Why shouldn't communities be allowed to opt out of Medicare?

Health reformers would do well to ponder on the profile of the two low-income communities in Australia that have explored "opting out" of Medicare, and taking their Medicare financial entitlements with them.

Apanipimu health service is an Aboriginal organisation on Cape York, searching for new approaches to the appalling state of Indigenous health. What they have found is that passive health dispensed by well-meaning bureaucrats is as incongruous as passive welfare, and just as ineffective.

South Kingsville Health Services Co-op is a patient-owned health service in Melbourne’s deprived west (the setting for the 1980s film Spotswood). Its several thousand members elect a Board that engages doctors, dentists, and allied health practitioners in two neighbourhood clinics.

It is highly likely that Australia’s first health maintenance organisation (HMO) will emerge among Indigenous Australians on Cape York. Apanipimu is currently negotiating with the Federal Government for a "cashing out" of Medicare.

The fact that two existing communities (and low-income communities) have independently explored a "cashing out" of Medicare demonstrates two points of enormous importance. One is that health reform will eventuate only by public policy moving into line with advanced practices on the ground in real communities at the leading edge of their fields. This is an antidote to pie-in-the-sky utopianism, for which Australian voters have historically shown scant regard.

The second is that health reform in the direction of managed competition (the only coherent alternative to our current un-managed and fragmented supplier-driven system) will never eventuate if it is driven by powerful industry interests.

The current public debate about health care is concerned almost exclusively with the question of how much public subsidy is to be allocated to this or that group of suppliers (general practitioners, medical specialists, public hospitals, or private insurers). It avoids the critical question for reformers and consumers alike, which is how to turn around a situation where no part of our current system provides a financial incentive to manage health risks to keep people out of hospital, or develop marketable advantages around good management of health outcomes.

Why do we find this too hard? After all, Australians were once innovators in health care. In the 19th century, most of our medical care was organised through consumer-governed associations. Friendly societies contracted with medical providers for capitation-based payments (payments per head of population) for medical services. For a (usually) quarterly subscription, doctors were contracted by friendly society lodges to provide general practitioner services to a pool of enrollees. Networks of bush and community hospitals were established and financed on a similar subscription basis, with visiting doctors engaged on a mix of capitation-based contracts and fee-for-service (payment according to volume and nature of services provided). Subscription systems of financing formed the basis of pharmacy service provision through friendly society dispensaries across the country.

Can we become innovators again? Apanipimu and South Kingsville are showing how grass-roots communities can indeed become innovators. Indeed, they are the only part of the health system with a strong interest in becoming so.

In a nutshell:

1. The health system is highly fragmented, with little continuity of care across program, service and practitioner types, with few incentives for the industry to become consumer-focussed.
2. There is little or no financial incentive for practitioners and providers to keep people well and out of their surgeries or hospitals. On the contrary, most of the financial incentives favour repeat business with unwell patients.
3. Consumers have little market-based power in the organisation and pricing of services. There are insufficient means for consumers to substitute one care regime for a better and more price-effective regime.
4. Consumers have little access to brokerage services which purchase services on their behalf and negotiate over price and service quality. Agents or brokers like this operate in almost all other industries—finance, real estate, insurance, law, agriculture—but not in the area they are needed most: health.
5. Private insurance is divorced from any active role in the management and delivery of health care, meaning it cannot contain costs without public subsidy and is therefore unsustainable.

Medicare has successfully provided universal health care access for all Australians but it now needs renovation if it is to give us patient-centred integrated care. There is no question of Medicare being removed – the question is how to introduce one form or other of managed competition to empower the consumer and curtail the fragmentation.

Take the management of the top ten chronic conditions that consume so much of federal, state and private health budgets: heart disease, stroke, lung cancer, colorectal cancer, depression, diabetes, asthma, renal disease, arthritis and osteoporosis. Who has a financial incentive to curtail the risk factors in these conditions and curtail hospital usage? Answer: no-one. Australia now has higher hospitalisation rates for these conditions than the UK, Canada, USA or New Zealand.

Management of these conditions is currently dispersed among a plethora of programs and providers. Paul Gross of the Institute for Health Economics and Technology Assessment has proposed pooling funds from four sources (MBS, PBS, public hospital subsidies, and Home and Community Care payments) to make capitation-based payments with appropriate risk adjustments to agents of these patients to manage these conditions. The agents may be a GP, a community health centre, or indeed a health fund who would receive an up-front annual payment to co-ordinate the care required, to manage and reduce health risks, and minimise hospital admissions.

This approach is infinitely preferable to continually pouring more tax dollars into public hospitals irrespective of health outcomes. The German Parliament, not usually known as a paragon of free-market zeal, introduced a similar scheme in 2002 for the management of four selected conditions.

A consumer-empowerment strategy in health reform requires three mechanisms currently absent from the Australian scene: an intermediate structure between patient and doctor (consumer intermediaries), and two new markets — one to create competition among consumer intermediaries for the allegiance of consumers and one to create competition among providers in supplying services to intermediaries acting as agents for consumers.

