budget is still in surplus. State services are generous; federal services are not. As soon as you have all of these artificial financial barriers, getting a rational allocation of resources, which is using the best services, is very difficult. A single funder, firstly, overcomes that because there are no artificial barriers. Secondly, the single funder has an incentive to get a better and cheaper system because they cannot cost shift. So it is desirable from both the point of view of allocation and cost control.

Ms Segal —The other possibility is to move towards a capitation based funding system where, in a technical sense, you do some analytical work to work out what level of funding should be provided to each region on a needs based formula? In that case, you are endeavouring to take the political element out of the amount of funding going to a region. You could potentially have different levels of government contributing to that formula. You could probably effectively move towards a technical system without necessarily having to—

Senator CHRIS EVANS —Would this be designed to take into account rural and regional factors.

Ms Segal —That is right. It is a whole range that can be put into the formula.

Senator CHRIS EVANS —Doesn't this get you back to where you started then? Being from Western Australia, I would say that is fine but that does not work for the Kimberley because of the needs of the Aboriginal community and the distances between medical facilities, et cetera. Are you saying that we would have to have a formula that accounted for all that as well?

Prof. Richardson —That is a technical question. That is not an ethical or political one. You simply research what is the impact of the Kimberley. At the moment we are doing a review for the Commonwealth of capitation payments and how it is done. That is done in the United Kingdom for regions. The United States has intensively researched it for their Medicaid. It is a difficult technical problem, but it is one for which you can get various levels of adequate solution.

CHAIR —My last question relates to having one level of funding versus one pot of money from which the funding comes, into which all levels of government contribute. People talk about this as being a very useful way to go. I am not sure. It seems to me that what you might be doing is shifting the ground where you brawl, because the question is how much gets in there. It might be very nice having only one source of money to get at. Am I misunderstanding it or is it your understanding that the fight would then be about how much each level of government puts in in the first place?

Prof. Richardson —This is the distinction between the problem facing the bureaucrats and the bottom line and, on the other hand, the health system for the population. The health system for the population will be improved if you have a single source. Who puts into that single source is where the bunfight is for the bureaucrats. Yes, the brawling would move to another area, but the brawling is about that pot of money. That pot of money can then be used flexibly under the one level or under the capitation approach, so that you get a centre for cost control, the breaking down of barriers and coordination. That is what is important for the patient and for the nation. Where the brawl is going on would not particularly matter so long as the pot of money remains the same size.

CHAIR —In conclusion, I found it interesting to listen to your comments. Thank you very much for the work you have done, for being here today and for the papers you have sent us. There is a sense that, given all that lack of research, evidence and everything else, it is amazing that you could say how good we are. Of course, you would proceed to say, `That's just a wild claim, Senator, we've got no evidence to prove it.' I would accept that. On the other hand, people are living longer and it is possibly because of better housing, sewerage or immunisation, but there is a sense in which we have got a bit of a handle on and control over the amount of money, as a percentage of GDP, that we spend on health and some kind of measure of allocations and so on. I do not think we can give ourselves a totally bad mark. We may not know how good we are, but we can say we are at least on the side of good. That was a bold claim. `No, you can't', say the researchers. All right; I will not go that way.

Prof. Richardson —By international benchmarking standards, you are quite right.

CHAIR —I am not sure if you were here when we heard from the Barwon Health area people. You might be interested to look at it because we found in the back of their book a lovely list of all the funding sources of money to this area health service. It is quite interesting to see just how many strings are attached to the bits of money. The evidence is clear that they have spent a lot of time at the borders trying to get this money to do that. You can see their complaints. On the other hand, it is a bit of a tick for how the system is working in the sense that you have got to account for how you are spending the money and, by getting it under special payments from the state or the Commonwealth, you tick off on having decided where it is going to be used, because that has been decided for you. That may be an argument at the margin but it is not terribly bad. However, I found it a most interesting illustration of a live case as to what they are trying to do to make better use of the bits of money they get, and they come from lots of places. I understand that you have probably got more than enough to measure without taking time off to read the Barwon Health allocation of funding and services, but you might be interested. We certainly are assisted by it. Thank you very much indeed. The committee is now going to try to evaluate all the information we have got. There may be further questions that we would like to put to you, if that is all right?

Prof. Richardson —Yes, of course.

CHAIR —Thank you very much indeed.

Committee adjourned at 5.13 p.m.