State tax veto setback to Malcolm Turnbull’s health reform plans

The abandonment of the state income tax idea has battered the Prime Minister’s ambition to lead an agile government committed to ‘innovation’ and ‘reform’, let alone ‘markets’, particularly in as fiscally challenging an area as health.

A question this begs is what would a truly innovative, market-based national health reform agenda look like? It certainly would not resemble the damp squib that remains of the Turnbull government’s plans for health — the $20 million Health Care Home trial.

Many health experts claim this kind of multidisciplinary, ‘coordinated’ primary care program will keep chronically ill patients well and cut avoidable hospital admissions. This sounds like a good idea as the rising cost of health is largely driven by the increasing cost of hospital care.

However, multiple Australian and international studies have shown that publicly-funded and administered chronic disease programs have not achieved the anticipated reductions in use of hospital services.

Expecting health bureaucracies to centrally plan supposedly innovative programs is futile. Real innovation is not driven from the top down by bureaucrats paying health professionals to comply with clinical treatment protocols at set funding ‘price’ — as the Health Care Home scheme will do.

In the real economy, innovations are generated from the bottom up — by entrepreneurial providers operating in competitive and contestable environments, who discover better ways to deliver services.

To spur genuine innovation, innovative private health insurers overseas, mainly in the United States, have developed ‘integrated’ payment models that combine traditional health funding streams into one bundled payment.

Aptly known as ‘value-based contracting’, the model sees insurer enter into shared-risk contracts with health management companies that provide all the healthcare of patients, funded from an agreed global budget. Because providers can retain all or part of the savings generated by efficiencies, they have a financial incentive to innovate — to change traditional patterns of care and efficiently manage the full pathway of patient care — and deliver all necessary and effective care in the most cost-effective fashion.

The potential impact on health costs is suggested by the promising results of the Alternative Quality Contract (AQC) developed by Blue Cross Blue Shield of Massachusetts. The AQC experiment has bent the cost curve down and yielded cost-effective savings by reducing use of procedures, images and tests — and by directing patients away from high-cost hospitals towards alternative, lower-cost, community-based facilities for specialist procedures.

These insights suggest major savings on health can be made on the cost of hospital care by better managing ultilisation. This is especially significant to the Australian health reform debate, given our much high rates of hospital use compared to other OECD nations.

The reason for this is that under the present Medicare system, the split federal-state health responsibilities mean no single funder is solely responsible for the entire health care needs of the patients. Medicare instead functions as a series of fee-for-service payment mechanisms for separate sets of hospital-based care and primary care, mainly GP and other medical services. Fee-for-service payments can entrench inefficient practice, encourage over-servicing, and account for ever-increasing health costs, because clinicians are financially rewarded based on the volume of services delivered.

If healthcare innovation is to flourish in Australia, a real and more dynamic market for health services needs to be created so efficient and cost-effective providers can sell their services to cost- and quality-conscious purchasers. This requires system-wide innovation of the way healthcare is insured and financed.

The Turnbull government needs to consider the structural changes to the health system that will transform the way health services are bought and sold, to deliver the best value healthcare.

This includes considering replacing Medicare with a publicly-funded, privately operated health insurance scheme, perhaps along the lines of the ‘Medicare Select’ proposals — which would see all Australians receive taxpayer-funded health insurance vouchers to fund the purchase of private health plans.

Under a private health insurance voucher scheme, health funds would have full responsibility for all health care needs, and instead of acting as passive payers of hospital and medical bills, they would act as active purchasers of health services from competing providers. Integrated payment models would be used to drive innovation, efficiency and cost-effectiveness, and to ensure fund members, especially those with chronic illnesses, receive the most appropriate care, including all beneficial primary care and outpatient specialist care to avoid expensive hospital admissions.

Persistent calls to increase taxes to pay for health will simply prop up latently inefficient health services. What the Turnbull government must explore are the ‘agile’ private sector solutions that could potentially reduce the cost of health by effectively and efficiently controlling the use of hospital services.

Jeremy Sammut is a Research Fellow in the Healthcare Innovations Program at The Centre for Independent Studies. His report, MEDI-VALUE: Health Insurance and Service Innovation in Australia — Implications for the Future of Medicare, was released on April 20.