Jennifer Doggett, Ian McAuley, John Menadue. Four Corners: No wonder we’re wasting money in health care – we got the incentives wrong

Repost from 06/10/2015.

A recently-aired ABC Four Corners program aptly titled “Wasted” exposed three areas of unnecessary, ineffective and outright dangerous health interventions, in knee, spinal and heart surgery.

The show’s host, Norman Swan, presumably extrapolating from the findings in those three areas, claimed that waste could be as high as 30 percent of all health care expenditure.

Perhaps that’s an overstatement, but the point made by Swan and by most of the ten other clinical experts who appeared on the program is that we just don’t know how much waste there is in health care because we lack the processes for evaluating the effectiveness of various interventions.

We know what we pay for a knee replacement or a cardiac stent, but we do not systematically evaluate the outcomes of these procedures.

Identifying and reducing or eliminating funding for low value services would save our health system billions every year.

However, this would only address one area of waste and inefficiency within our health system. A less obvious but potentially more significant source of waste lies in the way in which health care is funded in Australia, in particular via fee-for-service payment mechanisms and private health insurance.

These funding processes are driving unsustainable growth in health services consumption without meeting the needs of the community for efficient, preventative and coordinated care.

Unless Australia’s health funding system is fundamentally reformed to discourage inefficient and provider-driven health expenditure, efforts to increase the efficiency and targeting of Medicare expenditure will be dwarfed by the growing waste associated with our current funding systems.

The big picture

Every year we spend around $160 billion on health care – two thirds through our taxes, and one third through private sources.

At a macro level we can claim we spend that money well. At around ten per cent of GDP it’s in line with expenditure in similar countries, and by gross indicators such as infant mortality and life expectancy we’re among the high achievers.

But within our health care arrangements – a complex mix of private and public funding and provision – there are areas of poor outcomes, such as indigenous health, youth suicide, and obesity, and there is evidence of resource misallocation, such as long waiting times for elective surgery in public hospitals while there are government subsidies encouraging queue-jumping for those with lesser needs to use private hospitals.

The role of data

It’s not that we fail to collect data in many areas of health care, but as Adam Elshaug, Associate Professor of Health Care Policy at Sydney University points out, all the data is kept in separate silos – some relating to the Pharmaceutical Benefits Scheme, some relating to the Medical Benefits Scheme (MBS), and some in state public hospitals just to name three of the non-interlinked sources.

While we lack a systematic method of data analysis and feedback (which was one of the original purposes of Medicare), there are a some studies of cost effectiveness in specific areas of health care, upon which the experts were able to draw. In these three areas of health care, that make up a large proportion of surgical admissions in private hospitals, all the experts were able to identify evidence of ineffective treatment and over-servicing and where resources could be put to better use. As an example Swan pointed out:

At least half of all back scans and X rays are of no value, and to put that into perspective, that’s at least half a billion dollars over ten years. Now that would buy you a regionally delivered national suicide prevention program that would save 1000 lives a year.

The experts offered a number of explanations for this waste. One strong message was that the vast majority of the 5700 items on the MBS schedule had never been subject to any rigorous cost-effectiveness evaluation. As Elshaug reminded us, the MBS schedule dates back to the 1960s (when it had only 300 items), when the idea of “evidence based policy” as a standard was still some decades off. It has been easy for advocates, mainly in the medical profession, to add new items to the schedule, but it is very hard to have any removed. Professor Rachelle Buchbinder, Director of the Department of Clinical Epidemiology at Monash University, recounted the great difficulty she had experienced in having just one item removed from the MBS. She was confronted by well-funded corporate interests, and was subject to ad hominem vilification. (We wish Minister Ley the best of luck in her taking on the MBS schedule.)

Drivers of growth

Many referred to the availability of imaging technology, referring, for example, to the fact that GPs can now order knee MRIs without going through a specialist. Often discussions about technology in health care degenerate into a romantic and unrealistic call for the clock of technological advancement to be turned back. But Paul Glasziou, Director of the Centre for Research and Evidence Based Practice at Bond University pointed out that imaging and other diagnostic technology is here to stay and is becoming more widely available (have you noticed that “health” app on your smartphone?). As the Productivity Commission pointed out in its 2005 report on medical technology, IT-based technologies in most industries have reduced unit costs, and there is no reason why it should not do so in health care if used properly.

