International Health Care Reform

A Legal, Economic and Political Analysis

Colleen Flood

• Publisher: Routledge
• Year: 1999
• Print ISBN: 9780415316163
• eBook ISBN: 9781134619252
• Topic: Business
• Subtopic: Economic Theory
• Index: Business

This book analyses the wave of competition-oriented reform by comparing "internal market reform" (proposed in publicly-funded health care systems) with "managed competition reform" (proposed in systems with a mixture of public/private financing) and the role of "managed care" in each of these reform theories. International Health Care Reform clearl

1 Introduction

Why reform?

Since the middle of the 1980s, health care reform has been one of the top policy initiatives of most Western industrialized states. A new wave of reform has emerged that focuses on harnessing competition to more efficiently achieve social justice ends. This book analyzes this wave of health care reform and compares two types of competition-oriented reform models—internal market reform and managed competition reform. These models are looked at in the context of their implementation in the UK, New Zealand, the US, and the Netherlands. This book tries to determine which reform model best solves the complex optimization problem of how to strike a balance between individual needs and societal interests and more generally between equity and efficiency.

Managed competition reform and internal market reform models represent an important change from the traditional approach to health care reform. This traditional approach focuses on reducing the resources available to a health care system (e.g. the hospital beds, nursing services, technology, etc.). This traditional approach assumes that physicians, when faced with restricted resources, will allocate resources optimally amongst various medical needs. By contrast, the new reform models require purchasers–government-appointed authorities, private insurers, or risk-bearing groups of health providers–to proactively manage and allocate resources amongst different health care needs. Purchasers are expected to manage treatment decision-making by physicians and other health providers. Managed competition and internal market reform combine elements of both government planning and market approaches. Managed care, another concept that is often referred to in the context of health care reform, is the mechanism through which managed competition proposals seek to obtain cost savings, but as described further below, can be employed in any health care system.

Before describing the competition-oriented reform models, a preliminary question must be addressed: why is health care reform needed? A number of factors have converged creating strong pressures for health care reform in developed countries. These factors include:

• concerns over increases in total spending on health care services;

• concerns over rapidly increasing government spending;

• access and rationing concerns; and

• concerns over the cost-effectiveness and, indeed, effectiveness of many services supplied.

Let us look more closely at the forces contributing to reform throughout the 1980s and 1990s, beginning first with the concern over growth in total health care spending. Throughout the 1970s there were significant increases in the proportion of gross domestic product (GDP) (the total value of all goods and services produced by a country) absorbed by health care spending. Between 1972 and 1982 there was a 36-percent, 30-percent, 26-percent and 25-percent increase, respectively, in the percentage of GDP spent on health care in the US, New Zealand, UK, and the Netherlands. Between 1982 and 1992 there was only a 2-percent increase in the Netherlands, but the US, New Zealand, and the UK still saw increases, respectively, of 36 percent, 12 percent, and 20 percent.¹ These increases were partly due to the after-effects of the oil-shocks and to recessionary periods that slowed the growth of GDP within these countries. However, there was a concern that even if growth rates in GDP improved it would not be enough to keep pace with the aging of the baby boomers and their demands for high quality medical care and the best medical technology available.

Although increasing costs are often cited as a justification for health care reform, it is far from clear what is “too much” in terms of total expenditures on health services. Why are we not similarly concerned that we are spending increasing amounts on telecommunications services, cable television, computer products, or novelty toys? The concern over rising total health care expenditures is, in fact, rooted in two separate issues–concern over government spending and concern over inefficiency.

In most Organization for Economic Cooperation and Development (OECD) countries, government pays for the majority of health care expenditures. Even in the US, government expenditures account for over 44 percent of total health care spending. Moreover, in most countries, health care is the most significant component of total government expenditures. Thus, increased concern over public sector deficits has been a strong impetus for health care reform.

It is often difficult to disentangle fiscal realities from ideological pursuits, but a further factor contributing to calls for health care reform has likely been a rise in ideology, questioning the legitimacy and role of government in all sectors. This new ideology has not been the sole domain of neo-conservatives; governments of many political stripes have privatized and deregulated formerly government-owned industries, e.g., telecommunications, electricity, gas, broadcasting, airlines. In a number of countries, the final stages of reinventing government are resulting in re-engineering and/or partial privatization of social service systems such as education and health.

