Subject to my own reservations outlined in the introduction to Kevin’s first guest post, here’s his second.
Improving the Health Industry Market Place
by Kevin Cox
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The general theme in this set of blogs is how to overcome market failures or to create markets with tagged money in places where it is hard to introduce markets. The following is a case where tagged money can be used to make an existing market place more efficient by moving expenditure from the top to the bottom. Instead of governments directing how some taxes are to be spent, the taxes are given to the population and the population decides how to spend the money provided it is designated areas of expenditure.
The first question to ask is – Is there a market failure in the health industry? We are told that the percentage of the GDP spent on health is increasing each year, that waiting lists for elective surgery are unacceptable, that there is duplication in health funding between the states and the federal government causing inefficiencies in health spending. We see health insurance increasing each year more than inflation and we know from our personal experience how difficult it is to get to see a doctor for relatively minor complaints. Other difficulties often cited are how to control increasing costs, the increasing use of expensive technologies and/or providing for an aging population. Other symptoms are that we do not appear to spend enough on preventing health problems.
However our life expectancy has increased. Our expenditure on health as a percentage of GDP is a lot lower than the USA and we are also told that our pharmaceutical benefits scheme is amongst the best and most efficient in the world.
Is the health industry market place in need of reform? On balance I think we can say it can be improved.
One area we are told needs reform is the provision of funds for an aging population. This is a similar problem faced by Keating with old age pensions and an aging population. His solution for that can be modified and also bring other cost saving and efficiency benefits.
The superannuation solution was to tag some of our pay for our retirement. It was planned that this would remove the need for old age pensions for much of the population and it appears to be working. We can use the same approach for health because in many ways it is the same problem. We earn money in our middle years but we do not budget for health needs in later years because we think the government will provide for us.
There is little incentive for people to shop around for health services. The best strategy is to consume as much as we can as soon as we can and we are positively encouraged to do so. There is the safety cap, there are benefits from health insurance companies that go away if you do not use them. If you do not spend money on health then you get nothing back from your health insurance and there many who use health services perversely because they have health insurance. There is little benefit from being in a health fund if you are unlikely to be ill and some are in health funds as “insurance” against changes in the rules rather than insurance against health costs.
In summary there is little incentive in the current system for people to save for their health and health insurance is treated more like a rebate than like “catastrophic” insurance.
One relatively simple way to alleviate both these problems is to offer people an alternative to medicare and private health insurance. This might look as follows
Instead of being in medicare and in health insurance a person opts into medisave. A person in medisave has a health account and money in this health account can only be used for services that medicare and health insurance currently cover. The amount of money put into medisave by the government is calculated as a percentage of the average subsidy given to the average Australian through their taxes. If a person puts in extra money into medisave then the government contributes some percentage of the extra amount and people can put in as much as they wish. Money in medisave does not go away but sits earning interest which also goes into medisave. When you die (medisave does not save you:) then the account is part of your inheritance and can be bequeathed. You can transfer between immediate members of a family (spouses, partners, children, grandparents etc) but cannot transfer to others outside your family.
The only difference in the system is that if you optin to medisave then you pay for your health costs out of medisave and not call on payments from medicare or health insurance. This would be easy to implement could leave the existing system exactly the same. The changes would be made in medicare and in adding another payment option to a health insurance company which would take money from the person’s medisave account. The lower percentage of money put into medisave will cover a person for catastrophic problems like road accidents and heart attacks.
The system could be introduced incrementally and trialled in small jurisdiction say the NT, ACT or Tas. It would be relatively inexpensive to introduce and could be operating within a few months of a decision being made.
It is predicted that medisave will generate a large pool of savings. People will shop around and choose lower cost alternatives (such as generic drugs) and so health care expenditure will drop as well as people saving for those last few months of life with its high health costs.
By expanding the items on which we can spend money or even by introducing sub categories of money we can direct expenditure to particular areas where we think we need expenditure.
This approach is in line with the principle of directing expenditure of money by giving money to the beneficiaries of the expenditure and to give them the responsibility of spending the money on particular goods and services.
The problem is that in most countries health costs are rising faster than the rate of inflation, so you could be going backwards simply earning interest in the account.
