State income tax should pay for bloated public hospitals

Don’t worry about promises of more federal money for public hospitals for the next four years and promises of phantom efficiency gains if nurses are allowed to play doctor by ‘coordinating’ the care of patients. The Turnbull Government’s plan to let the states set their own income tax rate to cover the mounting cost of hospital services is the game changer that is desperately needed to spur long overdue reform of the health system.

A state income tax linked to the cost of hospital services would introduce a new political dynamic into the health debate.

Despite the huge financial burden imposed on state finances, premiers and health ministers are loath to upset the large, well-organised, and politically-influential public sector health workforce. Public hospital systems are, in essence, cossetted public sector monopolies that offer a form of workplace protection in the guise of favourable employment terms and conditions for their staff. Requiring all wage and salary earners to foot the bill for these services would create the best chance of overcoming vested interests and containing the amount of public resources consumed by hospitals.

A state income tax might force the states to discover some policy courage. The only choice would be to implement reforms capable of bending the hospital cost curve down, or raise the rate of income taxes to cover the escalating cost.

State governments need to tackle the inefficiencies that are rife in their highly-centralised, bureaucratically-run hospitals. Reforms that will make local hospital managers financially accountable for the performance of these facilities need to be implemented to insure there are proper incentives for good management. This includes allowing managers to re-write the productivity-killing, ‘sweetheart’, state-wide industrial agreements that are currently negotiated between health unions and state health departments.

This will require, in the first instance, corporatising public hospitals under their own independent board of governors. Making hospital boards and management teams fully responsible for their budgets, combined with full operational authority, will permit the introduction of a more flexible workplace relations regime. This will allow for frontline efficiencies and innovations, and for services to be delivered sustainably, cost-effectively, and increase the amount of care provided using the funding available.

This strategy should also be complemented by outsourcing the management of select public hospitals to more efficient private operators – as occurs already in some states, but in an isolated and piecemeal fashion due fears about potential political blowback.

A state income tax would also set the scene for ending the federal meddling in state health systems that has been a major cause of the problems that plague public hospitals.

In the mid-1970s, the Whitlam Government got the states to sign up to Medibank (as Medicare was then called) by committing the Commonwealth to pay for 50% of the real cost of delivering public hospital care – on the condition that those services were provided for ‘free’. This unaffordable promise was quickly renounced by the Fraser Government, which implemented the fixed federal-state health funding that has since been the norm.

The states were left in an invidious position. The only way to meet the obligation to deliver ‘free’ care in return for federal funding, while containing potentially unlimited health expenditure, was to ration services by cutting beds and forcing patients to queue by waiting lists. To implement rationing, tight administrative control needed to be exerted over local hospitals – a command-and-control structure that has made state health departments bywords for bureaucracy and red tape.

A state income tax will encourage the states to start addressing these problems, but will have limited success if the federal government continues to set the overall policy framework of Medicare.

Given the impact that an ageing population and new technology are having on the cost of hospital care, no tier of government can hope to raise sufficient revenue to pay for all the ‘free’ care the community wants to receive, and do all the other things that governments are expected to do.

This means, on the one hand, that there is simply no alternative to tackling the structural problems in public hospital systems, and for the states to make more rational decisions about how hospitals are run.

But on the other hand, we need to understand how unaffordable a ‘free’ public hospital system is, and to understand that ultimately the demographic and technological realities are a recipe for greater rationing of care and unavailability of services.

Political caution dictates that we might need to dance around this subject. But, potentially, a state income tax could leave the future of Medicare – as far as ‘free’ public hospital care is concerned – as a matter to be determined by each state according to the will of the electorate.

Reaffirming the national commitment to Medicare might be the short-term political price that has to be paid to implement a state income tax.  But in the long-term there will no avoiding the need to address how fundamentally unsustainable a ‘free’ health system is.

Jeremy Sammut is a Research Fellow at The Centre for Independent Studies and author, with David Gadiel, of How the NSW Coalition Should Govern Health: Strategies for Microeconomic Reform.