A further factor driving health care reform is concern over inefficiency. Despite mushrooming health care expenditure, there have not been significant improvements in health outcomes. So the question arises: are we getting value for money? Health economists have led the charge in this critique, emphasizing the lack of evidence for the cost-effectiveness or even effectiveness of many health care services. The economists’ critique is explored further in Chapter 2 but, in a nutshell, economists view this problem as resulting from leaving allocation decisions in physicians’ hands. Physicians are portrayed as being resistant to outside scrutiny of their decision-making processes and as having little or no incentive to be sensitive to the costs and benefits of the services they supply or recommend. Wide variations have been recorded in the kinds of health care services delivered to people with similar health needs. Thus, the concern has arisen that the present allocation of resources across health needs and between health services utilized to meet those needs reflects what is optimal from the medical profession’s perspective rather than what is optimal from society’s perspective.

Why have allocation decisions been left to physicians? Historically, both public and private insurers have been passive “indemnity insurers,” paying physicians a fee for every service they decided to provide (this is called a “fee-for-service” payment). As discussed in Chapter 3, both public and private insurers in the four countries under study have failed to scrutinize the services that physicians supply and the recommendations that physicians make with regard to drugs, hospitalization, referrals, etc. Thus, there has been relatively little pressure brought to bear on physicians to supply and recommend cost-effective care by those responsible for paying for health care services. There has also been little effective management to ensure the optimal allocation of resources between different health needs, as well as the choice of the most cost-effective service in response to each particular need.

To a lesser degree, health care reform has also been initiated in response to concerns by patients and citizens over their ability to access services and over the quality of services provided. Starting in the late 1970s, single-payer systems (relying to a large degree on government funding) reduced growth in spending by closing hospitals and reducing the numbers of hospital beds. The consequent increases in waiting lists and times resulted in widespread public concern and a sense that health care systems were not responding to patient and societal needs.² Citizens and patients have traditionally had very few direct mechanisms through which to ensure the accountability of health care decision-makers, leaving them feeling disenfranchised and frustrated. In systems that relied to a greater degree on private finance, such as the US and the Netherlands, there were concerns over access to insurance coverage for high-risk individuals who were facing increasingly higher premiums or excluded altogether from private insurance markets.

Concerns over government spending, inefficiency, reduced access and quality, and a general policy shift towards rethinking government’s role and government programs, have combined to create a strong force for health care reform. Managed competition and internal market reform are both reform models that seek to harness competition to achieve distributive goals and to change the incentive structure for decision-makers within a health care system.

The reform models

The language of health care reform can often be confusing and there seems to be a small cottage industry in inventing phrases and acronyms for the various new emerging arrangements between governments, private insurers, purchasers, providers and patients. This makes it very important to clarify at the outset of this book what is meant by the terms “internal market reform,” “managed competition reform” and “managed care.” As there is no one acknowledged theory of the internal market, I describe this model by reference to its implementation in the UK and New Zealand. With regard to managed competition, I describe the key features of the model originally designed by Enthoven and as proposed and implemented in the Netherlands. With regard to managed care, I describe this as a feature that could be adopted in many kinds of systems but is now most associated with the US system, given the huge growth in managed care that has occurred since the failure of President Clinton’s 1993 managed competition proposals.

Internal market reform and the purchaser/provider split

Over the course of the decade, the UK and New Zealand have each sought to create what is known as an “internal market.” Proposals for reform of the UK’s National Health Service (NHS) were first announced in 1989. Subsequently, the reforms were implemented through the National Health Service and Community Care Act 1990, (UK), (1990), c. 19. On 8 December 1997, the UK government published a policy paper (known as a White Paper) detailing further reform of the UK internal market.³ Enabling legislation was passed on 30 June 1999 in the form of the Health Act 1999, (UK), (1999), c. 8. In New Zealand, the then Minister of Health released his proposals for internal market reform in 1991.⁴ Subsequently, many of the reforms were implemented pursuant to the Health and Disability Services Act 1993, (NZ), 1993, No. 22, but, as in the UK, there have been a number of significant changes made to the original reform plan.