There need be no prescribed structural form for consumer intermediaries: the function may be performed by a not-for-profit friendly society, a for-profit financial agent, a community health centre, a health fund or a trade union — in short, any entity with a capacity to aggregate member enrolments, manage their financial entitlements and enter into contractual arrangements on their behalf, and manage member relationships to the mutual satisfaction of the intermediary and member. Intermediaries would be permitted to contract with providers and practitioners in developing price and service quality benefits for their members and would be free to develop packages of care, innovations in information management, home-care supports, and ancillary benefits for their pool of consumers. Consumers would be free to select the intermediary of their choice (and to collectively form one if they wish) and to transfer from one to another.

Instituting a role for such intermediaries remains the first and critical task of would-be health reformers. The good news is that this can be done without radical public policy change. It does, however, require entrepreneurial initiative from below to drive health reform from above. This is a critical point of departure from the way in which health policy reform has been conceived in Australia for the past half century, and it provides the crucial exit strategy out of the current policy impasse.

David Green, whose work on Australian friendly societies in 1984 remains of seminal importance in understanding the present health care stalemate, has called these civil society initiatives "private action plans" — initiatives that can be undertaken in the present without prior public policy change but which have the effect of creating conditions and capacities that encourage further public policy innovation. In health care, the development of functioning consumer intermediaries that win the confidence of consumers is fundamental to public policy change: without them, consumers are likely to view abstract proposals for reform as threats rather than opportunities.

Consumers should be permitted to have their Medicare contribution and their share of Pharmaceutical Benefit Scheme (PBS) expenditure paid directly to the intermediary of their choice. Consumers who register in this way with intermediaries should also be able to receive a cashed-out share of commonwealth and state expenditure on public hospitals payable to their intermediary. These financial entitlements would be adjusted for health risk according to age and health status, so that consumers with a higher health risk profile attract a higher payment. In the case of SKHS, this would mean it would receive a capitation-based proportion of total Medicare and PBS expenditure for each of its enrolled members, adjusted for their health risk profile, payable as an annual up-front payment to the co-operative.

Consumers who are eligible for Home and Community Care (HACC) and selected mental health and disability services should also be permitted to have these entitlements cashed-out and paid directly to the intermediary of their choice.

In turn, the intermediary would be required to meet the full cost of all medical services, public hospital services, and PBS pharmaceuticals for its enrolled consumers. The intermediary would be permitted to levy its own membership fees, co-payments and/or insurance tables as it sees fit to supplement its receipt of Medicare and PBS income. Since one third of all Australian health expenditure is paid directly by consumers or their insurers, it could be assumed that an intermediary’s pool of patients would contribute about a third of the total cost of health care for that patient pool.

Since intermediaries would receive risk-rated Medicare payments, higher risk members would attract a higher Medicare payment. This would offset, at least to some extent, the impact of risk selection within a less regulated health insurance market. Intermediaries that adopt insurance tables that discourage higher-risk members would lose the Medicare payment that follows these members.

A more flexible regulatory framework is essential to enable individually-tailored health maintenance strategies. Conventional health insurers lack the capacity to manage the health risks of their members to prevent crises and restrict hospitalisation rates. Intermediaries, on the other hand, would be in the business of employing resources and strategies to manage risk. They would have a financial incentive to keep their members well and out of hospital. The introduction of behaviour and outcome-related rebates, bonuses and penalties as incentives for members to manage their own health risks would be critical. It should be permissible, for instance, for intermediary tables to differentiate between smokers and non-smokers.

Consumer intermediaries working within a framework of pre-paid budget-capped health care management would be the only structural entities in the health system with a financial incentive to monitor the outcomes of care of their pools of patients and tailor their practices to objectives such as improved pre-admission and post-discharge reviews, reduced infection rates, fewer post-surgical complications, and lower readmission rates. Their aim would be to develop marketable health value advantages around these outcomes to attract more members, thus creating competition among intermediaries for consumer allegiance.

This is an opt-in strategy. In the spirit of competition, intermediaries would be obliged to engage with consumers and communities about health-outcome advantages. If consumers were not convinced, they could remain within the old regime. Unlike the current pseudo-competition among health insurers or medical practitioners (which avoids any reference to health outcomes), competition between consumer intermediaries would have to trade in measurable health outcomes and performance.

Some existing health funds, professional associations, credit unions and consumer co-operatives already undertake, in a limited form, some intermediary functions such as aggregated purchasing benefits or preferred provider arrangements in selected health areas. These could be readily expanded in anticipation of public policy changes to enhance the role of health intermediaries.

State or Commonwealth governments could recognise these intermediaries and encourage their development by introducing (without major public policy change) a fee payable to the intermediary for every enrolled consumer or family (the fee being risk-rated for age and health status to discourage selective enrolment of the young and healthy). The development of competing intermediaries would be the first step towards enhanced competition and a functioning market in health care.

For marketing purposes, I would present this approach as the introduction of Family Health Brokers to assist families access the best health care and home supports.