Isn’t it better to simply allow people to buy regular private insurance as that would match premiums with the annual costs and you therefore don’t have that problem I mentioned.
I think your suggestion was essentially suggested by one of the doctors organisations (or was it individuals?) quite some years ago now (so long ago, I can’t give a definitive link or remember exactly who it was saying that unfortunately), although they didn’t suggest in-and-out schemes like you are (my hazy memory was that it was a comment before insurance became essentially compulsary). I think the basic idea was that if you saved what you spend on health insurance, and used the pool as a defacto insurance, then you can pay for most things you are likely to need very quickly (this is the same as your idea, except the money isn’t somehow special). For super expensive things, you go to the government (as you would with your scheme), and hope they’ll cough up the bucks. Based on this method (and hence yours) there are certainly drugs out there that you won’t get because they are exceptionally expensive and the government does not provide them (although I imagine many insurance companies wouldn’t either — I’ll have to read the fine print of mine!). Of course the suggestion was evidantly not taken seriously, because too many people wouldn’t save the money, which is an advantage of your idea.
“…there many who use health services perversely because they have health insurance”
Is there evidence for this? It seems to assume that health services are something that people would actually want to make use of, even if they were perfectly fit and healthy. Sure, their might be the odd lonely person who visits their doctor just as somebody familiar to talk to, and there’s certainly an issue of doctor’s prescribing unnecessary drugs and operations, but it’s not clear to me that the nature of health insurance is having a big influence here.
The opposite hazard of people avoiding medical care because of the expense (especially an issue with dental care) seems to be far more dangerous. I know I’m guilty of this: I avoid visiting dentist regularly largely because of the cost, even though I know that statistically this makes me far more likely to need far more expensive/painful/inconvenient operations down the line.
I’m not sure this is backed up by any facts.
oops I should have read NPOV first.
Kevin – I have to say I don’t really understand your “tagged money” concept.
I think you need explain it better and compare it to some other systems.
The other distinct possibility is that I do understand it but think that it is not a good idea and unworkable anyway.
The biggest simple single improvement and huge money saver in health right now would be to abolish the private insurance subsidy and sink the savings into public health.
I have private health insurance.
Thank you all for comments.
Jc,
Insurance as I understand it is meant to cover “catastrophic” events. Ones that are very unlikely but if they do happen then they wipe you out. I am not saying to eliminate health insurance for that purpose but what I am saying is that most health insurance and most medicare payments are not of that nature. They are more like savings accounts which the government tops up and puts restrictions on how we spend them. What I am suggesting is that for these common health events we use our own savings. I am trying to give people control over the funds that society through its taxes have notionally allocated to them and to let the people concerned control those items. I want to give control over health expenditure to each and every one of us.
Conrad,
There is a similar scheme operating in Singapore – although it has been hijacked a little by the medical profession – and Singapore has a very good health system but spends half the proportion of GDP that Australia does.
NPOV and Francis,
Yes there is evidence and it is positively encouraged by the health funds. I was instructed by wife that I should go and have some treatment by a Chinese AcuMassage person to treat a lower back pain because we had this money from our health fund that would go away if it was not used. I went and came away in more pain than I went but at least we spent the money:)
I think there are ways of encouraging people to go for regular checkups. For example there is no reason why you should not get an incentive of more funds if you go get a dental checkup and you come out without any problems:) I am not sure if this is the right way to do it but think along encouragement lines not punitive lines.
Francis
Tagged money is “hard” because it is different and yet it is not different. What we do is to put information on money. At the moment the inforamtion on money is who backs it and says it is OK and and the amount or value. What I am suggesting is that we can add extra information to our money. We already do this everyday of the week. When you pay for something with your credit card then you actually “create” money. What you add to the money you create is a promise that you will repay the money and the reason for the purchase and where you made the purchase and the time you did it and how you verified it was you creating the money. There is no reason why we can’t tag money with other information – and this is where it gets a bit controversial. I say let us tag money with how you can spend the money. Thus health dollars can only be spent on health. Water Rewards can only be spent on ways of increasing the water supply. Energy Rewards can only be spent on ways to reduce greenhouse emissions etc.
