Road map for Australian health care reform - Part II

Access - choice and value for money

At present private insurance in Australia is a misnomer because it does not offer comprehensive coverage. According to the National Health Act of 1953 private insurance can only pay for services not covered by Medicare. As a result the relation between Medicare and private insurance has always been complementary rather than competitive.

Sure, the private insurance industry by serving private hospitals fosters some competition with public hospitals. It is most revealing, however, that still many hundred thousand patients with private insurance attend public hospitals for free each year - not revealing their private insurance. The reimbursement of hospital services is very complex with Medicare paying on average 50 per cent for the surgeon and anesthetist and insurance paying for overheads.

Private insurance covers only about half of the cost of chemotherapy, joint replacement or other high-tech health care. This is reflected in the incongruence between the fact that half of Australians have private insurance but contribute just 11 per cent to all health care expenditure. As a result most patients use private insurance to jump the cue for elective surgery and for choice of their preferred doctor.

It does not come as a surprise that Australian private insurance tends to be cheap by international comparison ($300 - $3,000 per year). On top of that it is also subsidised by the government with the 30 per cent tax rebate on individual purchase. Given that health funds have to insure everybody at the same rate there is no space for competition and no incentive for efficiency. This has only recently been slightly modified by Lifetime Community Rating meaning that people who take out health insurance before they get to 30 years pay 2 per cent lower premiums.

The 30 per cent tax subsidy and the Medicare “Safety net” need to be reviewed because both create perverse incentives to spend more money than necessary. After the first year of introduction the “Safety net” blew out from $440 million in 2004 to $1.65 billion in 2005. It tempts people to spend above the threshold and then pay only 20 cent in every dollar they spend on their health care. In the long run Medicare and also private insurance need to be rearranged in one system of competing health funds with comprehensive coverage for catastrophic illness. It helps that a quarter of the privately insured have household incomes of less that $33,000 and half have less than $70,000.

Among the 37 Australian health funds only six account for almost 80 per cent of all contributors, just three are for profit. However despite the large government subsidies there has been little regulation on costs and efficiency. Tapay concluded: “Private funds have not engaged in cost control. Insurers are not exposed to the risk of managing the entire continuum of care.” (Colombo, F. and N. Tapay, Private Health Insurance in Australia: A Case Study, Health Working Papers No. 8, OECD). The market for health insurers needs to be deregulated to give them more flexibility with coverage and pricing. Since at the moment all Australians have to put up with the same substandard public ambulatory care there should be a role for the private sector outside the hospital gate. In Australia HSA’s (health savings accounts) would be an elegant way to let private insurance enter primary care markets.

For decades medical progress has been shifting more and more procedures out of hospitals into dedicated same-day outlets. Russell Schneider (ACHR research paper 2006) has published a proposal for the federal legislators to address this problem and open primary and preventive care for private insurance. Health funds should offer innovative consumer-directed health plans with flexible excess rates or deductibles that give patients more choices. Attached to those would be health savings accounts which I will explain in a later chapter.

Costs - the future of health insurance

The Australian health care system, as those in almost all other developed countries, has eventually to be rearranged if it is to survive the two main challenges of the 21st century: the deluge from retiring baby boomers and the emerging global competition in health care, notwithstanding costly technological progress.

True, the baby boomers have huge assets and have a lot money to spend for medical progress. However, none of the technological advances will solve the problem. It has to be organisational and business innovation that will transform health care into a consumer-driven market place. Cost shifting and cream skimming have to be replaced by wealth creation because improving our health care translates into customer value.

Health is highly valued by all humans. This value is not merely subjective it is also measurable in terms of workforce participation, workplace absenteeism and economic productivity.

According to Paul Kelly, editor of The Australian, it takes excellence in only three parameters to increase the “hard power” of this country. These are economic growth, population growth and technological innovation. Health care affects all three and has already become the industry with the biggest work force (600,000). It is also an export industry of growing importance. Driving this is the “people’s economy”. As Chicago Nobel economist Gary Becker says:

… 75 per cent of our wealth is not land, buildings, equipment and the rest but the “human capital” skills, health, and experience of our people. The best way to improve all that, though, is to get government out of the picture.

The upcoming surge of retiring baby boomers is aggravating problems caused by the fundamental shift in the root causes of ill health - the change from contagion or bugs (spreading epidemics), to new life style diseases such as obesity or high cholesterol. It is probably too early to concede victory to the anti-ageing lobby (J. Sammut: The Coming Crisis of Medicare, CIS Policy Monograph, 2007) who dismiss the health funding crisis, because there is no doubt there has been faster than GDP growth of health expenditures for nearly two decades. By the middle of this century health expenditure is expected to grow to 15-19 per cent of GDP (Treasury data). It doesn’t really matter what to blame most, baby boomers, ageing, obesity or an increase in chronic conditions - they all matter.