The problem that Glasziou and others pointed out is that diagnostic technology has given us much more capacity to detect what is “abnormal” or supposedly “wrong” in our bodies. We misinterpret the normal changes associated with ageing, and, as a result otherwise healthy people are turned into “patients”. Our expectations and anxieties as consumers have interacted with GPs’ fear of missing a diagnosis and desire to do something tangible, in the form of delivering a “product” to the patient, leading to a detected abnormality and on to surgery, with all the attendant costs and the possibility of infection and other iatrogenic risks. (A similar motivation to provide some tangible product has been found to be a driver of pharmaceutical over-prescribing.) Doctors are generally dedicated professionals motivated by a strong desire to “do something” for those who turn up in their surgeries.

But as Robyn Ward, Chair of the Medical Services Advisory Committee said, “often the best medicine is no medicine at all, often the best intervention is no intervention at all”.

She said that if GPs could explain how certain procedures are ineffective, patients may make better decisions. And if GPs or other health professionals could help people understand that adopting a healthy lifestyle may be more effective (and certainly less costly) than going down the diagnosis-surgery path, there would be better outcomes all around.

The problem with our current funding system

But that’s not where the incentives lie in a fee-for-service system. Swan summarised the problem when he said “the way we pay for health services in Australia does not encourage good practice”. We pay for throughput, not for outcomes.

One perverse consequence of these incentives for over-servicing is that early intervention at the primary care level, which is supposed to result in better health outcomes and financial savings, can actually worsen outcomes and cost money when the incentives are wrong.

Cardiologists Richard Harper (of Monash University) and Andrew Macisaac (of St Vincent’s Hospital) noted that there was excessive use of angiograms (Harper suggested that up to 43 percent of invasive angiograms were unnecessary), and that these were most likely to occur in private hospitals. There is a confirmation of published findings by Monash University researchers that observed “startling variation” in the use of well-known procedures in Victorian hospitals. They found “in the 14 days following a heart attack, men and women admitted to a private hospital were 2.20 and 2.27 times more likely to receive angiography than their counter-parts in public hospitals”. They were 3.43 and 3.86 times more likely, respectively, “‘to undergo revascularisation” (coronary by-pass surgery, angioplasty and stent).

That study was published in 2000, around the same time the Commonwealth was strengthening subsidies for private health insurance, in a set of arrangements that de facto linked funding of private hospitals to private insurance. At no time has the Commonwealth evaluated that policy, but independent research suggests that while it has injected a large amount of new money into private hospitals, and into the incomes of medical specialists, it has done nothing to achieve its avowed objective of “taking pressure off public hospitals”, because where the funds have gone, so too have the specialists. If anything the subsidies have sucked resources out of public hospitals and have put pressure on public hospitals to try to match the incomes specialist can enjoy when they work in private hospitals.

If people who present to private hospitals get more treatment than those with similar conditions who present to public hospitals, then there is certainly some resource misallocation. Either public patients are being under-serviced, or private patients are being over-serviced. The Four Corners program strongly suggests the latter.

The funding honeypot – private health insurance

While there were frequent reference to the problems of fee-for-service medicine, the program only touched on the interaction of private health insurance and fee-for-service remuneration, which is where the root of the problem lies. Private health insurance is a major driver of resource misallocation and waste. But since 1997 the Commonwealth has had a policy of supporting private insurance, almost as an end in its own right.

It is notable that not since 1969 – when the Nimmo Report paved the way for universal public health insurance – have governments subjected private health insurance to policy scrutiny. The principle of evidence-based medicine, and the general bipartisan disdain for industry subsidies, do not seem to apply to private health insurance.

Although unquestioned support for private health insurance is normally associated with Coalition governments (“Private health insurance is in our DNA was Prime Minister Abbott’s justification), it has become bipartisan. When the Rudd Government set up the National Health and Hospitals Reform Commission it specifically ruled out any scrutiny of private health insurance. The Gillard Government strengthened the Medicare Levy Surcharge penalties for those higher income people without private insurance, and removed the 20 per cent tax offset for those who incur expenses not covered by private health insurance. Only the Greens seem to be committed to the original principles of Medicare as a single national insurer.

