Who pays?

Australia’s out-of-pocket healthcare problem

by Stuart Babbage and Dr. Dana Hutchins

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The recent Australian election brought forth a vigorous discussion about the affordability of healthcare for individuals, particularly in the form of out-of-pocket costs, or the amount patients directly pay for services obtained both in and out of hospitals. Post-election, there has been extensive discussion suggesting the exorbitant out-of-pocket expenses faced by some individuals represent a significant failure of our healthcare system.


This conversation requires consideration of broader questions including

We believe there are demonstrable problems, and there are some meaningful actions that can and should be taken to reduce out-of-pocket costs. Without action, those who most need care may increasingly be those who don’t seek or receive it.


How big is the out-of-pocket cost ‘problem’?

Medicare, when launched in 1984, was described by the government as 'a major social reform' that would 'embody a health insurance system that is simple, fair and affordable'.1 Despite the continued availability of Medicare, there is evidence that Australia’s healthcare is becoming less affordable:

  • Australians pay for about 17 per cent of total health expenditure directly through out-of-pocket expenses.2 This adds up to $29.8 billion, or about $1,235 per person.3

  • Compared to our international peers, Australia has the third highest reliance on individual healthcare contributions, behind only Switzerland and Belgium.4

Whilst the impact of this healthcare cost differs across families and individuals, there are three particular areas where out-of-pocket costs manifest as a real issue:

  1. For non-hospitalised services it can be significant, and unavoidable.

  2. Safety net arrangements fall short of providing help to many.

  3. Despite private health insurance (PHI), out-of-pocket costs for private hospital treatment are often significant.

Out-of-pocket costs affect you differently based upon where you live and the treatment you need

Out of hospital, both public and private patients are often confronted with significant out-of-pocket expenses. This includes individual contributions for GP care, specialist visits, pathology, radiology, pharmacy, aids and appliances, dental and allied health services, and associated costs to access healthcare such as travel and accommodation. Of the services that Medicare covers, 79 per cent are bulk-billed.5

While bulk-billing is high as a total volume, bulk-billing for specialist services is much lower and the size of the gap widely varies based on where a patient lives. The median payment made by patients with out-of-pocket costs for specialist services in 2016-17 was $64, and the 10 per cent of patients with the highest costs spent $137 or more per service. Patients in some local areas spent three times as much as patients in other areas. For example, the median amount patients in Mid North (South Australia) spent was $36 per service, compared to $97 in Leichhardt (New South Wales). This geographical variation is magnified for obstetrics, for which the median out-of-pocket cost per service was $227 in Northern Sydney Primary Health Network - ten times more than the median cost per service of $21 in Gippsland Primary Health Network.6

PHI members find limited financial reprieve from many out-of-pocket payments, despite the thousands of dollars per annum they have contributed to their membership,7 because health insurers are forbidden from covering Medicare services delivered out of hospital. Similarly, many patients are unable to avoid out-of-pocket contributions to the non-hospital services and goods that Medicare and the Pharmaceutical Benefits Scheme (PBS) do not cover, such as the majority of dental services, most allied health services, aids and appliances, and non-PBS pharmaceuticals.

Safety care nets fall short 

The Medicare and PBS safety nets attempt to address high out-of-pocket costs by providing higher benefits to people who require more medical services. Unfortunately they are confusing and fail to cover many expenses. Key issues include:

  • The existence of separate Medicare and PBS safety nets means that people with medical and pharmaceutical needs may be helped with only parts of their costs or fall short of both safety nets.

  • Dental expenses are excluded from the safety nets. 

  • There are two tiers for the safety nets – concession card holders and everyone else. Many lower- and middle-income households fail to meet the concession card holder threshold. 

  • Safety nets work on an annual basis, meaning patients with the same diagnosis and costs can end up with different out-of-pocket costs depending upon what time of year they are diagnosed and treated. 

Out-of-pocket costs for private hospital treatment are often significant

Individual contributions to hospital services occur when patients receive treatment in private hospitals, and in 2017-18, 40 per cent of the 11.3 million hospitalisations occurred in private hospitals.8 The reasons people attend private hospital are varied, but one driver is no doubt the long waiting lists for elective surgery in public hospitals. Others include choice of surgeon, and a perception that they may receive a different quality of outcome or patient experience. 

The average out-of-pocket payment for a hospital episode for people with private health insurance was $316 in the March 2019 quarter, with the majority of these episodes occurring at private hospitals. This included out-of-pocket payments for medical services, in addition to excess or co-payment amounts relating to hospital accommodation.9 Individuals with complex or chronic conditions often experience multiple hospital episodes, and when combined with spending on other forms of healthcare, the total cost can increase quickly.


