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National Affairs

Healthcare and the limits of competition

Lesley Russell

26 September 2014

Lesley Russell looks at what the draft recommendations of the competition policy review mean for health policy and services


Julian Smith/AAP Image

Julian Smith/AAP Image

The draft report of the federal government’s competition policy review, released this week for public consultation, is a massive opus, intimidating to all but insiders and the cognoscenti. In its chapter on human services, the review panel, headed by economist Ian Harper, takes on some sacred cows – pharmacy groups have already geared up to resist recommended changes – but also largely accepts the standard arguments for privatisation, and for market-based commissioning and procurement.

Pharmacies, health insurance and aged care are among the health policy–related areas discussed, and the panel’s focus is on encouraging innovation, competitive commissioning of services and public–private partnerships. Although the report includes a thoughtful discussion about what consumer/patient choice really means in health and human services, some key areas of healthcare policy are simply ignored. The most obvious of these is the “closed shop” that operates in specialist medical care, eating into government budgets, reducing patients’ access and adding to out-of-pocket costs.

The overarching premise of the review is that more competition, by giving greater choice, will help people meet their individual healthcare and aged-care needs. On that basis, the draft report argues that user choice must be at the heart of service delivery; that government funding, regulatory and service-delivery functions must be separate; that government should encourage a diversity of providers and foster the entry of new players; and that innovation must be rewarded.

Underlying these measures must be a competition policy that is “fit for purpose” and subject to public-interest tests. The review recognises the need to enable informed consumer choice and to provide default options for consumers unable or unwilling to exercise choice, and acknowledges the role of “mediated choice” (which happens, for example, when GPs act as gatekeepers to specialist services). Importantly, the case is made that choice is not the only important objective: equity of access, quality, and a focus on outcomes rather than outputs are also critical.

The draft report’s proposals for pharmacies, private health insurance, and the ways in which healthcare services are delivered provide a guide to its overall thinking.

Harper and his co-panellists acknowledge that some regulation of pharmacies is justified to ensure patient safety through good-quality information and advice. But it’s also important for managing and overseeing the expenditure of government funds and the costs of pharmaceuticals for patients in a transparent way.

Both this report and the recent report of the National Commission of Audit recommend opening up pharmacies to increased competition by deregulating ownership requirements and location rules. This riles the Pharmacy Guild of Australia, but it’s hard to argue that only a pharmacist can own a pharmacy when anyone can own a medical practice, or that such ownership is an essential mechanism for ensuring that the services delivered on the premises are in accordance with regulations. Likewise, it makes no sense that a pharmacist must have the approval of the federal government to open a new pharmacy or move or expand an existing pharmacy.

The draft report mentions other controversial issues – the location of pharmacies within or linked to supermarkets, and the restrictions on pharmacists delivering vaccinations and other services or reissuing prescriptions for long-term conditions – but fails to offer any solutions. We can be sure that even the mention of these professional turf issues will bring the stakeholders to the fray. But will they present new evidence of the need to maintain the status quo or other ways of improving consumer services and ensuring cost-effectiveness?

The need for a review of pharmacies is pressing. The current agreement between the federal government and the Pharmacy Guild, which provides $15.4 billion over five years to around 5000 community pharmacies, expires on 30 June next year. In return for those funds, pharmacies dispense Pharmaceutical Benefits Scheme medicines, provide pharmacy programs and services, and enter into community service obligation arrangements with pharmaceutical wholesalers. The agreement accounts for around 30 per cent of PBS expenditure.

In the fourteen years since the last review of pharmacy arrangements, different business and financial models, including discount pharmacies and online prescriptions, have emerged. As negotiations begin on the next Community Pharmacy Agreement it will be interesting to see whether the Abbott government brings the recommendations of their independent advisers to the table.

The private health insurance sector is also heavily subsidised by the federal government, in this case through the private health insurance rebate, which in 2015–16 will cost $6.6 billion. With this level of public investment, the requirement that the federal health minister approves annual premium increases seems more than appropriate. Funds may only apply to increase premiums if their cost structures have increased, although there is little public transparency to these requests. Not surprisingly, the funds argue that they are among the most heavily regulated industries, with the regulatory framework encompassing the scope of services covered, product design, pricing, discounts and capital requirements.

