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CAPITAL COAST HEALTH BUSINESS PLAN
ISSUE 3 JUNE 1999
Preface
The Health Dialogue is an occasional discussion paper published by the Association of Salaried Medical Specialists to stimulate debate and policy discussion on issues important to the health sector. The National Executive of the Association has approved this Health Dialogue prior to publication.
This issue of the Health Dialogue seeks to encourage debate over the direction promoted by Capital Coast Health's 1998/99 draft Business Plan. The Capital Coast Health draft Business Plan was unsupported by government. This left the Hospital and Health Service functioning without a business plan for the full financial year, an unusual situation that may be unprecedented.
Nevertheless it deserves the attention given by this Health Dialogue as it should be seen as the potential application of the controversial American market system of managed care. Further, influential interests in the health sector would conceptually empathise with its direction.
The direction of the Capital Coast Health draft Business Plan is disturbing and should be open to debate especially if it is considered to be a potential model for New Zealand.
Introduction
Like countries elsewhere, New Zealand is facing pressures of rising health costs and a restricted health budget, combined with a perception of an increasing demand for healthcare. The government's 'health reforms' introduced in the 1991 Green and White Paper(1) sought to address the fiscal pressures on the health system by artificially creating a competitive and commercial health market. Legislation was required to achieve this because an economic market had not and would not evolve naturally. The mechanism used to create the health market was the commercially based funder/provider split, which was introduced alongside other 'reforms' in the Health and Disability Services Act 1993.
The Health and Disability Services Act 1993, and amendments to it from the Public Health Agencies Bill 1998, resulted in the fourteen area health boards being transformed into twenty-three providers called crown health enterprises, which are now known as Hospital and Health Services. Four regional purchasers were created and called Regional Health Authorities, which have been merged into the single Health Funding Authority. The Regional Health Authorities were to purchase services from both public and private providers thus attempting to create competition in the provider market. The Health Funding may still purchase from both public and private providers on the condition that purchasing from the private provider will result in improved health outcomes.
The 1998 amendments to the Health and Disability Services Act 1993 were an outcome of the short-lived Coalition (National-NZ First) Health Agreement. They provided a reduced emphasis on competition in some aspects of the health system. However, the commercial business model remains firmly intact, including the applicability of the Companies Act 1993 and the Commerce Act 1986.
The early focus on the 'health reforms' was on creating a market among providers of health services. For various reasons including impracticability, this was not achieved except around the margins through a now discontinued process known as contestable funding. The policy shift now appears to be creating a market among purchasers of health services. It is in this context that managed care, as currently experienced in the United States, should be considered. The biggest structural obstacle to the expansion of managed care in New Zealand is our single funder system. Single funding is the most integrative feature of health systems internationally. In order for managed care to penetrate into the New Zealand health system and create a market such as that in the United States, it will first have to achieve a breakdown and fragmentation of the single funder system.
Managed care in a commercial context and as it exists in the United States has often been discussed as further 'reform'(2) that would extend the competitive philosophy of the 'health reforms'. This would effectively increase the competitive and fiscal emphasis, which would result in even less attention being given to patient's needs than what currently occurs.
Within this context, this Health Dialogue seeks to contribute to the debate on whether the draft 1998/99 Business Plan for Capital Coast Health as a model of managed care should be adopted and applied to New Zealand. The draft Business Plan has never been publicly supported by government and appears to be disowned by the Crown Company Monitoring Advisory Unit. Further, its key proponent, Capital Coast Health Chief Executive Dr Leo Mercer, has recently tendered his resignation from that position.
Influential interests in the health sector empathise with its ideological direction. It is consistent with contracted advice to the Health Funding Authority and a similar but not identical proposal for Tauranga Hospital. The opening up of accident compensation to business competition provides a model that could potentially be adapted to the health system in order to facilitate the creation of a market among purchasers, fragmentation of the single funder system, and managed care penetration.
Whatever the status of the draft Business Plan and despite its apparent demise, efforts have been made to implement parts of it. The policy direction as a model of managed care should not be viewed in isolation. It deserves active debate because it was promoted by one of New Zealand's largest Hospital and Health Services.
Managed Care - What Is It?
The definition of managed care is broad, open to interpretation and often dependent on political viewpoint. At the Managed Care Conference (1996) in New Zealand managed care was defined rather neutrally as
"... arrangements which give an organisation responsibility for ensuring that a given population receives a defined set of services in a co-ordinated fashion. Managed care often involves financial as well as clinical responsibility"(3).
