Working with The Constitution: Rethinking Medicare Safety Nets to Control Costs
Margaret Faux
Bruce Topperwien
This is the second post in a series of commentaries on out-of-pocket medical costs and the constitutional foundations of Medicare.
Margaret Faux and Bruce Topperwien
14.5.2026
Introduction
In our first post in this series, we examined a structural feature of Australia’s health financing system that is frequently overlooked in public debate: the Constitution protects the autonomy of medical practitioners.
Section 51(xxiiiA) empowers the Commonwealth to fund medical services through Medicare, but it does so subject to an important limitation. Laws providing such benefits must not amount to ‘civil conscription’. The High Court has consistently interpreted this constraint as preserving the voluntariness of medical practice, including the freedom of practitioners to determine the terms on which they provide services and to contract privately with patients.
This constitutional setting has practical consequences. It explains why governments cannot simply impose direct price controls on medical fees, even in the face of sustained concern about rising out-of-pocket costs. As we outlined in our previous post, attempts to do so risk constitutional invalidity, as well as broader destabilising effects within the health system.
However, constitutional protection of professional autonomy does not leave the Commonwealth without influence. While Parliament cannot compel practitioners to charge particular prices, it retains full control over the design of public subsidies. That is, it cannot dictate the price, but it can determine the extent to which public funds will contribute to that price.
This distinction is central: governments cannot regulate fees directly, so they manage costs indirectly through the design of Medicare benefits. The Extended Medicare Safety Net (EMSN) is one of the clearest and most consequential examples of this approach in practice.
Designed to provide financial protection for patients facing high out-of-pocket costs, the EMSN operates by increasing the level of public subsidy once certain expenditure thresholds are reached. In doing so, it alters not only the financial burden borne by patients, but also the incentive environment within which practitioners set their fees.
It is at this intersection, between constitutional constraint and subsidy design, that this post now turns.
The Extended Medicare Safety Net
The EMSN was introduced to protect patients who incur high out-of-hospital costs over the course of a calendar year. Once a patient’s out-of-pocket expenses exceed a set threshold, Medicare increases the rebate for subsequent services.
The policy objective is simple: reduce financial exposure for patients with greater healthcare needs.
Crucially, however, practitioners remain free to set their own fees. Medicare does not regulate price. Instead, once the EMSN threshold is reached, the Commonwealth contributes a higher proportion of the practitioner’s charge.
Put simply: as rebates increase, patient out-of-pocket costs decrease.
For example, a patient who has reached the EMSN threshold and pays $500 for a specialist consultation at today’s rates will receive a rebate of $303.90 instead of $86.15.
Over time, caps were introduced on many items to limit how much the Commonwealth would contribute. These caps responded to clear evidence that proportional subsidies were driving increases in both fees and public expenditure. However, caps were applied selectively. Some items remain uncapped, meaning public contributions continue to rise in direct alignment with private charges.
This has resulted in a mixed model.
For uncapped services, public expenditure increases as fees increase.
For example, assume a hypothetical uncapped surgical service attracts a rebate of $2,000. If a practitioner charges $4,000, the patient faces a $2,000 out-of-pocket cost. However, once the EMSN threshold is reached, in addition to the $2,000 rebate, Medicare covers 80 per cent of the remaining out-of-pocket amount, substantially reducing the patient’s net out-of-pocket cost. If the practitioner increases their fee above $4,000, the public contribution also increases.
This is not incidental. It is built into the design.
The EMSN does not simply subsidise high costs, it scales with them.
Where caps apply, that relationship is constrained. Where they do not, the amplification effect remains.
From a fiscal perspective, this increases Commonwealth exposure as fees rise.
From a behavioural perspective, it reduces price sensitivity, because a significant portion of any additional charge is effectively underwritten by public funds.
Importantly, this sits comfortably within the constitutional framework. The Commonwealth is not controlling prices; it is determining the extent of subsidy. Adjustments to caps, thresholds or benefit structures remain well within legislative power, as long as practitioner autonomy over fees is preserved.
The 2025 Dermatology Case
The Professional Services Review (PSR) is the Commonwealth’s primary Medicare compliance body, responsible for investigating inappropriate practice under Part VIIA of the Health Insurance Act 1973 (Cth)(HI Act).
