THE LUCKY COUNTRY GOES BEGGING
TABLE OF CONTENTS

Chapter 6

The Health Sector

Provisions of the legislation relating to health care

Health and medical services

6.1 According to the Government's proposals, generally, medical and hospital care services and health insurance are GST-free. In its deliberations on the health sector, the Vos Committee noted the Government's rationale for making most medical and hospital services GST-free:

Applying taxes to health care would place the private health sector, with its heavier reliance on direct fees, at a competitive disadvantage with the public health system. [1]

6.2 Although many submissions to the Vos Committee argued that health was a `public good' and therefore deserving of even more concessionary treatment than that proposed by the Government, the Committee could only acknowledge the intrinsic merit of health and confine its considerations to the guidelines established by the Government. To frame recommendations on the basis of the `merit' argument would have gone beyond the Committee's terms of reference. [2] Within these restrictions, the Vos Committee made a number of recommendations expanding on the Government's policy outlined in Tax Reform: not a new tax, a new tax system which were accepted and included in the subsequent legislation.

6.3 A New Tax System (Goods and Services Tax) Bill 1998 (the Bill) provides that a supply of a medical service is generally GST-free if it is provided by or on behalf of a `medical practitioner' or an `approved pathology practitioner', who are defined as a person who holds the same title for the purposes of the Health Insurance Act 1973. The medical service will be GST-free if it is a service that is `generally accepted in the medical profession as being necessary for the appropriate treatment' of the patient. [3] Examples of GST-free health services include:

• health services covered by Medicare;
• general practitioner and specialist consultations; and
• diagnostic, surgical and therapeutic procedures (for example, opthalmology, neurology, optometry, radiation oncology, anaesthetics, radiology, ultrasound etc) and pathology.

6.4 A supply of a medical service is not GST-free if it is provided in prescribed circumstances within the meaning of regulation 14 of the Health Insurance Regulations. This would include the removal of tattoos and injection of prescribed substances in the management of obesity. Medical services provided in relation to cosmetic surgery or other cosmetic procedures will not be GST-free unless a Medicare benefit is payable for such a service. For example, a nose reconstruction for purely cosmetic reasons would not be GST-free but a nose reconstruction that alleviated a breathing difficulty or was performed following an accident would be GST-free.

6.5 Goods that are supplied in the course of a medical service will also be GST-free, for example bandages, dressings and antiseptics, as is the supply of goods if it is made at the premises at which the medical service is supplied.

6.6 Other health services will be GST-free if they are provided by the following health practitioners as listed in section 38-10 of the Bill. The services originally proposed by the Government in their tax reform policy were expanded on the recommendation of the Vos Committee. As noted above the services must be necessary for the appropriate treatment of the patient and be of the type normally supplied in that profession. The listed services are:

• Aboriginal or Torres Strait Islander health;
• audiology, audiometry;
• chiropody;
• chiropractic;
• dental;
• dietary;
• nursing;
• occupational therapy;
• optical;
• osteopathy;
• paramedical;
• pharmacy;
• psychology;
• physiotherapy;
• podiatry;
• speech pathology;
• speech therapy; and
• social work.

6.7 The practitioner must be a `recognised professional' – a member of a relevant professional body subject to State or Territory government professional registration or uniform national professional self-regulation. In certain hearing related services the practitioner must be an accredited service provider under the Hearing Services Administration Act 1997.

6.8 The original tax reform policy had proposed that `commonly used health services' such as dental and optical be GST-free. The Vos Committee therefore restricted its consideration of GST-free health services to those that were very similar in nature to, or fitted the general characteristics of, those listed in the original Government policy. The Vos Committee noted that these health services `would generally be considered by the community to be mainstream rather than complementary or alternative, and have been available as a specialist service, with specific qualifications for some time'. [4]

6.9 A supply is GST-free if it is provided by an ambulance service in the course of the treatment of a patient. Other government funded health services will be GST-free where:

• a supplier receives funding from Commonwealth, State or Territory governments in connection with the supply of the health service;
• the supply is connected with the supply of a health service; and
• the health service is approved by the Minister as essential for patient welfare.

For example, coordinated care services where a care provider coordinates medical and other health services on behalf of a patient.

6.10 The Bill also provides a list of medical aids and appliances specifically designed for people with an illness or disability, supplies of which will be GST-free. These medical aids and appliances are discussed in the chapter on disability services.

Hospital treatment

6.11 Hospital treatment in both private and public settings will be GST-free except when providing cosmetic and other, limited, services as outlined in the section on medical services. Hospital treatment includes meals, accommodation and nursing services in addition to any medical treatment that an individual may receive while in hospital. It also includes goods used as part of the treatment of an individual (eg drugs and medicines, crutches and wheelchairs) and services such as hospital in the home, outpatient and community outreach services.

6.12 Goods and services that are not integral to the treatment of an individual will have a GST applied, including television and phone rental services. Food served in hospital cafeterias would also come within this category. [5]

Pharmaceuticals and health remedies

6.13 The Government originally proposed that prescription only pharmaceuticals, and pharmaceuticals supplied on prescription and listed on the Pharmaceutical Benefits Scheme (PBS) or the Repatriation Pharmaceutical Benefits Scheme (RPBS) would be GST-free. This policy was subject to advice from the Vos Committee.