The Capital Coast Health draft 1998/99 Business Plan defines managed care more controversially as being:
Robinson and Steiner(4), proponents of managed care in the United States, describe managed care as usually being:
However, these definitions are inadequate to understand the unique characteristics of the United States system and they are broad enough that any health system that has fiscal responsibility would be covered. It implies that capitation in all its forms is managed care even though capitation can exist in several ways and has dominated general practice in post-war Britain.
A common health plan in the United States is a Health Maintenance Organisation (HMOs) and its features are described below(4):
- population defined by enrolment in the plan
- a contractual obligation on the part of the plan to deliver defined services
- fixed payments to providers that are independent of the level of use of service
- plan acts as purchasing agent in negotiating terms of payments to doctors
- restricted choice between providers
- a level of financial risk borne by the plan; there can be risk sharing with doctors in the form of rewards or penalties for overuse
- control over doctors' practice and referral patterns through extensive utilisation review
- a prospectively determined budget
According to Relman(6) managed care developed in response to employer demand for control over rising health insurance costs. Using this proposition, he argues that health plans exist to control costs by restricting the use of services and reducing the payment to providers. As managed care is involved in the private health insurance market, it is part of a business system that is forcing health to become a competitive industry preoccupied with the bottom line. In this business environment Relman(6) affirms that physicians are finding it difficult to treat patients because of the economic intrusions into clinical care.
The present commercial environment is different to the 1970s where managed care was a minority movement that often had a social role. HMOs were not-for-profit with a focus on prevention and patient education(7). This functioned in a broader less competitive or monopolistic health system that was more akin to a small business economy. At the time the health plans were viewed as a positive force and as healthcare costs began to grow, legislation and policy initiatives in the form of Medicare and Medicaid favoured the development of managed care HMOs.
Control of Public Programme Funds: Medicare and Medicaid
One of the key developments in the American health system has been the federal government's decision to use the managed care environment for its public health programmes. This was first attempted unsuccessfully in California with Medicaid in the 1960s under Republican Governor Reagan. Medicaid (indigent, low income) and then Medicare (elderly) programmes are now tendered to competing organisations as a cost reduction initiative.
Over the past two or three years this has been responsible for most of the growth in HMOs. Coupled with Medicare, at risk tendering has successfully given managed care organisations the capital base to expand. The underlying principle is that one takes a fixed premium on what Medicare has been providing and is then given 95% of the funding. The incentive for the government is the 5% savings and the shifting of risk. The incentive for the managed care organisation/HMO is to reduce costs because of the belief that they can run it more efficiently.
Unfortunately some of the commercial business health plans have succumbed to using the Medicare and Medicaid programmes for fraud. "HMOs are overcharging Medicare $1 billion to $2 billion a year for "highly inflated" administrative fees, according to an investigation by the Department of Health and Human Services"(8). In fact, this whole specific feature of managed care is one in which litigousness predominates.
Managed Care Features
The growth of commercial managed care has been rapid with the proportion of employees enrolled in HMOs growing from 5 percent to 50 percent between 1984 and 1993(9). Increasing numbers of health plans operated in a for-profit business framework and traded on stock exchanges(10). A relatively short-lived stock market boom of health plans was effectively over by 1997(10). Large budget cuts and intense competition leading to narrow profit margins has become a feature of the managed care landscape(10) resulting in an overall change from over-servicing to under-servicing. These features and others distinguish current commercial managed care from the mostly social oriented HMOs of the past.
Summary of Commercial Managed Care Features:
- Managed costs as opposed to managed care
- Under-servicing and medical 'gagging'
- Market power and oligopoly
- High administration costs
- Instability and mismanagement
- Reduced access and poor health outcomes
- Consumer protection movements
Managed Costs
As the competition intensifies there is increasing pressure for HMOs to clamp down on costs and services. Physician gatekeeping was designed to reduce services by removing direct access to a specialist. Initially effective, the health plans appeared to achieve cost-reductions and make a profit. However, the current difficult fiscal environment, particularly since 1995, suggests that the initial profit was "easy money" achieved by reducing previous over-servicing.
In the current poor fiscal environment HMOs are trying to find profits by creating niche markets in public health, for instance disease management. Because cost savings are difficult to achieve, there has been widespread 'cream-skimming' as aggressive HMOs began to "cherry pick" for healthy patients. This resulted in an industry pullback when Congress became involved and introduced consumer protection legislation(11). In recent months over 400,00 seniors have been dropped from Medicare HMOs because managed care plans cannot make money on the elderly population(12).
