Professor Jeff Richardson Director, Health Economics Unit CHPE, Monash University

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Health Economics UnitH E U

Health Economics Unit

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Professor Jeff RichardsonDirector, Health Economics Unit

CHPE, Monash University

Social Values, Efficiency and Medicare

Inaugural Health Forum “Your Medicare - 30 Years On: Still good for you? ”

The Whitlam Institute, within the University of Western Sydney Tuesday 15 July 2003

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Social Values, Efficiency and Medicare

Social Values, Efficiency and System Reform

How Healthy is Medicare(a) Large Issues

(b) Small Issues and Non-Problems Options for Reform Conclusion

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Objectives

What do we want?

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“Would you tell me, please, which way I should go from here?” Alice asked the Cheshire Cat.

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where…” said Alice.

“Then it doesn’t matter which way you go”, said the Cat.

“…so long as I get somewhere”, Alice added as an explanation.

“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough”.

Where Do I Go From Here?

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Key Question for Australia:

Did Alice listen to the Cheshire Cat or the Mad Hatter?

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Social Values Liberalism/Libertarianism

maximise choice+ safety net

Communitarianism/Solidarity Canadian Medicare is ‘ far more than just an administrative mechanism

for paying medical bills, it is widely regarded as an important symbol of community, a concrete representation of mutual support and concern … it expresses a fundamental equality of Canadian citizens in the face of death and disease … As the Premier of Ottawa pointed out … “there is no social program that we have that more defines Canadianism”.’ Evans, R and Law, M. ‘The Canadian Healthcare System. Where are we and how did we get here’, in Dunlop and Martens, An International Assessment of Healthcare Financing, Economic Development Institute of the World Bank, Seminar Series 1995.

Communitarianism = different dimension equityequity funding

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‘Solidarity’/language/conceptsand the Dialogue of the Deaf

Theme: An emaciated vocabulary inhibits the concepts needed for debate

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(How to inhibit subversive thoughts)

“The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees… but to make all other modes of thought impossible. It was intended that when Newspeak had been adopted once and for all… a heretical thought… should be literally unthinkable, at least so far as thought is dependent on words… This was done… chiefly by eliminating undesirable words… Countless other words such as honour, justice, morality, internationalism, democracy, science and religion had simply ceased to exist. A few blanket words covered them, and in covering them, abolished them. What was required in a Party member was an outlook similar to that of the ancient Hebrew who knew, without knowing much else, that all nations other than his own worshipped ‘false gods’. He did not need to know that these gods were called Baal, Osiris, Moloch, Ashtaroth and the like: probably the less he knew about them the better for his orthodoxy. He knew Jehovah and the commandments of Jehovah: he knew, therefore, that all gods with other names or other attributes were false gods.”

Orwell, G 1949, ‘The Principles of Newspeak’ in Nineteen Eighty Four, pp317-319.

Orwell 1984, The principles of ‘Newspeak’

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Social Values and Efficiency

Achieving Wrong Objectives

is not Efficient

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Social Values and Efficiency

Private sector diversity + low cost efficient if objectives is solidarity* efficiency may involve equal

access and health outcome

Universal uniformity and low cost efficient if objective is ‘choice’

(of a particular type) Efficiency = Achieving objectives

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Economics, Options and Social Values

Objectives/Social Option which maximisesValues likelihood of success

Equalise – access, Public outcome

Maximise: choice Pure private scheme

Choice; diversity Mixed public-private = safety net

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How Efficient is Medicare?

Outcomes

Small issues

Larger problems

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Outcomes

DALES … rank 2 Cost … exactly where expected

with respect to GDP/capita

Does this imply we are performing well?

