Integrating insurance with health service provision - a volatile partnership - The Centre for Independent Studies
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Integrating insurance with health service provision – a volatile partnership



It is rare for a large provider of medical services to assume control of a health insurance company. But this occurred in September when Primary Health Care, a publicly-listed provider of medical and laboratory services, with a market capitalisation of some $2 billion, acquired Transport Health for $18 million. While Transport Health has traditionally provided health insurance for employees of the transport industry, it will now convert to an open-access fund.
Primary claims that members of Transport Health "will benefit from access to Primary's extensive network of health care providers".  It will use its suite of healthcare services "to establish an extended provider network for existing and future Transport Health members".
It appears a corporate health provider has assumed control of a health insurer as a strategy for underwriting and expanding the demand for the services of its health businesses. Although the Health Insurance Act seeks to prevent private insurers from writing private medical cover, this has not inhibited Medibank Private from trialing an insurance model that is designed to guarantee 'priority' access to out-of-hospital GP services at zero price in south-east Queensland at medical practices owned by Sonic, a major publicly-listed competitor to Primary.
To the extent that competitive offerings of this type of gap cover may neutralise the impact of Government attempts to introduce a GP co-payment or patient cost sharing, they could encourage the demand for medical services and prove a burden to health fund contributors obliged to meet higher premiums to pay for incremental front end medical costs.
Therein lies the dilemma for Primary: it can profitably underwrite expansion of its health services that prove costly to its insurance division and its contributors; alternatively, it can attract contributors to low cost insurance offerings that incorporate cost sharing and encourage patients to make rational decisions about the care they use-but not both.
Asymmetry between the welfare of fund members on the one hand and providers and users of services on the other has been a principal reason to have discouraged providers of services from taking over insurers. Such marriages have potential to wreak maximum damage where providers are remunerated in a fee for service setting where patients make no contribution to the cost. This maximises opportunities for providers to drive demand for health care that may not always be clinically supportable.
To be sure, there are examples of successful vertically integrated health insurance and health service provision. But these occur when insurance companies have initiated a takeover or have established their own service businesses. Providers have resisted them because, to protect their financial integrity, insurers have sought to influence the quality and content of services they underwrite.
Doctors interpret this as 'managed care', intruding into their professional realm. In 1988 a major health fund established a 12-chair dental centre in central Sydney that has since grown into a dental network. This was fiercely opposed by dentists. The fund had acquired the right to comprehensively audit and benchmark work of the profession, who in turn interpreted this as a threat to their autonomy and independence.
Wherever insurers have capacity to monitor services they underwrite and to calibrate price signals and provider remuneration to encourage doctors to keep patients well and out of hospital, there is greatest scope for vertical integration. The message here for corporate health providers in Australia is that where conventional fee-for-service prevails without cost-sharing, it is risky to conflate investment criteria for mutually opposed service objectives.


gadiel-davidDavid Gadiel is a Senior Fellow at the Centre for Independent Studies.