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Medical Gaps The Biggest Little Issue on the Table

Roger Kilham - Access Economics Canberra
Australian Medical Association National Conference 1999
Policy Discussion Group
May 1999

Contents

• Tasks (abstract)
• Quantifying the gaps
• Significance of gaps
• Why do we have gaps?
• A second order problem
• Implications of reducing PHI gaps
• Implications of not reducing PHI gaps
• Obstacles to a solution

Tasks

My tasks in this talk are to:

• Quantify the different types of "gap" payments and to show how they rank in importance in household (non-tax) health spending;
• Explain why the medico-political importance of medical gaps far exceeds their dollar value;
• Explain why Australia has chosen, thus far, to have medical gap payments;
• Explain why the gaps are not the biggest problem in health insurance;
• Discuss the economic and social implications of reducing medical gaps;
• Discuss the economic and social implications of not reducing them; and
• Assess the political and practical obstacles to a solution.

Quantifying The Gaps

The best overview of household (non-tax) health spending is found in AIHW's Health Expenditure Bulletins. Table 1 shows the latest - 1995-96 - data.

Table 1: Health expenditure by households, 1995-96 ($m)
	Via PHI	Out of pocket	Total
Public hospitals	380		380
Private hospitals	2,231	293	2,524
Repatriation hospitals	0	0	0
Public psychiatric hospitals	0	13	13
Sub-total hospitals	2,611	306	2,917
Nursing homes	0	677	677
Ambulance	91	71	162
Other non-institutional nec	0	0	0
Sub-total non-hospital institutional	91	748	839
Sub-total institutional	2,702	1,054	3,756
Medical services	223	757	980
Other professional services	215	758	973
Benefit paid pharmaceuticals	0	493	493
All other pharmaceuticals	44	1,569	1,613
Sub-total pharmaceuticals	44	2,062	2,106
Aids and appliances	172	438	610
Community and public health	2	0	2
Dental services	564	1,149	1,713
Administration	504	0	504
Research	0	125	125
Sub-total non-institutional	1,724	5,289	7,013
Recurrent health spending by households	4,426	6,343	10,769
National recurrent health spending			38,951
Household spending as a percentage of national spending			27.6%
Source: AIHW, Health Expenditure Bulletin Number 14, December 1998, Table 35.

In 1995-96, households spent $10.8 billion on health care, representing 28% of national health spending. Of this $10.8 billion, $4.4 billion was paid in private health insurance premiums and $6.3 billion was spent out of pocket.

Just over half the out-of-pocket expenses-$3.2 billion-went on pharmaceuticals and dental care. Medical services accounted for only 12 % of the total.

Table 2: Out-of-pocket health expenditure by households, 1995-96 ($m)
	$m	% total
Pharmaceuticals	2,062	32.5%
Dental services	1,149	18.1%
Other professional services	758	12.0%
Medical services	757	11.9%
Nursing homes	677	10.7%
Aids and appliances	438	6.9%
Private hospitals	293	4.6%
Research	125	2.0%
Ambulance	71	1.1%
Public psychiatric hospitals	13	0.2%
Recurrent health spending by households	6,343	100.0%
Source: As for Table 1.

The focus of our discussion today is medical gaps related to private health insurance, that is, privately provided in-hospital medical services. In 1995-96, these were of the order of $200 million.

Now lets look at it from a Medicare perspective, again using 1995-96 figures:

• Total fees charged were $7.02 billion;
• Total benefits paid were $6.04 billion;
• The total Medicare gap amount was $984 million, as follows:

Amount paid by the PHI funds	$223 million
Patient out-of-pocket re in-hospital medical services	$200 million
Total household funded in-hospital services	$423 million
Patient out-of-pocket re out-of-hospital medical services	$561 million
Total household funded medical gaps	$984 million
Source: Medicare Statistics, unpublished Medicare data, PHIAC annual report.

