Health System Financing and Organisational Arrangements

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Health System Financing and Organisational
Arrangements

• Delia Hendrie
• School of Population Health

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HEALTH SYSTEM MODEL 23/3/05
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Objectives of this lecture.

• Examine alternative health care financing and
  organisational arrangements
• the participants involved in the flow of funds in
  the health sector
• the relationships and type of organisational
  arrangements between these participants
• the impact of different types of financing and
  organisational arrangements on the performance of
  the health system
• But first discuss the role of
• the value system underpinning a health system
• markets, the government and health care

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VALUES AND THE HEALTH SYSTEM

• Health care systems are not just economic but
  also social entities
• Structure of health system reflects the social
  values of the community
• Two opposing views about health care
• Health care is a social good
• Increasing the health of the population benefits
  everyone
• Taxation is a legitimate mechanism to fund health
  care
• Health care a private responsibility
• Health is an private good and individuals
  should fund their own health care
• Taxation is an infringement on basic rights and
  should be used to finance only those expenditures
  that have to be publicly funded e.g. defence,
  justice, etc.

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VALUES AND THE HEALTH SYSTEM

• Viewpoint 1
• Health care is a social mechanism to improve or
  maintain health and relieve suffering at
  reasonable cost
• Eligibility to health services should be based on
  need
• Financing should be based on ability to pay
• Cross-subsidies will occur between groups
• Significant role for the state in the health
  system
• Viewpoint 2
• Health care a private responsibility
• The world is not a fair place (unfortunate but
  true)
• Eligibility to health care not based on need but
  ability to pay
• No cross subsidies should exist
• Health care is a market good and should operate
  within a market
• Role of government kept to lowest possible level

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Values and the health system

• Political ideology is a source of the different
  approaches to health care
• Political ideology based on the societies
  dominant ethos or set of beliefs about social
  behaviour and rlationships
• Individuality vs community
• Political ideology will shape health policy
  deevlopment
• Range of political opinion within each country
  but democratic process leads to the election of a
  government of a specific ideological leaning
• Shifts in health policy linked to the different
  ideologies and values of political parties

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Values and the health system

• Traditionally, conservative (right wing) parties
  have
• been in favour of free enterprise and
  competitive (market) models
• had a preference for less government
  intervention, except to protect the interests of
  very low income groups
• And Labour (left wing) parties have
• been more in favour of egalitarian (based on
  need) models
• Had a preference for more governemtn involvement
• Predominant consensus in most developed countries
  is that health care is a social good
• U.S. is the exception, with a much greater role
  of the private sector in the health system
• No right or wrong approach to structuring the
  health system rather a reflection of underlying
  beliefs and values

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Markets, the government and health care

• Markets a mechanism for allocating resources in
  society
• households and providers exchange products at a
  market price
• leads to a particular pattern of resource use
• Under certain perfect conditions, markets can
  be shown to allocate resources in an efficient
  manner
• Alternative approach for allocating resources is
  planned allocation by the state

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Why governments intervene in the market for
health care

• Market failure in relation to health care
• Consumers do not have information about health
  problems, available treatments or effectiveness
  of treatments
• Lack of competition in health system
• Specific characteristics of health care
• Consensus that health care a social good and
  access should be on the basis of need not ability
  to pay
• Note that markets allocate resources on the basis
  of ability to pay
• Health system has multiple objectives ? improve
  health status macro- and micro-efficiency
  consumer choice provider autonomy EQUITY

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Government intervention in health care

• Types of government intervention
• Regulation e.g. workforce, health system
  providers, products (e.g. drugs)
• Financing e.g. tax-funded hospital services,
  subsidise pharmaceutical costs
• Delivery e.g. public hospitals
• Different types of government intervention impact
  differently
• Financing mechanisms impact on equity
  considerations
• Product regulation impact on safety and quality

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HEALTH CARE FINANCING AND ORGANISATIONAL
ARRANGEMENTS
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Revenue collection
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Mechanisms for revenue collection
Initial funding source e.g. individual, employee,
employer
Contribution mechanism e.g. taxes, payroll
taxes, insurance premiums
Collecting organisation e.g. central govt.,
social security agency, insurance fund
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Funding source and contribution mechanisms

• Tax based health insurance
• e.g. Medicare ? health care financed from tax
  revenue so everyone who pays tax contributes
• Social health insurance
• e.g. many European countries ? contributions are
  usually compulsory and shared between the
  employee and the employer via a payroll tax
• Private health insurance
• e.g. supplementary health insurance in many
  countries ? premiums paid by individuals/families
  directly to health insurance funds
• Medical savings accounts
• e.g. Singapore ? individuals contribute a
  proportion of their income regularly into their
  account and the money can be used only for health
  care
• Hybrid systems e.g. Australia

