CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?
THE EVIDENCE ON BUDGET HOLDING
The appeal of budget holding is that it offers more appropriate incentives than fee-for-service or cost
reimbursement. The budget holder shares the financial risk with the funder of care, and therefore
has an incentive to ensure that optimal care is delivered. Skimping on quality and/or quantity of
service provision should be avoided as this will lead to poorer health outcomes which will require
further expenditure on services. Under managed competition, the budget holder is an insurance
fund. However, other variants of this provide for budget holding for defined population groups
without explicit competition, and the budget holder may be purchaser or a provider of care. For
example, in the UK General Practices hold budgets from which they purchase diagnostic services,
pharmaceuticals, specialist treatment and hospital admissions. Individuals must be registered with
a general practice and have some choice of the practices available in their local area, but explicit
competition between practices is not part of the strategy. In Australia, the Area Health Service model,
in which a health authority has responsibility for a population group defined on its place of residence,
has been considered as a possibility.
Fund holding also requires the appropriate risk adjustment mechanisms. However, once competitive
insurance is excluded, the incentives and opportunity for cream skimming are much reduced. What
is required is that the risk adjustment works fairly at the population or group rather than individual
level, and so the precision required is far less. It is important that the group size is sufficient to give
an adequate spread of risks, but small enough for there to be a recognised opportunity cost in
resource allocation.
As already noted, the development of managed care plans in the US since 1992 has been associated
with a constraint on expenditure growth. The extent to which this has been due to, rather than
coincident with, budget holding has been a focus for research since the advent of interest in HMOs.
Historically, HMOs have had a healthier population of enrollees so the extent to which lower costs
are driven by cream skimming versus better management of care is an important question. Studies
on resource use yield mixed results; some show lower utilisation and costs even after controlling
for selection bias while others show no difference (Miller, Luft 1997). However, even where savings
are achieved, these seem to be one-off gains with no long term change in expenditure growth rates
(Marquis, Long 1999). Caution must be exercised in interpretation as the form of the budget holding
organisation, the enrollees, and the categories of services covered all differ. Further, the period from
1992-3 to 1999-2000 was also marked by a more active purchasing role in health insurance (in the
US most private insurance is paid as an employment benefit and so employers negotiate insurance
contracts) and by excess capacity in the doctor and hospital markets (Miller, Luft 1997). Even with
these caveats, the results do not necessarily apply to other countries for the US health system, with
its high levels of utilisation and prices, presents an opportunity for what Reinhardt calls the bounty-
hunters (Reinhardt 1996).
GP fundholders in the UK did appear, at least in the first wave, to achieve cost containment in that
most came in under budget (Glennerster, Matsaganis et al. 1994). However, GP practices self
selected into the trial scheme and budgets were probably set generously. The scope of the budgets
and the number of practices included has been extended over time; now GPs are organised into
303 Primary Care Trusts which will eventually be responsible for 75% of the NHS budget. Overall,
it is difficult to judge from this the effect of primary care budget holding on cost containment, as at
the same time there has been a marked increase in the resources committed to the NHS with the
most recent NHS Plan providing for 6.3% increase in funding from 2000 to 2004. It is clear that the
various NHS reforms, including the purchaser-provider split between the health authorities and the
hospitals, have resulted in a large increase in transaction costs.
In Israel, a trial of budget holding in primary care has shown success in cost containment, with
expenditure under budget holding increasing by 12.5% per capita over a three year period compared
to 70% in the non-budget holding group (Gross, Nirel 1997). The trial period is too short to ascertain
whether this can be sustained in the long term, but even within the three years there is evidence that
the differential in cost increases reduced over time.
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