The corresponding figures for 1997-98 are:

Amount paid by the PHI funds	$228 million
Patient out-of-pocket re in-hospital medical services	$250 million
Total household funded in-hospital services	$478 million
Patient out-of-pocket re out-of-hospital medical services	$649 million
Total household funded medical gaps	$1,127 million
Source: Medicare Statistics, unpublished Medicare data, PHIAC annual report

The total fee charged, as recorded in the Medicare statistics is the total amount invoiced. We do not know how much of it is paid, and by inference, we do not know how much of the out-of-pocket amount of $250 million is paid. It is just the upper limit. The data indicate that some 20% of private in-hospital non-compensable services are by self-insured (ie, uninsured) patients. $200 million of the $250 million is therefore a top-of-the range estimate of the out-of-pocket amounts met by people with private health insurance. At face value, this is a trivial amount. It represents:

• 17.7% of the total household funded medical gap
• 4.2% of private health insurance fund contributions income
• 3.2% of Medicare rebates
• 1.7% of total household health expenditure
• 0.4% of national health spending

If the monetary level of the gap determined its importance, we could finish this discussion group before 12, beat all the other groups to lunch and spend the afternoon on the golf course or in the bar.

Significance Of Gaps

The medico-political importance of medical gaps far outweighs their dollar value. In the push for managed care, the then Labor Federal Government and the Funds made medical gaps a big political issue, constantly talking them way up beyond their monetary significance and never mentioning the numerically larger hospital gaps. This fanned member discontent, harming private health insurance coverage, but it did save the funds money because it increased the incentive for PHI members to avoid gap payments by seeking admission as public patients.

The gaps are not just a political issue, they are also an economic and social issue. The purpose of all insurance is to enable the sharing of risk. The purpose of health insurance is to enable people to share the financial risk of bad health. If insurers are prevented by government intervention from insuring their members for the cost of services at their market prices, their ability to spread the risk is curtailed. The $650 million of out-of-hospital gaps is distributed across the whole community. The $200 million of PHI-related in-hospital gaps is very unevenly spread, concentrated on a minority of the privately insured population who, in turn, represent only 30% of the population. Furthermore, they are unevenly spread among the group who incur them. I know two people who incurred out-of-pocket costs of some $10,000 each despite having private insurance.

In economic terminology, this is not a case of market failure. Rather, it is market impairment. Government regulation of the private health insurance industry has impaired its ability to carry out its insurance-its risk sharing-function. This makes private insurance a less attractive product. Government intervention has impaired the economic efficiency of the private health insurance market In a social context, that intervention has produced outcomes which consumers consider to be very inequitable. Many current and erstwhile fund members are angry. They dislike the "octo-whammy", being bitten eight times, having to pay for health care through Federal taxes, State and local taxes, the Medicare levy, PHI fund premiums, medical gaps, hospital gaps, pharmaceutical gaps and gaps on aids and appliances. While medical Medicare itself remains relatively simple, it is quite a different matter if you wish to use private hospital care.

Another imperfection of the private health insurance market has been the lack of informed financial consent. Unknown or unexpected gaps irritate people. Again, it is an economic tenet that well informed markets operate more efficiently than badly informed markets.

Why Do We Have Gaps?

We are not likely to find a solution to the problem of gaps unless we understand why we have them. The starting point is that medical gaps are something we, as a nation, have chosen to have. A public health insurance system could, at least in theory, be funded strongly enough to meet all medical costs. Ours was not:

• In their wisdom, our politicians judged taxpayers unwilling to pay the taxes necessary to make Medicare work the way its designers so fondly hoped it would, that is, with MBS fees set at a level to achieve universal bulk-billing. Medicare as originally designed was never going to be something the community would choose to afford. From early days, the Government started sawing bits and pieces off Medicare, a process that has never stopped. More importantly, however, as MBS fee increases were suppressed, the Medicare rebate simply became the amount the Government was prepared to contribute.
  
   
  
• The decision not to meet market prices was mostly politics, but there is a scrap of economics also. Without price barriers-that is, with most medical services "free" at point of service-the demand for medical services increases, not only because of better access for the poor but also because consumer utilisation decisions are distorted, made with little or no regard for the financial costs. While the Medicare gap was $1.1 billion last year, it would cost a lot more than that to get rid of it altogether because of the demand effect.
• Medicare was fine-tuned for maximum political popularity and there the politics is bipartisan. Successive Federal governments have remained sensitive to the rate of bulk-billing on GP consultations, but have cared little at the lower rates and slower progress among specialists. In any year, most people visit a GP. They like not having to pay. In any year, only a minority of the population have an in-hospital episode.
• A hostile Labor government withdrew PHI subsidies and shifted costs onto the privately insured, making premiums at least 40% higher than they would otherwise have been, opening a policy gulf compared with the Coalition which has recently supported PHI with tax rebates. Labor expected the privately insured patient to fund over half the cost of the hospital accommodation costs and nearly 40% of the medical costs. Most relevant to medical gaps, Medicare benefits on privately provided in-hospital services were reduced from 85% to 75% of the MBS fee and, rather than lift MBS fees to more realistic levels, the funds were forced to insure the gap between the Medicare benefit and the schedule fee. Since Medicare started, Medicare benefits have grown on average by 8.2% p.a., schedule fee amounts by 8.4 % p.a., fees charged by 8.7% p.a. and Medicare gaps by 12.5% p.a. This is no accident.
  