6.14 The Vos Committee indicated that the issue of whether certain drugs and medicines possess meritorious qualities, was not one that was used as the basis for the Committee's decision. Instead, the Vos Committee considered the competing objectives of simplicity in administration and compliance, clear and definitive boundaries, and limits to concessional treatment for revenue protection, as the basis for drawing boundaries on this issue. [6]

6.15 The Vos Committee recommended, and the Government accepted, that drugs and medicines to be GST-free should be limited to:

• drugs and medicines that can only be provided on prescription (S4 and S8 items on the Standard for the Uniform Scheduling of Drugs and Poisons);
• drugs and medicines that can only be sold within a pharmacy under the advice of a pharmacist (S3 on the Standard for the Uniform Scheduling of Drugs and Poisons); and
• PBS and RPBS products provided on prescription.

6.16 A crucial issue for the Vos Committee to determine was the treatment of over the counter non-prescription drugs and medicines. The Vos Committee concluded that if GST-free treatment were to be extended generally to over the counter drugs, it would add complexity by imposing a burden on general retailers, requiring them to separately account for sales of these products. [7]

6.17 The Department of Health and Aged Care (DHAC) submitted that individuals who have a medical reason to be high users of some over the counter drugs, such as stroke victims who may require small doses of aspirin daily, generally receive prescriptions from their medical practitioner for these medicines, and take these preparations under strict medical supervision. As is appropriate in these cases, the prescription will be GST-free. [8]

6.18 DHAC referred to some confusion about why particular medicines may be listed on more than one Schedule of the Standard for the Uniform Scheduling of Drugs and Poisons, and consequently will have a different tax treatment. There are some products that are available on Schedule 2 (S2) or Schedule 3 (S3), or in prescription form, depending on the amount of active ingredients and the volume of the drug that may be sold. DHAC argued that there are sound medical reasons for this scheduling. For example, excessive usage of some ingredients, such as pain relievers, may have adverse effects or mask and hide long term symptoms about which individuals should consult a medical practitioner.

6.19 The Vos Committee also considered submissions seeking GST-free treatment for natural remedies and suggestions that the Australian Register of Therapeutic Goods (ARTG) schedule be used as the basis for regulating the types of drugs that would qualify for GST-free treatment. However, the Vos Committee `felt that such proposals had significant adverse revenue implications and would not be simple to administer and could significantly add to compliance burdens on business'. [9]

6.20 DHAC noted that pharmaceuticals listed on the PBS have been through an evidence-based safety and efficacy process. [10] While the Department commented that a similar efficacy process does not apply to natural therapy goods, the Committee notes that the Government recently introduced amendments to the Therapeutic Goods legislation to regulate and manage complementary medicines to ensure that these medicines are safe, effective and of a high quality.

General issues arising in relation to health and medical services

Modelling

6.21 Both the Departments of Health and Aged Care, and Family and Community Services told the Committee that they had not undertaken any analysis on the impact of the new tax changes. There had been no modelling to examine how the GST would affect the health and community sectors. The evidence provided at the hearing stated that that was a matter for Treasury. [11]

6.22 The Committee notes the discussion in the First Report of the Select Committee on a New Tax System on macro and micro economic modelling. [12] The Select Committee noted that microeconomic models can incorporate individual economic units such as households or firms which may then be grouped into individual markets or industries, including the relationship between them.

6.23 The Treasury model, PRISMOD (which was used to create the cameos in Tax Reform: not a new tax, a new tax system), drew considerable comment in evidence before the Select Committee. One of the assumptions used in the Treasury calculations was to assign the same cost of living measure to all households, ie an average. Most other modellers disagree with this approach and prefer to assign different cost of living measures depending on household income levels.

Department of Health and Aged Care: no assessment of health impact of imposing

GST on pharmaceuticals and fresh food

CHAIR – Has the department undertaken any research, or are you aware of any research, that indicates what might be the impact of taxing fresh food in terms of health outcomes?

Ms Briggs – No, Senator. To my knowledge no research on that matter has been
undertaken.

CHAIR – Is it something the department might do?

Ms Briggs – At this stage we have no intention of doing so.

CHAIR – Equally, have you done any research or made any calculations about the
impact of the GST on Aboriginal and Torres Strait Islander people in terms of increased costs, particularly of food, for example, and particularly for those living in remote areas?

Ms Briggs – Certainly these are issues that we have considered, yes, and provided advice on in the appropriate fora.

CHAIR – Is that advice available to the committee?

Ms Briggs – That was advice to our minister in cabinet contexts.

CHAIR – Just to be clear, the answer to the question is that, no, there has been no
research done on the impact of fresh food but that there has been some advice around similar issues about the impact on remote Aboriginal and Torres Strait Islander people?

Ms Briggs – Certainly those were among the issues we considered, yes.

CHAIR – Thank you.

Senator CHRIS EVANS – What is the effect on those people?

Ms Briggs – I am sorry but, as I explained to Madam Chair, that was advice to the
minister.

Senator CHRIS EVANS – I am not asking you what you advised the government; I am asking you, as the department for health, what you think the impact of those changes will be on those people.

Ms Briggs – As I think Ms Davidson explained earlier, issues to do with price effects

and compensation are really a matter for Treasury.

Senator CHRIS EVANS – I was not asking about price effects; I was asking about
health effects. I am asking you as the health department about health outcomes. You have, in glowing terms, endorsed the package in this submission to us. I am asking you what work you have done on health outcomes arising from the changes to the taxation regime on food, pharmaceuticals and other things.

Ms Briggs – As I explained to you, we have done no detailed work in that area.

Senator CHRIS EVANS – So we do not know what the impact will be in that area?

Ms Briggs – No, we do not.

Source: Committee Hansard, 2.2.99. pp. 41-42.