More important still there is a major shift in the causes of diseases. Epidemics, like cholera, used to hit everyone and therefore was homogenised and unified. The answer to that was one-size-fits-all medicine, which is still around - providing collective health care arrangements with free hospital care, universal insurance and drugs benefits for everyone. The new epidemics are due to cholesterol and lifestyle. These are thoroughly personal, rooted in our private differences and this is ever more pulling us apart. The answer is bespoke individual treatment. However all developed health systems were designed in the era of epidemics and have hardly adapted to the new reality.

Proof of that comes from OECD data demonstrating that different health outcomes do not necessarily reflect good or poor health care anymore. This partly explains why the gap between non-Indigenous and Indigenous health is widening. With 17 years difference in life expectancy this gap is worse in Australia than in the US (four years), New Zealand (six years) and Canada (seven years) according to Andrew Twaddle (Ed., Health Care Reform Around the World, 2002).

Sure, this gap is more driven by lifestyle differences than anything else - as has been demonstrated with the study Eight Americas (2006 Harvard School of Public Health) each of them reflecting regional race-mixes and which found differences in life expectancies between groups of up to 35 years. And what’s so irritating is this: factoring out wealth, race, and even access to health insurance doesn’t eliminate the differences in life expectancies.

Peter Huber, senior fellow at the Manhattan Institute in New York (City Magazine online 2007):

Common as they still are, insurance systems that pool health risks indiscriminately are vestiges of the past. They can’t survive what lies ahead. Insurance makes sense for risks that people can’t control. The inconvenient truth for advocates of universal health insurance is that new drugs for the first time put people in overall control of their medical conditions. Of course this has not banished luck completely but the role for big government is definitely over in medicine.

One answer is de-mutualisation - underway at Medibank with other big health funds following suit - and shared risk management with subsidised health savings accounts. If people can control almost half of their health risks (the Australian Government figure is 36 per cent) then they obviously need health insurance only for catastrophic illness, which is much cheaper than universal coverage.

Russell Schneider, previously head of the Australian Health Insurance Association, says: “Medicare is so sick that thousands, perhaps hundreds of thousands of people will not get the care to which they are entitled, and some of those people will die.” (ACHR research paper Nov 2006).

Devolution of Medicare into consumer-directed health plans

There is no government role in health care provision even on the state level other than the provision of public health arrangements. However Peter Drucker from the Harvard Business School warns: “Systematic abandonment is both the most important and most difficult step in innovation” (Elizabeth Haas Edersheim, The Definite Drucker, 2007). However it is underway: the nation’s two biggest redevelopments of public hospitals in Adelaide and Sydney will not be led by the states but by Private Public Partnerships, indicating state failure and suggesting a much bigger role for the private hospital market, which has nearly 50 per cent market share already.

If we consider new health funding arrangements, we need to keep in mind that every health care system has to allocate or manage scarce resources among unlimited wants. And in order to control health care costs, someone must choose between health care and other uses of money. Since the value of health care is experienced subjectively, that decision can better be made by patients, except for emergencies, rather than by third parties like government, employers or insurers. It’s for a good reason that elegant solutions to problems often come from customers.

But mounting cost pressure is also important. In order to fend off a disrupting meltdown of Medicare we depend on changing unhealthy behaviour by handing back responsibility and control of health expenditures to consumers. The reason for that is that privacy laws and data protection prohibit any third party intervention into personal live-style.

The only escape from this dilemma is to put together the roles of patient, consumer and payer. Just get informed consumers in charge of minor health expenditures such as drugs and doctor visits or preventive care. For elective surgery consumers can look out the hospital that fits them best. And if they permanently don’t look after themselves properly health funds can charge them higher premiums.

Russell Schneider, previous head of the Australian Health Insurance Association predicts the demise of Medicare unless a fundamental transition from funding to purchasing health care is accomplished (ACHR research paper Nov. 2006). It would enable competition between hospitals and other providers on outcome and finally on prices. However, his proposal of managed competition within preferred provider organisations is not compatible with consumer choice.

Australia deserves a market-based, efficient health delivery system with private insurance and arranged along the lines of subsidiary federalism and consumer choices. Universal health insurance and state run hospitals are incompatible with the rapid innovation that is required to meet the challenges of the 21st century.

Over the last century the average global life expectancy has roughly doubled, from 30 to 60 years and human resources have pretty much replaced natural resources as drivers of the economy. This is exactly why health care has become such a big issue in all developed countries.

Innovation, excellence and global competition in the health care industry are becoming part of the fast growing knowledge-based “people’s economy”, which might give Australia the edge over the Asian Tigers. However, this very advantage could be jeopardised by a meltdown of Medicare caused by the overwhelming burden of retiring baby boomers if no action is taken. That’s encapsulated in ANU Professor Ross Garnaut’s prediction on demography being the route to success in the 21st century.