1301.0 - Year Book Australia, 2002  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 25/01/2002   
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Contents >> National Accounts >> New volume estimates for health and education services


Historically, the measurement of non-market service industry volumes has presented national accountants both here and abroad with a number of difficulties. Non-market services include the provision of health and education services, policing and defence services, and general government administration. In recent years a major research effort undertaken within the ABS to investigate the measurement of non-market output and productivity has led to the development of improved methods for the measurement of health and education volumes which will be implemented in the next edition of the annual national accounts.1 Australia will be one of the first countries to implement output indicators in the national accounts for a major component of the non-market sector. It is expected that a number of other countries will do so in the near future.

More often than not, growth in input volumes has tended to be used as a proxy for growth in volumes of non-market service industry output and value added. Hours worked or costs deflated by wage and other input price indexes have been primary components of these input-based methods. The main disadvantage of using input methods is that they do not reflect changes in output resulting from increased productivity. For this reason, international standards recommend using direct output measures for measuring the volume of output, in particular for health and education services which are consumed individually. However, it is recognised that for a number of industries where non-market producers are predominant, appropriate output volume indicators are difficult to construct. This is particularly so for industries where services are consumed collectively, such as government administration and defence. For this reason, some input-based estimates are likely to remain, even in the longer term.

It is important to note that the objective is to measure the quantities of services actually delivered to households, not the benefits derived from those services by society. For example, in the case of education, the services consist of the volume of teaching provided by producers of education services to students. It should not be measured by the level of knowledge or skills possessed by members of the community as that can be affected by a host of factors out of the control of the education establishment - such as degree of parental support, work undertaken outside of school, etc.

Health and education comprise around 10% of GDP, and government expenditure on health and education services represents around 45% of total government final consumption expenditure. Components of the health industry in particular have been subject to substantial technological change in recent years. The expectation that input methods were more than likely understating the rate of volume growth - for health output in particular - and the availability of suitable output data made these two industries an obvious starting point for investigations of alternative methods for non-market services.

Volume estimates for health services

Health services are composed of services provided in hospitals and nursing homes; medical services provided by general practitioners and medical specialists; dental; optometry and optical dispensing; community health services; paramedical; veterinary and ambulance services. Over 55% of health services are supplied by hospitals and nursing homes, the majority being provided by the government sector. The estimation of the volume of health services involves establishing volume indicators for each type of health service and weighting these indicators using data on the cost of providing the services.

Data to estimate volume indicators have been collected from a range of sources. For hospital services, data from the Department of Health and Aged Care are used which detail treatments provided by all government and private acute care hospitals in accordance with the Australian National Diagnostic Related Groups Classification (AN-DRGs). The current version of the classification consists of over 660 separate diagnostic related groups. The volume of services is represented by the number of episodes (separations) for each group. For nursing homes, the number of patient days categorised by level of care is used. For medical services, detailed data are available from the Medicare system. For general practitioners and medical specialists (e.g. in obstetrics, anaesthetics, diagnostic imaging and surgical operations), output is measured by the numbers of attendances weighted together by fees charged. In the case of pathologists, the number of tests has been used as the output volume indicator. Estimates on the new basis will be carried back to 1993–94, with earlier years backcast using the previously published growth rates based on input costs.

The effect of the change from the existing input-based method to the method outlined above is demonstrated in graph 29.3. It shows an average growth in the chain volume measure of the gross value added of health and community services between the years 1993-94 to 1999-2000 of 4.0% per annum, compared to 1.6% under the existing method. The ABS believes that the new method is a significant advance on the existing input-based method. It captures much of the anticipated increased productivity that one would expect from technological improvements in the industry. A shortcoming is the degree to which it can capture all quality change in the services provided, but using a fine level of detail helps to capture compositional quality changes, namely any shift to new and more advanced medical treatments being offered.

Volume estimates for education services

The new volume estimates of education output are based mainly on annual student enrolments. Enrolments for each level of education are weighted together by the cost of providing those services. Student numbers for primary schools and secondary schools are converted to full-time equivalents (part-time students are counted as 0.5 of a full-time student). Module hours are available for vocational education and are used in preference to student numbers. For universities, full-time equivalent student numbers enrolled in each of eleven discipline groups are used as the output indicators for the tuition component. The university research component is estimated by weighting together data for the number of publications and student research completions.

In the main, the new output indicators simply capture changes in the number of students enrolled adjusted for compositional change between the various levels of education, and subjects in the case of universities. They do not capture any quality change over time in the education services provided. A number of national statistical offices and international agencies, including the ABS, have investigated ways of incorporating quality adjustment factors into the education output measure. For example, class sizes and public examination results have been considered as indicators of change in the quality of the education service. Adjusting for class size has been widely rejected on the grounds that there does not appear to be an observable relationship - certainly not a linear one - between class size and the quality of services provided. Public examination results are useless unless the same test standards are maintained over time, and while results from standardised tests provide a better prospect, changes in scores over time could also reflect external factors - such as changes in the quality of home life - as well as changes in the quality of education services. Nevertheless, once a sufficient time series of such data becomes available and after taking into account external factors, it may be possible to at least discern the direction of change in quality.

Despite this shortcoming, the ABS is of the view that the output indicator method is conceptually superior to the existing input-based method, and yields more plausible results for Australia. It is also consistent with how output would generally be measured if education were predominantly provided in the market. In that case the volume of output would be based either on the number of fee paying students adjusted for changes in the quality of the service provided, or equivalently, current price output deflated by a constant-quality price index.

A comparison of results for gross value added under the new and existing methods is shown in graph 29.4. It shows an average annual growth in education gross value added between the years 1993-94 to 1999-2000 of 1.9% per annum, compared with 1.5% under the existing method. While this does not result in a significant change in the growth rates it does provide a more stable pattern of growth than under the existing method.

Future developments

The ABS plans to continue to seek improvements to the methods which it uses to measure the output of non-market services industries. A detailed study has already been undertaken into measuring the output of public order and safety and justice services, the results of which have been published in the ABS Discussion Paper Experimental Output Measures for the Australian Justice Sector. While satisfactory results were obtained for some of these industries, they are too small to justify the incorporation of the new estimates into the accounts on their own. It was not possible to compile satisfactory estimates for police services, the largest industry in this group, but there are hopeful prospects for the future. It is also planned to investigate the use of administrative data to derive output measures for various government agencies. The ABS will continue to monitor international developments in relation to potential quality adjustment indicators.