As I understand this is NG’s main issue, and he is in good company. The issue is that specifying how you can control the system to make sure that people do not cheat or manipulate the money. I maintain that it is “easy” because we make all such systems voluntary but worth while participating in and if people cheat or go outside the rules then they are simply banned from the system. Thus medisave dollars can only be spent on health things. What are health things. They are health things that any supplier can assert is a health thing. If the supplier is shown to lie then he/she can no longer play in the market place. If a buyer is shown to lie then he/she no longer gets health dollars. I maintain that it is also easy and cheap to do because we now have the technology to do it. We do it with credit cards and we do it with frequent flyer points – why not health dollars.
The other major departure from traditional economics is that I say that it is very difficult to direct expenditure through manipulation of price. A better solution is to decide on how much you want spend in an area (same as budgeting) and then set up a system to make sure that that expenditure is done efficiently through market choices.
An idea from trying to reduce greenhouse gases is to create a new product called emissions permits. These permits are sold to people who want to pollute and this raises the price of their energy so that renewable energy is competitive. The theory is that the increase in price will encourage investment in renewables. I personally do not believe this will be very effective and I can prove it will cost a lot more than the alternative of tagging some money that has to be spent on renewables. (How simple is that:)
Francis,
I agree if you mean health preventative measures as equivalent to “public health”. Encouraging people to go to the dentist, to take exercise, to stop smoking, to relax and not get so uptight, etc. By giving people choices over how they can spend money and rewarding them for doing the best thing then we can direct behaviour that way and we can do it through “tagged money”. Tagged money is nothing special – it is just information – but how we might use it is most interesting.
Francis,
Now you have me started on tagged money it is hard to stop me:) I have tried all sorts of terms – we started with Rewards (because it started with Water Rewards). I tried currency but that raised too many other issues. I have now settled on tagged money because that better expresses what it is. It is extra information that is added to units of money.
This now becomes controversial because so much of economics seems to be built on the foundation of all money being equal as the best way to distribute resources throughout an economy. However, if you think it through tagged money or making some money different to others is something we see every day and will not stop money moving to the best places. You have wallet full of Japanese Yen and I have one of NZ dollars. We cope with variations in who backs the money and its varying relative value why shouldn’t we be able to cope with other information.
The other problem is that if tagged money works then it can be applied to just about any economic problem. Instead of changing the system you put the information on the money and use rules associated with the tags to address the problem. That is instead of creating carbon credits you tag some money to be spent on reducing carbon emissions.
I also say that price is not a good indicator of value (and that really upsets people). I say spending an amount money in a competitive market place is a good way of allocating resources instead of trying to manipulate prices. (I say this as a person who just today was working out how much to charge for a product and it has very little to do with “value” and a lot to do with power in the market place)
People are very wary of all encompassing solutions but again they get confused when different problems have different rules associated with them. Also anyone who wanders around as I do and says they have a possible solution to many economic problems is bound not to be taken seriously. (If it is such a good idea why don’t we see it out there). The answer to that is that it is there but we do not recognise it as such and the best example is compulsory superannuation.
For example, I am promoting Energy Rewards as way to reduce greenhouse gas emissions. Water Rewards as a way to remove the need for Water Restrictions. In NGs ABC blog I talked about using tagged money as a voting tool to direct expenditure to radio and TV programs, in Health dollars I suggest health dollars as an alternative to health insurance, in the housing blog I suggest it as a way of keeping risk with the asset for which the money was created and so prevent inflation and make housing affordable, next week I will tackle public transport and we will see it as a way of encouraging greater use of existing infrastructure and increasing the usage of trains and buses.
In summary we have invented a practical way to put information on money that can be used in various ways to tackle many different economic problems.
The main objections seem to ones of implementation and deployment and the fact that they may not work as we expect. This may be true but we can build these systems to adapt to the environment and so even if they do not work properly the first time they have an excellent chance of adapting – because we have the information:)
The problem as I see it with your suggestion is the quite large proportion of people who have expensive illnesses. Until you get to (say) 65, most people don’t have a large call on the health system, and catastrophic cover is adequate. But a significant minority have sufficiently bad health that they know they are going to require quite a lot of money.
Your suggestion will mean that unlike the current two tiered system (free health cover that is OK, or private health cover that is quite good) they will join a third tier that means that they will be spend a lot more than the average population on their health.
