Two zombie policies stalk the Private Health Insurance (PHI) policy world: A ‘Hospital Benefits Schedule’ and ‘Medicare Select’. Here’s why both should have been put to rest long ago.
- A Hospital Benefits Schedule
A Hospital Benefits Schedule was floated as a way of addressing the different arrangements for distributing Commonwealth funding to public and private hospitals, most recently by John Menadue in a reprise of piece from a few years ago.
It would operate in a way similar to the Medicare Benefits Schedule, and would build on the work of the Independent Hospital Pricing Authority, which has determined a ‘national efficient price’ for public hospital services. For inpatient services the payment metric is Diagnosis Related Groups. The Commonwealth currently pays 45 per cent of public hospital activity growth at the national efficient price. This growth payment is capped at 6.5 per cent each year.
In contrast, Commonwealth support for private hospital activity is provided through subsidies for private health insurance premiums. This support is means-tested, and growth is capped at inflation. Currently Commonwealth support is about 23 per cent of private hospital income (income from private health insurance, including the rebate, and individual contributions). Because health costs are rising faster than inflation, this percentage is declining.
In addition to the support through the private health insurance rebate, the Commonwealth supports private hospital practice through the Medicare Benefits Schedule, probably adding a further 10 per cent to the subsidy for private hospital care. And it provides further support through the Pharmaceutical Benefits Scheme. The Medicare Benefits Schedule and Pharmaceutical Benefits Scheme payments are neither means-tested nor capped. In total, Commonwealth support for private hospital care is probably around 40 per cent of private hospital costs.
A Hospital Benefits Schedule, most recently advanced publicly in an official document as part of the 2015 federalism review, would harmonise these payment arrangements, at a single rate, which would be less than the current 45 per cent paid to states for public hospitals. There has been no suggestion as to how the reduction in funding for public hospitals would be addressed.
Although the Hospital Benefits Schedule would be neater than the current messy arrangements, the benefits to consumers are unclear. Certainly, from the Commonwealth’s perspective, it would create a clear and consistent basis for funding public and private hospitals. But, unless accompanied by other policies, it would not drive efficiency in either public or private hospitals or reduce patients’ out-of-pocket costs.
Unless these problems can be overcome, the Hospital Benefits Schedule will deserve a quiet burial.
- Medicare Select
Medicare Select was floated by the National Health and Hospitals Reform Commission (disclosure: I was a member of that commission) more than a decade ago. It has its antecedents in a proposal advanced by one of the founders of Medicare, Richard Scotton (1999a and 1999b).
The essence of Medicare Select is that all Australians would be signed up to a health plan – which the Reform Commission claimed might be run by government, for-profit, or not-for-profit entities. People could transfer between plans, thus introducing another element of competition into health care. The plans would be funded by the Commonwealth government on a risk-adjusted basis. The reality is that the plans would most likely be private, so Medicare Select effectively aims to address Commonwealth-state divisions by using private health insurers.
The National Health and Hospitals Reform Commission (p. 159) listed eight formidable obstacles to the implementation of Medicare Select. These included identifying:
- the type and extent of services covered under the universal service obligation;
- the financial transfers between state, territory, and local governments and the Commonwealth Government required to achieve a single national pool of public money to be used for funding health and hospital plans;
- the basis for raising financing for health and hospital plans, including the extent to which transparency should be promoted through use of a dedicated levy or through publicly identifying the share of consolidated revenue that makes up the universal service obligation;
- the approach to ensuring equitable access to health services in areas of market failure, particularly in remote and rural parts of Australia;
- the regulatory framework to support the establishment and operation of health and hospital plans;
- balancing people’s ease of movement in and out of funds with the need to give plans a long-term incentive to invest in the health and wellness of their members;
- ensuring consumers have access to sufficient information to make an informed choice about plans; and
- equitable and viable methods of funding health and hospital plans based on members’ risk such as age and previous use of health services.
There was no interest in Medicare Select from the Labor government which received the Commission’s report or from its Coalition successor. Nor have there been any academic papers grappling with any of the obstacles the Commission identified. Medicare Select was rejected in a draft paper prepared as part of the review of federalism by the Department of the Prime Minister and Cabinet in 2015. It is still an idea without any firm basis in reality.
In practical terms, Medicare Select would change the current flow of funds to public hospitals so that they would be mediated by the private health plans. The current average gross margin for private health insurers is about 14 per cent, and there is no reason to expect the plan average to differ from that.
There is no evidence that management of these pooled funds would achieve any savings, either by reducing costs for each hospital admission or by reducing unnecessary admissions. That means that the gross margin for the funds would represent waste and reduce the funds available for service delivery.
Some private health Insurance funds continue to advocate similar policies, presumably out of self-interest, given that such a scheme would generate increased revenue and profits for them.
The very idea of such a scheme should, like a Hospital Benefits Schedule, be killed off.
Scotton, R. B. (1999a) ‘Managed competition’, in Economics and Australian Health Policy, G. Mooney and R. B. Scotton, Eds., Allen & Unwin, pp. 214–31
Scotton, R. B. (1999b) ‘Managed competition: The policy context’, Australian Health Review, 22(2), pp. 103–21
Stephen Duckett PhD DSc FASSA FAHM is Director, Health Program at the Grattan Institute, Melbourne