Rather than persist with a 'saturated' market in the United States health plans are expanding into other countries in order to generate profits. One example is the exportation of managed care to Latin America.(13) Closer to home American health planKaiser Permanente co-operated with Southern Cross in helping develop the Marlborough 'integrated care' proposal.
More significantly the multinational HMO Aetna is already operating in New Zealand as a private health insurance company. Further, it is expanding into general practice. It fully owns one Independent Practitioner Association (First Health) and half owns another, PrimeHealth. It has also been involved in an unsuccessful attempt to implement another proposed model of managed care through its links with the PrimeHealth IPA.
Under-servicing
Incentives to under-service patients have been an outcome of the HMOs' need to contain costs and restore profits(10). While a physician's primary concern is for the patient, managed care techniques attempt to change this by using financial incentives to restrain services and shift risk.(14) This practice creates a growing fear, stemming from physicians' experience that quality of care is being compromised(15) because of conflicting loyalties between caring for the patient and managing their own financial interests(6), (16).
To restrain physicians further, HMOs introduced gagging clauses in their contracts. These prevent physicians from giving any advice to their patients that could cause their patients to enrol in another plan(17). This prevents disclosure of the physician's personal financial interests and discussion of treatment options that are restricted by the health plan.
Market Power and Oligopoly
Another response to the competitive environment has been for HMOs to gain market power through consolidation and acquisition reducing from eighteen insurers to only six. Oligopoly effectively gives HMOs bargaining power over hospitals, doctors, employers and patients alike, which effectively controls the supply of healthcare. Through mergers with other insurance companies, Aetna is now the largest HMO covering 22.4 million people(18). The most recent merger was with the fifth largest HMO, Prudential, that propelled it from fourth to first. The second largest is not-for-profit Kaiser Permanente with 8.5 million members. Prior to the Aetna-Prudential merger, Kaiser was first.
The result of the mergers is increased patient dissatisfaction as well as an increasing need for the government to regulate the activities of HMOs to prevent fraudulent activities(10). Aetna US Healthcare is currently being charged by the California Psychological Association with false advertising, routinely disregarding practitioner determinations of medical necessity, and purposefully delaying processing treatment requests(19).
Instability and Mismanagement
Bad management has resulted in accusations of fraud and scandals resulting in the collapse of some of the most entrepreneurial companies(10). Blue Cross/Blue Shield of Illinois was fined $144 million for fraud in processing Medicare claims(20). Harris Methodist Health Plan in Texas was fined $800,000 for illegally encouraging its physicians to limit medically necessary treatment(20). Columbia/HCA has admitted that one of its geriatric-psychiatric units inflated its "first-year baseline cost to increase the amount of money it could claim in future years for Medicare reimbursement."(21) In addition a fourth Columbia executive has been indicted by a Grand Jury in Florida for engaging in a $2.8 million conspiracy to defraud Medicare(22).
Bankruptcies and financial crises are a common occurrence creating instability in the health market as the key players either keep merging or falling over. One example is Independent Practice Associations (IPAs), which allow physicians to obtain contracts with HMOs, yet retain their own independent practice. IPAs grew faster than other physicians' organisations(23), although recently several IPAs have failed and others face operating deficits(24). Other groups to suffer similar fates or worse are Physician-Practice-Management Companies (PPMC), as well as Medical Groups, and Group-Model and Staff-Model HMOs.
Three large PPMC's in the United States are MedPartners, PhyCor, and FPA Medical Management, all Wall Street investment companies. Initially these entities grew rapidly because practitioners could contract with them in order take advantage of economies of scale and scope(23). This gives financially vulnerable practitioners leverage to obtain contracts with HMOs and spread the costs of their management services(25). In 1997, 110,000 doctors were affiliated with this type of company.(26) In 1998 two of the three large PPMCs collapsed, following a dramatic fall in stock value, with FPA Medical Management declaring bankruptcy and MedPartners pulling out of practice management(23). The remaining large PPMC, PhyCor, is also vulnerable, as it is also suffering from a fall in stock value of similar magnitude.
The decline of the PPMC's in the United States has adversely affected practitioners. Many physicians who had sold their practices to a PPMC are now unable to buy the practices back. They are left without office staff, equipment, or money owed to them for previous services rendered. (23) Practitioners who received stock in a PPMC rather than cash fared even worse as the stock values for PPMCs have recently plummeted(23).