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Contribution levels

• Tax based health insurance
• In proportion to individuals tax liability i.e.
  in proportion to ability to pay (assuming an
  equitable and socially just tax system)
• Social health insurance
• Contributions usually either a uniform percentage
  of salary or a varying percentage of salary
• Private health insurance
• Can be risk rated or community rated (see next
  few slides)
• Medical savings accounts
• Set percentage of income

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Impact of contribution levels on equity

• If tax system is progressive with people on
  higher incomes paying a higher percentage of
  their salaries in tax ? higher income people pay
  a higher percentage and a higher absolute amount
  of income to the common tax fund
• If collection level is proportional, as in many
  social health insurance schemes ? higher income
  people pay a higher absolute amount of income but
  all pay the same proportion of income
• Both approaches have a redistributive effect from
  high income to low income, and from the healthy
  to the sick (but tax-based has a greater
  redistribution effect)

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Contribution levels (private health insurance)

• Risk rating
• involves dividing the insured group into
  subgroups of different risk
• charging each subgroup a premium based on its
  risk
• Separate premium rates have to be calculated for
  each risk group ? costly
• Insurer may attempt to attract the best risks
  (i.e. the healthiest clients) into the insurance
  fund
• Can be advantages to the insurer of adopting such
  a practice, which is known as cream-skimming
• Result is that the young and healthy (rather than
  the old and sick) are more likely to purchase
  health insurance
• Redistribution between members within each risk
  groups only

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Contribution levels (private health insurance)

• Community rating
• individuals pay the same premium regardless of
  their risk profile ? redistribution across all
  members
• Information required to set community-rated
  premiums
• the average risk of the members of the insurance
  fund
• High risk members
• advantaged as their expected losses (i.e.
  payouts) are greater that the premium paid
• Low risk members
• disadvantaged as their expected losses (i.e.
  payouts) are less than the premium paid
• Health insurance companies may undertake
  community rating because
• they may have no way of distinguishing between
  individuals in different risk groups
• legislated for equity reasons (e.g. Australia
  note Lifetime Health Cover)

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Adverse selection

• Occurs when membership voluntary and community
  rating used
• WHY??
• Low risk group will be subsidising high risk
  group
• If membership is voluntary, then low risk members
  leave the fund and not purchase health insurance
• Higher proportion of high risk members left in
  the scheme ? premiums need to be increased
• Adverse selection
• Situation whereby individuals are able to
  purchase insurance at rates which are below
  actuarially fair rates plus loading costs

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Example of adverse selection

• Decreasing PHI membership in Australia in
  mid-1980s through to late-ish 1990s
• Increase in proportion of old (sick) people
  relative to the propn of young (well) people
  ADVERSE SELECTION
• PHI funds cost rose but revenue fell
• PHI funds no longer financially viable
• Reason for intro of Lifetime Health Cover
• Different premium based on age at entry
• Younger healthier people get PHI at lower cost
  than older sicker people
• Attracts young people back into PHI

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Collecting organisation

• Tax based health insurance
• Central or regional taxation office e.g.
  Australian Taxation Office
• Social health insurance
• Individual funds, social security agency, other
  government agency
• Private health insurance
• Individual health insurance funds
• Medical savings accounts (e.g. Singapore)
• Contributions paid into a Central Provident Fund
  overseen by government for regulatory purposes

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Selected Features of Funding Systems
GT SHI PHI MSA Low
admin costs?? Yes
Avg No Avg Are contributions
earmarked No Yes Yes
Yesfor the health sector? Link maintained
between contributions No Yes Yes
Yesand hc exp Control of health expenditure
easier? Yes Yes No Yes Promote
individual responsibility No No
Yes Yes Provide choice/promote
competition No S/times Yes No Are
contributions risk rated? No No
Yes? No (age) Do contributions determine
No No Yes
Yesentitlement (i.e. equity)? Special provision
for excluded groups No Yes Yes
Yes
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Australian health care system

• Publicly-funded health care
• Accounts for approximately 70 of health
  expenditure
• Revenue collection organisation is the Australian
  Tax Office
• Contribution mechanism through (progressive)
  income tax
• Rates (excl Medicare levy of 1.5)
• 0 - 6,000 Nil tax
• 6000 - 21,600 17c for each 1 over 6,000
• 21,601-58,000 2652 plus 30c for every 1 over
  21,600
• 58,001-70,000 13,572 plus 42c for each 1
  over 58,000
• Over 70,000 18,612 plus 47c for each 1 over
  70,000