Can we, and should we, remove out-of-pocket costs?

Not necessarily. While the current approach, or lack of cohesive approach, to out-of-pocket expenses in Australia is clearly not working, this does not suggest they should be removed entirely.

The constitution says doctors can charge what they want

As a starting point, this would require constitutional change because doctors in Australia have the constitutional right to charge what they want, as laid out in Section 51(xxiiiA) of the Australian Constitution. Simply put, this clause says that doctors can directly charge a patient whatever they like if they believe that available rebates are insufficient.

Individual co-payments to healthcare can be a useful policy tool

Strategically designed individual contributions to healthcare can support efficient allocation of scarce resources for healthcare. When faced with no co-payments, individual demand for health services is unchecked and is likely to result in resource wastage unless there are other barriers to access (such as long wait-lists). Further, there is clear evidence that co-payments reduce the use of healthcare, including prescription medicine, visits to GPs and specialists, and outpatient care.10

However, co-payments are only useful if they send effective purchasing signals to people about the best choice among healthcare alternatives. They need to be designed to reduce the demand for unnecessary care and not limit the demand for worthwhile care. Our present approach to co-payments fails in this regard, and co-payments often prevent people from accessing preventative health services that reduce downstream healthcare costs.


What can government do to tackle out-of-pocket costs?

We believe the government should do more to help Australians obtain the healthcare they need without incurring significant out-of-pocket costs, and we suggest four possible approaches.

1. Close the information gap

A lack of information and transparency is one of the main issues underlying our extreme out-of-pocket expenses. Patients need to navigate through a maze of health services and providers and make purchasing decisions with limited information on the full range of options available, related payments, waiting periods, quality of care and likely outcomes. This decision making occurs at a time when patients are most vulnerable and may find it difficult to make decisions about care that differs from a doctor’s recommendation, despite the costs involved. Getting a second opinion is expensive and not accessible to everyone.

More readily available information on providers’ costs and outcomes will give the consumer a larger role in the healthcare market and move the market closer towards competition, where the relationship between suppliers and consumers determine the price of goods and services. 

Lack of information is also an issue for GPs, who often do not know the costs their patients will face from the specialists they refer them to. With more information, GPs would be able to provide greater support to patients in navigating their care journey, including help determining which services they really need and understanding the choices available to them and their related costs and outcomes. 

For those with the most complex conditions and the most vulnerable, there may be a need for Medicare-subsidised healthcare navigators to assist patients in using the available information to make decisions on care and how decisions relate to out-of-pocket expenses and outcomes. Initiatives such as healthcare homes, which coordinate care for patients with chronic and complex conditions, and other practice incentives are just the start of exploring what might be required.

We can learn from our international peers

Healthcare price transparency is a goal of many international governments. Sweden, for example, has led the charge in healthcare transparency. Since 2006, the Swedish government has published annual performance comparisons and rankings of healthcare services, including 350 indicators considering prevention, patient satisfaction, waiting times, trust access, surgical treatment and drug treatment.11 The depth and breadth of transparent public reporting in Sweden exceeds that achieved by its OECD peers.12

More recently, the United States mandated in 2018 that all hospitals must establish, make public via the internet, and regularly update a list of their standard charges.13 While this information alone does not capture the variability of the ‘product’ being purchased and differences between hospital charges and the cost to individuals that arise with the existence of health insurers, the transparency is a first step towards supporting a competitive market with consumer-driven healthcare.

Federal Health Minister Greg Hunt has similarly promised Australians a new government website to provide patients with more information on out-of-pocket costs. However, data on costs alone is not enough. For any medical need, a patient should have access to enough information to compare the cost and outcomes of the services of multiple providers to make an informed purchasing decision.

2. Shift costs away from individuals

The government could address the inequitable distribution of co-payments by shifting costs across payers and away from direct individual payments. While this may not reduce the underlying contribution of individuals, who ultimately pay for Medicare, the PBS and PHI through taxes and member fees, it would distribute the costs more broadly across society. This could happen via changes to what Medicare and the PBS cover and/or changes to what private health insurers are allowed to cover.

Building on the ongoing work of the MBS Review Taskforce, we need a rigorous re-evaluation of what outpatient services (or public hospital services) are less likely to be available via bulk-billed services, but are critical to patient journeys. Allied health services, for example, are critical for individuals with chronic illness, yet most of these are not covered by Medicare. Of those that are covered by Medicare, 38 per cent incur an individual contribution. Thought needs to go into the impact of extending Medicare subsidies for certain services, the related demand for services and healthcare outcomes, and the cost to the government. If we can increase the use of lower cost services that ultimately prevent costly acute care episodes, while also reducing the cost to individual patients, this could potentially reduce overall healthcare expenditure.

