This is an edited version of an article published in the Age on 2008-03-20.

The Federal Health Minister, Nicola Roxon, recently told the private health funds that their proposed premium increases from next April were too high and would not be approved unless they were cut.

After further discussions an average rise of 4.99 per cent was approved. This was higher than last year's 4.5 per cent and it was acceptable to the industry.

But the minister had not seemed to realise that health costs, in this high tech age, inevitably increase at a much faster rate than the consumer price index. Some modern equipment delivers wonderful benefits for patients. However, it also tends to be fiendishly expensive.

Furthermore, because the health funds are required to charge a uniform premium regardless of the age of a particular member, Australia's ageing population also leads to higher claims costs per dollar of premium income in successive years.

The minister also seems to have missed another vital point - namely, that the premiums charged for health services are fundamentally different in character from the prices charged for commodities at large.

If the latter are too small then the companies concerned will go broke, but the only persons adversely affected by this will be their shareholders and their lenders, rather than their customers. On the other hand, if a health fund goes under then the victims will be its members - patients whose claims are not able to be met.

Surely the Federal government does not want another HIH?

Of course, the minister was just making a political point. The financing of the health system in Australia is a real mess. It involves a curious mixture of the statutory 1.5 per cent Medicare levy on taxable incomes, of ordinary taxation at both the Commonwealth and state levels, and of the semi-compulsory health fund contributions discussed above.

In addition, some health costs are paid for by employers through the workers' compensation schemes in each state and territory, and also by motorists through schemes covering the victims of road accidents.

It really begs belief that some 108 years after Federation the responsibility for the running of the hospital system is split between the Commonwealth and the states, with its inevitable inefficiencies such as gaps and duplications, not to mention the glorious political opportunities for buckpassing.

In the interests of better transparency, the separate Medicare levy should now be absorbed into the general income tax scale. Although parts of the legislation and official pronouncements pretend otherwise, in order to make the public think that the tax rates are lower than they really are, this levy is really just a part of income tax.

Its imposition under a separate heading is really quite absurd. The 1.5 per cent basic rate covers only about one-seventh of the total health costs actually being incurred by the Commonwealth. This fraction would be roughly halved if the total expenditures on health by governments at all levels were to be taken into account.

The current Medicare levy rate thus gives the public a totally misleading impression as to the real situation. The actual levy rate would need to be nearer to 10 to 20 per cent of taxable incomes to overcome this.

This is mentioned by way of illustration only - it is not being recommended here. Nor is it suggested that the current 31.5 per cent income tax rate including the Medicare levy should simply fall to 30 per cent, as this would deprive the government of too much revenue. Rather the suggestion is that the tax rate just be expressed as 31.5 per cent, without the current official pretence that it is only 30 per cent (and similarly for the other tax brackets).

One other weakness of the present approach comes about because taxpayers with incomes below a defined threshold are exempted from the Medicare levy. This sounds good, but it is accompanied by a special 10 per cent levy rate for incomes just above the threshold, as part of a phasing-in mechanism.

Thus relatively low income earners are subjected to a marginal tax rate of 25 per cent on part of their incomes. (Admittedly, this rate for 2006-07 and 2007-08 is better than the 35 per cent rate which applied in 2005-06.)

Of course, this is not the only instance of turning a simple-sounding tax rate into something more complicated. Collectively such devices can produce a remarkably complex picture.

The present approach also leads to another serious problem for the community, not directly related to taxation. It is that the Medicare levy probably encourages the overutilisation of scarce health services.

At the patient level the thinking tends to be "as we have paid for this we might as well use it" and no doubt some taxpayers try to make a "profit" by claiming more in benefits than they pay by way of the levy.

They tend to go to the doctor for minor ailments in circumstances when they would not bother if they had to pay for the visits out of their own pockets.

At the medical practitioner level the thinking tends to be "as any extra tests will not be costing our patients very much money we might as well order them; even if the additional knowledge gained in this way is only marginally useful, it will at least help to protect us against unwarranted malpractice suits".

It is high time for the community to rethink the way health services in Australia are funded.