This year, the Commonwealth will spend over $50 billion on health and ageing. In 2009-10, it will spend a lot more, courtesy of the COAG deal thrashed out last November.

Depending on your ideology — health ideology, not merely political ideology — there are potentially enormous savings available in that massive portfolio, although the biggest programs are all demand-driven, not capped by the Government. It can only estimate demand and budget accordingly.

But, whisper it quietly if you dare, Australia actually does health very well. You wouldn’t guess it from endless newspaper headlines about emergency ward tragedies and obesity, but, in terms of bang for our buck, Australia looks after itself better than virtually any other country.

According to the Australian Institute of Health and Welfare, we’re equal first in male life expectancy with the Japanese, and second only to France in female life expectancy. We have significantly improved most of our key health indicators in life expectancy, risk factors and mortality since 1987, although our performance on chronic diseases and dental health hasn’t been great.

Some areas of improvement, like the big reduction in the road toll, and our dislike of firearms, are outside the health portfolio, but other areas like tobacco use are the result of sustained intervention by governments of all hues.

And we’ve achieved that despite spending less on health as a proportion of GDP than the OECD average, or, calculated on a per capita basis, about average.

What we don’t have, of course, is equity of outcomes. The lower your income and the further away from cities you live, the poorer your health. The most disadvantaged of all, indigenous Australians, have the worst health, despite greater per capita expenditure.

The biggest issue in the health budget should therefore be how to maintain our overall strong performance while redirecting savings toward improving health outcomes for the disadvantaged. Doing this while avoiding the apparently remorseless pressure to pump money into metropolitan hospitals serving the healthiest, wealthiest and most media-savvy Australians is a big ask.

Greater use of means-testing and co-payments would provide some savings and free up resources to redirect toward priority areas. There has been speculation about means-testing or capping the Medicare safety net (subject of Tony Abbott’s famous “rock-solid” commitment on thresholds), with particular focus on the exorbitant cost of IVF treatment. This has drawn predictable bile from the maternal fundamentalists on baby forums and the IVF lobby. The safety net itself costs $320m a year (a tiny amount in the health portfolio), but means-testing it could enable a lower limit than the current $1100+, redirecting taxpayer funding to improving health outcomes for lower-income families rather than subsidising, say, middle-class fertility.

Much greater savings are available from means-testing the private health insurance rebate, which cost over $3.4b last year. Since the ALP apparently cannot bring itself to reverse this policy disaster of a subsidy, means-testing it would be the next best thing and yield several hundred million dollars from ending the practice of taxpayers funding the health insurance of the well-off. They would be likely to take out such insurance anyway, meaning the impact of means-testing on the private health insurance industry — ever ready to cry poor — would be minimal.

Co-payments are a well-established component of the health system. The Pharmaceutical Benefits Scheme has long relied on consumers paying up to an indexed threshold, capped at an annual safety net limit. Labor tore itself apart over the issue of Medicare co-payments in 1991, helped along by a self-exiled Paul Keating. Co-payments for GP visits, unless hideously high, won’t offer much in the way of offsets, but will introduce the basis of a price signal in circumstances where consumers are encouraged to over-use a service.

In practice, the simplest way to address the issue is to end bulk-billing, but this would be sacrilege for a Labor Government, as would the next step of introducing some sort of price mechanism to curb overuse of emergency wards — a problem State and Federal Governments prefer to try to address the carrot of establishing nearby GP services, rather than the stick of charging a small amount.

Fortunately, pathology and radiology companies are already considering implementing co-payments for services currently free to patients as a result of Federal Government efforts to curb funding — pathology and diagnostic imaging cost over $3 billion in 2006-07 and has increased significantly since. Nicola Roxon might like to pretend that this is merely the result of such companies trying to gouge patients, but she should be encouraging them to end free services and being upfront that this is a deliberate approach on the part of the Government. All doctors know of patients who complain of ” tiredness” or “not feeling 100%” and demand a blood test despite no clinical reason.

The biggest single item in the health portfolio after Medicare, pharmaceuticals and hospital funding is ageing and aged care, with nearly $6 billion allocated to residential care subsidies this year and a further $1 billion expenditure on seniors’ health and other services. Aged care funding is a slow-motion crisis unfolding under the media radar, only occasionally breaking the surface with stories of poor care in aged care facilities.

In short, Australia faces a doubling in demand for aged care places in the next twenty years and no clear means of funding it beyond ever-greater government payments. There are also shorter-term problems that are just as difficult to resolve, like the sector’s inability to recruit qualified nurses because it can’t pay as much as the health sector — the subject of an entirely justified campaign by aged care nurses at the moment.

Both the Government and the industry are worried about the long-term funding problem. The Minister, Justine Elliott, has upset the industry with her strong focus on greater scrutiny and reporting of aged care standards in individual facilities, although it forms part of this Government’s overall emphasis on greater reporting and consumer information levels. The broader problem is that there are only two possible sources of greater industry funding — Government or consumers. The National Health and Hospitals Reform Commission recommended in its interim report a shift from funding based on places to funding based on people to drive increased choice and competition, while also leaving the door open to accommodation bonds in appropriate circumstances.

There are, oddly enough, no easy answers. The issue has claimed better Ministers than Justine Elliott. No one will forget how Warwick Smith, one of the finer minds ever to grace the Coalition partyroom, came a cropper in the early years of the Howard Government. That’s probably one of the reasons why one of the heaviest hitters from the Bob Carr years in NSW, Walt Secord, was put into the otherwise-obscure office of the Minister for Ageing. The more successful our health system, the longer Australians live — and the longer they will need aged care services of all varieties. The problem of an ageing population will grow with every budget for decades to come.

Tomorrow: Education