Can we design a market for competitive health insurance? CHERE Discussion Paper No 53



CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?

THE APPLICATION OF MANAGED COMPETITION IN AUSTRALIA

The notion that managed competition might resolve the problems in the Australian health care
system was first advanced by Scotton in 1989, directly influenced by Enthoven (Scotton 1990).
Under Scotton’s proposal, the public-private mix in both financing and delivery of health care would
become more integrated and less fragmented. The current dysfunctional nature of Commonwealth-
State financial arrangements, and the periodic disputes over public hospital funding (the five
yearly Australian health care agreements) would be resolved. According to Scotton, the features of
Australian managed competition would be:

> The Australian Government becomes the funder of all public benefits. This would remove the
States and Territories’ role in providing funding for health care services. It would also involve
pooling all public funding into one pool, thus eliminating the artificial barriers between services
that are created by separate funding streams. All of these would be rolled into Medicare
entitlements, which are allocated to fund holders as risk-adjusted capitation payments,

> State and Territory Governments become providers of health services, supplying budget holders
with services in competition with other providers. This clarifies and distinguishes separate
functions for the Commonwealth and the States. States’ revenue is derived as any other
providers, by competing for service provision contracts with fund holders.

> There are public budget holders, established, supervised and financially guaranteed by State
and Territory Governments, who receive publicly financed risk-adjusted capitation payments.
The reasoning behind this is not explicit but it seems that Scotton does not intend a dividing
line between private and public sectors. So it seems that public fund holders will compete with
private fund holders. Presumably, the public funder holders will be the default option.

> Private insurers become budget holders, receiving the same risk-adjusted capitation payments
for their enrollees, but also able to charge additional premiums,

> Private providers compete with public providers for the business of budget holders.

Above all, incentives are re-aligned so as to promote efficiency, in terms of least cost methods
of production, satisfaction of consumers, and an extra-welfarist perspective on social welfare,
maximising health gains (Productivity Commission 2002).

Scotton’s description has not covered all of the aspects of market design that would have to be
addressed, for example, the minimum benefits package, regulation of advertising, enrolment
periods, entry and exit of insurance providers; and he himself has suggested that this is not a
blueprint for an implementable model (Scotton 1999). It is this proposal which has attracted the
attention of the Productivity Commission as “one of the few coherent and well thought out reform
policy prescriptions currently on the table in Australia” (Owens 2002). Therefore, although many
variants of managed competition are possible, the rest of this discussion is based on Scotton’s
framework.



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