Workers to get crunched by rising health costs

By Leith van Onselen

A new report by the Actuaries Institute finds that the tax burden and private health insurance costs facing younger generations will rise dramatically in order to pay for the health needs of an escalating number of older Australians:

Health care costs rise dramatically with age – health expenditure for an 85 year old Australian is more than four times that for a 50 year old. By 2049-50 the number of Australians over 85 will more than triple…

Ageing is the most predictable factor which will influence future health expenditure. It is a key factor that affects our ability to fund health care…

Our population is predicted to live significantly longer and forecasts indicate that spending on health care across all levels of government is expected to grow from 6.5% to 10.8% of GDP over the next 50 years…

Health care remains almost entirely funded on a pay-as-you-go basis and largely through general taxation. Pre-funding of future health care needs is virtually non-existent.

Total expenditure on health goods and services in Australia was an estimated $147.4 billion in 2012–13 (9.7% of GDP). Currently 68% of health expenditure is funded by Australia’s various levels of government…

Some intergenerational cross subsidy is an inevitable part of our health care system (as it is with other services) but the cost on the working population through taxation needs to be addressed in order to protect the quality of Australia’s health care services and system.

Working age people will be supporting the health care costs of an increasing number of older people. By 2049-50, there will be twenty people aged 75 and over for every 100 working age people, compared to ten now. For the over 85s, where health care costs rise dramatically, there will be seven people aged 85 and over for every 100 working age people, compared to just three now.

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Without policy action, the working population may be paying almost double their own health expenditure to subsidise older Australians compared to a current rate of 1.4…

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The report then outlines three possible reforms to help cope with the rise in demand for health services by older Australians:

  1. encoura­ging older generations to work longer;
  2. establishing health savings accounts; and/or
  3. drawing on retirees’ wealth to self-fund healthcare costs.

On the last option – drawing on retirees’ wealth to self-fund health costs – the Actuaries Institute notes:

By 2030, almost half of household wealth will be in the hands of the over 65s. This fact leads to the question does it make sense, and is it equitable, to ask this cohort to pay more to help fund future health care costs? The major reforms to the funding of aged care – Living Longer Living Better – which came into law on 1 July 2014 focus on just this issue. These reforms include a greater emphasis on ‘user-pays’ with increased means testing arrangements along with fee caps and lifetime limits.

The challenges in health care provision are unique, and a ‘user-pays’ approach could lead to higher mortality and poor health outcomes. Solutions to address this question will need to be equitable, practical and acceptable to the community whilst ensuring that all Australians have access to free or low-cost health care, consistent with Medicare’s aims.

While I agree with the thrust of the Actuaries Institute‘s report, in my view there is a simpler and fairer solution to coping with Australia’s rising health costs.

First, reform the tax system, so that the base is broadened and the burden is shifted away from workers (via inexorable rises in personal income taxes) towards consumption (e.g. raising/broadening the GST, along with compensation for the poor), wealth (e.g. land taxes), and resources (e.g. greater resource rents taxes).

Second, close Australia’s inequitable and poorly targeted tax concessions – such as on superannuation, negative gearing, and capital gains taxes – which deprive the federal budget of many billions of dollars in tax revenue, and overwhelming benefit richer, older Australians (increasing the burden on younger workers in the process).

This way, the tax load required to pay for older Australians’ health costs will be spread more evenly across the population (and across the generations), rather than merely slugging the young.

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Unconventional Economist
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      • Leith regularly notes the fiscal burden we are bequeathing the young. As this bequest is unlikely to change in any substantive way I would not be surprised to see coming generations adopt a self-responsibility stance somewhat stronger than our molly coddled generation is prepared to do.

        That all citizens directly contribute in some way to services like health and education will become the norm. Tough love.

      • 3D, what do your talking points have as a response to why the co-payment goes into a “medical research fund” instead of actually funding the provision of healthcare?

      • D – I criticised the Medical Research Fund as a back of envelope idea – had the copayment gone direct to revenues/debt repayment it may have held ground.

      • The GP co payment is a classic example of a false economy. It dissuades some people from seeing their GP in a timely manner for seemingly minor conditions and therefore aggravates medical costs downstream because of late treatment leading to major illnesses and also economic losses from lengthy periods out of work, not to speak of the unnecessary suffering of the individuals and families concerned.

      • @St Jacques,

        Almost to the extent, that if implemented, it may appear as part of Macquarie Dictionary definition of same.

      • heres something wacky and fantastical:

        Wait, its too good to be true….

        No, yep – here it is – how about we encourage people to get healthier and often, so they dont burden the system later on in life…

        With, you know, regular free visits to the GP – say every 3-4 months – and free medication and other services (physiotherapy, gym memberships, dental, optometry, etc) to keep them fit and healthy?

        And then at the same time, fund long term, deep research into medicine and technology so that future Australians (maybe not you or even your children – kind of like planting trees now that you wont enjoy the shade….) can be even healthier and treat diseases quicker and at less burden to society.

        No? Too crazy an idea. Next you’ll have me thinking that we should pay each time a policeman or fireman is needed.

        Crazy ex-husband at the door? That’s a $200 co-payment please
        Hostage situation in your local cafe? Thats $2500 co-payment please
        Fire in your backyard that’s out of control? $50000 plus expenses please.

        Can’t afford it – oh well, too bad. Go and work in the mines until you can you scum.

      • heres something wacky and fantastical:

        Communist ! 😉

        Next you’ll have me thinking that we should pay each time a policeman or fireman is needed.

