James Walsh
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NHS vs Medicare

Medicare: where it all began

The Opening Ceremony of the 2012 London Olympic games put the NHS on display to the world and dressed it up as one of the UK’s most symbolic national treasures. Although the British people are led to believe that the NHS is ‘the envy of the world’, the structural issues inherent in the system don’t typically feature in discussions on healthcare. Rather, defenders of the NHS tend to focus on inputs rather than outcomes and avoid making comparisons to other healthcare systems that enjoy far better results. As outlined by The Guardian, the only black mark against the NHS is its poor record of keeping people alive.

One of these better performing providers is the Australian Medicare system. The implementation of Medicare in 1984 was highly controversial; politicians and the public alike were concerned over how it would operate, how effective it would be and how many taxpayer dollars would be required to fund it. Whilst the Australian system is far from perfect, Medicare has remained as Australia’s flagship universal health provider to this day and the NHS has a lot to learn from the way it operates.

Turning back the clock, the Australian Government began showing interest in the healthcare sector soon after the Second World War. Determined to make Australia a country “fit for heroes”, there were repeated efforts to introduce a national health insurance scheme throughout the mid 20th century with each attempt receiving a poor reception. For example, a national health insurance proposal in 1938 was met with staunch backlash from medical practitioners and conservative politicians. Resistance by the Australian medical profession to any government control has been a key ideological theme in health policy debates throughout the decades since.

The election of Gough Whitlam’s Labor government in 1972 initiated a fresh attempt at creating a national insurance scheme funded entirely by taxation. Whitlam’s new proposal was named ‘Medibank’, and was an ambitious plan to provide universal healthcare to all Australians by centralising control of the healthcare industry to the government. Medibank was again faced with backlash from the private sector and was subsequently rejected by the Senate in 1973 and 1974.

Nonetheless, Medibank was finally established in 1975 with the Health Insurance Scheme (HIC) overseeing its operations. Instead of sourcing funding directly from taxation, a patient would be charged a schedule fee with the opportunity to claim back 85 per cent from the HIC. Alternatively, GP’s could bill the HIC directly and accept 85 per cent of the service fee as full payment. This process is known as ‘bulk billing’ and has resulted in increased competition and lower prices.

Although Medibank was renamed ‘Medicare’ in 1984, its core structure has remained relatively identical to this day. According to the Australian Parliament, Medicare “provides free hospital services for public patients in public hospitals, subsidises private patients for hospital services at 75 per cent of the Schedule fee and provides benefits for out-of-hospital medical services such as consultations with GPs or specialists.

In essence, the Australian system operates closer to that of a free market, as GP’s and patients have more freedom to make decisions independent of government regulation. This has had significant implications for health industry outcomes, and has allowed Australia to become one of the most successful providers of universal healthcare in the world.


1. Remuneration

The Australian Medicare system operates under a ‘fee for service model’, whereby GP’s are remunerated each time a patient pays a visit. Not only does this allow for more personal choice as patients have the freedom to pick and choose the GP’s they prefer, it incentivises GP’s to act more entrepreneurially. Importantly, patient medical history is not shared between practices unless the patient consents, ensuring confidentiality and security. As a result, doctors are encouraged to increase their skillset and reputation to attract more clients, which in turn leads to better medical quality and increased efficiency. Bloom et al conducted a study looking at the relationship between competition in the healthcare industry and quality of service. They analysed the statistical impact of competition on a range of quality indicators and found that not only does competition improve clinical quality outcomes, but it also reduces death rates, increases productivity, reduces the length of hospital stay and increases staff satisfaction. Indeed, these results do not come as a surprise. The relationship between competition and efficiency has been studied for centuries, pioneered by Adam Smith’s idea of the ‘invisible hand’. Detailed in his magnum opus ‘The Wealth of Nations’, he concluded that competition and free choice creates an unobservable market force that removes inefficiencies and directs the economy toward equilibrium.

Nonetheless, the Australian healthcare system is far from perfect, and the government does have a role to play in maintaining its integrity. Whilst the Australian ‘fee for service’ model encourages free enterprise and individual liberty, the existence of information asymmetries between patient and doctor create the possibility for patient exploitation. Some examples include the insistence of GP’s to conduct unnecessary follow up tests, or patients checking in to practices for routine prescriptions that could have been issued online or by telephone. Although this acts as an efficiency handbrake, external audit entities work hard to keep ethical misconduct to a minimum and the Medical Board of Australia makes explicit the standards of ethical and professional conduct expected of doctors. The Board dictates that doctors must be transparent and honest in their financial arrangements with patients, which reflects a typical free market solution to resolving ‘market failures’ such as information asymmetries.