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Australian health care system

• Private health insurance
• Accounts for 11 of health expenditure (includes
  30 rebate to private health insurance)
• Revenue collection by individual funds
• Premiums based on community rating
• Households pay same absolute payment regardless
  of income note Lifetime Health Cover
• Out-of-pocket payments
• Accounts for 21 of health expenditure
• Revenue collected by provider
• Households pay same absolute payment regardless
  of income, except for provisions for special
  groups e.g. health care card holders (28.60 vs
  4.60)

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Risk pooling
Revenue collection
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Pooling of Risks

• Pooling refers to the accumulation of prepaid
  health care revenues on behalf of the population
• Important questions are
• Coverage for health service costs (for specific
  groups or the entire population)
• What are the equity implications of the pooling
  mechanism?

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Revenue transfers from risk pooling

• No insurance-type revenue transfers 1
• savings accounts, family/friends 1
• Pure insurance pooling of random deviations
  fromthe expected health costs incurred by people
  in various risk groups 2
• voluntary private health insurance with risk
  rating 2
• Transfers between risk groups people with
  higherexpected costs pay less than actuarially
  fair premiums and vice versa 3
• voluntary private health insurance with community
  rating 23
• Transfers between income groups people on low
  incomes are cross-subsidised 4
• general taxation and compulsory social health
  insurance 234

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Purchasing and provider payments
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Purchasing and provider payment

• A purchaser is an individual or organisation
  that makes arrangements for health care to be
  provided or accessed
• Purchasing means the transfer of pooled
  resources to service providers on behalf of the
  population for which the funds were pooled
• Pooling and purchasing provide coverage for a
  defined population
• Examples of purchasing organisations Ministry of
  Health (either centralised or decentralised)
  area health boards social health insurance
  funds private health insurance funds
  fundholding providers)

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Examples of purchasing organisations in Australia

• Purchasing using pooled funds
• Commonwealth government
• State and territory governments
• Private health insurers
• What services do each of these purchasers
  purchase?
• Hospital services, medical services,
  pharmaceuticals, allied health, dental services,
  public health services, primary and community
  care, etc.
• Note that individuals also purchase some health
  services themselves from their own private funds

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Different functions of purchasers

• Insurance function taking over the consumers
  financial risk of health care utilisation
• Agency function
• Reducing moral hazard
• Providing information about the quality of care
• Being a prudent purchaser of care on behalf of
  the consumer
• Access function
• Guarantee universal access to basic health
  services

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Purchasing, provider payment, and more.

• Provider payment refers to the methods or
  mechanisms used to allocate resources to
  providers of health services
• Hospitals, doctors, allied health professionals,
  community care organisations, public health
  service providers, etc.
• Different allocation mechanisms generate
  incentives that can affect the behaviour of
  service providers
• Individual providers fee for service vs.
  capitation vs salary
• Institutional providers historical vs global vs
  casemix funding
• An important policy questions in relation to
  purchasing organisations
• What is their role with respect to the providers
  ofcare? Passive or active (i.e. use financial
  power)?

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Role of purchaser in relation to provider

• Information asymmetry ? providers influence
  consumer demand for health care ? purchasers can
  use incentives regulation to control providers
  on the supply side
• Tools such as
• Payment mechanism
• Encourage providers to be efficient and provide
  quality care
• Passive purchasers or financial intermediaries ?
  result is often provider-led cost escalation
• Active purchasing
• Link payment to the performance of providers
• Requires information systems and management
  skills
• Different forms of active purchasing

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Examples of active and passive purchasing in
Australia

• Active purchasing
• Commonwealth government using its monopsony power
  in purchasing pharmaceuticals
• Health insurance Commission profiling services
  provided by doctors
• State health departments contracting with
  hospitals and other provider organisations to
  provide selected services
• Passive purchasing
• Commonwealth government purchasing of medical
  services using fee for service
• Private health insurers acting as financial
  intermediaries in paying providers of services
  for their members

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Appropriate role of purchaser

• Administrative procedures used by purchaser must
  be guided by
• Public health policy considerations
• Awareness of market failure in the
  patient/provider interaction
• Under these circumstances ? many of the active
  purchasing features can have positive effects for
  the health system
• If not, active purchasing can get out of control
  e.g. managed care organisations in the U.S.
• Guided by short-term financial interests
• No accountability to public or the covered
  population
• Threat to system-wide efficiency, equity and
  quality