Thanks to the Medicare Levy Surcharge, people on higher incomes (individuals with an income above $90 000 and families with an income above $180 000) are virtually conscripted into private insurance. Quite apart from the problem of promoting a two-tier health system, with the public system reduced to a residual “charity” system, the surcharge has strong incentives for people to use private insurance, and for opting out of sharing his or her health expenses with other Australians. Someone with an income of $150 000 can either buy top hospital cover for around $1300 or pay an extra $2250 in taxes, for example.

The subsidy to private health insurance comes to more than $8 billion a year according to Commonwealth Budget papers, and is growing strongly. That figure does not include the effect of the Surcharge, which, if it is re-framed as a subsidy for having private insurance (rather than as a penalty for not having it), results in revenue forgone of around $3 billion a year, or a total subsidy of around 11 billion dollars a year. As Jeff Richardson of Monash University once said, not even in the days of high support of manufacturing were the rich actually provided with a taxpayer-funded Holden with change left over.

With governments ready to provide such permissive access to public money to support private insurance, it is hardly surprising that private health insurance premiums have risen so strongly. Since 2000, while general prices (as measured by the CPI) have risen by 54 per cent, private health insurance premiums have risen by 133 percent – a 50 per cent real increase. As a source of ever-growing funds private insurance has been a honeypot for private hospitals and those who work in them (as well as directing public money that taxpayers may have believed were for health expenditure, to flybuy cards and Coles gift vouchers).

So long as we have a highly-subsidised private health insurance industry, fee-for-service medicine, and a private hospital system with its own privileged source of funding, these problems will remain. In time we could head to the US system, where private health insurance has resulted in health costs approaching 20 per cent of GDP, and with only mediocre outcomes by the standards of most prosperous countries. (“Obamacare” will solve some coverage problems, but it will not solve the cost problem.)

The real cost of private health insurance

There are several independent analyses of the costs of private health insurance – Jeff Richardson’s “Private Health Insurance and the PBS: How effective has recent government policy been?”, an analysis by Don Hindle and Ian McAuley “The effects of increased private health insurance: a review of the evidence”, a Centre for Policy Development paper“Private health insurance: High in cost, and low in equity”, an article for The Conversation by Terence Cheung of the University of Adelaide “Why it’s time to remove private health insurance rebates”, and a chapter in the recently-published book Governomics: can we afford small government?

A common theme of these works is that measures such as private health insurance, designed to shift costs off-budget, generally result in the public paying more for the same or worse services, with far less accountability or equity, and with much higher administrative costs as slimmed down public agencies (such as Medicare) are replaced by corporate bureaucracies duplicating competitors’ corporate bureaucracies.

In fact, in the USA, reliance on private health insurance, far from saving public money, has resulted in a blowout in public expenditure. Because health costs are set in an undisciplined market between powerful service providers and comparatively weak health insurers, even the publicly-funded programs (Medicare and Medicaid) are now costing more than the comprehensive single insurer models in place in Canada, the UK and the Scandinavian countries.

Outcomes, not volume

In the Four Corners program Robyn Ward called for a system that pays for value and outcomes rather than activity or volume. It’s a view shared by many others.

It is hard to see how such a system based on outcomes rather than outputs could be developed through any monetary incentive system. One basic problem is that in very few cases is it possible to link any specific health interventions unambiguously to outcomes. There are too many other variables leading to people’s health outcomes, and there is often a very large time lag between interventions and outcomes. When it comes to non-interventions (e,g, the decision not to have a knee reconstruction) the measurement and time lags are even more problematic.

It is even harder to see how any private insurance-based system can deliver satisfactory consumer outcomes or any significant degree of cost control. The economics textbooks claim that businesses seek profit, while the business textbooks, based on empirical studies of organizational behaviour, see growth and expansion as the prime objective of firms (with profit as a constraint to be satisfied). That growth objective would surely dominate in any scheme relying on financial incentives, leading to over-servicing. The Four Corners program is an excellent exposition of the way private sector incentives lead to such poor outcomes. If costs rise because of over-servicing, the insurers can simply jack up their premiums.

The benefit of a single public insurer is that Commonwealth Treasurers will always sustain pressure to keep expenditure in control and to achieve value for money. It’s easier for insurers to raise premiums than for governments to raise taxes.

Public insurance, private and public delivery

That is not to say the private sector should not be involved. It is simply to point out that private insurance should have no role in funding health care.

