VCE Health & Human Development (Year 12) · Australia's Health System · 16m read

Funding and Financing the Health System

Ever wondered who actually foots the bill when you visit a doctor or hospital? Australia's health system relies on a mix of public funding through taxes, private insurance, and out-of-pocket payments from individuals — and the way money flows through the system directly affects whether everyone gets fair access to care. You'll explore how different groups experience these costs differently and whether the current setup truly supports equitable healthcare for all Australians.

Learning objective: Explain how Australia's health system is funded and evaluate whether funding is equitable.

By the end of this lesson you can:

• I can distinguish public and private health funding sources.
• I can explain the Medicare Levy and its purpose.
• I can evaluate equity of health funding in Australia.

Health funding is a shared bill. Governments, insurers and individuals each pay part of the cost of keeping people healthy.

Health system funding in Australia

### Public funding sources

• Medicare Levy (2%): Paid by most Australian taxpayers on taxable income. Funds Medicare rebates and public hospital care.
• Medicare Levy Surcharge (1-1.5%): Additional levy on high-income earners without private hospital cover — incentivises taking private insurance.
• General taxation revenue: Majority of health spending comes from consolidated revenue beyond just the Medicare Levy.
• State government funding: Contributes to public hospitals, community health, ambulance services.

### Private funding sources

• Private health insurance premiums: Paid by ~44% of Australians. Covers private hospital care and extras (dental, optical, physio).
• Out-of-pocket payments: Co-payments, gap fees, non-bulk-billed visits.
• Employers: Some workplace health programs funded by employers.

### Distribution of health spending

Australia spends ~10% of GDP on health (~$220 billion annually). Breakdown:
- Federal government: ~41%
- State/territory governments: ~26%
- Private sources (insurance + out-of-pocket): ~33%

### Equity issues

Equity in funding: Those with higher incomes pay more Medicare Levy (proportional) AND are more likely to have private insurance — contributing to the system without necessarily receiving more benefit.

Equity in access: Despite universal Medicare, equity gaps persist:
- Rural and remote areas: fewer GPs, specialists, and hospitals.
- Lower socioeconomic groups: less likely to bulk bill (GP reluctance in affluent areas), higher rates of chronic disease.
- Aboriginal and Torres Strait Islander peoples: face geographic, cultural, and structural barriers.

AARI TIP: Ask Aari about the arguments for and against increasing the Medicare Levy to fund better healthcare.

Quick reference

| Source | Example |
|---|---|
| Federal government | Medicare, PBS |
| State government | Public hospitals |
| Private health insurance | Extras, private hospital |
| Individuals | Out-of-pocket costs |
| Medicare levy | 2% of taxable income |

Key ideas at a glance

• Sustainability: Rising costs.
• Equity: Access for all.
• Rebates and surcharges: Incentives.
• Evaluate: Strengths and limitations.

Worked example (Medium)

Explain how Australia's health funding model balances public and private sources.

1. Public funding sources. The federal government funds Medicare and PBS through the Medicare Levy (2% of taxable income) and general taxation revenue, contributing ~41% of total health spending. State/territory governments contribute ~26%, primarily funding public hospitals, community health services, and ambulance services.
2. Private funding sources. Private health insurance premiums (held by ~44% of Australians) and out-of-pocket payments contribute ~33% of total health spending. Government incentivises private insurance through the Private Health Insurance Rebate, Lifetime Health Cover Loading, and Medicare Levy Surcharge.
3. The balance. This mixed model aims to provide universal baseline access (Medicare) while allowing choice and reducing public system pressure through private insurance. However, the balance creates a two-tier system: those with private insurance access faster elective surgery, choice of doctor, and broader services — creating an equity tension within a supposedly universal system.

Answer: Australia's ~67% public / ~33% private health funding model provides universal access through Medicare while using private insurance to reduce public system pressure — but creates equity concerns as privately insured patients access faster and broader care.

Worked example (Hard)

Evaluate whether Australia should increase the Medicare Levy to expand Medicare coverage to include dental care.