   
  
• It was not only a policy choice to increase aggregate Medicare gaps, but also to redistribute them so that they fell more heavily on the privately insured population. In 1984-85, unreferred attendances (GP consultations) accounted for 36% of benefits paid and 30% of Medicare gaps. In 1997-98, the corresponding figures were 37% of benefits paid and 17% of Medicare gaps. Anaesthetic services and operations together accounted for 14% of benefits paid and 18% of Medicare gaps in 1984-85. In 1997-98, the corresponding figures were 11% of benefits paid and 33% of Medicare gaps. Here again, the politics has been bipartisan, to try to make the funds the hapless agents for controlling the costs and the prices of those deemed uncontrollable-the doctors providing private in-hospital medical services (surgeons, the anaesthetists, physicians, etc).
  
   
  
• The Government is seeking more predictability in Medicare outlays-sealing or seeking health care agreements with pathology, diagnostic imaging and general practice which together represent two thirds of all Medicare benefits-while flick-passing the thorny problem of the procedural medical specialists to the funds.
• So again it is a matter of choice. The Coalition Government could have used some of its financial support of PHI to close the medical gaps. Instead, it preferred to introduce the 30% rebate, judging it infinitely more popular with the electorate to give money to all the people with private health insurance than to assist the small minority who are significantly disadvantaged by the gaps. An occasional paper recently released by the Federal Department of Health and Aged Care and co-authored by the Department's Secretary, Mr Andrew Podger, notes "the failure of insurers to protect members from unexpected out-of-pocket charges ('gaps') by doctors" . How fascinating! It may have escaped Mr Podger's notice that, for many years, the insurers were prevented by legislation from offering any form of gap insurance until, through the Lawrence legislation, the Government sought to re-engineer private health insurance, seeking to transform the funds from unthinking, passive payers into "big ugly buyers" who would use their expanded powers in the health market to force doctors and hospitals to lower their prices. This was another "non-market" solution which essentially maintained the insurance function impairment while also markedly increasing the frustration of the medical profession. The funds "failed" to protect members from gaps because the Government had ordained that they fail.

A Second Order Problem

In the private health insurance market, one problem towers above all others-the high cost of the premiums compared with the perceived value in the cover. Private health insurance confers important benefits-a chance to jump the queue and choice of doctor and/or hospital-but in the language of economics they are marginal benefits, things over and above the substantial benefit of the free public system. However, it is certainly not a marginal price. Whenever a fund member claims on his or her private health insurance, a substantial part of the payments made on his or her behalf represent Medicare benefits foregone.

If this towering problem is not fixed, nothing will save private health insurance from relegation to an insignificant role in the health financing system. After a faltering start with the PHIIS scheme, the Coalition Government has played a stronger hand with the 30% PHI rebate. There is no guarantee consumers will see this incentive as being large enough to restore value in the product, and there is little confidence it is here to stay as Labor and the Democrats are in the wings just busting their guts to get rid of it.

The medical gaps are the biggest of the smaller problems. The other smaller problems include the perverse results from community rating, the endemic over-regulation of the funds with its stifling impact, the inexplicable failure of the funds to implement efficient electronic claims and payments systems and the oligopoly which leaves the funds with little incentive to compete and be efficient.

Unless all these smaller problems are attended to, private health insurance will continue to struggle.

Implications Of Reducing PHI Gaps

If the PHI out-of-pocket medical gaps are substantially reduced, it will most likely occur as a result of a more workable gap insurance system than we have now. The implications are that:

• The price of health insurance will rise further, as covering all the gaps will lift premiums for hospital cover by about 6% and total PHI premiums by about 4%. Taken in isolation, that will make PHI less attractive;
• Consumer irritation with gaps will decrease, and that in isolation will make private health insurance more attractive;
• Fund members will be less likely to seek admission as public patients, so there will be a cost shift from the public sector to the private insured;
• No gap means removing price barriers so utilisation will tend to rise.