6.24 The Select Committee referred to the belief of key social welfare groups that Treasury's modelling underestimates the impact of the GST on the living costs of low income households because it does not take account of variations in savings and expenditure patterns among different households. [13] Similar criticism of the use of an average in being unable to account for variations in low income households' savings and expenditure patterns was also made in evidence to the Community Affairs Committee.

Impact on users of over the counter medications and health products

6.25 The weight of evidence received by the Committee indicated that the application of the GST on over the counter medications and health products would be felt mostly by those who can least afford it, specifically:

1. those on low incomes;
2. the elderly;
3. residents of rural and remote areas;
4. the chronically ill; and
5. families with young children.

(a) Low income households

6.26 Households with the lowest income levels spend a much greater proportion of their disposable income both on health care generally, and non-prescription medication than households in the highest income levels.

6.27 The lowest 20 per cent of households, which have an average weekly income of $151.66, spend $14.81 per week or 9.7 per cent of their income on total medical care and health expenses. Households in the highest 20 per cent bracket on an average weekly income of $1608.77 spend $45.73 a week or 2.8 per cent of their income. [14]

6.28 In the lowest household income group, $2.84, or 19.2 per cent of the total expenditure on medical and health expenses, is made up of non-prescription medicines and products defined in the ABS Household Expenditure Survey.

6.29 In addition, low income earners tend to encounter a higher level of health problems than higher income earners.

6.30 The imposition of a 10 per cent GST will mean that low income earners will have the harsh choice of whether to devote a higher percentage of their income to maintain the same level of self medication for themselves and their children, or to reduce this important aspect of health treatment and suffer from even greater health inequalities compared with those who can afford to look after themselves adequately.

(b) Older people

6.31 The use of medication generally increases with age, with about 92 per cent of people aged 75 and over using medications regularly. [15] The application of a GST on over the counter medication will mean increasing costs for treatments upon which these older people rely. Important products used by older people include bandaids, paracetamol, creams and stretch bandages to treat painful arthritic conditions (a very common health problem amongst older people), medicated creams as well as gels, and antifungal creams, and creams for the treatment of ulcers. In a double blow, some of these treatments were recently de-listed from the PBS leading to higher `out of pocket' costs for those older people dependent on the therapeutic effects of these medicines. [16]

(c) Residents of rural and remote areas

6.32 Australians living in rural and remote areas have unequal access to health services due to the concentration of many services and doctors in larger urban areas. People in rural and remote areas travel considerable distances to access health services. Despite incentives programs, it has been difficult to attract and retain GP's to practice in rural areas. There has been a parallel decline in the number of rural pharmacies.

6.33 As a consequence rural and remote residents tend to visit the doctor less frequently and self-medicate with non-prescription medications. The effect of the proposed definitions for which items would be GST-free will discriminate against rural people who rely more heavily on those items excluded from the definition of health products.

(d) People with chronic illness

6.34 Research provided to the Committee by the Chronic Illness Alliance and Consumers' Health Forum [17] shows that many chronically ill people cannot afford the required medication for all their health needs, particularly when encountering added minor acute illnesses such as coughs and colds. Many are forced to choose which of their illnesses to purchase medicines for, or to go without medication in order to buy medicines for their children. Many may also be forced to take medication only when the symptoms become extreme, or to only take part of the required dosage.

6.35 The Chronic Illness Alliance's research found that the costs of both medication and associated needs are a major contributor to hardship for all people with chronic illness, regardless of income. They are high users of S2 products bought at a pharmacy. The Committee shares the concern expressed by a number of groups that on top of a range of other expenses encountered by the chronically ill, the GST on over the counter medication will only increase their hardship. [18]

(e) Families with young children

6.36 For families with young children, the consumption of pharmacy items is greater due to the common ailments incurred by children. A range of baby and younger children's products such as infant paracetamol and cough and cold medication will be taxed.

6.37 Families with young children also require large amounts of sunscreen to protect them properly from skin cancer. For a family this can quickly escalate into an expensive outlay. It is imperative that in order to reduce the incidence of skin cancer in adults, childhood protection from dangerous levels of exposure to the sun is an absolute priority.

6.38 As a result of this increased hardship for those who can least afford it in the Australian community, the government will collect $80m from the imposition of a GST on over the counter products. Despite this increased revenue for the government, the Committee considers that discouraging people from purchasing over the counter medication will increase the number of people visiting GP's to obtain prescriptions for more expensive medications for ailments which could be self-treated. When appropriate, over the counter medicines are more efficiently obtained, and have proven safety.

6.39 It was argued in evidence that the revenue gained from applying a GST to over the counter or complementary healthcare products is outweighed by the savings in the health budget achieved by their widespread use [19]. The Committee is of the view that the imposition of a GST will increase the strain on the public health system by, on the one hand, unnecessarily increasing demand for publicly funded GP and PBS services, and on the other hand, discouraging the prevention and treatment of illness through responsible self-medication.

Impact for public health programs

6.40 A number of organisations drew attention to the conflict where the application of a GST on various products was contrary to important public health measures currently funded by government. The GST will create a disincentive for people to adopt improved health behaviours advocated by these public health campaigns. The Committee notes this significant policy conflict whereby the introduction of the GST runs contrary to broader public health and protection issues and public health policy.

6.41 The National Cancer Control Initiative is an especially important example of this contradiction. It is an identified National Health Priority Area. Australia has the highest rate of skin cancer in the world, with the incidence of melanoma increasing dramatically since the early 1980's. Over 270,000 people have a skin cancer removed each year and nearly 1,000 Australians die of skin cancer every year. [20] This high incidence has placed a huge demand on preventive and curative services.

