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Melbourne Institute News September 2010 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 29

The Paralysis of the Health Care System

Professor Anthony Scott

The Paralysis of the Health Care System

Professor Anthony Scott argues that there are fundamental structural problems and inefficiencies in the Australian health care system, making it difficult to reallocate resources where they might have their best effect. Page 1

Welfare Participation of Women Who Experienced Teenage Motherhood This study finds evidence of dependence over time in welfare participation for all mothers, showing a stronger effect for mothers who experienced teenage childbearing. Page 3

R&D Employment and Public Subsidies The authors of this study find that R&D subsidies have a positive effect on the amount of private R&D expenditure. Page 4

When the brain is no longer in contact with the body, the body eventually ceases to function. This has been the case for a number of years now with the ‘patient’ called the Australian health care system. The federal government might be able to ensure the money flows through the arteries, but it cannot make the system move. As doubts linger about the ability of the next government to implement substantial health reform, it is important to reflect on the reform options on the table. Even a cursory glance at the US and UK health systems shows that the Australian health care system is seriously lagging behind. Though the US system is more fragmented than that in Australia, there is nevertheless more diversity, innovation and evaluation of organisational and financial reforms. The UK’s National Health Service (NHS) is different because it is a single health system with one funder and this enables it to implement national reform and make significant inroads into the devolution of funding, the use of electronic health records, and the implementation of effective performance management frameworks. This is not to imply that the systems in the United Kingdom and United States are ‘better’ than that in Australia, but they are moving ahead at a much faster pace with respect to health care reform. In health care, one of the easiest things to do is to throw money at it, and this has been the history of health care reform in Australia. The introduction of Medicare in 1984 and the private health insurance reforms of 1999– 2001 are all concerned about how to finance health care. More money for doctors and nurses, more money for beds, more money for mental health are all currently on the table, embedded within a structure set up 30 years ago. In health care, the costs of inefficient spending are high in terms of loss of life, increased morbidity, and reduced productivity and economic growth. Inefficiency kills. Many inefficiencies exist in the current system, Melbourne Institute of Applied Economic and Social Research - Page 1

The Paralysis of the Health Care System (continued)

and one key source of inefficiency is the way the system is organised and financed. Increasing spending ignores the fundamental structural problems in the Australian health care system, which make it difficult to re-allocate resources where they might have their best effect. The job for politicians is to strike a delicate balance between wellthought structural reform that might take a number of years, and the short-term spending announcements that might swing an election. The reforms of the last Gillard government did attempt to blend structural reform with additional spending. They attempted to reconnect the brain with the body to try and make it move again. The proposals sought to alter the architecture of the health care system to make it more efficient and equitable, though these objectives were not explicitly spelt out. The key attraction of the reforms was that they comprehensively covered hospital care, primary care, aged care and prevention, and within each of these sectors there seemed to be a medium- to long-term plan. The reforms at least represented a cautious step in the direction of broad and fundamental structural change. For example, the idea of Local Hospital Networks and primary care-based Medicare Locals will help to devolve decision making to lower regional levels. The government’s intention to match the geographical boundaries of these organisations sets up the possibility in the future that they could merge into regional health organisations, a policy advocated by many commentators. The UK NHS went through a similar experience 10 years ago, though it is difficult to tell whether such a model worked given the pace and breadth of other reforms in the NHS that occurred at the same time. There are other aspects of the government’s plans that were potentially important. The establishment of a National Performance Authority would begin to make health care organisations accountable for the tax revenues they use through the use of performance management frameworks. At the moment, there has been very little explicit performance management or incentives applied (at the local level) to hospital managers or GPs. Will these performance management structures have teeth? What