A common outcome of PSR investigations is that a practitioner enters into an agreement with the Commonwealth to repay amounts deemed to have been inappropriately claimed. These are known as section 92 agreements, referring to the provision of the HI Act under which they are made. Summaries of these agreements are published monthly on a public register.
In June 2025, one such agreement was entered into with a dermatologist whose billing intersected with an uncapped EMSN item. The practitioner agreed to repay $320,000 to the Commonwealth, representing a proportion of the benefits paid. The repayment followed a finding that the practitioner had engaged in inappropriate practice in connection with those billing practices.
The case involved, among other issues, the billing of item 45506, which related to the surgical revision of a scar not exceeding 3 cm on the face or neck. The structure of the item’s rebate reflected that the procedure did not typically require hospital admission and could be performed safely in an outpatient clinical setting, as occurred in this case. At the relevant time, the Medicare rebate for the procedure when performed out of hospital was $197.65.
Importantly, item 45506 was not subject to an EMSN cap.
It is not known how much the dermatologist charged the patient for this service but given the relatively low rebate shown above, the amount of the repayment, and an understanding of what other dermatologists charge, it may well have been over $2,000.
The PSR Director found:
The practitioner’s billing of MBS item 45506 was inappropriate because they charged fees significantly higher than the Schedule fee, resulting in significant cost to the Commonwealth arising from the availability of the Extended Medicare Safety Net on this uncapped MBS item.
This finding is important for what it does and does not say.
The PSR did not find that the practitioner charged ‘too much’. Practitioners are entitled to set their own fees. Rather, the issue was the interaction between the level of fees charged and access to public subsidy. In effect, the practitioner charged so much that it triggered disproportionately large public contributions through the EMSN. That was sufficient to constitute inappropriate practice requiring repayment, which the practitioner ultimately acknowledged.
The significance of this case lies in the principle it establishes.
The Commonwealth is not regulating fees. It is regulating the conditions under which it will subsidise those fees. That distinction is critical.
Doctors remain entirely free to set their own prices. There is no legal limit on what a practitioner can charge a patient. What the Commonwealth controls is something different: whether, and to what extent, public money will follow that fee.
The PSR decision makes this point clear.
It establishes that where a practitioner deliberately sets fees at a level that triggers disproportionately high public contributions – well beyond the base rebate - it may be characterised as ‘inappropriate practice’ because it is conduct in connection with providing a service that could be reasonably found to be unacceptable to the general body of their profession or specialty (s 82, HI Act). This is a formula that Kirby J said, in Wong’scase [2009] HCA 3 at [156], protected the PSR Scheme from invalidity.
In other words, the issue is not that the fee is ‘too high’ in a private sense. The issue is that the fee has been set in a way that draws down excessive taxpayer subsidy from Commonwealth funds. Once that line is crossed, the consequences are significant.
The practitioner may be found to have engaged in inappropriate practice under the HI Act, required to repay Medicare benefits and subject to further compliance action. This reframes the entire debate.
The Commonwealth does not need to control what doctors charge. It can instead control how public funds interact with those charges. And where fees are structured in a way that effectively compels taxpayers to contribute more than the intended base level, such as through mechanisms like the EMSN, that conduct can fall within the scope of regulatory scrutiny.
This is not price regulation. It is subsidy governance and the PSR has now confirmed that it has real legal force through the application of professional standards of conduct.
The likely behavioural response
There is, however, a very real and predictable risk.
If this type of reform reduces how much extra Medicare contributes when fees are inflated, the behaviour won’t stop; it will simply change. Medical practitioners are rational economic actors. If one pathway closes, they look for another.
In practice, that means the money is likely to move into places that are harder to see. Instead of higher declared fees driving larger safety net payments, we may see more administration fees, booking fees, facility fees, consumables, and other add-ons - charges that sit outside Medicare items and are far less transparent.
In simple terms: visible amplification may be replaced by hidden amplification.
As we explained in our previous post, many of these so-called ‘extra’ charges are not benign. They are often fraudulent charges, repackaged and positioned outside the Medicare framework to avoid scrutiny. This is not a theoretical concern. We are already seeing widespread use of opaque billing structures across both outpatient and inpatient settings.
