Home' Policy Magazine : Policy Vol 33 - No 3 Contents 28 POLICY • Vol. 33 No. 3 • Spring 2017
ENDING THE BLAME GAME: FEDERALISM AND HEALTHCARE
Box: An Opt-out Model for Federalism Reform
• Achieving universal agreement among the states on reform of the federation would be difficult. In the absence
of consensus, one solution could allow states individually and voluntarily to reclaim their income tax powers
and authority over health policy, in conjunction with a tax swap with the federal government. However, this
would involve the federal government striking differential rates of income taxes across states. This would be
unconstitutional: sections 99 and 51(ii) of the Australian Constitution prohibit unequal treatment of states by the
Commonwealth with respect to taxation.
• Optional reform of the federation, state-by-state, in an indirect but constitutionally valid form would still be
possible. For states acting alone, this could be done if the federal government were to agree to:
A. Convert the existing federal specific purpose payment for state health services into a general purpose payment.
This would simultaneously release the state from its Medicare obligation to provide free public hospital care
inherent in the conditions of the specific purpose grant.
B. Index the general purpose payment to the amount of health funding the state would otherwise receive according
to the formula used to distribute health funding to other states.
C. Identify the value of the general purpose payment with the equivalent percentage of federal income tax revenue
collected in the state. This would become the ‘public hospital levy’ in all but name.
D. A state could, if it wished, supplement the federal public hospital levy either by imposing its own income tax
surcharge or levy or by issuing a tax rebate under its own legislation but administered by the ATO.
• The opt-out federalism model proposed here has the potential to achieve the following beneficial outcomes:
1. Establishing an indexed general purpose ‘health’ grant transparently linked to a specified percentage of the
federal income tax collected in the state would end the blame game by making it clear that the citizens of the
opt-out state were paying for public hospitals. The percentage of federal income tax so identified as the de
facto ‘public hospital levy’ would represent the real cost of operating public hospitals. Publication of the real
public hospital levy would immediately make the state more accountable to voters for how this money is spent
on public hospitals.
2. Under an opt-out model, the restoration of state accountability for health would be further enhanced if
participating states chose to supplement the federal public hospital levy with their own additional surcharge
through a state income tax, as their needs dictated. A hospital surcharge would give opt-out states powerful
political incentives to undertake supply- and demand-side reforms. On the other hand, opt-out states would win
through voter acclaim were they to reduce income tax or perhaps rebate part of federal income tax/state hospital
levy to taxpayers as an ‘efficiency dividend’ for operating sustainable hospital systems. Attention could be drawn
to the extent of the gain that each household could derive by specifically inviting them to claim the hospital
efficiency rebate as part of their annual tax return.
be equivalent initially to the amount of federal
hospital funding. This would effectively release a
state from its obligation under Medicare to provide
free public hospital care.
The percentage of the federal income tax
surrendered could thereafter be designated ‘state
income tax’, and could rise or fall as participating
states determined, and as necessary to meet the cost
of public hospitals. The political responsibility for
raising the state income tax rate would encourage
states to undertake the demand-side initiatives
to control the use and contain the cost of public
To better manage demand for hospital services,
state health policy should therefore incorporate
patient cost-sharing in the form of a compulsory
co-payment for public hospital treatment, which
should be introduced as a ‘revenue neutral’
measure to pre-empt equity and electoral concerns.
Quarterly compensation, equivalent to the
actuarial cost of a typical household’s expected
co-payment charges, could be paid automatically to
all households in the state—regardless of whether
they actually used a public hospital service. The
cost of the compensation would be recovered by
the revenue generated by the co-payment, by the
savings generated by more rational use of hospital
services, and by encouraging the use of lower-cost,
non-inpatient substitute treatment options.
Not all jurisdictions may have an appetite for a
state income tax—let alone demand-side hospital
reform. An alternative ‘opt-out’ approach might
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