The original goal of internal market reform in the UK and New Zealand was to split the purchaser and provider roles of regional or area health authorities. This was in order to eliminate what was viewed, in both jurisdictions, as a conflict of interest, as the old health authorities had been responsible both for purchasing hospital and community services and for managing and providing public hospital services. The reformers’ perception was that the old public hospitals were not performing as efficiently as they could, because they could always rely on getting extra funding from their own coffers.

Internal market reform requires government-appointed purchasers (100 Health Authorities in the UK and one Health Authority in New Zealand) to bargain and enter into contracts with competing public and private health service providers. Initially, it was intended that the new Health Authorities would be the sole purchasers (known in economic terms as monopsonies) of publicly-funded health services in their region and would buy a comprehensive range of health services on behalf of the people living in their regions. A split was created between the purchasing and provision of hospital and other health services: in both the UK and New Zealand, the Health Authorities are not permitted to provide health services directly. On the other side of the split are public hospitals, which in both countries are now managed by crown corporations. In the UK these are called “NHS Trusts” and in New Zealand they are called “Crown Health Enterprises.” In both systems these new enterprises are meant to act much more like private firms and compete with each other and private providers for supply contracts with the new Health Authorities. Thus the term “internal market” is something of a misnomer as the market created is not intended to be completely internal to the public sector, although in reality it continues to be largely so.

Exceptions to the purchaser/provider split in the UK’s internal market were “GP Fundholders.” Fundholding was originally an “add-on” to internal market reform but rapidly assumed increasing importance. GP Fundholders were groups of general practitioners (family doctors), serving at least 5,000 patients. Prior to 1 April 1999, over 3,500 Fundholders received public funding, in the form of capitated budgets, with which to buy drugs, diagnostic tests and x-rays, outpatient services and approximately 20 percent of hospital and community services, on behalf of the patients enrolled with them. Within Fundholders, the purchaser and provider roles were combined in one enterprise to the extent that a physician was able to substitute the supply of his/her own services instead of buying services from other providers. The New Labour reforms of December 1997 called for the abolition of GP Fundholders as of 1 April 1999. They are to be replaced by new organizations called “Primary Care Trusts.” These Trusts are to be much larger groups of general practitioners and community nurses that will receive capitated budgets from the government with which to purchase a full range of publicly-funded health care services from public hospitals and other health providers. In New Zealand “Independent Practice Associations” (IPAs) have been established and these too are exceptions to the purchaser/provider split that characterizes the bulk of the internal market. There has been a change of terminology such that now IPAs are referred to as Budget-holders. Budget-holders are physician groups of varying size paid on a capitated basis by the Health Authority to cover the cost of specified services for their patients such as drugs, diagnostic texts, x-rays etc. Fundholders, Primary Care Trusts, IPAs, and Budget-holders are all examples of “managed care,” which is described further below.

Figure 2 in Chapter 3 depicts the structure of the NHS internal market prior to the New Labour Reforms of December 1997. Figure 3 depicts the New Labour Reforms. Figure 1 depicts New Zealand’s internal market in 1996.

Managed competition reform

In an internal market citizens have no choice but to rely upon a government-appointed purchaser (generally a Health Authority) to purchase on their behalf publicly-financed health services. They cannot indicate their dissatisfaction with a purchaser’s performance by shifting a share of public funding to another purchaser. This is in contrast to managed competition reform. Managed competition requires private insurers to compete for customer allegiance within a regulated system that is progressively financed.

Enthoven is often considered to be the creator of the managed competition model and his writing on this subject co...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Abbreviations
• Acknowledgments
• 1. Introduction
• 2. Arguments in economics and justice for government intervention in health insurance and health service markets
• 3. The reform of health care allocation systems in the US, the Netherlands, New Zealand, and the UK
• 4. Accountability of health care service purchasers: Comparing internal markets and managed competition
• 5. The interface between health care service purchasers and providers: Contracting out versus integrated production
• 6. The problems of monopoly supply
• 7. Achieving quality in a competition-oriented system
• 8. Conclusion
• Bibliography
• index