Paying for Health Care

Commentary, Frontier Centre, Healthcare, Worth A Look

In Britain, the Labour government belatedly realised that structural reform was needed if the vast sums of money being poured into the health service were not to be wasted. Following a major policy shift after the 2001 election, the NHS is now being reorganised into an internal market, something first tried by the Conservatives in the 1990s but dropped by Labour after it won power in 1997. Most health care is now bought by locally based primary-care organisations. Public hospitals are being given greater autonomy so that they have more incentive to compete. Under the new payment system, the more patients they have, the more money they will get.

Try globalization

In a further attempt to ginger up the supply side, the government has attracted foreign medical groups into the NHS market. They have won the lion’s share of an innovative five-year tender for 250,000 elective operations a year. That amounts to only 5% of the 5m elective operations carried out in the NHS in 2002, but the entry of new competitors is sending out a powerful signal to inefficient hospitals in the state-run sector. The government is now planning for private providers to carry out up to 15% of NHS elective procedures as early as 2008.

HEALTH care in rich countries presents a paradox. On the one hand, advances in medicine are extending life and improving its quality—gains of great value to those who benefit from them. On the other hand, the evidence of error rates shows that hospitals and doctors routinely break the first rule of medicine, to do no harm. Widespread waste is evident, yet the costs of health care spiral ever upwards, causing increasing alarm among individuals, employers and taxpayers. Medical costs are so buoyant that all containment strategies seem doomed to eventual failure.

The revelation that much health care is of poor quality poses some troubling questions for the medical profession in rich countries. “There has to be a shake-up in the medical world, led by the medical world,” says Mr Bodaken of California’s Blue Shield. Doctors have traditionally treasured their independence and resisted outside interference. But medical care is now delivered through expensive, complex systems that require sophisticated management to avoid errors, to ensure that patients get appropriate advice, tests and treatments, and to keep costs as low as possible. Doctors need to be able to work collaboratively in teams spanning professional boundaries. Medical education, still locked in an old-fashioned apprenticeship model, should prepare doctors for these new demands. Alain Enthoven of Stanford University says that teaching doctors how to deliver cost-effective care will require a transformation in medical training.

A long, cool self-appraisal by the medical profession is essential, but on its own it will not be sufficient. Doctors and hospitals around the developed world preside over a seriously defective system of medical-care delivery, which will need comprehensive re-engineering. Information technology will play a big part in this, but in itself it will not transform health care without the right incentives.

What is needed is a change in the structure of health-care systems so that competitive pressures push them in a more useful direction, enhancing the power of purchasers and increasing competition in the supply of medical care. The traditional argument has been that health care is too important to leave to the market. The opposite holds true: it is too important not to be exposed to the market.

What governments can do

That requires rethinking by government, which is intimately involved in all health-care markets because it picks up so many of the bills. That involvement can be made much more constructive. Instead of trying to supplant the market, governments should be striving to promote competition while upholding social values about equity in health care. Thus in Britain, a Labour government now sees no contradiction between its historic commitment to free services by doctors and hospitals and the pursuit of an internal market in the NHS. In countries where there are competing insurers, governments can direct public money to poorer and sicker people so that they can afford insurance, organised in a way that fosters effective competition for better medical care.

Another lesson is that just because governments finance so much of health care, they do not necessarily have to provide it themselves. Britain’s NHS employs 1.4m people, making it the world’s third-biggest employer, surpassed only by China’s Red Army and the Indian railways. This monolithic grip on the provision of medical care has inhibited the experiments that flourish when the ownership of hospitals is more varied, and has contributed to poor morale in the workforce.

Governments should also review their role as regulators. Historically, regulation has tended to block competition, for example by preventing health-care purchasers from selective contracting with providers. A better role for regulators would be to sponsor competition. Regulators should also set out quality standards and monitor performance, building on some of the initiatives that are already proving their worth in America.

The re-engineering of health care will certainly require a reform in the way that medical providers are paid. “Changing the payments system is indispensable,” says Ms O’Kane of America’s NCQA. The aim is clear: to pay doctors for doing the right thing at the right time. The best way of getting there is less obvious. Fee-for-service payment promotes productivity but also encourages over-use; conversely, paying doctors a straight salary in heavily regulated markets may lead to underperformance, because it fails to reward productivity. Successful reform will involve remoulding payments systems so that they reward quality and performance. “What we’re trying to move towards is more financial incentives in paying directly for better outcomes, in paying directly for steps that reduce costs of care,” says Mr McClellan of America’s CMS.

There is no one-size-fits-all model of health care. Health systems have evolved in diverse ways that reflect individual countries’ values and histories. The important thing is to change these structures so that they encourage medical providers to do better, not to rebuild them from scratch.