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A viable alternative to letting policy wonks determine health policy

By Vern Hughes - posted Wednesday, 19 November 2003

South Kingsville Health Services Co-operative Ltd (SKHS), located in a low-income pocket of Melbourne’s western suburbs, may seem an unlikely place for an entrepreneurial and policy revolution. There is, however, no more hopeful innovation in Australia than this community entity in both conceptualising health care reform and driving its implementation.

Formed in 1980, SKHS is a co-operative of health consumers who elect a governing Board that engages 20 general practitioners, several dentists, and a team of allied health practitioners and educators. It operates two clinics in low-income suburbs, and since its formation has received no grant funding from any tier of government. It is a self-sustaining business through its fees for services. From the outset, it has sought to integrate health care with social supports for the sick and elderly, and has extensive teams of volunteer home visitors working in partnership with its primary care practitioners. It is perhaps the only health-care entity in Australia that bases its structure and operations on the truism that socially connected people live healthier lives. For more than 15 years, it has sought (so far unsuccessfully) to entice health bureaucrats to allow it to trial capitation-based payment systems rather than fee-for-service arrangements, so that it may more adequately fulfill its mission of keeping its pool of consumer members healthy and out of surgeries and hospitals.

It would be fair to say that politicians, health policy makers, and middle-level bureaucrats are utterly baffled by this grass-roots innovation. Because it is a self-funding business, it is not regarded as a community health centre or a public health institution. Because it is owned by its consumers, it is not part of any medical industry lobby or association. And because it actually contracts with practitioners, pathology companies, and general-practice training providers, it is not regarded by the so-called "consumer health" networks as a lobbyist for the consumer viewpoint. Only in a system jointly dominated by politicians and guilds could this kind of consumer innovation be regarded as unusual.


SKHS does serve, however, as one possible model for the kind of intermediate structure between doctor and patient that is necessary for health reform. A consumer-empowerment strategy is the only feasible path for reform in Australia, and reform requires three mechanisms which are 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 as the agent of consumers.

Consumer intermediaries are needed to overcome the doctor-patient information asymmetries in health care that make market competition difficult. Intermediaries are needed to make available comparative price and service-quality data to patients, and enable patients as consumers to purchase (individually or collectively) their preferred services. Agents or brokers like this operate in almost all other industries – real estate, insurance, the law, agriculture – but not widely in the area where we most need it: health.

Because consumer preferences in health care are increasingly diverse, consumer intermediaries will necessarily adopt various philosophies of care. Some, like SKHS, are based on geographic community, others will be based on communities of interest, and would employ, like SKHS, the resources, infrastructure and volunteer networks of those communities. Not all would necessarily be consumer-governed entities, though it would be appropriate to allow intermediaries of all kinds to exercise a high degree of self-regulation, making their own judgements about which practices enhance good health and which are injurious to good health.

It is reasonable to assume, though, that a consumer-empowerment approach to health-care reform would see a proliferation of entities based on consumer governance, since this governance model is the only one in health care that is fully compatible with an "active agency" model of health maintenance and financing. This model, whereby individuals as consumers are engaged as active agents in modifying their behaviours to manage health risk, is counterposed to the "casualty" model of health care, in which illness is viewed essentially as an act of God. Active agency implies the facilitation of self-direction in health maintenance and illness prevention, not passivity. It implies a culture of self-help.

SKHS is seeking to fully employ this active-agency model, but this now requires a series of policy and regulatory innovations.

First, SKHS has argued that its patients/members should be able to "cash out" their Medicare entitlements and have them allocated to the co-op. Why shouldn’t consumers 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 elect to register in this way with intermediaries should also be able to receive a cashed-out share of commonwealth and state expenditure on public hospitals. 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, SKHS would be required to meet the full cost of all medical services, public hospital services, and PBS pharmaceuticals for its enrolled consumers. It 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 one third of the total cost of health care for that patient pool.

In going down this road, SKHS should be permitted to adopt its own insurance tables, with an exemption from the usual regulatory requirements for private health insurance. Since it 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 which discourage higher-risk members would lose the Medicare payment that follows these members.

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About the Author

Vern Hughes is Secretary of the National Federation of Parents Families and Carers and Director of the Centre for Civil Society and has been Australia's leading advocate for civil society over a 20-year period. He has been a writer, practitioner and networker in social enterprise, church, community, disability and co-operative movements. He is a former Executive Officer of South Kingsville Health Services Co-operative (Australia's only community-owned primary health care centre), a former Director of Hotham Mission in the Uniting Church, the founder of the Social Entrepreneurs Network, and a former Director of the Co-operative Federation of Victoria. He is also a writer and columnist on civil society, social policy and political reform issues.

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