CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?
THE EVIDENCE ON HEALTH INSURERS
It is not only consumers who must act as informed purchasers, so also must insurers.
The Australian private health insurance industry has long been criticised as a passive conduit of
money from consumers to providers rather than active purchasers on behalf of their enrolees
(Willcox 1991). It can be argued that their capacity to act has been constrained by the regulation
imposed upon them. However, since 1995 legislative changes have been enacted to encourage more
active management of costs, through negotiation with doctors and hospitals on price, and to allow
selective contracting, and to encourage the provision of no-gap products (Hilless, Healy 2001). This
has been accompanied by incentives for private insurance which have resulted in a large increase in
the proportion of the population with insurance. The aim of increasing population coverage was to
reduce the risk profile of the insured, particularly by attracting younger enrollees. However, data on
the hospital use of the insured population shows that hospital admissions and hospital bed-days per
insured person have stayed roughly the same, while the benefits paid per day have increased by 44%
since 1999.
Finally, competing insurers are associated with higher overhead costs, in administration and
advertising. This last is significant as shown by a number of comparative studies across countries,
most recently in a comparison of the UK NHS with Californian managed care (Feachem, Sekhri et al.
2002). In the latter, administration and marketing took 4% of gross revenue, while profits accounted
for 5%, items which are not incurred in a single payer, non-profit system. The recent expansion of
private insurance in Australia has been associated with large increases in management costs, a real
average increase of 14.3% per annum since 1996-7, compared to 4.3% for the six years previously
(Australian Institute of Health and Welfare 2000a).
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