CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?
INTRODUCTION
Although any international comparison of health care systems shows great differences in the
organisation and financing of health care, its history, and in the social and cultural role accorded to
health care, all countries are facing the same problems. These are rising expenditure, increasing
demands on government funding, growing consumer expectations, rapidly developing technology,
and questions about efficiency. At the same time, funding arrangements which link different sources
of finance to different services make it difficult for patients to navigate the system and for providers to
co-ordinate care. Perhaps it is not surprising that there has been a major interest in the greater use
of competitive forces to drive efficiency gains. The terms ‘managed competition’ and ‘managed care’
are used to describe many of these developments. Although they are, at times, treated as synonyms,
it is worth distinguishing them. Managed care refers to the arrangements under which a third party,
which could be a health insurer or some other holder of a budget for health care, purchases health
care services. Managed competition describes competition among insurers for enrolees (Reinhardt
2002). These insurers may use managed care to reduce premiums and ensure quality and thus
compete successfully.
In Australia, major health system reform along the lines of managed competition has been
advocated by Dick Scotton, one of the architects of the original Medibank (Scotton 1990; Scotton
1999). The ideas have also been taken up by the Productivity Commission (Productivity Commission
2002). During 2003, the Australian Government proposed a greater role for private insurers in the
funding of primary care (Australian Department of Health and Ageing 2003a). Although this was only
a small change in the role of private insurance and did not approach the ‘big bang’ reform envisaged
by Scotton, it was excluded from the revised proposals (Australian Department of Health and Ageing
2003b). But whether reform is of the big bang or incremental variety, the question of whether
managed competition can deliver greater efficiency remains. As Scotton summarised:
The general objective of managed competition is to establish structures in which market
incentives can increase economic efficiency - that is, make better use of resources to improve
health outcomes and satisfy consumer wants... While managed competition involves the
use of market tools to guide resource allocation, it also includes a regulatory framework
designed to eliminate sources of market failure found in unregulated markets for health
services (Scotton 1999).
The topic of this paper is whether it is possible, given the current state of knowledge and technology,
to design the appropriate market structure for managed competition. The next section reviews
market failure in the private health insurance market. The subsequent two sections describe the
principles of managed competition and its development and application in other countries. Then, the
paper outlines recent developments in private health insurance policy in Australia, and proposals to
apply managed competition in this country. The required design of the managed competition market
place is described, and four major issues, risk adjustment, budget holding, consumer behaviour, and
insurer behaviour, are identified. The final sections of the paper review the evidence on these four
issues to determine if managed competition can be implemented, given current knowledge.
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