US Health Plan a Model

Strange as it may sound, Australia should look to the US for tips on reform of the health system.

Clearly the US health system has attributes that no-one would want to see in Australia, including large numbers of people without adequate health cover and crippling malpractice insurance costs.  It has also suffered for years with run-away health costs.

Since the early 1990s, however, there has been a revolution in US health care which has not only contained the growth in health cost but resulted in a better allocation of health services.

In 1990, virtually all Americans with health insurance were insured under "unmanaged" fee-for-service schemes.  Under this system, a person went to a health provider of her choosing, the provider determined the level of service and the price, and the insurer paid the bill.  There was no incentive to economise.  As a result, medical costs soared and employers struggled to pay their workers' insurance bills.

The fee-for-service system still prevails in Australia.  Here, however, governments regulate prices, provide many services and limit the flow of funds to the industry.  Although these restrictions have helped to limit some of the excesses of the American system, our health system does, nonetheless, suffer from excessive costs and overuse.

In the last seven years, managed care or health-maintenance organisations (HMOs) have virtually taken over the health system in the US.  Today 85% of workers with insurance are insured through a HMO.  Of the remainder, most are in schemes that contain elements of managed care and only 3% of insured Americans remain in fee-for-services schemes.

The reason for the revolution is clear -- HMOs provide huge savings in a variety of ways.

First, HMOs bulk-buy services on behalf of their members, which gives them the bargaining power needed to squeeze discounts from their suppliers -- doctors, drug firms or hospitals.  Second, they negotiate fixed-price contracts with health providers and thereby limit the unnecessary tests and the number of operations and days spent in hospital.  Third, they make far better use of information technology to co-ordinate service for patients, discover which treatments work and which treatments are most cost-effective.

The growth in managed care has resulted in health-care premiums actually falling in real terms over the last seven years and has generated savings in excess of $24 billion per year.

On the available evidence HMOs have not only saved a fortune but haves done so while maintaining, and in some areas enhancing, the standard of care.

Significantly, HMOs have proven to be better at preventive care.  Because HMOs generally provide a comprehensive health coverage at a fixed price for long periods, they have a strong incentive to keep people healthy and out of surgery.  As a result, female HMO members are 40% more likely to be screened for breast cancer, and 95% of children in HMOs are inoculated against major childhood diseases.

Despite, or rather because of, these benefits, HMOs are very unpopular with doctors.  Indeed to doctors -- in the US and Australia -- they are the devil incarnate.

To a great extent this stems from the fact that HMOs have, for the first time, introduced a degree of rationing into the US health system.  More importantly, they constrain the power of providers to determine demand and costs at will.

Similar changes will need to made in Australia if we are to continue to provide the level of care we expect and deserve.

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