John Menadue. The unfairness and waste in health. Private Health Insurance is the real culprit.

Medibank Pte has been in dispute with the Calvary Hospital Group and now with UnitingCare over performance in their hospitals.

At last our largest private health insurance company, MBP has come to understand that the private providers, hospitals and doctors, are really in control. These private providers determine the quality of care and its cost. The PHI companies like MBP are really powerless to control both the quality and cost of healthcare. They need to lift their game .But they are in a bind.

The problem that the MBP faces is precisely the same problem as the US healthcare system faces. In the US hundreds of competing private health insurers do not have the power to control quality and price setting by providers. If a private insurance company is too tough the provider will take the business to a competitor. The worldwide lesson is that only a single insurer can have a real effect on costs and promote quality.

The CEO of MBP has got into trouble by confronting the powerful providers, in this case Calvary and UnitingCare. He has resigned!  In his exit comments, the CEO of MBP, George Savvides said he was seeking to ‘reposition MBP from being a payer of bills, to a player in the health system’. He could not be more precise and correct. The private health insurance companies meekly accept the prices set by providers, both hospitals and doctors. I read Savvides’ comments to mean that the providers rebuffed him in his attempts to improve the quality and contain the cost of care. And his board did not support him. The providers have won again.

Apparently Savvides was insisting on two things. The first was that MBP would refuse to pay when any of a list of 165 ‘highly preventable adverse events’ occurred, including preventable falls in hospital and presumably hospital-caused infections. Secondly he proposed that MBP would refuse to pay hospitals for unplanned patient readmissions that occur within 28 days of a procedure, compared with seven days previously.

Good luck to PHI companies like MBP who refuse to be passive payers of bills and want to have a say in the cost and quality of care by private providers particularly in private hospitals.

‘Adverse events’ are a major cost in all health systems – mistakes, injury, infections and even death. Many are avoidable and many are not. Avoidable adverse events probably cost well over $ 5b p.a. in the Australian health sector. Good clinicians are caught up in a bad system. See link to my previous post ‘The personal, public and social costs of mistakes in health’.

Other PHI companies like BUPA must similarly be concerned about the difficulty in controlling provider costs. That is the reason why PHI premiums rise significantly each year. Since John Howard introduced the rebate on PHI in 1999 the cost of PHI premiums has increased 150%.Overall prices have increased by less than 50%.Not surprisingly a reader panel in the Sydney Morning Herald has found that 64% of people don’t believe that PHI provides value for money. The Minister for Health describes many PHI policies as ‘junk’

But PHI companies like MBP and Bupa contribute to high costs. Through GAP insurance that they provide they have underwritten an enormous increase in specialist fees in private hospitals. These specialists receive remuneration three to four times what is paid in public hospitals. And not to be out done on specialist fees the major private hospital; Ramsay Healthcare for example paid its CEO $31 m in 2014. No wonder MBP wants to get hospital costs down!

In addition to the inability of PHI companies to put pressure on health costs, there is the problem of waste in the delivery of health care – excessive pathology and radiology tests, over-treatment and over-prescribing. In the recent Four Corners program we were told about a tsunami of over-diagnosis and treatment. We heard about

  • Care that is ineffective and sometimes unsafe;
  • That perhaps a half of MRIs, are unnecessary;
  • At least half arthroscopies are unnecessary;
  • At least 20% of knee replacements may be inappropriate;
  • The majority of MRI’s and CT’s for back pain are a complete waste;
  • The scientific evidence for spinal fusion is just not there;
  • As much as a third of money for stenting is potentially being wasted;
  • And up to 43% of invasive coronary angiograms are unnecessary.

This waste is common across the health sector, both public and private, but I suggest that the problems are greater in the private sector and private hospitals in particular.

The Four Corners program highlighted the particular problems in private hospitals.

  • ‘Stents are more likely to be given in the private sector than in the public’
  • ‘Most spinal fusion is done in private hospitals’
  • Angiograms are performed ‘more frequently in the private system’
  • ‘In the last ten years we have forked out nearly $486 m. for knee MRIs in the private sector alone.’
  • ‘It does seem that over-treatment is in the private sector’.

Four Corners did not examine Work Cover and the cost of injuries in the workplace, particularly back injury when it is treated in private hospitals.

Many clinicians and others in the Four Corners program pointed out that there is a great deal of data in all these areas but unfortunately it is invariably in silos and not readily accessible to the public so that we can effectively address the problems of ineffective, wasteful and sometimes harmful medical procedures. There are large variations in medical procedures between public and private hospitals and regions. We have a long way to go in rigorous evidence based care. Accreditation in itself does not tell us much about the quality of care.