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10,000 lemmings can’t be wrong…

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Short Run Problem 1

Private Health Insurance

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PHI: The Myth PHI

use of Private hospitals pressure on public hospital beds

Public Queues Policy objective:

Reverse process pressure off public hospitals

Plausible, logical, wrong

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Private Hospital Services

Separations% of Total Bed

Days1985/86 25.9 21.91989/90 26.7 22.01995/96 30.5 26.31999/00 34.3 28.1Increase 32.4% 28.3%

Source: Butler 1999, Bloom 2002

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PHI PoliciesJuly 1997 Private Health Insurance Incentives

Scheme (PHIIS)Tax subsidy … low income groupsTax penalties … high income groups

without PHIsingle >50,000family > 100,000

Dec 1998 ‘30% rebate’ PHIIS replaced

flat 30% of PHI

Sept 1999 (effective from July 2000)Lifetime Community Rating

age 30 … no PHI life time premium

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3339Percent population covered by a hospital insurance table,

Australia June 1984 to June 2001

Source: Butler 2001, ‘Policy change and private health insurance’ in Mooney & Plant (eds) Dare to Dream: The Future of Australian Health Care’, p 60.

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The Echidna, the Platypus and PHIAustralia’s entries into the World

‘Strange but True’ contest

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(i) If income > $50,000 single, $100,000 family… price of PHI < 0

Analogy: to support auto industry surcharge on wealthy families failing to buy Australian car

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(ii) If use PHI, out of pocket cost

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(ii) If use PHI, out of pocket cost (iii) To sell insurance, increase the risk

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Sensible Options

Private Health Insurance

Enlarge scope to comprehensive health cover Finance/management st regulation,

(ie Managed Competition) efficiency (hopefully)

Allow erosion PHI ‘safety valve’ inefficiency unimportant

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Short Run Problem 2

Pharmaceuticals

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3339Pharmaceuticals and Other

Medical Non-Durables

% of total expenditure on health

1960 1998 1960 1998

Australia 22.3 11.4 Japan 16.8

Belgium 24.3 16.1 Korea 13.8

Canada 12.9 15.0 Luxembourg 12.3

Czech Republic 25.5 Netherlands 10.8

Denmark 9.2 New Zealand 14.4

Finland 17.1 14.6 Norway 9.1

France 22.1 22.0 Portugal 25.8

Germany 12.7 Spain 20.5

Greece 26.8 14.7 Sweden 12.8

Hungary 26.6 Switzerland 7.6

Iceland 16.7 15.5 United Kingdom 16.3

Ireland 9.9 United States 16.6 10.1

Italy 19.8 21.9

Australia’s rank 7 out of 25

Source: OECD, 2002

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Pharmaceuticals: Long run solution Must be part of a coherent health scheme Cost of pharmaceuticals alone is irrelevant

if $ (Pharm) $ (hosp) then cost of pharmaceuticals desirable

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Long Run Non-Problem 1

Cost ‘Nation’ can’t afford to pay

False Expenditure choice If U (health) > U (elsewhere)

then health Caveat

Expenditure must be efficient

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Long Run Non-Problem 2

‘Government can’t afford to pay’False: taxes/levy can True iff: taxes – fixed

Collective or individual financing Efficiency issue= Issue of choice

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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1995 2006 2021 2036 2051

Hea

lth

Exp

en

dit

ure

as

% G

DP

2.1% p.a.

3.1% p.a.

3.6% p.a.

Long Run Non-Problem 3Projected Health Expenditure as a Percentage of GDP

based on GDP growth rates of 2.1%, 3.1%, 3.6%

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How Healthy is Medicare

Large Problems

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Problem 1

Quality of Care (Efficiency)

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Adverse Events

Quality in Australian Hospitals Study AE = 16.6% (Wilson et al 1995) Revision 10.6% (Thomas et al 2000)

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Problem 2

Cost Effectiveness

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3339Cost-effectiveness of selected health programs

Australia 1992 to 1998Service/intervention Cost per life year

drugs submitted for listing on the 7 drugs $5 - $10,000PBS approved for funding at 5 drugs $10 - $20,000nominated price 1991 - 96 6 drugs $20 - $40,000

4 drugs $40 - $70,000

primary prevention of NIDDM: cost savingbehavioural programs $2,400/LY

primary prevention of NIDDM: $4,600 - $12,300surgery for serious obesity

comprehensive diabetes care < $1,000/life year saved

Segal L ‘The Role of Economics and Health Economics in Environment Research’, Workshop on Environmental Health, Department Health and Aged Care, Melbourne April, 2000: Derived from:

Segal L 2000, Allocative efficiency in health. Development of a model for priority setting and application to NIDDM, Doctoral

Thesis, Monash University.