Consideration should also be given to allowing PHI funds to both cover and negotiate service arrangements for outpatient services - this could reduce costs for insured patients, prevent unnecessary hospitalisations, minimise waiting times for public patients, and help reinforce part of the value proposition of PHI. 

3. Pilot diagnosis-specific care bundles

We need to stop thinking about a diagnosis as a sum of myriad individual needs and focus on a patient’s end-to-end journey. Instead of expecting a patient to source many different services for a given diagnosis (for example, the initial GP visit, specialist consultation, surgery, and aids and allied health services to support recovery), we need to develop innovative funding models that cover the full spectrum of required needs. These models would support patients, service providers and funders to think about the package of care required to meet patients’ needs, covering both inpatient and outpatient services with incentives for efficient and effective care. Moving away from fee-for-service payments and combining all costs of treatment into a single total, ideally linked to patient outcomes, would go a long way towards mitigating the problem of individual co-payments, while also encouraging efficient use of healthcare resources.

Successful application of this approach would be complicated by the separate payment streams in Australia, where the Australian Government is broadly responsible for Medicare services and states and territories are responsible for the management and administration of public hospitals and many preventative and community health services. A diagnosis-specific funding package would require cooperation between both levels of government, as well as third party health insurers, to provide funding for services incurred across the spectrum of available health services. It would also require providers to assume some financial risk for an episode of care, but it would give them some control over the risks in the interest of the patient. Primary health networks and hospital systems would be a good starting point from which to trial this approach.

4. Redefine the medical safety nets

While the Medicare and PBS safety care nets are designed to assist people with out-of-pocket costs associated with medical services and pharmaceutical costs, they are confusing and fragmented. The reason for separate safety nets is unclear and consideration should be put towards combining the two measures into a single framework, ideally one that also includes dental services. 

Further, the rationale for a calendar year as the underlying basis for the safety net is weak; it favours support for individuals with high care cost over a short period of time and fails to support individuals with chronic illness who need moderate levels of care over long periods of time. Building on the concept of diagnosis-specific care journeys raised above, consideration should go towards including diagnosis-specific care components within the safety nets that are not limited by a defined period of time.

Last, there may be benefit in introducing a sliding scale of thresholds and benefits for safety nets to avoid the two-tier problem that disadvantages households who just miss out on access to healthcare concession cards.


Now is the time to act

The out-of-pocket problem is multi-faceted and cannot be fixed with a single remedy. If we want to stop the problem from becoming a crisis and protect the integrity of our health system, a number of actions need to be taken. No single approach will do, a package of changes is essential if we are to make a real difference to the healthcare costs faced by many Australians.


Medicare background brief, Australian Parliamentary Library
2 Australian Institute of Health and Welfare, Australia’s Health 2018, 2019
3 This includes co-payments for subsidised services, full payment for non-subsidised goods and services, and contributions to health insurance funds. Australian Institute of Health and Welfare, Health expenditure Australia 2016–17, 2018
4 This considers Australia in comparison to the 17 wealthiest OECD countries. Duckett, S. (2018). ‘Expanding the breadth of Medicare: learning from Australia’, Health Economics, Policy and Law, Vol. 13, pp. 344–368.
5 Figures for July 2018-March 2019, Quarterly Medicare Statistics. 
6 Australian Institute of Health and Welfare, Patients’ out-of-pocket spending on Medicare services, 2016–17, 2018
7 PrivateHealth.gov.au (2019).
8 Australian Institute of Health and Welfare, Admitted patient care 2017-18, 2019
9 Australian Prudential Regulation Authority, Quarterly Private Health Insurance Statistics, 2019
10 Kiil, A. and Houlberg, K., ‘How does copayment for health care services affect demand, health and redistribution? A systematic review of the empirical evidence from 1990 to 2011’, The European Journal of Health Economics, 15(8), 2013
11 The Commonwealth Fund (n.d), The Swedish Health Care System
12 OECD, Caring for quality in health: Lessons learnt from 15 reviews of health care quality, 2017
13 Centers for Medicare & Medicaid Services, Fiscal Year (FY) 2019 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Prospective Payment System Final Rule (CMS-1694-F), 2018

Contact us

Stuart Babbage

Partner, PwC Australia

Tel: +61 2 6271 3021

Dr Dana Hutchins

Director, PwC Australia

Tel: +61 3 8603 1550

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