The underlying pattern is consistent. Where the rules governing public contributions are clear, but enforcement is weak, behaviour does not disappear, it migrates.
Historically, enforcement in this area has been limited because the current model is poorly suited to addressing systemic patterns of conduct. The result is a regulatory environment where the law exists on paper, but its practical effect is diluted. And in that space between rule and enforcement, alternative charging structures have flourished. We will explore this enforcement problem in detail in our next post in this series.
This is why Medicare safety net reform cannot succeed on its own.
If we tighten how public contributions are calculated but leave hidden fees untouched, the system won’t save money, it will simply shift where the costs are buried. Patients will still pay. It will just be less visible and harder to challenge.
For reform to work, hidden fees must be addressed first.
That means two things are essential:
A single, legally authoritative source of truth about what can and cannot be charged.
A credible enforcement model capable of identifying and acting on fraud, misrepresentation and disguised fees.
Importantly, this requires independence and legal authority and must therefore be positioned within the Attorney-General’s portfolio, so that these practices are treated for what they are.
Without that foundation, contribution reform risks becoming little more than a game of regulatory whack-a-mole: close one loophole and another one opens.
Conclusion
The interaction between constitutional constraint, subsidy design and behavioural response is often misunderstood in debates about healthcare costs.
Too often, reform defaults to blunt solutions - price controls or incremental rebate adjustments - without addressing the structural realities of how the system actually operates.
This post demonstrates that a different pathway exists.
The Constitution does not prevent cost control. It prevents direct control of practitioner fees. It is a distinction that matters because it shifts the focus from price-setting to subsidy design - an area where the Commonwealth retains both authority and flexibility.
The EMSN provides a clear example. Its proportional structure has historically amplified costs. Caps have sought to constrain that effect. The recent PSR decision adds a critical development: it confirms that the interaction between fee levels and public subsidy can fall within compliance scrutiny.
Taken together, these elements show that cost control is achievable within the existing constitutional framework but only if policy targets the right lever. That lever is not the fee itself. It is the conditions under which public funds participate in that fee.
This creates a genuine opportunity for reform.
By recalibrating how and when subsidies apply, particularly for high-cost services, it is possible to influence behaviour and reduce excessive out-of-pocket costs without engaging constitutional risk.
But that opportunity comes with a warning.
Payment systems are adaptive. Where one pathway is constrained, another will emerge. Without effective oversight, cost amplification does not disappear, it is displaced.
The likely outcome of poorly designed reform is not lower costs, but more complex, less transparent charging, including further expansion of illegal hidden fees.
This is the central tension.
Reform must be carefully constructed to avoid simply shifting costs from one part of the system to another. For reform to succeed, two preconditions are essential.
The first is a single, authoritative source of legal truth. At present, Medicare rules are fragmented and inconsistently interpreted. This creates uncertainty for those trying to comply and opportunity for those willing to exploit ambiguity.
The second is a new enforcement model capable of operating at scale. Traditional approaches, particularly criminal prosecution, have struggled in this space due to the low value of individual transactions and the high burden of proof required. The result is a system where unlawful conduct can persist with little practical consequence.
Without these foundations, reform will repeat a familiar cycle: new rules, minimal behavioural change and continued divergence between policy intent and patient experience. With them, the position is different.
The Commonwealth already has the constitutional capacity and policy tools required.
The opportunity is real. The challenge is to ensure those tools are supported by a system capable of making them work.
If these foundations are put in place, reform has the potential to deliver genuine financial relief to patients and rebuild trust in how medical costs are set and shared.
Without them, the system will continue to evolve around unenforced rules and patients will continue to carry the cost.
Dr Margaret Faux is a health system lawyer, nurse, author, senior executive, academic and the founder of Synapse Medical, a software and advisory organisation specialising in payment integrity within Australia’s health system.
Bruce Topperwien is a senior public law practitioner with extensive experience in administrative, veterans’, compensation and health law.
Suggested citation: Margaret Faux and Bruce Topperwien, ‘Working with The Constitution: Rethinking Medicare Safety Nets to Control Costs’ (14 May 2026) <https://www.auspublaw.org/blog/2026/5/working-with-the-constitution-rethinking-medicare-safety-nets-to-control-costs>