6.42 The Australian Cancer Society advised the Committee that skin cancer is the most expensive burden on the health system of all cancers, with over $300m spent annually on the treatment and management of skin cancer by hospitals and general practitioners. [21]

6.43 The Melanoma and Skin Cancer Research Institute submitted that:

There are a large number of products available `over the counter' which are effective both in preventing skin diseases and in treating established skin diseases. These include sunscreens, soap alternatives, anti-fungals, treatments for psoriasis and seborrhoeic dermatitis, treatments for baby rashes and cradle-cap and, of course, analgesics which are vital to the management of many people with chronic pain or even acute problems such as headache and muscular damage. These conditions should not necessitate a visit to the doctor in order to gain relief. [22]

6.44 The Committee believes that applying a GST to sunscreen, which is currently tax exempt, runs contrary to public health measures aimed at reducing the incidence of skin cancer.

6.45 As the Australian Cancer Society said `the continuation of having no tax on sunscreen will provide considerable health benefits to the general public and in the long term potentially reduce considerably the costs of the public health system'. [23]

6.46 Lung cancer remains a major killer in Australian society. Anti-smoking campaigns such as Quit are aimed at reducing smoking levels, a primary risk factor for lung cancer. Yet, major aids in quitting smoking, the use of tobacco patches or gum such as Nicorette [24], will have a GST applied.

6.47 As noted in the earlier sections on food and the GST, it was argued that the application of a GST on basic foods will make it harder to protect the nutritional health of Australians due to nutritious fresh foods becoming more expensive relative to less healthy manufactured foods. This effect of the GST runs contrary to government efforts to encourage healthier eating as a cost-effective way of achieving better health as promoted through the Dietary Guidelines for Australians and the NHMRC strategies from Acting on Australia's weight: a strategic plan for the prevention of overweight and obesity. [25]

6.48 The application of the GST on previously tax exempt products, such as sanitary items and condoms, will increase the cost of these items. The Australian Federation of AIDS Organisations (AFAO) argued that access to the means of prevention of HIV transmission, including condoms, water based lubricants and clean syringes, should be as freely available as possible and accessible to all members of the Australian community. AFAO commented that `a tax on these items would adversely affect the public health outcomes of the Third National HIV/AIDS Strategy'. [26]

6.49 Concerns over the future funding and viability of government public health programs were also raised in evidence. The Public Health Association of Australia (PHAA) raised concerns about the impact that transferring GST revenue to the States and Territories would have on the future funding and operation of public health programs. The PHAA asserted:

That national initiatives in public health would thus be threatened with the States and Territories then not taking necessary public health initiatives or operating in isolated, fragmented ways which result in programs and activities which are much less effective than they would be through national approaches and consistency. [27]

6.50 The Committee considers that this would lead to a move away from national programs, just at a time when their importance is being recognised by government. For example the Federal government was recently forced to intervene with a national immunisation campaign due to the inadequate funding being provided at the State and Territory level.

Pharmaceuticals and pharmacies

6.51 The Committee received evidence that the limitation of GST-free pharmaceuticals both between schedules and with the anomalous distinctions between similar items on different schedules could adversely impact on treatments and result in general confusion.

6.52 The Pharmacy Guild of Australia (the Guild) typified the problem when it submitted that the Vos recommendations, now enshrined in the legislation, ignored a significant group of products, the GST status of which would be a source of confusion to consumers. These products are restricted to sale through pharmacies only, albeit not necessarily under the supervision of a pharmacist, and are classed in Schedule 2. [28]

6.53 Groups representing pharmacies and the pharmaceutical industry advised the Committee of many items where confusion arises because the same item will be available both as GST-free and GST-inclusive depending on the circumstances of supply or depending upon product strength and/or pack size, eg Panamax, Panadeine, Nicorette. This current scheduling of products between S3 and S2, with only S3 proposed to be GST-free will also create a high degree of administrative complexity. [29]

6.54 The concerns expressed by these groups were that not only are these situations extremely confusing for the average consumer, they will also directly encourage unnecessary purchases of larger quantities or higher strength products and promote inappropriate use and/or hoarding of medications. The exclusion of S2 products from GST-free status could create an incentive for consumers to seek to avoid the extra GST costs by visiting a doctor and obtaining those items on PBS prescriptions, thereby putting further strain on public funding of medical services. These outcomes would conflict with the measures and initiatives undertaken in recent years to promote quality use of medicines.

6.55 Medicines are often re-scheduled from prescription only (S4) to S3 or S2. Down scheduling of these products does not mean that they are not required for a legitimate medical complaint. Where a product is rescheduled as S2, it would incur a GST and may cause some patients to discontinue their use of medicines, leading to medical conditions remaining untreated. Older people particularly lose the ability to purchase these medicines at concessional rates and prices increase even without the GST. Evidence was given that considerable down stream costs could be incurred by rescheduling medicines through, for example, additional doctor visits and possible time off work. [30]

6.56 The Committee believes that the application of a GST on over the counter products will create unnecessary complications, anomalies, and price distortions on medications.

6.57 Non prescription medicines are made easily accessible at present not only because of their health benefits, but also their proven safety. Imposing tax on products that have proven health benefits and may be used with safety, will have the perverse effect of reducing their accessibility and usage, thereby increasing demand for alternative products which may have harmful side effects requiring a controlled usage through prescriptions.