rewards will there be for good performance, and what penalties for poor performance? The MyHospital website and the public reporting of the performance of hospitals and GPs would have provoked debate, but it would have also generated better data on the system, which is urgently needed. To have a health care system that does not routinely measure patients’ health improvements is akin to a business not measuring profit. Failures (death rates) are measured very well, but success is not. Public reporting of performance may move this issue forward. One idea from the United Kingdom is patient-reported outcome measures (PROMs) where patients’ health outcomes are measured before and after treatment. Whether the public will use performance information to improve their health care is another issue. In the United States the public reporting of performance information has made little difference to consumers’ choice of health plans. However, in the United Kingdom the patient choice policy, where patients visiting a GP have choices about which hospital to be referred to, has produced evidence of lower waiting times. The Coalition’s informed financial consent policy will be particularly important in the Australian health care system, where most of us do not have a clue about the cost of health care once we get referred. But let’s also have an ‘informed waiting times’ policy, where GPs will tell you how long it takes to see a range of specialists, and the specialists will tell you how long it takes to be admitted to a range of hospitals. Informed choice requires good data and information which are slowly being developed in Australia but nevertheless continue to be a major barrier to better health care for all. Paralysis can take many years to overcome. Given the election outcome, the next three years are likely to be bereft of any hope for the patient. The last Gillard government offered some hope through structural reform, but the immediate future seems bleak and is likely to be dominated by ‘shroud waving’ and throwing money around without any evaluation. Australia will continue to lag behind. The costs of this are potentially high, both in terms of the growth in GDP spent on health care, and the avoidable morbidity and deaths that occur from the continuing inefficiency. In three years time, governments will still muddle through, patients will be no better off, and health care spending will continue to rise. The patient is alive for now, but the prognosis is not good. Professor Anthony Scott, ARC Future Fellow This article is based on an opinion piece that appeared in the Australian Financial Review on 11 August 2010.

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Welfare Participation of Women Who Experienced Teenage Motherhood of early school leaving seem to be influenced by the same factors. Although this was not the main aim of the study, cross tabulations of age of first childbirth and age of leaving school show that, in most cases, teenage mothers had left school a year or more before giving birth. Thus, teenage pregnancy and motherhood do not appear to be the cause of most of the observed early school leaving.

An article by Dr Sung-Hee Jeon, Associate Professor Guyonne Kalb and Dr Ha Vu, which is forthcoming in the Economic Record, analyses the welfare participation of women aged between 20 and 62 who had their first child when they were a teenager. The article is based on the research for a project on the same topic that was undertaken in the 2007 Research Agenda under the Social Policy Research Services contract with the Department of Education, Employment and Workplace Relations. The study examines whether the factors that determine the welfare participation of women who experienced teenage motherhood differ from those determining the welfare participation of women whose first birth was at an older age. Using a dynamic random effects probit model on the Household, Income and Labour Dynamics in Australia (HILDA) data, the study finds evidence of state dependence in welfare participation for all mothers, but it is relatively stronger for women who experienced teenage childbearing. Welfare participation in a previous year affects current welfare participation, even after controlling for a wide range of other factors, and this effect is larger for ‘teenage mothers’ than for ‘older mothers’. This dependence in observed welfare receipt over time could be arising from the fact that the experience of welfare receipt in itself has altered preferences or constraints relevant to future choices. In addition, a counterfactual decomposition shows that, conditional on welfare receipt, differences in the characteristics of the two groups of mothers explain a larger proportion of the differences in their welfare dependency compared to differences in their behaviour. Overall, welfare participation by women who experienced teenage motherhood is substantially higher than welfare participation by mothers who had their first child at an older age.

Given the observation that one of the major differences between older and teenage mothers is the level of education attained, the study also compares teenage mothers with older mothers who left school before or at the age of 16. This is an informal check of the importance of the low educational attainment of teenage mothers. The coefficients (and marginal effects) for this low-educated group of older mothers are mostly in between those for teenage mothers and older mothers, and remain very close to those of older mothers. This indicates that education is only a small part of the explanation of higher welfare participation for teenage mothers in Australia. Enquiries about the Labour Economics and Social Policy program can be made with Associate Professor Guyonne Kalb on (03) 8344 2095 or by email <>.