Most americans think that is fine – if you’re in bad health you deserve it, so therefore you have to pay for it (or suffer). But most Australians think that you shouldn’t suffer financially from being sick.
This is the reason why insurance companies aren’t allowed to provide differential premium rates, or turn anyone away. There is a lot of difference between health spending requirements for different people of the same age, and it’s predictable in advance.
Jennifer,
The current system works by the government providing services (bulk billing, free public hospitals, subsidised health insurance) and people using those services when they have to. There are variations and some choice but it is limited. The essential idea of medisave is for the consumers to have more choice and hence to be “wiser” in how they spend their health dollars. If this hypothesis is correct then we will get more value for our health dollar.
I do not know if this will be the case but it looks plausible and we will soon find out. medisave can operate in parallel to medicare and we can measure the results. That is we can have a choice between the existing system and the new one. The system is voluntary and you do not have to join so people who are healthy will tend to join medisave and possibly reduce their expenditure and the sick ones will tend to stay in the existing system.
The main argument against medisave is that it can be corrupted and abused. My argument is that we can nowadays create systems where this is difficult to do and where the incentives are for people to try to remain in the system. Most people, most of the time obey “the rules” and it is difficult to abuse the system and importantly get away with the abuse. We really have had tremendous advances in our information technology systems over the past two decades but we have not taken advantage of the opportunities they offer in many of our systems including the health market. This is understandable because it normally takes at least 10 years before any new technology is widely used. The Internet is one such technology and we are only now learning, fifteen years after it was introduced, how to apply it to our major systems like health.
The Singapore system does seem to work well, but China also has a system of personal accounts that doesn’t work well because people avoid going to the doctor when they should.
However, with the Singapore system one of the reasons why they spend so little is that they have a significantly lower ratio of doctors, nurses and hospital beds to the population than has Australia.
See, http://www.legco.gov.hk/yr05-06/english/sec/library/0506rp06e.pdf and compare Tables 1 and 12, which shows that Australia has close to twice as many doctors and hospital beds per 10,000 people than Singapore, which suggests to me that it would be quite hard to get spending down to Singapore levels in a short period of time.
Peter,
Thanks for the report. The numbers are stark.
Per capita expenditure on health
Australia 9.7%
New Zealand 8.7%
Singapore 3.7%
Singapore must be doing something right.
Their system is a combination of MediSave and MediCare.
In general outcomes of mortality rates, waiting lists, deaths of children, etc. Singapore comes out well.
Superficially the major difference appear to be that Singapore gives more responsibility to the individual to provide for their own health through a subsidised Medisave.
Information Technology is much better now than it was when the Singapore system was set up and we can do a better job. For example one of the things that “falls out” of medisave as proposed is that a person has access to their health records (excluding doctor’s comments). That is, a person on medisave will be able to have a consolidated view of not only all their payments but all their treatments. Australia is struggling with implementing such a system and it does not look all that promising because it is institutionally centric rather than individually centric.
Another outcome is that a medisave system can – in a privacy friendly way – suggest that you should see a dentist because it is two years since your last checkup. Once a person’s records are amalgamated then many benefits flow from it.
Yes it will take a lot of change to the system to get to say 5% of GDP on health or even to keep GDP spending at its current rate. Introducing an optional person centric system based around Medisave and more individual responsibility will give us at least a chance of getting there.
Kevin, I was talking about public health-cover: one of the arguments against it is supposedly that because there is no monetary incentive for minimising your use of health services, the public a) doesn’t bother to keep itself fit & healthy and b) overuse the system, visiting doctors for the most trivial ailments etc. etc.
Of course, this point of view only makes sense to people who think money is the only thing that motivates us in life, neglecting the fact that being unfit and unhealthy is generally makes life miserable anyway, and that visits to the doctor and/or hospital are hardly something most people would undertake for the sheer joy of it.
If the problem is happening with private health funds, then that would strike me as an argument against encouraging people into private health funds.
NPOV,
I agree with you but I do not want to stop people who are comfortable with the current system joining private health funds.
I like many others were “bribed” back into health insurance because the risk was too great to stay out of it. We did not know what the next set of changes would bring but we knew that if we were out of it then we may not be able to participate in future benefits.