6.58 Consistent with the basic objectives of simplicity and clarity, both the Guild and the Pharmaceutical Society of Australia submitted that the GST-free treatment of medicines should be extended to S2 products as well as S3. This proposal received broad support from welfare and consumer agencies with ACOSS, among others, making the same recommendation. [31] The Australian Consumers Association (ACA) noted that including `pharmacy only' S2 products `would impose no burden on general retailers and would not further complicate the compliance of pharmacy businesses who are already selling a mixture of taxable and GST-free products'. [32]

6.59 A number of organisations, including the Proprietary Medicines Association of Australia (PMAA) and the Complementary Healthcare Council of Australia, carried the argument a step further. They argued that because the `pharmacy-only' S2 medicines and `unscheduled' medicines are either registered or listed on the Australian Register of Therapeutic Goods (ARTG) and with few exceptions are currently not subject to sales tax, the GST legislation should adopt the policy of the sales tax law and all medicines on the ARTG should be GST-free. [33]

6.60 All products making therapeutic claims or containing prescribed substances must be included on the ARTG. These products have been subject to various levels of scrutiny to establish their therapeutic benefit. The purpose of the Register is for public safety and protection. The PMAA advised the Committee that the Australian Taxation Office decided to accept the ARTG as the practical industry benchmark for determining the sales tax classification of drugs and medicines. Thus only a very small number of medicines included on the ARTG are not automatically exempt from sales tax. [34]

6.61 The PMAA argued that all those same products should be classified within the GST context, in the same manner as they were when the ATO accepted the ARTG as the benchmark for sales tax exemption. They considered that the net impact on the tax revenue generated from wholesale sales tax compared to that from a zero rated GST when applied to all medicines, would be minimal. [35]

6.62 While, as noted earlier, the Vos Committee rejected using the ARTG, the PMAA believed that such an approach would have `beneficial public health policy outcomes' and argued:

In particular, responsible self-medication, rather than resort to doctor and prescribed medicines for every common ailment, is efficient and cost-effective. Medicare and PBS costs would also be reduced – plainly an offset against the revenue losses of which the Vos Committee made so much. [36]

6.63 Ironically, the Government itself has acknowledged the `growing use and acceptance of complementary health care products in this country and throughout the world'. [37] The Government recently introduced into Parliament amendments, to the Therapeutic Goods Act 1989 designed to provide a new and appropriate framework for the regulation and management of complementary medicines. [38] This new framework for complementary medicines proposed by the Government addresses key issues related to market access, the regulatory environment as well as allowing for greater expert and industry participation in the regulation of complementary healthcare products.

6.64 The PMAA also drew the Committee's attention to what it considered to be a serious drafting defect in clause 38-50 of the Bill stemming from a failure to define `drug or medicinal preparation' for the purposes of the Bill. The PMAA held that an unintentional effect of the present drafting will be to exclude many S3 medicines from GST-free status, which was not the Government's stated intention. [39]

Impact on pharmacies

6.65 The Pharmacy Guild of Australia also commented upon the impact the GST proposals would have on a pharmacy. The Guild noted that a pharmacy would be placed in the unique position of being required to deal with products falling within the three tax classifications of GST-free, GST-inclusive and input taxed. The Guild argued:

The administrative complexities and costs associated with the handling of these three product groups fall on a business sector already beset with an onerous, government-generated, clerical load which, in most cases, can only be handled by one person, namely the pharmacist. [40]

6.66 DHAC has acknowledged that as a result of selling a combination of GST-free goods and goods that attract a GST, pharmacists will need to have adequate administrative arrangements in place prior to the implementation of the GST. The Department advised that Treasury estimates have put the figure for ongoing compliance costs for the GST in 2001-02 at $1195 per registrant. [41]

6.67 Significant cash flow problems, an even more complex administrative burden and onerous compliance costs for pharmacies created by the new tax system were also discussed by the Guild. [42] The Committee believes that these impacts will be exacerbated for smaller rural pharmacies, possibly leading to a further decline in the number of rural pharmacies.

6.68 Evidence demonstrated to the Committee that compliance costs for pharmacies would clearly increase, a situation which is contrary to the Government's stated intention of down grading compliance costs for small businesses.

Complementary health services

6.69 As noted earlier the legislation provides a list of health services which will be GST-free. These services are commonly used health services generally accepted within their profession as being necessary for the appropriate treatment of a patient, and performed by a recognised professional who is registered and possessing specific qualifications. The listed services included what are generally considered mainstream services, such as chiropractic, osteopathy and physiotherapy, although many complementary or alternative health services such as acupuncture and traditional chinese medicine, remedial massage, and naturopathy will be subject to the GST.

6.70 Organisations representing alternative therapists and therapies argued that they should not be subject to a GST. They contend that they are already penalised in contrast to medical services provided by GPs and argue that it is a cost saving measure for people to utilise the preventive health measures such as they offer. As the United Consumer Awareness Network submitted:

Complementary Health Therapies focus on prevention rather than cure, thereby minimising the burden to the taxpayer and the overall need for expensive medical intervention and hospitalisation. [43]

6.71 To impose a GST on complementary health services will discriminate against those who choose this form of medicine. Currently, the cost of mainstream medicine is largely covered by Medicare. Yet despite this massive economic incentive, millions of Australians are choosing complementary health services, thereby reducing the burden on the public health system. The Committee supports consumers having that choice and not being penalised for taking responsibility for their own health.

6.72 Evidence was received that many of those who choose to use complementary health therapies and medicines are low income earners and the disadvantaged. For example, many carers and people with care needs use alternative health therapies and over the counter products which they regard as absolutely essential. [44]

6.73 The Committee received evidence from a number of organisations pleading their case for inclusion in the GST-free list.