1. The dental exclusion problem. Medicare excludes dental care for most adults. AIHW reports 1 in 3 Australian adults delayed or avoided dental care due to cost in 2020–21. Poor oral health is linked to cardiovascular disease, diabetes complications, adverse pregnancy outcomes, and mental health — making dental exclusion a significant public health gap.
2. Case for expanding Medicare. Including dental care would improve health equity — the socioeconomic gradient in dental health is one of the steepest in Australia. Low-income Australians have significantly worse oral health and much lower rates of preventive dental visits. Universal dental coverage would enable preventive care, reducing costly emergency dental presentations and downstream chronic disease costs.
3. Funding and implementation challenges. Expanding Medicare to dental would cost an estimated $5–7 billion annually. Increasing the Medicare Levy from 2% to 2.5% could raise ~$8 billion — sufficient to fund dental inclusion. However, a tax increase faces political resistance. The dental workforce may be insufficient to meet demand — private dental practices are concentrated in metropolitan areas, and wait times for public dental services already exceed 12 months in some states.
4. Evaluation. The health case for dental inclusion is strong — the economic case (preventive dental care reducing downstream costs) supports it. However, implementation requires simultaneous workforce expansion, geographic distribution strategies, and sustained political will to increase taxation. A phased approach (children and concession card holders first, expanding over time) may be more politically and practically feasible.

Answer: Expanding Medicare to dental care is justified by both equity and economic evidence, but requires a Medicare Levy increase and dental workforce expansion. A phased approach targeting the most disadvantaged groups first would balance health improvement with practical feasibility.

Common mistakes

• Treating the Medicare Levy as the sole funding source for Medicare The Medicare Levy (2% of taxable income) raises only a fraction of total health spending. The majority of federal health funding comes from general taxation revenue — the Levy is a visible, dedicated contribution but not the whole picture. Fix: State: "Medicare is funded through a combination of the Medicare Levy (2% of taxable income), general taxation revenue (the larger source), and the Medicare Levy Surcharge (1–1.5% on high earners without private cover)."
• Forgetting to distinguish federal and state/territory health responsibilities VCAA expects you to understand the division: federal government funds Medicare, PBS, and aged care; state/territory governments fund public hospitals, ambulance, and community health. Confusion about this division is a common exam error. Fix: Create a clear mental model: "Federal = funding and insurance (Medicare, PBS). State = service delivery (hospitals, ambulance, community health). Private = choice and extras (elective surgery, dental, optical)."
• Ignoring out-of-pocket costs when discussing equity Even with Medicare, Australians pay significant out-of-pocket costs — gap fees for non-bulk-billed services, dental, optical, and allied health. These costs disproportionately affect low-income households. Fix: Always mention out-of-pocket costs: "Despite Medicare, out-of-pocket health spending has risen faster than inflation — averaging ~$1,200 per person annually (AIHW), creating a growing barrier to equitable access, particularly for dental and non-bulk-billed GP services."

The Medicare freeze and its equity consequences

Between 2014 and 2020, the Australian government froze the Medicare Benefits Schedule (MBS) rebate — meaning the amount Medicare paid doctors for consultations did not increase despite rising practice costs (rent, staff, equipment, insurance).

What happened: As the gap between the MBS rebate and the actual cost of providing a consultation widened, many GPs stopped bulk billing — they could no longer absorb the difference. Bulk billing rates declined in many areas, particularly in regional centres and affluent metropolitan suburbs where patients could afford to pay gap fees.

Equity impact: The Medicare freeze disproportionately affected: (1) low-income patients who could not afford gap fees and either delayed care or switched to bulk billing clinics (often with longer wait times and shorter consultations); (2) patients with chronic conditions requiring frequent GP visits — the cumulative gap fees became a significant financial burden; (3) rural patients — already facing fewer GPs per capita, they also faced higher proportions of non-bulk-billing doctors.

The broader lesson: The Medicare freeze demonstrates a critical vulnerability in Australia's health system — Medicare's effectiveness depends on the MBS rebate keeping pace with the real cost of healthcare delivery. When it doesn't, the "universal" system develops gaps that mirror the socioeconomic gradient in health. For VCAA exam questions evaluating Medicare, the freeze is a powerful contemporary example of how funding decisions directly affect equity of access.

The 2023 federal budget addressed this by increasing the bulk billing incentive, but many health economists argue the fundamental MBS rebate remains inadequate relative to practice costs.

Practice questions

1. The Medicare Levy Surcharge (MLS) is designed to:

   1. Fund the NDIS
   2. Encourage high-income earners to take out private health insurance
   3. Increase the size of the public hospital sector
   4. Pay for PBS medications

   (1 marks)

2. Evaluate whether Australia's health funding system promotes equity.

   (3 marks)

Summary

• Medicare Levy (2% of taxable income) + general taxation funds public health.
• MLS: extra levy for high earners without private hospital cover.
• Private funding: ~33% from insurance and out-of-pocket payments.
• Equity: universal Medicare improves access; rural/remote/Indigenous gaps persist.