George B, Harris A, Mitchell A 1999,`Cost-effectiveness Analysis and the consistency of decision making: evidencefrom pharmaceutical reimbursement in Australia, 1991 to 1996,’ CHPE Working Paper 89 HEU, Monash University.

Notes: * maximum $68,913 in $1995-6# LY = life year gain, QALY = quality adjusted life year gain,

1 QALY is equivalent to one life year in full health.

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Problem 3

Variations in Treatments

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3339Standardised Rate Ratios for Various Operations in the Statistical Local Areas in Victoria, Compared to the Rate

Ratios for All Victoria

400350300250200150100500

Coronary Angiography 13.4Cor Revasc Procedure 5.4Cataract Extraction 15.4Tonsils & Adenoids 7.5Myringotomy 11.7Carpal Tunnel Release 8.4Vertabral discetomy 2.1Decomp laminectomy 1.9Total Hip Replacement 3.8Hysterectomy 6.4Prostatectomy 3.9Colonoscopy 45.3Cholecystectomy 5.3Explorat Laparotomy 1.7Appendectomy 5.9

Procedure Variance Ex(Variance)

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Ratio of likelihood of public patients to private patients in private and public hospitals, 1995/97

Private Hospital Patients Private Patients in Public Hospitals :Public Patients to : Public Patients to

Angiography Revascularisation Angiography Revascularisation

Within 14 days

Men 2.20 3.43 1.77 1.53Women 2.27 3.86 1.57 1.81

Within 3 months

Men 2.24 3.43 1.53 1.23Women 2.28 3.34 1.49 1.32

Within 12 monthsMen 2.16 2.89 1.42 0.97Women 2.22 2.84 1.48 1.10

Source: Victorian Inpatient Minimum Dataset

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Problem 4

Silo based system

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Overarching Problems with Funding

Dollars follow providers, not patients fragmentation geographic/disease based

Allocative inefficiency Inequity

Magnitude/consequences of the problem Unknown / ignored

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Case Studies: What we would expect to see in a

Health System

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‘Ethix, a Seattle based Managed Care organisation was asked to establish a health plan for a nearby country town. The scheme included, inter alia, detailed utilisation review. Shortly after commencement this detected an unexpectedly high level of spinal injury in youths. Investigation established that the reason for this was a tree stump which had been left in the middle of a popular toboggan run. Young people were crashing into this and injuring their backs. The health plan paid for a bulldozer to remove the tree stump.’

(Summary from a public address, Richardson et al 1999)

Vignette 1

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Key Element

Flexibility of funds ‘single payer’ No cost shifting

Information systems Health Service Review/Research

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‘A woman with dizziness is concerned about her health. She rings the state call centre which advises her to visit her local health team. She is able to see the GP quickly who asks her a series of questions from the relevant research based protocol and undertakes a clinical examination. The GP emails the results to a local specialist… who orders some further investigations consistent with the state research based care path… Advice of (an) impending admission is automatically conveyed electronically to the GP and the social worker in the referring health team. The social worker contacts the hospital to discuss discharge planning… The specialist… suggest a number of sources for information about the patient’s condition. The patient contacts the call centre for further information… The case is randomly selected by the hospital audit committee for quality review. The committee suggests some slight changes to the state-wide protocol committee.’

(Duckett 2000 p241)

Vignette 2

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Key Elements

Integrated provider system EBM Review/Adaptation Information System No financial barrier

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QA Procedures

After Quality of Australian Hospital Study Expect: Permanent, ongoing

randomcheck of hospitals

Analogy 1: Checking hygiene in restaurants

Analogy 2: Airline/safety Observe ???

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Hospital Records

Expect: All hospitals have LAN andmandatory recording oftreatment

Observe: Erratic coverage

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Out of Hospital Data

ExpectData : Compulsory electronic

linking (would a travel agent

survive without record linkage?)