6.74 The acupuncturists and practitioners of traditional chinese medicine, in addition to the above arguments of choice and saving to the health system, also argued that they currently met the criteria used by the Government in determining the GST-free list. Their services are commonly used and widely accepted, mainstream health services. Private Health Insurance Administration Council statistics reveal that acupuncture is a more frequently used health service than many on the GST-free list, including speech therapy, dietary services and occupational therapy. Indeed, acupuncture and traditional chinese medicine are mainstream therapies in some of Australia's major Asian trading partners, including China, Japan, Singapore and Taiwan.

6.75 The Committee's attention was also drawn to the anti-competitive and discriminatory arrangement existing between acupuncture and traditional chinese medicine services as provided by qualified professionals, and those provided by GST-free medical practitioners. Acupuncture is a recognised Medicare service when performed by a doctor, but is not when provided by a professional acupuncturist. Often medical practitioners may only have completed short courses in acupuncture, whereas a qualified acupuncturist will have undertaken an accredited degree or higher degree program.

6.76 While Victoria is currently drafting legislation for the registration of acupuncturists, about 80 per cent of practitioners belong to the peak professional body subject to national professional regulation. A large number of private health insurers already provide rebates for acupuncture services provided by qualified practitioners (even if Medicare does not). The accreditation standard set by the Australian Acupuncture and Chinese Medicine Association has been the benchmark for providing recognition by all the major insurers. [45]

6.77 Massage therapy was also a health service where issues overlapped services on the GST-free list. The National Council of Massage and Allied Health Practitioners submitted that massage therapy is recognised by the medical professions as an integral part of overall health services, especially in the treatment of stress and soft tissue injury. Massage therapists work with physiotherapy, chiropractic and osteopathy (all on the GST-free list) as part of a comprehensive treatment of patients in hospitals, hospices and geriatric homes. [46]

6.78 These examples demonstrate further anomalous aspects of the proposed GST which in these examples are not just inconsistent but arguably discriminating and anti-competitive.

Hospital services

6.79 The Australian Private Hospitals Association (APHA), which represents 60 per cent of all private hospitals, was concerned that the reference to `treatment' in the definition of `medical service' could limit the definition to curative procedures and impose GST on preventive procedures. APHA believed the definition of medical service should explicitly include diagnostic, preventative and education services. [47] The Ramsey Health Care Group, one of the largest private hospital operators in Australia, expressed similar definitional concerns. [48]

6.80 APHA argued that the scope of hospital treatment to be GST-free should be defined, like medical services, as broadly as possible. The definition of `hospital treatment' used in the Bill is derived from the National Health Act which refers only to accommodation and nursing care. APHA noted that in addition to a range of other goods and services that may be included in a hospital episode, such as pharmaceuticals, medical care, allied health care and prosthetic devices, private hospitals provide a range of community care health services outside of the hospital facility, which do not include accommodation and may not include nursing care. While some of these services must rely on other sections of the Bill to be GST-free, APHA believes the definition should be clarified to ensure that any services provided as part of a supply of `hospital treatment' should be GST-free. [49]

6.81 APHA also referred to the administrative difficulties of separating hospital services which are GST-free from those which are not, particularly television and phone rental and food served in cafeterias. According to DHAC, in most cases, these are optional services within a hospital, and are already charged for separately, which will mean that the system will be relatively easy for hospitals to administer. [50] APHA disagreed with this view submitting that personal services and other non-medical goods and services, such as television rental, are included into the daily nursing/accommodation charge and are not always separately billed. These services are provided as an intrinsic part of hospital operations. APHA argued that to administer this arrangement would substantially increase administrative costs for a minimal amount of revenue from the application of the GST. [51]

6.82 APHA agreed that any increase in non-treatment costs for private hospital care would to some extent be borne by private health insurance (or the patient, depending upon whether or not they were insured). While these cost increases may not be substantial for hospitals, they would most likely flow on and result in an increase in private health insurance premiums. [52]

6.83 The Australian Catholic Health Care Association (ACHCA) commissioned Arthur Andersen to undertake economic modelling to assess the impact of a GST on the services they provide. The original modelling provided to the Committee was revised to factor in calculations of cost savings from indirect tax reform and on-going sector compliance costs, and additional motor vehicle costs.

6.84 The analysis demonstrated that the impact of the indirect tax changes on the Catholic health care sector will be substantial, especially in the first year. The sector will face additional costs on an on-going basis. Compared to the Government's projection that costs to the health care sector as a whole would decrease by 1.7 per cent, the Arthur Andersen analysis found that the Catholic health care sector is likely to be almost 2.5 per cent a year worse off on an on-going basis and about 4 per cent worse off in the first year. It was estimated that the indirect tax changes alone will add $36-$56 million to costs in the first year with on-going annual additional costs of about $5 million. [53] Further details of the findings are discussed in the aged care chapter.

6.85 Services provided in Catholic hospitals are often directed more towards medical patients, rather than surgical patients. The length of stay is less predictable for their patients; often they are elderly and in many cases people who are not well off. In a purely competitive, cost recovery world, church and charitable hospitals would be unable to continue providing services at the same levels to some groups, particularly those most in need. These elderly, disadvantaged and needy people would be particularly vulnerable to any reduction in service level or quality.

6.86 A smaller yet significant component of private hospitals – the Church and Charitable Private Hospitals – was especially concerned at the impact that the imposition of a GST would have on their sector. They believe that the taxation of charities, and charitable hospitals in particular, is quite unacceptable to the Australian community. The important role of charities in Australian society and the argument for their exemption is discussed in an earlier chapter.

