25 September 2014

Why the Medicare Co-Payment Could Cost You Less.

The following article has been extracted from Inside Enterprise, a Business School sponsored, student-run publication.

With the introduction of a new $7 doctor’s fee announced as part of the 2014 Federal Budget, effectively ending the reign of free healthcare in Australia, Geordie Costello explains the logic behind the move and how it could cost you significantly less in the long-run.

I am sitting in the waiting room of my local doctor’s office. What am I doing? Waiting of course, what else does one do in a doctor’s office? Having forced myself through all the celebrity magazines, there is nothing left but to sit back and gaze around the unadorned room. Or is there? I decide to play a game, maybe not a tasteful game, but one that will help kill the time. It is called ‘pick the ailment’. Some patients are easier to pick than others. A boy sitting two seats to my left has plaster around his arm, the obvious conclusion that he has fractured it. The woman directly across from me sits hunched over a bucket and looks to have a terrible virus. Other patients prove more of a challenge, probably carrying illnesses with less obvious symptoms. I start to wonder if there is someone in the waiting room who does not really need any medical attention? After finally being called in to see the doctor, who prescribes me a ‘good night’s sleep’ for my case of the ‘sniffles’, I realise that person is me. Not to worry, the whole doctor thing is free right?

Wrong. There is an old saying, ‘there ain’t no such thing as a free lunch’. If you are not paying for a good or service, it just means someone else is. As taxpayers, we all incur the costs of healthcare, albeit some more than others, and that cost is currently rising at an alarming rate. The Australian Institute of Health and Welfare has released the latest statistics on primary healthcare funding, of which general practitioner (GP) billing comprises a large percentage. Controlling for inflation, Australian government expenditure has increased from $669 to $1,005 per person over the last 10 years, an increase of 50%, or an average annual growth rate of 4.2%. Unless we are willing to pay considerably higher taxes, redirect funds away from other vital areas, or let the government budget collapse into long-term decline, these rising costs need to be addressed.

Part of the reason for these increased costs is that, as a common good, healthcare leaves itself vulnerable to exploitation. This problem is known as the ‘Tragedy of the Commons’. The term stems back to 1830’s England, where herders were allowed to let their sheep graze on common land. If overgrazing occurred, only the herders overgrazing would reap the benefits of fatter sheep, yet all would share in the costs of the damaged land. To understand the likely outcome in this situation, we can use a little ‘game theory’, and ask ourselves what is the best response of the herder, given the responses of all other herders?

If you are a herder and none of the other herders are overgrazing, your best response is to overgraze and reap all the benefits. But what if half the herders are overgrazing? The benefits of overgrazing are smaller, but the cost to the commons occurs regardless, so you might as well overgraze. Then again, what if all the herders are overgrazing? In this case, you are incurring a huge cost to the commons, so even the smallest benefit of overgrazing may mitigate this loss.

Given that overgrazing is always your best response, and hence, are the best responses of all other herders, we arrive at the Nash Equilibrium, a point where everyone overgrazes and the commons is destroyed. This concept is called ‘free riding’ and is currently occurring in our medical system such that we are all likely to have overgrazed once or twice in our lives. The extra benefit I received from seeing the doctor was minimal but, ignoring the opportunity cost of my time, the personal cost of my doctor’s visit was zero. I was free riding on the collective, given the true cost of my visit is assumed by the taxpayer. This ‘true’ cost is based on the Medicare Benefit Schedule (MBS), which details a list of items that the government will cover, and the amounts they cover for.

With the MBS data provided by Medicare, we may be able to estimate the current prevalence of free riding behaviour. The MBS lists a number of items. The most common is called ‘Item 23 (Level B)’. It relates to a GP consultation lasting between 0-20 minutes that involves only one of the following: taking patient history, conducting a clinical exam, arranging an investigation, implementing a management plan or providing preventative healthcare. This is your standard GP consultation and it costs you about $36.30.

There also exists ‘Item 3 (Level A)’ which refers to “professional attendance for an obvious problem characterised by the straightforward nature of the task.” This item costs $16.60. Given level A people do not truly require medical assistance, it seems conceivable that free riders like myself are ubiquitous in this group.

The MBS data illustrates a sobering picture. In 2013, 12 visits for every 100 people in Australia were committed by free riders, and the problem appears to be worsening. Since 2003, the average annual growth rate per capita has been 7.6%. This is a conservative estimate, given that a GP is incentivised to charge a Level B to a free rider, as the criteria can be easily met and they would receive more than double the benefit from the government.

So, I hear you ask, how does charging a $7 fee solve this problem? Well, it may not eliminate free riding altogether, but it is certainly a step in the right direction. By charging a small fee, the government introduces a ‘user pay’ element into the Medicare system. This is not too dissimilar to our government subsidised rail network. According to Infrastructure NSW, each train trip costs the taxpayer on average $9.45, while the average on-peak fare is about $4.70.

Like the rail system, a Medicare fee reduces free riding behaviour as everyone must now face an explicit cost. Even though it is a reasonably small cost, it would be enough to convince me to just wait out my sniffles or head up to the Chemist to buy some Sudafed. In other words, with a $7 fee the personal cost of going to the doctor now exceeds the benefit.

Of course, all systems have their drawbacks. Most people’s first impression would be that a fee will unfairly penalise the lowest income earners and the sickest people, those already burdened by the increasing exemption of GP Bulk Billing. Firstly, less bulk billing is a fallacy. Bulk billing rates of GP’s reached their highest point ever in the 2013 December quarter, at 81.9% Australia wide and 86.7% in NSW. There is simply no such thing as the ‘good old Bulk Billing days’. Those days are now.

Despite this, the flat fee announced in the Federal Government’s 2014 Budget may cause sick, low-income earners to avoid the GP or instead seek out emergency rooms. The government has partly mitigated this concern by providing a ten visit safety-net for pensioners, concession cardholders and children, and by suggesting to the states and territories that higher fees should be charged for emergency room use. Yet by far the most effective and fairest policy would be to means-test the fee. This would reduce the burden on low income earners and further eliminate free riding behaviour, given that high income earners would face an explicit cost that better reflects their ability to pay.

Nevertheless, next time you leave the doctor’s office, remember that the annoying $7 fee you just paid has prevented countless free riders from unnecessarily going to the GP, saving you, the taxpayer, $36.30 for each one. And that is why the Medicare co-payment could cost you less.

Geordie Costello
Current student at the University of Sydney Business School

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