Should competition policy apply to private health insurance, and how should it be balanceed with consumers’ needs and the efficient use of government funds? In considering this question, the review panel would have done well to consider the regulatory requirements imposed by the US Affordable Care Act to reign in the excesses of American health insurers. Insurers must not discriminate on the basis of pre-existing conditions; physical and mental health and substance abuse services must be given parity; information must be made available to enable consumers to accurately compare plans; non-discriminatory wellness programs must be provided; and insurers must spend at least 85 per cent of premiums on medical care.

Instead, the panel’s draft report refers to the National Commission of Audit’s recommendation that “there may be scope for ‘lighter touch’ regulation of the private health insurance sector, which could encourage innovation and wider product availability for consumers” and its suggestions that “price regulation of premiums could be replaced with a price monitoring scheme and health funds could be allowed to expand their coverage to primary care settings.” The review’s decision to adopt advice predicated solely on budget savings, rather than take up a discussion of the competition and consumer protection issues involved in those controversial proposals, is regrettable, especially as all the signs suggest that the Abbott government is pushing better-off Australians to rely more heavily on private health insurance.

Interestingly, the review panel takes the view that preferred-provider arrangements, under which consumers have lower or no out-of-pocket expenses if they see one of the medical providers offered by their insurer, are not anti-competitive. Such arrangements do, however, constitute the major reason for the Australian Medical Association’s strong opposition to any expanded role for private health insurance into out-of-hospital care, which it sees as “managed care.”

Where governments retain some control over the delivery of human services, the review believes that the diversity of service providers and high-quality outcomes can be encouraged by commissioning. This issue has assumed increased importance given that commissioning is to be a core function of the Primary Health Networks, which will replace Medicare Locals on 1 July 2015, especially given that private, for-profit organisations like private health insurance funds will be eligible to operate the networks.

Effective commissioning is based on continually analysing community needs and designing, specifying and procuring services to meet these needs within the resources available. This certainly separates funders, regulators and service deliverers, but competition is involved only at the tendering stage. Commissioning can ensure a diversity of providers and deliver greater flexibility to meet local needs; but it can also lead to unnecessary and inappropriate variations in care at a national level.

As the draft report warns, commissioning decisions are generally structured to achieve best value rather than best outcomes, and the decisions are not made by consumers. It’s all too easy for commissioned providers to keep down their costs by limiting access or services in ways that deliver short-term financial savings but longer-term costs elsewhere in the system. Little is currently known about what “effective commissioning” is and how it can be achieved in practice. The draft report fails to make note of the examples of how not to commission provided by Britain’s National Health Service.

Although the review panel acknowledges that “markets work well when consumers are engaged, empowering them to make informed decisions,” it places little emphasis on the role informed healthcare consumers can play in driving competition and efficiency. A greater availability of healthcare data would help drive informed decision-making and enhance competition. Efforts in this regard are more advanced in aged care and disability services, but much more needs to be done in healthcare. If patients know that the top 10 per cent of some specialist doctors charge half again more than the next 10 per cent, for example, and there’s no evidence that they are delivering better care, it’s likely that some excessive charging practices – and the huge out-of-pocket costs that patients bear as a consequence – would diminish. That has certainly been the case in the United States.

But it’s important to recognise that competition and choice in healthcare is not always appropriate. Increasing the number of providers does not always result in decreased costs, and can lead to increased administrative inefficiencies and complexities. And the consequences of consumers making the wrong choice – as a result of confusion, lack of resources or timing – can be significant and long-term.

This is a draft report, with considerably more work to be done and the opportunity to explore all these issues, and more, in greater detail. At the end of the consultative process it will be important that the benefits of reforms proposed have been thoroughly argued and modelled and that proposals are in place for how the impact can be measured. Whether the federal government will then choose to act on the recommendations is a different question. •

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