There is clearly a role for personal out-of-pocket (i.e. uninsured) contributions to health care. In fact, such contributions are a feature even of the most generous single insurer models as operate in the Scandinavian countries, and, in a wealthy country such as Australia they should clearly pay their part. When Medicare was first designed we were much less prosperous, but now, on average, households now have around $300 000 in financial assets, a figure that has grown, in real terms, more than 60 per cent this century.

While we all need to be covered for high health care expenses, we don’t need the “first dollar cover” provided by so many private insurers – the cover that drives us to over-use of health services. Both public and public insurance comes with the same incentive for over-use (“moral hazard” in the quaint language of economics) – there is no difference in the notion “Medicare will pay for it” and “BUPA/Medibank Private/HCF will pay for it”, but, as pointed out above, Medicare comes with the discipline and accountability of public finance, and it is easy for governments to build in compulsory out-of-pocket contributions to lessen moral hazard.

Out-of-pocket payments provide some price signals to consumers, and they can be designed in such a way that most people who make light use of health services in any one year can be independent of any public funding support, so that public funding can be directed to serious acute and chronic conditions. We already spend around $27 billion a year in out-of-pocket contributions, but, as Jennifer Doggett points out, their incidence is haphazard, and do not adhere to good insurance principles: some health care programs are free at the point of service, while for some others the patient is left bearing open-ended risk. Ham-fisted ideas to bring in open-ended MBS co-payments, as proposed by the Abbott Government, understandably meet with community resistance.

In the delivery of services the private sector has always played a central role, and will go on doing so. Alarmists often interpret any criticism of private health insurance as an attack on the “private system”, but that’s bunkum. There is no reason why private hospitals cannot be involved in delivering publicly-funded services.

That model is already operating in Australia through the Department of Veterans’ Affairs, which acts as a single insurer for war veterans, while purchasing most services, including hospitalisation, from the private sector. At a state level there have been initiatives to break this dependence. Victoria, under the leadership of Premier Jeff Kennett first made the offer to private hospitals in the 1990s and the Tasmanian Government has recently offered $25 million of elective surgery cases to private providers. There’s nothing radical about such measures – in fact they are in line with national competition policy that calls for competitive neutrality between private and public sector providers.

Future dangers – Medicare Select

The Four Corners program has been a useful reminder of the problems we face in health care, particularly (but not only) the perverse outcomes when private insurance, fee-for-service payment, and a private hospital system separated from public hospitals interact. No doubt private insurers, who will be well aware of these perverse outcomes, will be presenting to government schemes which they claim will solve these problems. For example, arising out of the Health and Hospital Reform Commission’s work, the insurers put forward an idea called Medicare Select, which made great claims about consumer choice and cost control, but which was simply a way of churning even more public funds through health insurers, adding private sector administrative costs to public sector administrative costs, without demonstrating any value-added, other than offering consumers some “choice” of care plans – as if people are in a position to know their future health care needs.

We could well see the private insurers offer Medicare Select, or some similar proposal, as a “solution” to our problems. Even if such schemes are put forward in good faith, we should heed the lessons from the USA, however, where private health insurers have been quite unable to contain health costs – or perhaps unwilling.

There are too many parties – medical specialists, private hospital companies, appliance manufacturers, pharmaceutical firms – who would see cost containment as quite inimical to their interests. And there is the whole investment community – superannuation funds, banks stockbrokers, financial advisors – looking for a new growth industry, as profits in traditional industries such as airlines, newspapers and retailing are squeezed.

Only a strong government can protect us from the economic and health costs of health care becoming a growth industry.

Jenniffer Doggett is a consultant in the health sector. Ian McAuley is a Adjunct Lecturer, Canberra University. John Menadue chaired Health Enquiries in NSW and SA and was involved with Gough Whitlam in the creation of Medicare.  All three are Fellows of the Centre for Policy Development. 


John Menadue posted three articles on health reform as part of the Policy Series ‘Fairness, Opportunity and Security’ which he edited with Michael Keating. Links to those three articles follow.

Health Policy Reform: Part 1 – Why reform is needed.

Health Policy Reform Part 2 – Why reform is difficult.Health ministers are in office but not in power.

Health Policy Reform: Part 3 – Principles for reform.


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