I would much prefer to pay for my own regular health matters and have a catastrophic health insurance. Unfortunately if I do not join a health fund I cannot get access to some of the health dollars from the government.
The current system encourages inefficient allocation of resources. To give a very simple example. When I go to get a prescription I am given the choice of a generic drug or a branded drug. Of course I will take the branded drug because to me it is the same cost and why take the risk on generic drug if I do not have to, even though I know the risk is miniscule. It is these millions of small decisions that people make because of the system structure that are important in delivering an efficient health system.
Kevin,
I can tell you that my experience of the hospital system from HK (where people also spend less than Oz — and I believe they have more old people too) was pretty good (very similar to Oz, although people don’t recommend going public, but its hard to know paranoia vs. reality). It also worked well when SARS came about, which I imagine is pretty decent test of a public health system.
Perhaps a useful observation I can make is that far more preventative stuff happens in HK and Singapore and it isn’t included in those numbers — things like Chinese medicine are a big deal and people worry about their general health more (smoking is very low in HK — like Australia). Things that cost heaps indirectly like obesity are also far less common (although on the flipside, things like air-quality is hopeless in HK, so they get extra visits due to illness caused by this), so perhaps part of the real solution is to target things like that. It might not be very popular, but you could think of allowing allow different levels of insurance payments for things like BMI — this already exists for smoking, but other factors don’t seem politically palatable. Perhaps the government could get around this simply by allowing insurance companies to allow “discounts” for things like this.
Conrad,
I lived for 8 years in HK during the 90’s and found the health services as good as Australia on the rare occasions I had to use them. I needed laser eye surgery for torn eyeball and it was done within a few hours of diagnosis by the fellow who diagnosed it. No going to a doctor then getting a referral to go to a specialist who might then take weeks to get to see then he schedules the treatment a few months later.
Because the Australian system is set up the way it is then money from the top has to be accounted for and so a tremendous amount of effort is wasted in ensuring compliance – so we have this strange system of a GP having to give you a referral to a specialist. The doctors have no choice but to follow the system.
I have to have a relatively simple diagnostic procedure every two years by a specialist. I am to have the procedure next week but I have just received a note saying I must first go to a GP (any GP) and get a referral otherwise I will not get my rebate on medicare!! These are the sorts of small inefficiencies that will go away if I had the money and I could direct its expenditure.
Kevin,
I guess what you’ve got consider is the proportion of money you are going to save from making the system more efficient. If you can think of ways to make the system more efficient (like getting rid of these useless GP visits), then you need to work out how much you can save overall. If you are saving, say, 10% for free (and being in a sector where “efficiency” actually means worse outcomes, I think that would be huge) then you are still way off the numbers of the healthier countries. If you really think you can get huge amounts of savings via more efficient processes then you need to (a) specify where they are going to come from; and (b) specify how to do it. I just don’t currently believe simple efficiency changes will get you very far (not that I know much about it — I’m happy to listen about what changes give you what gains — which is why I asked). In my area, for example, people always claim that you don’t need this manager, or this administrative person etc., but when they take them away to “improve” efficiency, all that happens is someone else, who is generally paid more than the person that got deleted, ends up doing their job in a more in incompetent way (upper management excluded — I think you could employ monkeys to do a better job at that level).
Here’s my bet: most of the gains you can get have essentially nothing to do with efficiency. The things that will save you the big bickies are things like the don’t smoke campaign, getting people to exersize more (including old people — excluding sports that lead to too much physical damage), getting people to drink less alcohol (people in Singapore and HK drink very little), getting people to eat decent food across a lifespan (that includes quantity — notice how serving sizes in Asia are far much smaller than here?) etc. Lots of these really need long term cultural changes, and have nothing really to do with medicine per se, but they keep the big ticket people who have chronic health problems out of the system by not creating them in the first place.
Conrad
You are right that health costs are influenced by other factors much more than the health industry. The biggest “health works” in terms of prevention of disease we have are our water and sewerage works.
We have no idea how much will be saved by what is proposed. That is another reason why it should be optional and done on a small scale first. If it does not save anything then we can drop it but if it does work then we will know how much we will save. Like all markets you have no idea what will happen until you start it up.