6.87 The Church and Charitable Private Hospitals Association was concerned that the increasing administrative burden, compliance and labour costs imposed by the tax charges will adversely impact upon the services church and charitable hospitals can offer. This would exacerbate the situation whereby these hospitals currently find themselves under increasing pressure from profit centered commercial concerns. The Association stressed that the tax package needed to be seen in a broader context, at least as far as hospital care is concerned:

We do not wish to see the commercialisation of hospital care in this country totally overwhelm the spirit of charitable service which has distinguished the church and charitable sector. Rather than employing tax accountants to tell us that we should not make separate charges for GST-taxable televisions and telephones but rather pad it into patient bills, we would prefer to concentrate on our central commitment, that is, providing quality care with compassion to as much of the Australian public as we can. [54]

Impact upon indigenous health

6.88 In relation to health issues, Aboriginal people start from a position of disadvantage at the outset. It is well documented that Aboriginal people suffer from by far the worst health status of any group in Australia. The enormous burden of morbidity and mortality experienced by Aboriginal people in all age groups and all settings is strongly related to underlying chronic poverty and disadvantage.

6.89 The National Aboriginal Community Controlled Health Organisation (NACCHO) expressed major concerns regarding the potential impact of the proposed tax reforms on Aboriginal health and Aboriginal community controlled health services. [55] NACCHO argued that the imposition of the GST would potentially have a negative impact on the standard of living, and consequently the health and well-being, of Aboriginal people. Price increases for essential goods and services needed by families are likely to outweigh increases in benefits and other forms of income. The effect on Aboriginal people in remote areas will be greater because the base cost for essential goods and services is much higher in these areas. This argument was expanded by ATSIC which outlined the cost of living impact of the GST on food, clothing and footwear, housing, transport and other items for rural and remote Aboriginal communities. [56]

6.90 NACCHO, while acknowledging that Aboriginal health services will have GST-free status, was also concerned at the administrative burden being placed on these services and the potential negative effect of the proposed FBT changes on the ability of Aboriginal health services to recruit and retain a professionally skilled workforce, particularly salaried doctors and nurses.

Proposed limit on Fringe Benefits Tax (FBT) concessions

6.91 Currently, public hospitals that are public benevolent institutions are exempt from FBT. Under the proposed tax changes, the FBT concessions will be capped at $17,000 of grossed-up taxable value per employee. Any amount above this limit will be subject to the normal FBT treatment and taxed at 48.5 per cent. For a discussion of the impact of the proposed changes on charitable and community organisations, see Chapter 3.

6.92 Evidence to the Committee indicated a need to limit the existing FBT concessions. Further regulation will be required to ensure transparency in the use of the concessions and provide guidance on the appropriate use of salary packaging.

6.93 In its evidence, the Australian Healthcare Association (AHA) noted that the proposed changes to FBT concessions could result in the loss of $150 million from the public hospital sector. The AHA noted that the existing funding arrangements between the Commonwealth and the States were agreed on the basis that the FBT exemptions would remain in place. Governments have been reducing health funding levels with the expectation that public hospitals would use the FBT exemption in order to maintain service levels.

6.94 The AHA argued that unless the proposed changes to FBT concessions are accompanied by compensation, the already stretched public health care system would suffer a significant loss that it cannot afford. [57]

Conclusions

6.95 The Committee notes that the Government has generally made the medical and hospital care services GST-free. However, evidence to the Committee has argued that the tax reform proposals in this sector do not meet the competing objectives of `simplicity in administration and compliance', with `clear and definitive boundaries' and limiting concessional treatment `for revenue protection'.

6.96 The legislation is far from simple as demonstrated by the complex, confusing and contradictory GST treatment of pharmaceuticals, certain medical services and ancillary services provided in hospitals. The burden on the public health system will increase both financially and in relation to the availability of services. Further contradictions emerged with the imposition of a GST on some health products conflicting with the objectives of a number of government funded public health campaigns and initiatives.

6.97 The Committee notes the contradictory arrangements whereby some pharmaceuticals will attract a GST while others will not. Ironically, this could lead to an increase in health costs as patients seek medical appointments to obtain GST-free prescriptions rather than purchasing taxed medicines over the counter.

6.98 The Committee concludes that the treatment in the tax package of complementary medicines is discriminatory. Implicit in the proposed tax treatment of health is that traditional medicine is health promoting, but complementary medicines and natural therapies are regarded as outside the health system. This contradicts the approach adopted with the classification therapeutic goods, a situation that the Committee believes is an artificial distinction that creates a market distortion in the health industry.

6.99 Overarching all of these contradictions and complexities are the Household Expenditure Survey figures which show that low income earners spend considerably more on health than wealthier Australians. With the CPI being used to calculate `an average' for compensation purposes, the significantly higher health costs of low income earners have not been factored into the compensation package being offered by the Government. The Committee considers this situation to be inequitable.

6.100 Low income earners and people on fixed incomes and pensions will be financially worse off in the health area, irrespective of its supposed GST-free status. There are also significant concerns over the impact upon the general health of these people as a result of the GST treatment of health services and products.

6.101 The Committee concludes that the imposition of the GST on fresh food is likely to have a harmful effect on the health of low income earners, including Indigenous Australians. The Committee also considers that the health of low income earners will be adversely affected by a GST on commonly used non-prescription pharmaceuticals and health care products.

6.102 Finally, the Committee notes that existing funding levels in the public health system have been set on the assumption that the existing FBT concessions will be used by public hospitals in order to attract and retain staff on packages below the market rate. The Committee agrees that unless the proposed limit on FBT concessions is accompanied by compensation, the change would represent a significant cut to public health funding.