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Provision of services
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Provision of services

• Policy questions
• Extent to which structure of service provision is
  competitive or monopolistic
• Markets ? geographic market (urban vs. rural)
  product market (primary care vs hospital care)
  etc.
• If competitive ? if consumer choice determines
  provider payments then may get efficiency gains
• If no competition ? alternative mechanisms may
  have to be used to achieve efficiency gains
• Autonomy of managers
• Private sector providers generally have autonomy
• Public sector providers may or may not have
  autonomy

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Competitive markets

• Competitive markets provide efficiency gains if
  operate properly
• Recognition of market failure in health care
  market but focus on use of market and
  quasi-market relationships and incentives where
  possible
• Australian Competition and Consumer Commission
  (ACCC) has responsibility to enhance the welfare
  of Australians through the promotion of
  competition and fair trading and provision for
  consumer protection
• Commissions activities include
• Private health insurers and false, misleading and
  deceptive advertising
• Joondalup Health Campus and the AMA
• Royal Australasian College of Surgeons
• Royal Australian College of General Practitioners

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Another question is Public sector vs. private
sector
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• Possible advantage of privatisation
• Reduction of the involvement of the public sector
  in the financing/provision of services
• Releases government funding for other activities
• Exposes purchasers/providers to the discipline of
  competitive markets
• Promotes efficiency, innovation and
  responsiveness since private sector providers
  keen to eliminate waste, adopt new technologies
  and working practices, and satisfy their clients
• Exposes management and boards of organisations to
  the same discipline and scrutiny that exists in
  the private sector (recent corporate
  performance??)
• Improves performance and increases accountability

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• Possible disadvantages of privatisation
• Implications for equity and access of vulnerable
  populations
• Public sector more likely to consider impact of
  policies on these groups
• State no longer responsible for the
  financing/provision of core services
• Value judgement gt altruistic motivations are
  intrinsically superior in a moral sense to
  self-interested ones
• Empirical proposition gt public
  purchasers/providers aim is primarily to help
  the people they are serving (while principal
  motivation of private sector is self-interest)
• May be advantages of having a single
  purchaser/provider

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• Some differences between the sectors
• Public sector
• Egalitarian, non-competitive approach to funding
  and delivering health care
• Public accountability and funding mechanisms gt
  public sector can focus on equity/access
  irrespective of profitability
• Consumers tend to trust public sector
• Private sector
• Profit-maximising approach
• Possibility of concentrating on short-term profit
  at expense of long-term health risks
• Concern relating to quality (??)
• Note for-profit vs. not-for profit distinction in
  the private sector

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• Public and private sectors
• Unrealistic to strive for
• A perfect health system in the private market
• A perfect health system in the collective public
  model
• Health system is a mix of
• Public and private financing
• Public and private provision
• Issue is not about perfectly competitive markets
  but rather the optimal regulation of markets
• Well managed markets lead to efficiency in the
  health care system and cost control

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Public/private mix in Australia
Funding of health care
Provision of health care
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Benefit or service package
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Benefit package and out-of-pocket payments

• Benefit package
• What services are purchased by purchaser from
  pooled funds?
• Is the cost fully or partially covered?
• Role of direct payment by patients
• Are fees designed to create appropriate
  incentives?
• Cost sharing can be an essential part of the
  active purchasing function (to reduce moral
  hazard)
• e.g. charge fees for specialist services if not
  authorised by primary care gate keepers
• Must be provisions to enable access for low
  income persons
• Health care cards for pensioners and social
  security recipients

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Out-of-pocket payments

• Useful to examine demand characteristics for
  different kinds of services
• How the user fee or out-of-pocket package differs
  for services with different demand
  characteristics?
• Demand for first-contact, primary care services
  largely consumer-driven
• Demand for referral/specialist services usually
  provider-driven
• Potential role for cost-sharing as a tool to
  limit unnecessary use of services due to moral
  hazard is greater for primary care than referral
  services

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Contextual background to health system

• Socio-demographic factors
• Demography, inequality, patient/consumer
  involvement
• Technological factors
• Biological and pharmaceutical advances, medical
  equipment, information and communication
  technology
• Economic factors
• Cost containment, evidence based practice,
  rationing
• Political factors
• Ideology, collaboration vs competition,
  globalisation

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Do you understand how all it all hangs
together??