CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?
THE PRINCIPLES OF MANAGED COMPETITION
In the face of these complexities, no one is advocating an entirely free market for health insurance
but rather a re-design of the regulatory structure and government intervention so that greater
competitive forces are used to drive efficiency gains.
The principles of managed competition can be summarised as follows:
> There are a number of insurers in competition and consumers are free to insure with any
insurer;
> Insurers will be required to offer comprehensive cover so that all or nearly all health care
services are included;
> Insurers will compete on price of premiums, and quality of care providers;
> Consumers will switch insurers to ensure they select the combination of price and quality that
maximises their utility.
Under this scenario, insurers bear all or at least the greater share of the risk of health care
expenditure. As insurers bear the financial risk for their enrollees’ health care use, there are
incentives to use different types of services in a co-ordinated and efficient way, without shifting costs
from one funder to another, and to limit total service use. In practice, this requires that enrollees
sign up to an insurance fund for a reasonable minimum period, typically one year, so that the
incentives for the insurer to delay provision of care are limited. Some public health analysts argue
that this will actually encourage an investment in health promotion and disease prevention to
reduce the future exposure of insurers to health care spending. As the outcomes of most preventive
strategies are realised over several years if not decades, this seems somewhat fanciful. However, it
is expected that financial risk will be limited by negotiating on provider price and in reducing moral
hazard. The behaviour of insurers is expected to generate price competition among providers, thus
driving greater provider efficiency. This should not be at the expense of quality, in theory, for the
following reasons: poor quality in terms of adverse events and poor outcomes will drive up health
care costs; poor quality as perceived by consumers will lead to switching of insurers; and quality in
terms of amenity value can be provided at higher premium costs for which consumers can reveal
their willingness to pay. Thus, this is likely to lead to selective contracting and preferred provider
arrangements, which limit consumer access to providers.
Insurers will also attempt to reduce moral hazard. While moral hazard will arise under insurance
because price signals are muted, the health care market is also beset by information asymmetries
which may lead to higher health care consumption. Insurers, rather than providers, thus become
an agent for the principal-consumer- patient. This will lead to controls on the number and level
of services consumers can use, such as controls on hospital stay, limits to diagnostic services,
constraints on the prescribing of pharmaceuticals and so on. This is likely to lead to various
requirements for second medical opinions, certification of need for admission, and reviews of drugs,
tests and other services ordered.
Insurers thus become a third party purchaser of care, on behalf of consumers, using market power
and better information to drive efficiencies, both lower costs and higher consumer satisfaction, and
perhaps even produce better health outcomes. This is the managed care strategy. However, insurers
can also limit their financial exposure by cream skimming so it follows that market regulation must
be such that it encourages efficiency rather than gaming.