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A Public Baseline: The Australian Health Care Model

Health care in the United States is riddled with contradictions. The country spends $3.5 trillion a year on health care—more than $10,700 per person and 17.9 percent of GDP—yet 28.5 million Americans are uninsured—nearly 9 percent of the population. America is the richest nation on earth but has only the twenty-ninth highest life expectancy. It has some of the best hospitals, doctors, and health care in the world, but one million Americans a year—one every thirty seconds—are bankrupted by medical bills.

These data might be new, but America’s health care contradictions are not. They have spurred public policy debate over health care in America since President Harry Truman proposed a universal health insurance program in 1945. And from the failure of Truman’s efforts after Republicans regained control of Congress in 1946, to President Lyndon Johnson signing Medicare and Medicaid into law in 1965, to the travails of Hillary-care in the 1990s, and the passage of the Affordable Care Act (ACA) during the Obama administration, intense debates over health care have gone unresolved.

There is no sign of that debate dying down any time soon. Congressional Republicans have tried no fewer than seventy times to repeal part or all of the ACA, and competing models of health care are at the center of the battle for the Democratic Party’s 2020 presidential nomination. There is no disagreement among Democrats about the desire for universal health care, but sharp differences about how to achieve it.

On one side are democratic socialists who believe in “Medicare for All.” This involves expanding the existing Medicare program into a universal, single-payer system that either undercuts private insurance on price so much that it kills it, or perhaps private insurance is simply made illegal. Those are just two different paths to the same, government-run single-payer health system.

On the other side are those who want to use the ACA as a starting point toward more universal coverage. For this side, the abolition or effective abolition of the market for private health insurance, a market than serves around 170 million Americans at present, is a non-starter and, in their view, an approach likely to lead to President Trump’s reelection in November.

Part of the difficulty in reconciling these two approaches to health care is a deep difference over how much markets should be trusted. To Medicare for All proponents, health insurance companies are bad actors that profit from the suffering of their policyholders while busily trying to deny their claims. For supporters of the ACA, private insurance is an essential part of the path to universal coverage. The prospect of wiping out private insurance led Michael Bloomberg to observe in January that Medicare for All would “bankrupt us for a very long time.”

Yet Democrats who are not comfortable with Medicare for All seem unable to point to a well-functioning health care system that has a mix of a public option and private insurance. The United Kingdom, Canada, and much of Europe are no help in that regard. They are single-payer systems.

Australia, however, is a health care system with a true mix of public and private components, and it works remarkably well. And we say that as two people who have lived and worked, and raised children in both the United States and Australia.

The Australian Health Care System

For Australians, like Europeans, health care is viewed as a right, not a privilege. The question is the scope of the right—what components of health care are included—and how to pay for it.

The Australian health care system involves a free baseline plan that covers all Australians. (The plan is, confusingly perhaps, called Medicare.) This provides all Australians with a baseline level of medical coverage for all core health care needs, including emergency room visits and acute care, non-elective surgery, and primary-care physician coverage. Australian Medicare also includes coverage for prescription drugs, through a program known as the Pharmaceutical Benefits Scheme.

This baseline plan therefore guarantees a “social minimum”—a level of dignity for all. For health services beyond that minimum, however, like priority elective surgery, dental and optical, or a private room in a hospital, private insurance is more or less required.

The Australian government also encourages higher-income earners to buy private health insurance that pays for above-baseline care, and effectively takes the burden off Medicare for these and other services used by the privately insured, through a mix of carrots and sticks. Those buying insurance actually get something extra, beyond Medicare, for the money they pay. And they are encouraged to buy-in early, by regulations that effectively require prices to increase for those who buy insurance later—or when they are at higher risk.

But the system also involves some sticks, chief among which is a tax penalty of an additional 1 percent marginal tax rate for not purchasing private health insurance if family income is above A$180,000, scaling up to 1.5 percent for family incomes above A$280,000.

