Mediscare merchants bid up private health insurance premiums - The Centre for Independent Studies
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Mediscare merchants bid up private health insurance premiums

As the political author of the original “Mediscare” that has given the Australian Medical Association (the doctors’ union and de facto regulator) effective power of veto over federal government health policy, Bill Shorten has tied his own hands on reforms that can fix the private health sector and lower the cost of health insurance premiums.

A temporary premium price cap is a superficial “feel your pain” political gesture that will not deal with the true causes of private insurance premium hikes.

The real problem is that the current system of private health regulation does not allow for rational use of scarce resources to achieve the best health outcomes at the best price.

Freezing premium rises for two years will not only lead health funds to seek to recoup spending – by cutting payments to private hospitals and shifting costs on to members through higher out-of-pocket gap payments. It will also do nothing to solve the fundamental structural problems with the private health system. Without doing so, governments won’t limit the spiralling cost of private healthcare.

At a time when an ageing population is driving ever-escalating use of healthcare, the current highly regimented private health system severely limits the ability of insurers to control their costs – and thus premium charges – by ensuring the health services they fund are cost-effective.

Limited ability to innovate

To speak of private health “insurance” is a misnomer, as it wrongly implies health funds can manage the care of their members to ensure the best quality service is received at the lowest cost.

In reality, the current system compels health funds to pay, hand over fist, for health care that is primarily delivered in the highest-cost hospital settings, with very limited ability to foster innovations that could deliver better care more efficiently outside of hospitals.

That’s because the Health Insurance Act forces health funds to operate as “fee for service” payment mechanisms that guarantee the incomes and underwrite the business models of medical specialists and hospital operators.

It does this principally via the strict indemnity covering private insurance, which mandates that health funds must pay for members’ hospital care if the admission is approved by a registered medical practitioner.

In turn, these strict-indemnity, fee-for-service arrangements reward hospital operators and specialists for the volume of services provided. This inherently encourages over-servicing to ensure that hospital beds are filled – with the bill passed on to health funds that have no choice other than to foot the cost of the same old, high-cost hospital services in the same old way.

Not only that, but the rigidities of the current system actively discourage any shift away from expensive hospital-based care in favour of delivering specialist procedures to people as outpatients in lower-cost, community-based facilities.

This is further compounded by the Health Insurance Act also banning health funds from paying benefits for any out-of-hospital medical service for which Medicare rebates are available. This prohibition dates back to the start of Medicare, with the rationale being that if health funds could pay for GP services, it would create a two-tiered system undermining equal access to healthcare.

But in practice, this has tied the hands of health funds with respect to the number-one health challenge of the age: the rising burden of chronic disease that could be treated more efficiently and effectively by providing members with better services in the community to prevent the need for hospitalisation.

Little wonder that the private health sector is caught in a demand-cost-and-premium spiral when all the financial incentives in the system encourage providers to get patients into hospital – rather than focusing on keeping them well and out of the wards.

Fixing the real drivers of rising private health costs requires moving away from a passive payment system for private health that simply funds providers for delivering siloed hospital services, regardless of whether patients’ overall health needs and outcomes could be served and improved by delivering alternative services.

Real structural reforms

Correcting these skewed financial incentives would require real structural reforms that allowed health funds to play a more active role in organising and purchasing care on members’ behalf – and pass on the benefits not only in better-quality care, but ultimately in the form of lower premium charges.

Yet any such revision of the private insurance regime will immediately elicit howls of protest led by the AMA, which is resolutely opposed to any changes to the existing strict-indemnity “fee for service” system for private hospital care.

One way around the “managed scare” sure to be orchestrated by the doctors union (and probably the nurses) would be to simply permit greater flexibility, based explicitly on consumer choice. Fund members could either opt for lower cost “managed care” health plans, or stick with the current arrangement but expect to pay higher premiums.

Nevertheless, the AMA’s political veto over health policy remains the single biggest obstacle to enacting truly effective measures to grapple with the cost of private health insurance.

Ironically – thanks to the “Mediscare” – the opposition leader is mainly responsible for poisoning the well of rational health reform. And hence will only have himself to blame when his price cap gesture fails to fix the cost of private health.

Jeremy Sammut is director of the Health Innovations Program at The Centre for Independent Studies.