THE recently released Grattan Institute report Stopping the death spiral by Stephen Duckett and Greg Moran outlines four key reasons why the private health industry continues to be stuck in an inevitable death spiral, all leading to the inevitable same result: high cost.

The report proposes that if these high costs could be lowered through a range of mechanisms, such as increasing private hospital efficiencies, lowering the out-of-pocket costs paid by patients, standardising prostheses prices and controlling premium increases by health funds, then there is hope for sustainability of the industry.

While these measures are certainly promising when viewed as individualistic and segmented perspectives through the lenses of each stakeholders’ interests, they still promulgate the underlying issue of cost-shifting, and somewhat fall short of taking the sorely needed approach of taking a more system-wide bird’s-eye view of the problem.

The report does set the correct tone by identifying the factors that have led to and continue to contribute to inertia for bolder reform, such as the industry’s unhealthy dependency on short term government fixes, reform paralysis as a result of overbearing lobbying efforts by select stakeholder groups, lack of bipartisan political support, and calls on all players to come together in creating sector sustainability. It commendably highlights that inevitable disruptive change is already occurring within the sector (by some industry players innovating to create competitive advantages for themselves) and instead recommends a more managed change approach where all players make compromises in the short term for long term viability.

However, it restricts this recommendation for “managed change” to be achieved through (only) an efficiency-driven industry plan” and stops short of taking a more comprehensive view of creating value for Australia’s private health sector in its entirety.

The first of the four proposed reforms is to make private hospitals more efficient by reducing the average length of stay comparative to public hospitals, setting and being paid an efficient price for private hospital care, reducing no or low value care, and issuing single bills to patients to drive down out-of-pocket costs.

While each suggestion certainly has merit on its own, rather than simply looking at increasing the efficiency in one segment of the sector, we should be looking at creating value for all players, including patients, by aligning each player’s incentives towards a common goal.

The goal should not be to become efficient or to simply reduce costs, it should be to create better health outcomes for the market it serves: the patient. To do this, we need to first understand whether and how these efficiency gains translate to actual value.

As an example, reducing average length of stay should indeed be compared across sectors but only if the resulting health outcomes are also considered. The sector or hospital that shows a comparatively reduced average length of stay for a given diagnosis related group must also show a correlation to an improved (or at least nil adverse impact) on the consequent health outcomes of its patients.

Failing to take this level of bilateral and comprehensive approach to reform could result in unanticipated adverse impact to one or all segments of the industry in the medium to long term, which could in fact serve to accelerate the unsustainability paradigm of not only the private health sector but the Australian health sector more broadly.

Similarly, proposals for setting and being paid efficient prices for each diagnosis related group could be a unilateral approach if accurate costings for the provision of care within that diagnosis related group across the various health settings are also not considered and/or if they are not associated with a demonstrable increase in health outcome measures for the patient, or improved safety and quality measures for the health service. Perhaps a better tactic might be to incentivise individual efficiency drivers of each segment of the industry collectively, by aligning their care and payment models to achieve common agreed goals that are of benefit to the health system as a whole. Health insurers, private hospitals and medical specialists could all partner to be funded for generating better health outcomes underpinned by a risk-sharing framework, for example. This will then drive the efficiencies required, not just in average length of stay but across a suite of measures ranging from theatre and bed utilisation rates of private hospitals, to higher claims ratios of health funds, and in turn lower private health insurance premiums for patients.

Redesigning the private health industry dynamics to shift away from the current antagonistic relationships between its players towards a collaborative and aligned partnership would further address the exorbitant out-of-pocket costs issue that is the second broad recommendation in the report. We could refocus away from arguing whether Medicare rates are the appropriate benchmark to define exorbitant costs, or what remit cost-finding websites should have. Instead we could develop four-way partnerships between insurers, doctors, private hospitals and device companies, all with the common aim of designing their models and processes around achieving better patient outcomes. Such improvements could then have a higher likelihood of leading to significant reductions in out-of-pocket costs for the end-point consumers.

If medical specialist fees, hospital charges, insurer payments and device procurement costs could each be dependent on and linked to definable and demonstrable health outcomes, there would be no perverse incentive for out-of-pocket costs at any touchpoint.

This could be achieved through a phased partnership approach. Private hospitals and medical specialists could agree to scalable out-of-pocket costs dependent on the resulting benefit to patients, either as a functional or health outcome, and/or against key performance outcome measures such as revision rates or infection rates per specialist (or hospital) per procedure. The price scale charged by device companies could be dependent on demonstrable efficacies and safety profiles of each product (via independent testing). Discounts could be given to purchasers with better outcomes using the device and resultant higher volumes purchased. Consequently, there will be an incentive for manufactures to optimise their supply chain costs and build efficiencies into production lines.

The third recommendation from the Grattan report proposes to fix the prosthesis market and lower the cost of prostheses by improving transparency of pricing mechanisms, establishing a diagnosis related group-based pricing approach and hoping for trickle-down cost savings to patients by shifting the revenue from private hospitals to health insurers.

While a diagnosis related group pricing approach does have the benefits such as alignment with a clinical measuring tool and creating some incentive for efficiency and reducing any unforeseen costs, this only acts to shift the cost away from insurers to private hospitals. What would be a more inclusive approach would be to align prosthesis manufacturing companies, purchasers and end-users, all incentivised towards achieving demonstrably better outcomes to justify a higher cost.

