The bill for health services reflects the power balance between seller and buyer. This is the health funding paradox.


Why do health experts around the world get so angry about privatised healthcare? Wouldn’t private health insurance companies be more efficient at managing health services than the government-run Medicare? It’s called the health funding paradox. In a nutshell, size matters. The bill for health services reflects the power balance between seller and buyer. Not the production costs.

Overall healthcare is the most powerful industry in the western world. 1 in 6 dollars in the American economy flows through healthcare. It is probably that 1 in 12 dollars in the Australian economy flows through healthcare. Healthcare is the largest employer in Australia. No doubt it is the largest employer in America. Healthcare is a monster industry. 75% of political lobbyists in America represent the health care sector. No doubt the figure is similar in Australia.
The American’s fully private heath system currently spends double the amount of money on healthcare, that similar countries with public health systems spend. For example, Australia spends 8.9% of its GPD on healthcare. America spends 17.7% of it’s GPD on health, or 2.6 trillion USA dollars a year. However, this huge rise in cost, is not related to the number of Americans actually receiving healthcare.
Americans have fewer doctors visits than people from similar countries. They also have a lower life expectancy and higher infant mortality rates than other people. So why are they paying so much money? And how does this relate to Australia, and the push to privatise Medicare?
The Americans costs are related directly to the huge prices they are paying for tests, drugs, medical devices and hospital treatments. All the major health items cost more than double for Americans than they do to all other similar countries. For example, American health insurance companies pay $215 for one script of Nexium, a common heartburn medication.


Nexium is a re-engineered version of an older drug called Prilosec. The patent was due to expire in April 2001. Instead of becoming available to countries at a far cheaper generic price, a very similar drug was aggressively promoted. The patent for Esomeprazole (Nexium) was taken out in March 2001. The process of keeping drugs ‘in patent’, and at a higher cost to both private health insurance companies and governments is called evergreening. The higher price they pay, the more they pass the cost on to the consumer (and taxpayer). Pricing of drugs has an enormous impact on health budgets.
Australians are currently paying 14 times higher for drugs that the UK, Canada and New Zealand. The Grattan Institute estimated that we are paying 1 billion a year too much for pharmaceuticals. Steven Duckett, a noted health commentator, says that there is a conflict of interest within the Pharmaceutical Benefits Pricing Authority. He questions the validity of industry groups who represent the pharmaceutical companies being on the actual PBS board, which is meant to be buying drugs at the cheapest possible cost.
Health funding 101 – Pharmaceutical companies charge completely different prices across countries, for the same drugs. The price they charge is not directly linked to what it costs to produce these drugs. Instead, drug prices reflect the power to ‘negotiate a better deal’ between the seller and the buyer.


There is another health funding paradox, driving up costs. Fee for service means the more you ‘do’ with a patient (writing scripts, ordering tests, making hospital admissions and delivering medical treatments) the more you actually get paid. This encourages over servicing, fraud and waste. It is estimated the 1/3 of health spending in America does not result in any improvement in patient’s health. Health reform groups in America and Australia want to replace fee for service with a ‘whole of treatment fee’. This would result in more coordinated care and allow quality to be monitored. Conservative medical associations and many health lobbyists oppose this funding model. It could result in fewer profits for them.
Health funding 101 – Paying more for drugs, tests, hospital visits and treatments does not translate into longer life expectancy or better quality of care for patients. Instead, health costs reflect the funding model used to pay for health services (i.e. fee for service). 30 – 40% of American health spending (and possibly Australian heath spending) is currently being wasted on over servicing. This funding system rewards the providers of health services. And punishes the buyers of health services (taxpayers).


Evergreening drugs
Still not sure? Look at these comparisons between Australian and American health costs, for identical surgical procedures in 2012.
– Angioplasty (including doctor’s fees and hospital costs) came to $8,991 in Australia. The same procedure in America came to $61,649.
– Bypass surgery (including doctor’s fees and hospital costs) in Australia cost $ 43,230 in Australia. The same procedure in America cost $150,515.
– A hip replacement (including doctor’s fees and hospital costs) in Australia cost $27,810. In America, it cost $87,987.
- A caesarian section (including doctor’s fees and hospital costs) in Australia cost $10,566. In America, it cost $26,305.
- One day in hospital in Australia cost $1,472. In America, it cost $12,537.
Health funding 101 – Bringing transparency to the costs of health services, will bring down prices.

Clear Health Costs
Obamacare has begun to bring health insurance to ordinary Americans. But many people are discovering their health plans come with massive out of pocket ‘co-payments’. Sound familiar to Australians? Americans are finding it cheaper to buy heath services offshore, in Asia or Europe, than to go through heath insurance companies in their country. Sound familiar to Australians? We had a Senate Enquiry into out of pocket medical costs in 2014. We are now third in the world for medical out of pocket costs, behind Switzerland and America. Every media outlet in the country has published stories of ordinary Australians, who thought their private insurance would cover them, and instead were left bankrupt after private medical treatments.
Some in America are lobbying for transparency of health pricing.
Clear Health Costs – Set up by journalists and run by Jeanne Pinder.
CastLight – Castlight Health was founded in 2008 to help American employees get cheaper, better health care plans for their employers.
The future for better health care pricing lies in providing free and cost effective GP services, to keep people out of hospitals and away from the over-servicing and wasteful hospitals. It lies in demanding governments beat down the price of drugs and medical services, instead of allowing multinational corporations to price fix and artificially inflate costs. And by shifting away from ‘free for service’ to ‘whole of treatment’ payments.
That is what the Liberal party does not want to hear. Community run, government-funded health services are cheaper to run and more effective. Standing up to powerful health lobbyists and multi national pharmaceutical corporations is essential. And controlling private doctors fees and curtailing their love of the expensive ‘fee for service’ funding model is vital.

Australian’s paying 14 times more for prescriptions than other Commonwealth Nations – ABC
Australian Senate Inquiry into out of pocket costs – 2014
Prostate cancer patient anger at huge bills despite paying insurance 2013
Cancer patient Tracy Ryan’s $60,000 bill that forced her to raid her superannuation. 2014
Clear Health Costs
High Prices – The New Yorker – Malcolm Gladwell – October 25th 2004
Explainer: evergreening and how big pharma keeps drug prices high – The Conversation – Hazel Moir and Deborah Gleeson – 6th November 2014
An MRI costs $1,145 in America and $138 in Switzerland. But Medicare could change that. – Ezra Klein – Vox – 19th January 2015.
21 graphs that show America’s health-care prices are ludicrous – Ezra Klein – The Washington Post – 26th March 2013
America’s Bitter Pill: Money, Politics, Backroom deals and the fight to fix our broken health care system – Steven Brill – Amazon – 5th January 2015
Could Abbott end Medicare? – Independent Australia – Shaun Wilson – 10th January 2014.
Wikihospitals  2015