        You say this in jest, but in the (American) Libertarian worldview the latter is all but a given, and you don’t have to scratch the surface much at all before finding people who think the police should be privatised as well.

      • Possible scenario – head to somewhere like the US to avoid funding oldies hospital bills here in Oz (and of course avoid paying education loan back), then head home for hospital care in twilight years.

      • Forgive 3d. He’s just trying the protect the largess that benefits him at the expense of the young.

    • Well a co-payment, means tested, for older australians would not be a problem. Many have excess wealth (relative to what they will spend before death), utilise medical services with high regularity (sometimes frivolously “I’ll just book that two week appointment because it is equivalent to a social outing”) and receive disproportionate benefit.

      Not to mention gerontology is viewed as a gold mine by health companies (a captive audience where interest lies more in prolonging life than maintaining quality) and is actively targeted for expansion. Flick through Australian Family Practitioner and take note of how many treatments are targeted at older demographics if you ever get the chance (or any other doc mags).

      The only downside of a co-payment is it violates universality, however doing what is effective to accomplish goals is more important than principle and ideology, which are personalising forces.

      *a genuine co-payment, not a slush-fund building essential services consumption tax in a dress

      • The only downside of a co-payment is it violates universality, however doing what is effective to accomplish goals is more important than principle and ideology, which are personalising forces.

        Why would a co-payment be more effective than increasing wealth and property taxes, which would fall far more onto wealthier, older demographics than younger, poorer ones ?

    • When the young have been slugged enough they’ll demand GP co payments. Not $5, not $7, say $25?

      Why would they when the methods described above are more efficient and equitable ?

  1. My private health cover went from 129 per month to 175 in three years. Please explain. Thats like a yearly rise of more than 4x cpi. Hmmm

    • bearsbullsbattlestargalacticaMEMBER

      Yep mine has increased 10% YoY for the past 3 years. IMO the cost of comprehensive cover is fast approaching unaffordable levels.

      • Hmm, but its tricky, a lot of the time you can’t predict when you might need it

        and they have implemented that clever little 2% a year penalty for everyone over 30/31

  2. Given increasing automation, item 1 on the Institute’s list of possible reforms may not be doable, so some combination of 2 & 3 just seem inevitable.

    As the age pyramid inverts, it will not be possible for a decreasing number of workers to pay for the health needs of an increasing number of retirees – either costs decline substantially (seems unlikely), some health needs go unfunded (has happened before) or health care becomes more self-funded.

    In case of either of the last two, an intuitive consequence seems to be a decrease in longevity (albeit possibly hidden by other factors going in the other direction – so potentially a failure for longevity to keep increasing at trend)

  3. Increased consumption taxes will fall predominantly on those under 60 anyway, and it’s a reasonable bet that land and resource taxes will remain a pipe dream. Which really leaves …

    3.drawing on retirees’ wealth to self-fund healthcare costs

    Not an unreasonable proposition given the need to invest in the productive capacity of the younger generations through the education/training system. The current generation of (soon to be) retirees has had an enormous gift through taxation concessions and asset market inflation to boost their wealth. We should be looking at that before we start increasing the burden on the young.

    • The oldies probably have a choice along the lines of see their accumulated asset wealth deflated away (if they cripple young people’s ability to attempt to buy real property by increasing healthcare burden) or use that accumulated wealth to fund their own healthcare.

    • +1

      Lets face it – anyone with ASX health care related investments in their super is indirectly benefiting from the rise in health spending anyway – might as well complete the loop!

    • Agreed,

      Increased consumption taxes will fall predominantly on those under 60 anyway

      3.drawing on retirees’ wealth to self-fund healthcare costs – this is a bit tricky, the ones drawing on the system may be asset rich ($1mil+ home) and cash poor (pension).

      Land taxes may force them from their lofty elevations in small units, but then will hit younger families taking their place

      This group is clever, they have years to plan and ensure their assets are spread amongst family members so that they have little other than their PP of R once they hit retirement age

  4. * land and resource taxes
    * the need to invest in the productive capacity of the younger generations through the education/training system

    One of these is a pipe dream. But which is the lead pipe cinch?

    • Didn’t quite understand your last question there. Hardly a pipedream to invest in a nation’s young ! Successful societies (including Australia) have been doing it for a very long time indeed. Though clearly as a society we are being led to view it more as an operating expense than an investment.

    • Sparky. I was doing a smart alec reply to your post (higher up) where you made a few assumptions. You said land tax was a pipe dream, and that we would need to train the young.
      Sadly I don’t see much desire to train the young, and I also suspect greedy govt will soon start adding taxes.
      I don’t know which is more likely, the land tax or the training.

  5. the largest component of health care cost increase are wages for growing health and aged care workers.

    Without health care growth (and cost increase) unemployment would be few percent higher and we would probably be in a recession by now.

    Growing demand for health and age care services (as well as other services required by elderly: delivery, cleaning, home repairs, ) will eventually push young people’s wages up and trigger wealth transfer from older wealthy people who need help and young people who can provide the help

  6. Here’s an idea to rile up the McCarthy fans in the room.

    Establish a low-fee (or no fee?) government-owned super fund which invests for productivity enhancement (infrastructure, venture capital grants, research, etc.)

    The money normally siphoned off for fees (perhaps even less) is directed into the health budget as a forward payment of future health needs.

  7. Many old, sickly people would welcome an easy exit from this life. Currently this is denied by outdated laws based on Christianity.

    So pass euthanasia laws, so the very sick, very old people can exit gracefully and at a time of their choosing.

    The saving to the medicare bottom line would be huge