There are particular reasons why we should be concerned about what is happening in some private hospitals.

  • Fee for service in private hospitals and in the private sector generally provides a perverse incentive. Clinicians are rewarded for volume of work rather than the quality of care and patient outcomes. In the public sector, clinicians are more likely to be remunerated on a salaried or sessional basis without the financial incentives for over treatment.
  • In the public hospitals peer review is much more widely practiced with mistakes, adverse events and poor performance more readily corrected.
  • Dealing with less complicated cases, many private hospitals do not have the breadth and depth of experience and the skills that are found in public hospitals and particularly teaching hospitals. Some of the larger private hospitals are well run with peer review and strict accreditation. Some have training registrars and medical students. However the quality of care is patchy, particularly in smaller private hospitals.
  • I am also advised that private hospitals are much more likely to import minimally qualified nurses on temporary visas. This inevitably leads to more adverse events.
  • Private hospitals work much more on a cottage industry basis with visiting medical practitioners coming and going between the hospital and their private rooms. With hundreds of visiting specialists it is very difficult to develop professional collaboration and peer review and professional esprit des corps when they are coming and going on a part time basis.

Australia is spending $10 b. to subsidise private health insurance. In 2014/15 this was made up as follows

  • $6.3 b for direct outlays as in Budget Paper 1
  • $1.5b tax free income rebate.
  • $1.0b benefit for exemption from Medicare levy surcharge.

The total is $8.8 b for 2014/15. This year it would be higher and before we look at the inflation effects of PHI

Most of the direct outlay of over $6b benefits higher income people accessing high cost private hospitals in the name of choice .In the process they jump the hospital queue.

MBP’s attempt to address some of these problems in negotiations with Calvary Hospitals and UnitingCare is the first public sign that I have seen of PHI companies recognizing their serious problems. The ‘canary in the mine’ is warning us about the quality and cost of private hospital care that is   generously subsidised by the Australian taxpayer.

PHI’s are financial intermediaries. They do not deliver healthcare. They are proving unable to effectively manage quality and contain costs in private hospitals. George Savvides has found out the hard way. But the government doesn’t care and diverts attention with nonsense about the unsustainability of our health system. Abolishing the $10b subsidy for PHI would greatly improve the quality of health care, reduce costs and make our health care system much more sustainable.

But the lobbying power of PHI companies and private hospitals like Ramsay Healthcare frightens almost all politicians and particularly Commonwealth health ministers from both sides of politics.

Taxpayer subsidised PHI will destroy our world class health system in the same way that PHI has caused disaster in the US.

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3 Responses to John Menadue. The unfairness and waste in health. Private Health Insurance is the real culprit.

  1. Michael D. Breen says:

    Like education we have a two tier health system. The privileged who go to the private system would be loathe to acknowledge the genuine benefits of the public system. But they like to think “they are not like the rest of men.” Then again we see almost no stats about iatrogenic disease, do we? You do not mention the opportunity costs of neglecting investment in serious preventative strategies or bonuses for those who work to preserve their health. Then there are the medical supply companies and the pharmaceutical companies who know they can charge what they like ‘cos it is essential stuff. I have a surgeon mate who suggests the checking of credentials of doctors from overseas working in private hospitals in rural areas is below par. And trainee specialists report bullying and harassment by senior specialists which their colleges seem unable or unwilling to control. There are some services which are so essential that only a government managed system can provide. When it is in so many private hands it is as you suggest, out of control.

  2. John Thompson says:

    This post and many other articles from respected economists have pointed out the waste and inefficiencies of our private health insurance system and I think it is quite revealing that the insurance companies do not attempt to publicly rebut or respond to the charges made. Instead their lobbyists and political donors work behind the scenes in league with the private hospital sector to influence politicians to continue to support the system and to approve the annual rises in fees. And is it any wonder that politicians do the bidding of the private health providers when a firm like Ramsay Health Care (and its affiliated bodies) has donated an estimated $1.8 million to the Liberal Party since 1998. But then this is the firm whose CEO, Chris Rex, earned $30.8 million in 2014 so it can afford to be a generous donor – at the health system’s expense. This figure was reported in the Australian Council of Superannuation Investors’ CEO Pay study.
    The PHI subsidy must be eliminated soon. The longer it remains in place the more difficult it will be to remove it.

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