Many studies on teenage mothers investigate the potential effect of teenage motherhood on education outcomes. It is evident that teenage mothers have much lower education levels than other women. However, recent studies have established that this is not necessarily a causal relationship; that is, teenage motherhood does not seem to cause low education outcomes, instead the probability of teenage motherhood and the probability

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New Professorship at Melbourne Institute Beth Webster has been promoted to Professor after applying for a professorial research fellow position with the Melbourne Institute. The Melbourne Institute Director, Professor Deborah Cobb-Clark, congratulated Professor Webster on behalf of the Faculty of Business and Economics. “The University of Melbourne’s Selection Committee was very impressed with Professor Webster’s research leadership and the outstanding contribution she has made to both the Melbourne Institute and the University” said Professor Cobb-Clark. Professor Webster is an economist and Director of the Intellectual Property Research Institute of Australia (IPRIA) at the University of Melbourne. She has a Bachelor and Master of Economics from Monash University and a PhD from the University of Cambridge. Professor Webster has undertaken wide-ranging research on the economics of innovation, and intellectual property, as well as more general research on the performance of Australian enterprises. She has been published widely, including two books and over 50 journal articles.

R&D Employment and Public Subsidies A considerable body of empirical evidence suggests that public R&D subsidies have a positive effect on the amount of private R&D expenditure. However, recent studies have focused on whether such subsidies have simply led to higher R&D worker wages rather than an increase in real R&D effort. Evidence of such wage inflation would seriously question the effectiveness of stimulating private R&D via public subsidies. In the recently released Melbourne Institute Working Paper, ‘The Effects of Public Subsidies on R&D Employment: Evidence from OECD Countries’, authors Dr Russell Thomson and Associate Professor Paul H. Jensen examine this issue using comprehensive, cross-country data on a panel of OECD countries between 1980 and 2005. The authors consider a comprehensive suite of different public R&D subsidies — including tax incentives, subsidies and direct government grants. In this way, they are able to control for the potential substitutability of different R&D subsidies; a fact which has typically been overlooked in other studies. In other words, the study controls for the fact that governments may choose to introduce more generous tax incentives while at the same time reducing direct government grants. To model country-specific fiscal incentive schemes, the authors compile separate indicators of the tax component of the user-cost of both R&D labour and equipment. In this way, the authors aim to isolate the effect of public subsidies on real R&D effort. The study results suggest that the number of researchers employed in the business enterprise sector responds to public subsidies in a similar manner to the response observed in aggregate R&D investment. In other words, the study finds no evidence that wage inflation has seriously conflated past estimates of the effectiveness of R&D subsidies delivered via the tax system. Additionally, the study provides some tentative evidence that, at least in aggregate, equipment and researchers are reasonably substitutable. The authors believe that this latter result suggests policy makers can be flexible in terms of the manner in which fiscal incentives are provided. Associate Professor Paul Jensen and Dr Russell Thomson

The Working Paper (11/10) can be downloaded from < publications/working/wp2010.cfm>.

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Labour Market Dynamics In a study to evaluate how a person’s employment status in one period influences their status in the subsequent period, it was found that education and qualifications play a big role. Using the 1995 cohort of the Longitudinal Survey of Australian Youth, the study authors Dr Hielke Buddelmeyer and Dr Gary Marks found that if young Australians are out of the labour force in the previous period, it has a varying effect on their chances of being in permanent employment, depending on their level of post-school qualifications. The effect is almost nil if they have a Bachelor degree or higher, but significant if they have no post-school qualifications: a probability penalty of approximately 10 percentage points for men and 27 percentage points for women. Having a Bachelor degree for men and women, or a Certificate IV for women, is shown to provide the best buffer against being out of the labour force becoming a persistent state. Similarly, the effect of previous period unemployment on the probability of being employed permanently is negligible for those young Australians with a Bachelor degree or better. When unemployment is combined with having no post-school qualifications there is a negative impact: a reduction of 6.87 percentage points for men and 14.64 percentage points for women. Although having a much smaller impact, social skill policies could improve labour market outcomes for young Australians too. It was predicted that lifting young women’s confidence to a point where they feel very confident would increase the proportion of them finding permanent employment by 1 to 2 percentage points. This study was funded by the National Centre for Vocational Education Research (NCVER) under the NVETRE program. A copy of the report, Annual Transitions between Labour Market States for Young Australians, can be obtained from < publications/2247.html>. Enquiries can be made to Dr Hielke Buddelmeyer by email <>.

