The provision of health services is an important part of the Australian economy, accounting for 9.0% of all goods and services produced in Australia in 2006-07 (Table 2.2).

This report examines expenditure on health goods and services in Australia for 1996-97 to 2006-07 at the aggregate level, as a proportion of GDP, on a per person basis, by state and territory, by comparison with other OECD and Asia-Pacific countries, and by source of funding - the Australian Government, state and territory and local governments, and the non-government sector.

What is health expenditure?

Health expenditure comprises recurrent and capital expenditure on hospitals, medical services, dental services, patient transport services, other health practitioner services, community and public health services, medications, aids and appliances, health research and the administrative systems that support these services.

In editions of Health expenditure Australia prior to 2005-06, the high-level care component of residential aged care was included with health, but this has been reclassified to welfare services which now includes all aspects of residential aged care.

What does Australia spend on health?

In 2006–07, total expenditure on health goods and services reached $94 billion, or $4,507 per person. This was just over $7 billion, or $286 per person, more than was spent in 2005–06, and after adjusting for inflation, represented an increase of 4.8%. Health expenditure increased in real terms every year in the preceding decade (tables 2.1 and 2.6).

Expenditure on health grew at a similar rate to spending on all other goods and services in the economy in 2006–07. As a result, the heath expenditure to GDP ratio remained at the same level as in 2005–06 (9.0%). It was also 9.0% in 2004–05. However, for the decade as a whole, average annual real growth in health expenditure was 4.9% compared with 3.6% growth in GDP, resulting in a substantial increase in the health to GDP ratio from 7.7% in 1996–97 to its current 9.0% (tables 2.2 and 2.3).

Compared with other OECD countries, Australia spent a similar proportion of GDP on health as Italy, New Zealand and Norway, more than the UK, but considerably less than the USA where health spending accounted for 15% of GDP (Table 6.1).

Who pays for health expenditure?

The majority of health expenditure in 2006-07 (69%) was funded by governments, with the Australian Government contributing $40 billion (42%), and state, territory and local governments contributing $25 billion (26%). The remaining $29 billion (31%) was funded by individuals, private health insurers, and other non-government sources (tables 3.1 and 3.2).

Australian Government funding

In 2006-07, the Australian Government provided 62% of total government health funding (Table 3.1). It did this through expenditure on its own programs such as Medicare and the Pharmaceutical Benefits Scheme ($23 billion), grants to the states and territories for health ($10 billion), rebates on private health insurance premiums ($3 billion), payments for health services for veterans and their dependants through DVA ($3 billion), and tax expenditures ($382 million) (Table 3.5).

Although the Australian Government has consistently been the largest single source of funds over the period 1996-97 to 2006-07 (ranging from 41% in 1996-97, to a peak of 44% of all funding in 2000-01), its funding share has declined in recent years and is now 42% of total health expenditure (Table 3.2). In 2006-07, expenditure by the Australian Government rose by 3.8% - below its 5.2% average annual growth for the decade (Table 3.4).

The Australian Government share of funding of public and private hospitals increased from 36% in 1996-97 to 45% in 2000-01, and then declined in every year since to 40% in 2006-07 (Table 4.4).

State, territory and local government funding

While the Australian Government provides the majority of government health funding, state and territory governments are the main providers of publicly provided health services.

The biggest area of responsibility for state and territory governments is public hospitals - $14 billion out of their own funding sources to public hospitals in 2006-07. This makes state, territory and local governments the largest provider of public hospital funding - providing 52% in 2006-07, compared with 40% by the Australian Government (33% through the Australian Health Care Agreements (AHCAs)), and 8% from non-government sources (Table 4.5). The state and territory government funding share of public hospitals was 49% in 1996-97, it was 47% in 2002-03 (the last year of the previous AHCAs), and then increased to 52% in 2006-07. Australian Government funding of public hospitals through the AHCAs was 39% in 1996-97. In 2002-03, the share was 38% and, as noted above, since then it has declined to 33% in 2006-07 (Table 4.6).

Real growth in total state, territory and local government funding for health averaged 5.8% per year between 1996–97 and 2006–07 (Table 3.4).

Non-government funding

The non-government sector funded 31% ($29 billion) of total health expenditure in 2006-07. Individual out-of-pocket payments accounted for 17% ($16 billion); private health insurance funds provided 7% ($7 billion); and other non-government sources (mainly compulsory motor vehicle third-party and workers’ compensation insurers) accounted for the remaining 7% ($7 billion) (Table 3.7).

Over the decade to 2006-07, the share of funding by private health insurance has fallen to 7.3% (from 11% of health funding in 1996-97), accompanying the introduction of the Australian Government’s partial funding of private health insurance from 1997 (Table 3.7).

Of the $16 billion of out-of-pocket payments in 2006–07, around one-third (34%) was spent on medications, and a further 24% was spent on dental services (Figure 3.3). While the total proportion of health funding that was from non-government sources has declined over the decade to 2006–07 (31% in 2006-07 down from 34% in 1996-97), the share of out-of-pocket expenditure by individuals has increased. It comprised 16% of health expenditure in 1996-97 and rose to a high of 18% in 2000-01 and 2001-02. In 2006-07 it was 17% (Table 3.7).

According to analysis of the ABS Household expenditure survey (Chapter 5), Australian households spent an average of $18 per week on health goods and services in 2003–04, the latest year for which survey data are available (Table 5.7). This represented 5% of their total expenditure (Table 5.11). The amount of this expenditure was considerably higher for people in older households (that is where the reference person designated by the household was 65 years or older) - averaging $25 per week per person compared with $17 for households with a reference person aged under 65 years. As a percentage of income, older households spend 7.2% of their income on paying for health goods and services, compared to 3.7% of income spent by younger households on health goods and services (Table 5.8).

In 2003-04, the areas of expenditure accounting for the largest share of health expenditure by households were: accident and health insurance (an average of $7 per week, or 39% of total household health expenditure); health practitioners’ fees ($6 or 31%); and medicines, pharmaceutical products and therapeutic appliances ($5 or 25%) (Table 5.7).

Where does the money go?

In 2006-07, three areas dominated health expenditure. The biggest area of expenditure was hospitals, which accounted for 39% of recurrent expenditure (that is, excluding capital expenditure and capital consumption). Of the $34 billion spent on hospitals, $27 billion was for public hospital services, and $7 billion was for private hospitals. Expenditure on medical services was $17 billion (19%) and expenditure on benefit-paid pharmaceuticals and other medications was $12 billion (14%). Together, these three areas of expenditure accounted for nearly three-quarters (72%) of all recurrent spending on health (tables A3 and A9).

This proportion is representative of the pattern of expenditure over the decade to 2006-07. During this period, expenditure on the three major areas has remained within a 3 percentage point range of between 72% and 75% of recurrent expenditure (Table A9).

The fastest growing areas of expenditure in 2006-07 were patient transport services (up 16% in real terms on what was spent in 2005-06), public health (up 13%) and research (up 8%) (Table A8).