In contrast, the NHS runs on a ‘capitation’ system, whereby GP’s are paid a fixed sum to take care of set number of patients, usually in a given geographical area. Not only does this restrict personal choice, as patients are unable to change GP’s if they are performing subpar, but it removes the incentive for GP’s to provide a high quality of service outside of the status quo. In other words, if a patient requires any extra attention for a certain illness, they can expect a sub-optimal level of service. For example, the standards set by the NHS dictate that GP referral-to-treatment wait times should not exceed 18 weeks. According to a report conducted by the Care Quality Commission, 376,000 people were waiting to begin treatment at the end of 2016 and 10.3 per cent of total patients had waited longer than 18 weeks to begin treatment. The failure of the NHS to hit crucial benchmarks demonstrates the importance of reforming its remuneration structure and allowing greater freedom of choice.


2. Health care funding

There are persistent claims from the left that in order to prop up the NHS, healthcare spending and investment must increase. Indeed, more funding will help to an extent – but it is not the only problem. According to the World Bank, total healthcare spending as a percentage of GDP in Australia in 2014 was 9.4 per cent, and 9.1 per cent in Britain.

Whilst these numbers are quite similar, the UK performed poorly relative to Australia when looking at key healthcare quality indicators. For example, IEA Research Fellow Kristian Niemietz reported that the UK had the lowest 5-year lung cancer survival rate out sample of 30 high-income countries, scoring just under 10%. On the other hand, Australia ranked 12th in the count with 15% of lung cancer patients surviving 5 years or more. When comparing these figures to the 45,500 new cases of lung cancer diagnosed every year, over 2,400 lives may have been extended if UK lung cancer patients were treated in Australia. This clearly indicates that the NHS has fallen considerably short in providing quality healthcare by international standards.

 The results are even more striking when looking purely at public spending. Although Australia spent slightly more on healthcare as a percentage of GDP when combining public and private spending figures, The World Bank reported Australia’s public expenditure figure to be 6.317 per cent, considerably less than the 7.579 per cent spent by the UK government. This indicates that although Australian public sector spent relatively less than the UK, it performed significantly better.  

 Unfortunately, supporters of the NHS ignore this evidence, and vehemently defend it with comparisons to the American system, completely omitting to realise that there is a plethora of more efficient and successful healthcare systems out there.


3. Efficiency

At present, the NHS is operating under the effective banner that, “the government knows you better than you know yourself”, and it is through this lens that inefficiencies have been allowed to creep in. It is also why the major problem surrounding the NHS isn’t necessarily funding, but rather identifying the core system failures that impede on the efficiency of the service. For example, the Australian Institute of Health and Welfare found that the median waiting period for a non-urgent surgery in Australia is 37 days, compared to 66.5 days under the NHS system. In other words, you will wait 1.7 times longer in England than in Australia for the same surgery. Nonetheless, the question arises again – will injecting more money into the system decrease waiting periods in England? Indeed, throwing more money at any problem will partially solve it, but the efficiency loss that emerges will create considerably higher costs – and it is the taxpayer who will end up footing the bill. Of course, the NHS could perform better with more funding, but it is the source of this additional funding and how it is used that is the issue.

In fact, the NHS underwent significant reform in the early 2000’s with healthcare expenditure rising from 5.05 per cent of GDP in 1999 to 7.65 per cent in 2010; the sharpest increase since 1950. The spending was designed to facilitate an expansion of the NHS and increase key quality indicators. However, according to a report by the London School of Economics, whilst the spending increase in the early 2000’s lead to improvements in some areas of the health care system, overall productivity did not increase. The report indicated that although NHS output increased between 1997 and 2008, at over 4.5 per cent per annum, the increase in inputs was even higher at almost 4.75 per cent per annum.

Indeed, it is undeniable that various healthcare indicators did improve over this period, but could the NHS achieve similar results through identifying and maximising efficiency opportunities, rather than simply increase funding? The answer, unsurprisingly, is yes. A study published by Joumard et al (2010) looks at the increase in life expectancy that could be achieved through improving the efficiency reserves of different health systems. The study finds that Australia has the potential to increase life expectancy by less than one year, whereas the UK has potential to increase life expectancy by 3-4 years. In other words, Australia is best at converting fiscal spending into efficiency, whilst the UK has significant room for improvement. Thus, it is imperative that political and media attention toward the NHS be focused less on the funding debate, and more toward identifying the key structural issues (less harsh wording) that lead to it falling consistently short in almost all efficiency studies.