In this sense, the Australian model is more of a public baseline than a public option—and it gives higher income earners strong incentives to buy private insurance, as a top up, rather than alternative, to public coverage.

And it works. Total health care expenditures (public and private) in Australia are around 10 percent of GDP, compared to 18 percent in the United States. And the Australian system works well—contributing to a life expectancy of 82.8 years, the fourth highest in the world.

Notice also that nothing about the Australian system is “neoliberal,” to use the favored social democratic insult. Contrast the Australian system with the pre-1965 situation in the United States, which remains the archetypical neoliberal approach to health care. Some Americans, by implicitly sacrificing some of their wages, received health care through their employer. The rest were left to fend for themselves—which essentially meant they did not have health insurance (the exception being veterans, with VA health care established by President Herbert Hoover in 1930).

This neoliberal approach of “private insurance for some” has become further complicated over the years with a combination of VA, Medicare, Medicaid and, since the passage of the Affordable Care Act, government subsidies for individuals to purchase private insurance. Yet at its core it requires the majority of Americans to acquire private insurance or do without.

The Australian model offers something different. Rather than “private insurance for some” it offers a mixture of private and public insurance that achieves universal coverage, consistent with the view that health care is a right.  In this sense, it might be called “democratically liberal” as opposed to either democratic socialist or neoliberal in its philosophical underpinnings.

A Public Baseline versus a Public Option

Someone committed to this “democratic liberal” approach might still ask whether a public option, rather than a public baseline, is the best way forward for health care in the United States.  For instance, among Democrats the current leading alternative to a single-payer system is the idea of “Medicare for All . . . who want it.”

The persistence of “public option” proposals is understandable. Universal private insurance may ultimately be more feasible politically in the United States, especially if it includes a public option that competes with private providers in a truly national health care market. It may also be easier to sustain in a context in which the U.S. maintains relatively open borders, and thus where even free basic public health care may serve as an additional reason for non-citizens to seek entry. There is certainly a potential connection between Australia’s approach to health care and welfare benefits and its quite restrictive asylum and migration policies.

The benefit of a public baseline, however, is that it provides truly universal coverage and peace of mind for families facing major health problems, but at an affordable cost to the national budget—in part because it recognizes a role for co-pays, private insurance, and for higher income earners to pay more both for their own care and that of others. It also avoids the tricky question of how to ensure competitive neutrality that inevitably arises with a public option approach.

In practice, achieving competitive neutrality is hard. Even a slight edge can cause consumers to shift from private providers to the public option, leading to an unraveling of the private part of the market. Put another way, it is all too easy for a public option to morph into a Corleone option: people are made an offer they can’t refuse. As we noted earlier, many democratic socialists see this as a desirable design feature of Medicare For All.

In the U.S. context, the additional coverage above the baseline that is provided in Australia could also be provided either through an employer or purchased individually. And following the initial logic of the ACA, one might stipulate that higher-income earners who fail to purchase private insurance pay a tax penalty, since private insurance acts not only to provide additional services but to partially cross-subsidize the basic services (e.g., in the instance of hospital admission).

 A Generous Social Minimum

The Australian health care model focuses primarily on issues of adequacy or sufficiency rather than simply equality. Its chief concern is with ensuring universal access to a generous social minimum for all. In the context of health care, adequacy means a baseline level of coverage for all Americans. Coverage for priority elective surgery and other above-baseline health care should come from private, optional insurance.

Medicare for All—at least as it is commonly understood—involves strongly restricting individual choice in a deeply personal and important area of people’s lives, giving up on the positive aspects of markets, and will likely be so expensive as to necessitate large tax increases that both reduce post-tax incomes and create distortions such as muting incentives to work.

It is perfectly possible to have a strong commitment to a generous social minimum, through which all Americans are guaranteed access to a range of core goods, without entirely eliminating the virtues of markets. The Australian health care model offers a good place to start.

This article is an American Affairs online exclusive, published February 19, 2020.

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