Observe : Very slow uptake of EDP

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Type/Mix of Services

Expect : Evidence Based Medicine Observe: ‘Clinical freedom’ (license) Expected Response:

Maximum priority topromote EBM

Observe: Unhurried projects

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Organisation

Expect: Kaiser HMO-type clinics

Observe: 19th Century ‘corner store’organisation

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Response to Problems (Generally)

Queuing Expect: taskforce pinpointing cause of

problem Actual: political accusations/assertions

Small Area Variation Expect: Follow-up; - how general

- impact on health Actual: Silence

Heart Attack Study Expect: Follow-up; - how general

- impact on health Actual: Silence

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Use of Data

Expect Ongoing analysis to identify

anomalies/problems(eg SAV; Erratic severe patterns)

Record linkage to track success/unsuccessful National Institute for Data Analysis

Observe Relative inaccessibility

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Health Services Research

Expect large scale funding US: NIH $US 1.5 billion

$Aus 2.5 billion Australia equivalent

$ 100 million Observe

Erratic small scale, unfocused grants

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Quality of Information/Debate

Expect: Readily available, information on system

performance Observe:

Ongoing repetition of same wrong assertions with respect to

Private Health Insurance (20 years) Co-Payments (35 years)

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Options for Reform

System

Individual elements

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System Change

Principles Single fundholder (government or pte) Incentives for reform

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Scotton/Enthoven Managed Competition

Public Hospital

Private Hospital

Public Other

Private Other

Various Sub-contracts

HIC

Treasury Tax

Public(Area Health)

Private (Fund Holders)

Private (Funds )

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Uncertainties

Evidence limited Quality … neither nor (USA)

Cost … US prices (‘low hanging cherries’) real effects … limited

Threats(i) Administrative costs

contracts(ii) Competition marketing

cost attractiveness(iii) Multi tier system

Violation of social objectives ??

Managed Competition

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Regional Budget Holders (RBH)

(A win-win low risk strategy) Weakness of Medicare = Fed/State split

solution Regional Base Scotton MC requires default public

scheme Regional Base

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Advantage of Regional Budget Holder

First stage to Managed Competition

Rationalises funding

Progressive experimentation

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Impact of Regional Budget Holder

Public … indistinguishable from

status quo

PHI … unchanged (initially)

Government … both compromise

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Box 1 Stages of the Reform Process t0: Methodology and Cost

(a) current regional spending (b) expected spending (c) public saving due to PHI

t1: Pooling

(a) regional authorities (n = 15) receive a single budget (b) initially 100 percent reimbursement of overspending (c) reimbursement of providers as occurs presently (d) HIC a possible agent (e) public hospital reimbursement by DRG

t2 Early Transition 1

(a) regional budgets adjusted 5 percent per annum towards ‘expected value’ determined by a risk population based framework

(b) regions permitted to alter specified relationships (eg limited preferred provider contracts but preservation of ‘default payments’; employment of allied health personnel; introduction of integrated information, QA system)

t3 Late Transition 1

(a) regional budgets set equal to the ‘expected budget’ (b) flexibility and discretion increased eg no or low default payment for non-

contract providers; elimination of high risk (low quality) hospital departments; construction of (Kaiser style) vertically integrated clinics. Possible integration with aged services

(c) assessment of final transition

t4 Transition 2

(a) private sector ‘carve outs’: transfer of full budgets per person to registered accredited groups, regulated as in the Scotton proposal

(b) ongoing review of performance (see Scotton)

Stages of the Reform Process

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Conclude Main Themes

Reforms should Address identified ‘problems’,

ie unmet achievable objectives

Be evidence based

Priority

Risk likelihood of perverse outcome

PotentialBenefit

risk=

=

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Implications

RiskBenefits

(i) Privatisation low small/zero/negative

(ii) Simple Competition v. high negative

(iii) Managed Competition high high

(iv) Regional budget holder v low modest

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Individual Elements

Respond to problems (Prerequisite: motivation to reform)

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Importance Ordering of IssuesActual1 Objectives2 Delivery System

(i) Quality, routine monitoring, feedback(ii) EBM’(iii) Full use of databases(iv) Efficiency in all elements cost effective

3 Funding Co-Payments PHI Government/Pte Share

4 Total Cost of Health CareObserved Order (4) (3) (2) (1)

chief concern - effect on access

notcost sharing

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Conclusions

Medicare has served community well universal efficient to administer consistent with Australian values

Complacency the ‘UK-NHS Disease’ Medicare-defined as funding system … OK Medicare-defined as whole system-needs

important change

Professor Jeff Richardson Director, Health Economics Unit CHPE, Monash University

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