4. Privatisation 
The British government, and to a large extent the British people, are exceptionally proud of the NHS. Indeed, there is nothing wrong with being proud of a system that was brought in to improve the lives of every British resident, but there is something wrong when this patriotism rejects rational debate and objective analysis. It is common knowledge that the NHS is suffering significant financial stress, and this is partly due to the fact that there is no private sector involvement. In other words, there is no competition to the NHS, and taking out private health insurance is expensive and discouraged. For example, the NHS recently made media headlines when 50,000 non-urgent surgeries were postponed until February, labelling it as a ‘winter crisis’. A clear example of government failure, the ‘winter crisis’ illustrates the necessity for private sector intervention.

Looking at it from an economic perspective, a spike in demand for a good or service, such as the NHS, naturally increases its price. In a free market environment, an increase in price dampens the level of demand for the service, essentially lowering the price to its starting position – known as the ‘equilibrium’. However, when the government fixes the price of a service (such as the NHS) to zero, demand continues to increase beyond its capacity and an undersupply emerges – synonymous to that of the ‘winter crisis’. Patients are then forced to undertake appointments over the phone or suffer long delays in emergency departments and walk in centres. More accessible private health insurance will lower the financial burden on the NHS and allow patients in need of pain-relieving surgeries the opportunity to push forward their treatment.

Interestingly, the British Social Attitudes Survey (BSA) conducted a study to analyse individual attitudes toward the NHS and the private sector. As outlined in a book titled ‘Universal Healthcare Without the NHS’ by Kristian Niemietz, ‘the survey asked whether people preferred treatment from an NHS provider, a private for-profit or private non-profit provider if they were allowed the choice. Niemietz reported quite remarkably, “43 per cent express no general preference for either sector, and a further 18 per cent express an active preference for the independent sector.”

Although the British people are famously patriotic in their defence of the NHS, these results illustrate that a significant portion of the population remain indifferent to the

inclusion of market reforms and an improvement in private sector intervention. This is fascinating, as NHS ‘purists’ underpin their defence of the NHS with the argument that the British people are not in favour of private sector reforms. Of course, as Niemietz remarks, these ‘purists’ are contradicting themselves. If the British people did not want independent entities to compete with the NHS, then “there would be no need to specifically exclude for-profit providers or put up barriers against them”.

Although private sector intervention has been frowned upon in the British healthcare industry, it has been a centrepiece of Medicare since its inception in 1984. Initially, Medicare’s framework included a 2.5 per cent levy on taxable income with the option of taking out private health insurance in place of paying the levy. Not only did this help open the door to the private sector, it set in place a strong cultural framework that led to almost 50 per cent of the Australian population taking out private insurance today, compared with 10.6 per cent in Britain.

In the years since 1984, a range of incentives have been rolled out by the Australian Government that have solidified the position of the private sector in Australian culture, best explained using a ‘carrot’ and ‘stick’ analogy. The ‘carrot’, is that young people are encouraged by a relatively low cost plan, which increases as they age or have children. For example, The Lifetime Health Cover (LHC) initiative increases health premiums by 2 per cent every year after an individual turns 30, with a maximum premium of 70 per cent of total healthcare costs. In other words, someone who has waited until their 40th birthday to take out private insurance will pay 20 per cent more for healthcare than someone who first took out hospital cover at age 30. The ‘stick’, is that there is an additional tax on high-income earners who do not hold a certain level of private cover, called the Medical Levy Surcharge (MLS). Depending on individual circumstance, the savings attained by purchasing basic hospital insurance might outweigh the surcharge that has to be paid as an additional tax.

Allowing the private sector to take some of the financial pressure from government has had demonstrable effects on health industry outcomes. Indeed, paying a small portion of health insurance is a cultural phenomenon in Australia, but surely having the opportunity to pay for an improved service is better than not having it at all.


Ultimately, the NHS is a flawed system that is perpetually safeguarded from rational debate, mostly due to the assumption that only a “nationalised system can guarantee universal healthcare irrespective of an individual’s ability to pay.” Current discussions on the realities of the NHS have unfortunately been dominated by ignorant optimism and empty rhetoric. The unjust patriotism that currently clouds the vision of the British people must be discarded, and the better performing universal healthcare systems should not be ignored. The debate for an alterative system should be directed away from the US and towards Australia and Europe. Moving toward a decentralised system that champions the consumer and encourages market reforms will work toward resolving the vast array of structural issues that currently plague the NHS.

James Walsh

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