The Australian Economic Review The September 2010 issue of the Australian Economic Review (vol. 43, no. 3) includes an article on ‘The Challenges of Climate Policy’ by Timothy J. Brennan. The author discusses how climate policy presents both economic and normative challenges, and he assesses climate policy tools and considerations. The Policy Forum section of the September issue includes five articles on ‘Saving for Retirement’. Guyonne Kalb’s introductory article outlines how policies affecting people’s retirement decisions, such as policies on population ageing and retirement, have become important topics of research. She notes that the authors in this Policy Forum reach similar conclusions: all seem to agree that Australia is relatively better placed than many other countries to deal with population ageing and the associated retirement issues. Guyonne Kalb observes that amongst the suggested improvements, a need for improved financial education is identified. In addition, governments should avoid continually altering policy settings that govern superannuation and other forms of retirement income. In the Policy Forum section, Ross Guest’s article focuses on policy options to increase retirement saving in Australia. The article by David M. Knox compares the Australian retirement income system with those in 10 other countries. John Freebairn and Diana Warren’s article evaluates the effects of the current Age Pension, superannuation and taxation arrangements on the work preferences of older Australians — offering suggestions to encourage increased labour supply. The article by Jonathan Kennedy and Peter Matwijiw argues that Australia needs a strategy to better prepare people for their retirement through financial education and to provide the right incentives in the tax–transfer system. Contributed articles in the September issue are ‘Population Ageing and House Prices in Australia’ by Ross Guest and Robyn Swift; ‘Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia’ by Shane Brittle; and ‘Structural Estimation of Variety Gains from Trade Integration in Asia’ by d’Artis Kancs. The September issue also contains a Data Survey article by Melbourne Institute’s Nicole Watson and Mark Wooden. The article provides an update on progress with the Household, Income and Labour Dynamics in Australia (HILDA) Survey, including comments on the evolution of the sample. More information on the Australian Economic Review can be found on the Melbourne Institute’s website at <www.melbourneinstitute. com>. To subscribe to the Australian Economic Review, visit <>.

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Explaining the Differing Valuation Placed on Income and Work The authors of a recent Melbourne Institute Working Paper investigated whether personality traits explain the diversity (heterogeneity) in people’s subjective well-being and how they view income and work.