Unavailability and lack of access to relevant outcome data are often cited as a barrier to designing funding and payment models that are linked to health outcomes and/or clinician outcomes. While this may be accurate in that comprehensive and national datasets covering all clinical specialties in Australia are still lacking, the Australian Orthopaedic Association National Joint Replacement Registry (AOANJRR) currently collects the clinical outcomes (eg, revision and infection rates) and has the capacity to report these comparatively against individual surgeons and against both private and public hospitals.

As a starting point, such data of joint replacement outcomes could be used to drive contract negotiations between health insurers and private hospitals. In addition, the outcome rates of individual doctors could be plotted directly against the out-of-pocket costs they each charge (which are already captured by the Medicare billings dataset). This level of scrutiny and direct alignment of outcomes to provider fees would act as a better platform for driving our discussions in lowering exorbitant out-of-pocket costs and egregious billing practices of some medical specialists.

Equally, clinical outcome data that are linked to prosthesis utilisation (which is currently available via the AOANJRR) could be used as a more appropriate and relevant framework to drive the discussion on fixing the prosthesis market. As a somewhat simplistic example, the data held by AOANJRR show that all Australian hospitals that currently use the majority of the available range of joint implants are outliers (when type of prosthesis is plotted against implant failure or revision rate). However, if we restrict this analysis to include just the 10 best joint prostheses (defined as those with the lowest revision/failure rates), no hospital is an outlier. This type of data linkage and analysis should be what is used to drive the much-needed reforms to the prosthesis market, not just in procurement choices made by purchasers but also in the production and marketing decisions that are made by the device companies.

This type of whole-of-private-sector approach for prosthesis reform, as opposed to considering only prosthesis cost reductions, prevents us from continuing the shifting the costs from one part of the sector to another.

The final recommendation of the Grattan report is to base insurance premium increase approvals on the health funds’ claims ratios (the proportion of premium revenue returned to members in the form of benefits). This degree of regulation is certainly beneficial but extending this alignment to also tie in selective contracting mechanisms with better performing providers (private hospitals and/or medical specialists) will ensure value creation for all players of the sector.

The specific changes required in this regard will include a sharp refocus of the provider-funder relationship, where a private hospital with better outcomes (or reduced complications) is rewarded financially by way of bonus payments (or penalised with penalty payments for unfavourable outcomes), as one way of putting an end to the constant cost-shifting which results when the incentives of key players are misaligned.

A central tenet of Australia’s health strategy is to develop an integrated system with reductions in unwanted variation across service availability, care models and health outcomes. It follows then, that for a truly integrated approach to ensuring the sustainability of Australia’s private health sector, a whole-of-system perspective and a national and centralised approach to private health funding and health insurance reform are required.

Advancing this concept, establishing a centralised methodology for implementing a national pricing framework for private health services is likely to yield outcomes of greater value. This would, as an example, involve establishing universal unique patient and provider identifiers so that the required outcome and cost information can be tracked across players and across sectors and over time. As the Independent Hospital Pricing Authority has identified in their November 2017 report released by the Bundled Pricing Advisory Group, the lack of a unique national patient identifier is a main barrier to implementing alternative (value-based) funding models in Australia.

Care and funding reforms can no longer continue to be designed in isolated and fragmented segments within sectors but must use the rationale for an integrated and adhesive system that can deliver health outcomes that are valuable to all players, both individually and collectively within that system.

Dr Sidney Chandrasiri is Group Director (Academic and Medical Services) and Deputy Chief Medical Officer at Epworth HealthCare.



The statements or opinions expressed in this article reflect the views of the authors and do not represent the official policy of the AMA, the MJA or InSight+ unless so stated.


3 thoughts on “Unravelling the “death spiral” of private health

  1. Anonymous says:

    You forgot to say “for profit” US Style managed care system who dictate what will be funded or rejected and hence reduce patients options and reduce medical decision to a bureaucratic fight for preemptive funding…… heaven forbid if you have an emergency.. The American health system is not really the way forward for Australia. And it could well be argued that the complete lack of indexation over the years by government and health funds, rising cost for practices and general inflation are the reason why out of pocket expenses occur, rather than using the rhetoric of exorbitant out-of-pocket costs of greedy doctors. This is primary a PR spin to shift the attention aware from the real issues of managed care. Australia has one of the best systems in the world and we should examine why that is. US for profit Insurance and some of our own Health funds are looking at way to maximise their shareholder profits and the Australian health system seems ripe for the picking.

  2. Sidney Chandrasiri says:

    Hi Peter, I think the key is to take the perspective of creating a more transparent, coordinated and integrated care system that doesn’t incentivise financial control (and hence imposes restrictions to treatment through commercial-in-confidence HPPA contracts for example) for any one player. A demand-driven US-style managed care system carries the risk of shifting the empowerment of all stakeholders as a collective health system, to just one or other big players (which is why even in Aus we’re already seeing commercial drivers directing the type and nature of care providers are reimbursed for).
    Perhaps a system that instead aligns our funding and payment models to transparent, demonstrable and publicly reported outputs (eg. clinical outcomes) could create the type of healthy market competition that managed care systems were intended to do..

  3. Peter Ritchie says:

    Are you advocating a Managed Care system?

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