The latter (demand inflation) problem could be ameliorated if there were greater emphasis on front-end deductible insurance, although this is no magic bullet as the lower premiums of FED policies simply reflect lower expected benefits. The "first dollar" insurance system used in Medicare is the system least able to effectively manage demand and share risk.

In summary, I am arguing here that gap insurance solves one problem by creating another in the form of more expensive PHI premiums. If PHI is to remain as part of the health financing landscape, a lasting solution to the gaps may well involve further government financial assistance. The Government's resolve to support PHI will be tested.

Implications of Not Reducing PHI Gaps

If there is a failure of will and/or a failure of policy in regard to the PHI out-of-pocket medical gaps, and if they remain or increase:

• Public hospital costs and pressures will increase as fund members seek to avoid using their membership entitlements except in special circumstances.
• The impairment of the insurance function in PHI will remain, reducing economic efficiency and equity of outcomes for patients.
• Consumer discontent will remain high, and membership will suffer.
• The Government will see poorer results from its other initiatives, including the rebate and lifetime community rating, through lack of an holistic approach to the problems in PHI.
• PHI coverage may stagnate or again decline despite the rebate and the Medicare levy surcharge

Obstacles To A Solution

The first obstacle to a solution to the problem of the medical gaps is purely political, the difficulty of dissuading the Government from the view that Lawrence-style contracts are the only answer. This is not a matter of rhetoric. It requires first of all an opportunity to implement alternative solutions and, most importantly, to get some runs on the board.

The second obstacle to a solution is the Federal Health Department's theology in regard to doctor charging and doctor incomes. The basis of this theology is that doctors will seek to have insured rebates as high as possible, while retaining the right to charge whatever the market will bear in the way of gaps. Under this theology, any increase in benefits increases doctors' incomes but never reduces patient gaps. It is a simplistic view of the world, of course, but the data are quite supportive of their view. The Department's desire to restrain doctors' incomes is a material factor in the setting of MBS fees just as it was a material factor in their success over many years in outlawing any form of gap insurance. There is quite a lot of community and political support for their endeavors. You can test it out by offering to swap pay packets with a parliamentary backbencher. There are many who are jealous of your incomes. You know all the terms, tall poppy syndrome, and so forth. The practical upshot of this is that any gap insurance proposal which does not enhance your incomes will have a better chance of getting up than one that does.

The third obstacle is related to the second. Insurers are risk managers. They are usually quite good at passing on risk and seek to achieve as many certainties for themselves as possible. You might like to think of gap insurance without agreed fees but they won't. They want agreed fees and they want capped fees-a higher benefit in exchange for no gap. In economic terms, no gaps is a worse outcome than known gaps. No gaps increases the moral hazard of indiscriminate over-use of services, inflating demand for services. But whether it is no gap or some agreed known gap, there is still a need for a reference fee of some kind. The MBS is a poor reference point. Charging patterns are all over the place, with variations between individual practitioners, geographical variations and very marked inter-specialty variations, this latter illustrated in the following chart.

78% of services by recognised GPs are billed at or below the schedule fee. For ENT surgeons, it is 23%, and the range across all medical and surgical sub-specialties is 9% (for facio maxillary surgeons) to 99% (clinical pharmacology).

6% of services by recognised GPs are billed 30% or more above the schedule fee. For ENT surgeons, it is 45%, and the range across all medical and surgical sub-specialties is 0.3% (for rehabilitation medicine) to 54% (facio maxillary surgeons).

A nationwide agreed fee would tend to see low compliance in Sydney and Melbourne (where costs of practice and costs of living are higher) and high compliance in Adelaide (where costs of practice and costs of living are lower). "One size fits all" might work for elasticized socks. It won't work for medical gaps.

In economic terminology, what we are looking at here is the difference between a very highly differentiated personal service represented in, say, open heart surgery, and a service which is much closer in characteristics to a bulk commodity represented in, say, a computer-generated blood test. The second item fits much more easily into the conformity of the insurance framework than the first.

It is obviously desirable to seek a solution to the problem of medical gaps. If there were any simple solutions, the gaps would have been fixed long ago. Without compromises in the stances adopted by the medical profession, the funds and the health bureaucracy, the problem will not be solved. No compromises, no deal.

Thank you.