Andrew Podger – Health reform, co-payments, fee for service and doctor contracts.

Jan 22, 2014

The recent suggestion of a modest user charge on patients of bulk-billing doctors, and the immediate reaction in the media, suggests the need for a more careful study of the appropriate role of co-payments in our health insurance system, and of other measures to contain costs while delivering an effective insurance product.

Ensuring everyone has affordable access to effective health services, while keeping total costs manageable, is the central challenge for any health insurance system. The very existence of an insurer raises the risk of moral hazard whereby consumers and service providers take advantage of the third party payer. This is exacerbated in the health system by the reliance patients have on the expertise of doctors and the extent to which doctors, understandably, wish to draw on the latest technologies to help their patients.

A fee-for-service system, as we have in Australia, adds to these problems, as doctors (and other health service providers) are rewarded financially by the number of services they provide, a variable they can influence particularly if the insurer meets all of the costs.

There are several ways of addressing this issue, all of which involve insurers acting more as purchasers of services on behalf of their members, rather than simply reimbursing costs. A number are already used in the Australian health system.

  • Copayments send a message to consumers that services are not entirely free. They currently apply to pharmaceuticals up to a cap, even for concessional groups, and to non bulkbilling doctors particularly specialists. Private insurers typically leave substantial copayments for private hospital and related specialist services.
  • Gate-keeping may constrain the use of high cost services. This applies to specialist services which require GP referrals, and to elective surgery which requires specialist referral as well.
  • Hard or soft budget caps can constrain over-servicing. Hard caps used to be applied by the Commonwealth to its funding of public hospital services through the Commonwealth Health Services Agreement, and the States then applied as best they could soft caps. Soft caps also apply through Commonwealth agreements on MBS costs for pathology and radiology and, on occasion, to newly listed medicines through price-volume deals with pharmaceutical companies.
  • ‘Blended payments’, where fee-for-service is complemented by some ‘capitation’ funding based on patient populations, is a variant of the soft budget cap approach. This has become part of the regime for primary care through the provision of practice grants and rewards for certain preventive health outcomes such as high child immunisation rates, cancer screening levels and coordinated care plans for chronically ill patients.

What is obvious is that our current approach is messy and not focussed on a system-wide strategy relevant to today’s challenges affected so much by chronic illnesses and the needs of the frail aged. There is the likelihood of continued over-servicing by bulk-billing GPs in particular, but also under-protection (and hence obstacles to access) for those unable to find a bulk-billing GP and for those referred frequently to specialists. The limited role of blended payments also means insufficient reward for preventive health services and high quality continuing care. There are also distortions such as people turning to (free) emergency departments for primary care services. Some international studies also suggest Australia relies too heavily on co-payments on pharmaceuticals (though Australians also pay large amounts voluntarily for ‘complementary medicines’ of dubious effectiveness).

The suggestion of a modest charge on non-concessional patients of bulk-billing GPs would not go very far to address these problems. A better approach with the potential to achieve greater long-term savings to taxpayers would be:

  • To impose higher user charges on non-concessional patients of bulk-billing doctors, with a modest charge also for concessional patients (possibly akin to the current PBS co-payments);
  • To allow the States to apply similar charges for emergency department patients (and perhaps outpatients);
  • To tie these to firm caps on total eligible health service charges in any one year, thus ensuring a genuine and effective overall health insurance product;
  • To negotiate with GPs and specialists (or their corporate organisations) the mix of MBS fees and capitation funds required to ensure compliance with the standard fee regime and to promote improved preventive services and continuing support for at risk patient groups. These agreements, or contracts, could vary by region reflecting variations in the supply of doctors and the costs of service delivery.

Private health insurers similarly should be encouraged to set total annual co-payment caps for their members’ hospital-related services.

An early dialogue with the AMA and other doctor associations (including the Colleges which focus on professional standards rather than just doctors’ financial interests) could develop a manageable reform agenda. Regional variations would need to be negotiated, with the new Regional Primary Healthcare Organisations perhaps playing a role so long as conflicts of interest can be managed.

This approach could be complemented by a more transparent system-wide budgetary control arrangement which helps to promote the optimal allocation of resources across programs to address health risks in the community. In the short to medium term, some notional health budget for the population in each region, with a soft cap, would assist allowing regions to negotiate agreements/contracts with doctors and other service providers within their notional budget cap to supplement or vary national fee-for-service prices, focusing in particular on the most appropriate support for the chronically ill and those at risk of chronic illness. (In time, private health insurers might play a greater role for their members including for Medicare services, by being offered their members’ Medicare ‘premiums’ otherwise managed through the regions’ budgets along the lines of the Bennett Report’s Medicare Select option).

The Abbott Government will not want to ignite public doubts about its commitment to Medicare and so is likely to move cautiously. A balanced strategy that clearly improves Medicare’s overall insurance product while introducing a more coherent system-wide approach to co-payments might be attractive politically as well as economically.

Andrew Podger was former Director General of the Department of Health and Ageing. He is currently Professor of Public Policy, College of Arts and Social Sciences, Australian National University.

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