Dr Jongsay Yong

Dr Stefanie Schurer

The study ‘Personality, Well-being and Heterogeneous Valuations of Income and Work’, authored by Melbourne Institute’s Dr Stefanie Schurer and Dr Jongsay Yong, used Australian longitudinal data. The authors found that people differ in their basic happiness and in the way they value income and work. A key finding is that significant differences in people’s subjective well-being are explained by the personality trait of emotional stability, and that women place a higher importance on fluctuations in their income. This result lends support in the current debate on the potential social cost of neglecting mental health care provision in Australia’s public health insurance system. Interestingly, the authors found that women and men differ significantly in their relative satisfaction or dissatisfaction arising from a given change in income or work hours (that is, the incremental strength of influence, or their marginal utilities) and some personality traits are found to be important in explaining these differences. Men of different personality traits differ significantly in their marginal valuation of work hours but not income, whereas the reverse applies for women; that is, women tend to have a different marginal valuation of income but not work hours. Additionally, the more that women exhibit the personality trait of being open to experience, the higher is their valuation of income, which correlates with being independent and career-minded. Men, on the other hand, significantly differ in their valuations of work depending on their level of conscientiousness, and to a lesser extent on their emotional stability. Men who score very high on conscientiousness are more likely to regard their financial situation as important and thus may have a greater interest in performing well in their job than other men. These results show that personality traits have an impact on, and can be powerful predictors of, people’s well-being and how they feel about the quality of their work life (that is, aspects or domains of their life). The authors used data on importance of life domains as collected in the Household, Income and Labour Dynamics in Australia (HILDA) Survey, Wave 1. The diversity in people’s valuations of income and work implies that individuals will react differently to wages and prices. For example, if a significant number of workers have personality traits that strongly bias their preferences towards nonfinancial aspects of jobs such as sociability, degree of responsibility, or location, then extraordinarily large financial rewards would generally be needed to induce them to choose a job that does not match with their preferences. In many countries, financial incentives are used to attract teachers, doctors and nurses to hard-to-staff areas or institutions. However, these incentive programs will mostly be ineffective if the targeted individuals place little emphasis on the pay. The Australian federal government, for example, provides up to A$120,000 in financial incentives for doctors to relocate to very remote areas of Australia, in addition to an annual incentive payment of up to A$47,000. Despite these non-trivial sums, rural hospitals continue to face doctor shortages, so much so that locum doctors from New Zealand have to be flown in for short-term assignments. Similarly, it has been documented that salary bonus payments have a minor influence in retaining qualified teachers in disadvantaged schools. The Working Paper (14/10) can be downloaded from <>.

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Melbourne Institute Economics Forums on Commercialising Australian Technology The Melbourne Institute Public Economics Forum, ‘Finding the Best Model to Exploit Australia’s Inventive Talent’, was held in Canberra on 27 July 2010, and the topic was also discussed at the Economics Forum in Melbourne on 29 July 2010. Speakers at the Forums were Mr Terry Stinson (CEO and Managing Director, Orbital Corporation), Mr Terry Healy (Specialist Counsel wireless patent litigation, CSIRO), and Professor Beth Webster (Director, Intellectual Property Research Institute of Australia, The University of Melbourne). Mr Healy expressed a general preference to see Intellectual Property applied to create new and strengthened business activity within Australia, and he nominated the need to clarify research exemptions (that is, freedom to operate) for Australian scientists. Wireless technology was invented at CSIRO and developed to prototype stage by a start-up company. The technology was used in wireless products globally, however after industry refused to accept their licences, litigation ultimately achieved royalties for CSIRO. Mr Stinson outlined how licensing technology exposed Orbital to Left to right: Professor Beth Webster, Terry Stinson, Terry Healy considerable competition from technological substitutes. The Orbital fuel injection technology had limitations by relying solely on licensing to generate returns. This indicates a paradox: on the one hand licensing can avoid the expensive steps of development and establishing manufacturing, on the other hand, in order to strike a licensing deal, a technology needs to be on the market and supported with spare parts. A conclusion might be drawn that internal commercialisation and licensing to third parties can be complementary strategies. Professor Webster made three policy suggestions. First, she highlighted the need to reform the global intellectual property rights system to reduce costs and increase global harmonisation. Second, she sought continued support for informal networking including student and researcher exchanges. Third, she advocated that Australian firms receive a large tax concession on licence fees paid to public sector research organisations and universities, thereby avoiding ‘double payment’ for taxpayer funded technology. Information about the quarterly Economic Forums is available at <>.

Economics Forums: September 2010 The Melbourne Institute is holding the next Public Economics Forum at the Hyatt Hotel Canberra on 14 September 2010, and the topic is ‘Macroeconomic Policy Challenges: Dilemmas for the New Australian Government’. This topic will also be discussed at the next Economics Forum in Melbourne at the Park Hyatt on 16 September 2010. While there has been little Australian productivity growth in the current century, and none (total factor productivity growth) over the last five years, salaries and wages have risen, taxes have been reduced, and government services and social security payments have increased. The Australian community expects these good times to continue.Professor Guay Lim of the Melbourne Institute will discuss some of the macroeconomic issues faced by a small open economy in an everincreasing integrated world, and the difficulties of maintaining balanced sustainable growth. Professor Ross Garnaut AO, Vice-Chancellor’s Fellow at the University of Melbourne, will discuss various ways — productive and disruptive — in which expectations of rising living standards without productivity growth might be resolved. Further information is available at <> or please enquire with Penny Hope on (03) 8344 2151 or by email <>.