Footnotes

[1] The Report of the Tax Consultative Committee (Vos Report) p.25.

[2] Vos Report p.26.

[3] Section 38-5 of the Bill.

[4] Vos Report p.28.

[5] Section 38-20 of the Bill.

[6] Vos Report p.37.

[7] Vos Report p.37.

[8] Submission No.682, p.11 (DHAC).

[9] Vos Report p.38.

[10] Submission No.682, p.11 (DHAC).

[11] Committee Hansard, 2.2.99, for example pp.22, 24, 65-6, 75 (DHAC) and pp.81-2, 124-5, 130 (DFaCS).

[12] Senate Select Committee on a New Tax System, First Report, February 1999, Chapter 2, pp.7-32.

[13] Senate Select Committee on a New Tax System, First Report, pp.29-30.

[14] Household Expenditure Survey: Detailed expenditure items, ABS, Cat No.6535.0, pp.3,10.

[15] Submission No.928, p.25 (Australian Consumers Association).

[16] Submission No.850, p.34 (CPSA/APSF).

[17] Submission No.254 (Chronic Illness Alliance); Cost of Chronic Illness and Quality Use of Medicine, Consumers' Health Forum, April 1997, tabled at hearing 3.2.99.

[18] Submission No.254, p.1 (Chronic Illness Alliance); Submission No.273, p.2 (Pharmaceutical Society of Australia); Submission No.609, p.2 (Consumers' Health Forum).

[19] Submission No.637, p.4 (Complementary Healthcare Council of Australia).

[20] Details on the incidence of and mortality from cancer may be found in Australia's Health 1998, AIHW, pp.85-94.

[21] Submission No.873, p.1 (Australian Cancer Society).

[22] Submission No.422, pp.1-2 (MSCRI).

[23] Submission No.873, p.1 (Australian Cancer Society).

[24] Nicorette will be GST-free when sold in 4mg strength (S3), but taxed when sold in 2mg strength (S2) which is the more widely available form and easier for consumers to access - Submission No.273, p.2 (Pharmaceutical Society of Australia) and Committee Hansard, 10.2.99, p.558 (PMAA).

[25] Submission No.796, p.2 (Dietitians Association of Australia).

[26] Submission No.680, p.2 (AFAO).

[27] Submission No.895, p.8 (PHAA).

[28] Submission No.622, pp.8-9 (Pharmacy Guild of Australia).

[29] Submission No.273, p.2 (Pharmaceutical Society of Australia); Submission No.622, p.9 (Pharmacy Guild of Australia). See also Committee Hansard, 4.2.99, pp.283-86 and 10.2.99, pp.556-57.

[30] Submission No.622, p.11 (Pharmacy Guild of Australia); Committee Hansard, 3.2.99, p.140 (CHF).

[31] Submission No.68A, p.17 (ACOSS); Submission No.609, p.3 (Consumers' Health Forum).

[32] Submission No.928, p.26 (ACA).

[33] Submission No.794, p.4 (PMAA); Submission No.637, pp.1-2 (Complementary Healthcare Council of Australia); Submission No.226, p.5 (National Herbalists Association of Australia).

[34] Committee Hansard, 10.2.99, p.559 (PMAA). See Taxation Ruling SST 12 – Sales tax: classification of drugs, medicines and sunscreen preparations, 12 August 1998, p.18.

[35] Submission No.794, Attachment 1, p.6 (PMAA) and Committee Hansard, 10.2.99, p.559.

[36] Submission No.794, p.4 (PMAA).

[37] Therapeutic Goods Legislation Amendment Bill 1999, Minister's second reading speech.

[38] Therapeutic Goods Legislation Amendment Bill 1999, Explanatory Memorandum, p.2.

[39] Submission No.794, pp.5-6 (PMAA).

[40] Submission No.622, p.7 (Pharmacy Guild of Australia).

[41] DHAC, Additional information dated 5.3.99, p.4.

[42] Submission No.622, pp.12-16 (Pharmacy Guild of Australia).

[43] Submission No.847, p.2 (U-CAN).

[44] Committee Hansard, 11.2.99, pp.665, 672 (Carers Association Victoria and Gippsland Carers Association).

[45] The arguments outlined in these paragraphs have been drawn from Submission No.662, pp.3-34 (AACMA); Submission No.337, pp.2-8 (Mr Stephen Janz) and evidence Committee Hansard, 5.2.99, pp.461-71.

[46] Submission No.40, p.4 (NCMAHP).

[47] Submission No.607, p.2 (APHA).

[48] Submission No.548, pp.4-5 (Ramsey Health Care Group).

[49] Submission No.607, p.3 (APHA) and Committee Hansard, 3.2.99, pp.164-5, 173.

[50] Submission No.682, p.10 (DHAC).

[51] Submission No.607, pp.3-4 (APHA) and Committee Hansard, 3.2.99, pp.165-66.

[52] Committee Hansard, 3.2.99, pp.175-6 (APHA).

[53] Submission No.683A, p.3 (ACHCA) and attached Tax Reform Impact Study, March 1999, pp.i, iii.

[54] Submission No.668, p.4 (CCPHA).

[55] Submission No.510, pp.1-2; Committee Hansard, 3.2.99, pp.177-78, 183, 186-87.

[56] Submission No.810, pp.7-12 (ATSIC) and Appendix A - Aboriginal Communities and the GST in the North, a study by Owen Stanley from James Cook University.

[57] Submission No.657, pp.4-6 (AHA) and Committee Hansard, 4.2.99, p.333, 337-8.