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Recent 2010 Melbourne Institute Working Papers 14/10 ‘Personality, Well-being and Heterogeneous Valuations of Income and Work’ Stefanie Schurer and Jongsay Yong    13/10 ‘Do Non-cognitive Skills Help Explain the Occupational Segregation of Young People?’ Heather Antecol and Deborah A. Cobb-Clark 12/10 ‘What Factors Influence the Earnings of GPs and Medical Specialists in Australia? Evidence from the MABEL Survey’ Terence Chai Cheng, Anthony Scott, Sung-Hee Jeon, Guyonne Kalb, John Humphreys and Catherine Joyce   11/10 ‘The Effects of Public Subsidies on R&D Employment: Evidence from OECD Countries’ Russell Thomson and Paul H. Jensen     10/10 ‘The Effect of Waiting Time and Distance on Hospital Choice for English Cataract Patients’ Peter Sivey     Working Papers can be downloaded for free from <>. If you would like to receive an email notification when new Working Papers become available, contact the Melbourne Institute at <>.

Professor Warwick McKibbin This year’s Department of Economics – Melbourne Institute Public Policy Lecture was presented by Professor Warwick McKibbin, Professor and Director of the Research School of Economics (The Australian National University), and Adjunct Professor in the Australian Centre for Economic Research in Health (The Australian National University). He is also a Professorial Fellow at the Lowy Institute for International Policy in Sydney, and is a member of the Board of the Reserve Bank of Australia. Professor McKibbin outlined the key features needed in a climate change framework beyond Kyoto. He advocated a national and global policy framework to address many of the shortcomings of the current policy frameworks. He explained how climate change policy should focus on long-run credibility of targets and short-run cost management. Professor McKibbin presented an approach that would not require ‘starting again’ in either the international negotiations or the national policy design, but it would require some key changes to build a political consensus for action. The lecture was held on 26 August 2010 at the University of Melbourne.

Economics Forum on Global Economic Stability A special Melbourne Institute Economics Forum on ‘Continuing Growth and Global Economic Stability’ was held in association with the Australia China Business Council, on 15 July 2010 at the Sofitel Melbourne. The Forum speakers were Professor Ross Garnaut AO (Vice-Chancellor’s Fellow and Professorial Research Fellow, The University of Melbourne), Professor Wing Thye Woo (Professor of Economics, The University of California at Davis), and Dr Ligang Song (Associate Professor and Director, China Economy and Business Program, The Australian National University). Professor Garnaut spoke on longer term sustainability of Chinese growth, including the external dimensions of sustainability at a time of tensions over exchange rate and climate change policies.

Melbourne Institute News Views expressed by the contributors to Melbourne Institute News are not necessarily endorsed or approved by the Melbourne Institute. Neither the Melbourne Institute nor the Editor of Melbourne Institute News accepts any responsibility for the content or accuracy of information contained in this publication. Editor: Cliff Howard tel: (03) 8344 2154, fax: (03) 8344 2111, email: Sub-Editor: Nellie Lentini. Contributors: Dr Hielke Buddelmeyer, Professor Deborah Cobb-Clark, Professor Ross Garnaut AO, Ms Penny Hope, Associate Professor Paul H. Jensen, Dr Sung-Hee Jeon, Associate Professor Guyonne Kalb, Dr Stefanie Schurer, Professor Anthony Scott, Dr Russell Thomson, Dr Ha Vu, Professor Ross Williams AM, Professor Mark Wooden, Dr Jongsay Yong.

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#29 September 2010 - Melbourne Institute News