High Transaction Costs
The United States healthcare system is characterised by a multiplicity of funders resulting in high administration costs. This is in marked contrast with New Zealand's traditional single or dominant payer system. In the United States hospital administration costs are significantly higher than the Canadian single funder system(27). Hospitals in states with higher HMO enrolments had proportionately higher administrative costs, as did those states that used the most amount of competitive contract bidding(27). Faced with such high administration and transaction costs there are increasing calls in the United States to move towards a single payer model.
Compared with 28 other OECD countries, the United States had the highest per capita health spending at $3,925(28). The next closest country was Switzerland with $2,547 per capita(28). United States health expenditure totalled $1,092.4 billion(28). Public funding comprised $507.1 billion and the rest was private expenditure at $585.3 billion, which included out-of-pocket payments, private health insurance and 'Other'(28).
The extent of the extremely high funding is made clear when the per capita public and private expenditure is compared separately with the TOTAL per capita spending of the other 28 OECD countries(29). The public funding covering only 33% of the population ranked ninth ($1,824.1 per capita). Private funding alone ranked fourth ($2,105.4 per capita). Countries who spent more nationally per capita on health than the US private expenditure alone were Switzerland, ($2,547 per capita), Luxembourg ($2,340 per capita) and Germany ($2,339 per capita).
Demands for Consumer Protection
Consumer right groups are forming to protect patient's rights and to advocate for protective legislation. One group called the "Citizen's Right to Know" advocate for written disclosure of treatment policies, practice standards and restrictions on normal health services. The TMJ Society of California also lobby for disclosure.
According to Newsweek(30) consumer advocates and lawmakers are developing state and federal legislation that would force health plans to guarantee subscribers a choice of providers, a say in treatment decisions, confidentiality and other basic protections. Consumer groups consider that health plans are too powerful and that the market will no longer be able to address the power imbalances(28).
Reduced Access and Poor Health Outcomes
In addition to the above features, a review of national healthcare costs demonstrates that the United States has an extremely high level of health spending(31) with lower levels of access. Despite Medicare and Medicaid increasing numbers of Americans are falling into the gap between public programmes for the destitute and elderly, and health insurance.
The number of people without insurance is increasing, rising to approximately 16.1% of the population in 1996(32), of which 31.6% are classified as poor. There are also increasing rates of underinsurance(33), leaving people either not covered by their health plans, or with high co-payments. Out-of-pocket expenditure is also increasing because of increasing co-payments to managed care health plans(28).
Despite high health spending, the United States was near the bottom for health outcomes and the rate of improvement was also slower compared to other OECD countries in 1996(29). These statistics indicate that the United States health policies are resulting in reduced access and poor health outcomes.
The World Health Organisation
The World Health Report(34) signals health sector development ensures that people get a better deal from their health system. While international reform relies on market forces to resolve structural inadequacies, the World Health Organisation maintain that markets have failed to achieve similar success in health services or health insurance. The report cites the United States as an example of this market failure. The report maintains that "market-oriented approaches lead to intolerable inequity with respect to a fundamental human right" (pxiv) and it cites empirical and theoretical evidence that market approaches are also inefficient.
The World Health Report advocates a "new universalism", universal cover with fiscal responsibility. Diversity and competition are encouraged but with appropriate guidelines where the public sector is ultimately responsible for "ensuring solidarity in financing healthcare for all (pxv)."
Concluding this section on managed care, it is important to ask the question is managed care delivering the quality and cost savings results its advocates maintain? It would seem that corporate managed care in a competitive market was able to make cost efficiencies but this is at the risk of cost shifting, reduced access, quality of care, and increased administrative costs. There is an argument that the initial boom in managed care profits was the result of removing the significant costs of over-servicing. The real hard slog remains to prove the benefits of managed care in a competitive environment that is becoming increasingly controversial as the profit margins narrow.
Lessons for New Zealand
Managed care is the health system that describes the United States. While some of its features can be seen in New Zealand they do not define or characterise our health system partly because real competition(35) in health is impossible to achieve in New Zealand. The entire New Zealand population compares to one HMO in the United States.
The geographic isolation of the population also makes competition practicality non-existent for many because of the inability or reluctance of patients to travel long and sometimes unsafe distances to go to another provider. In addition health has traditionally been considered a social right as opposed to an economic transaction.
The Health Funding Authority funds most of the secondary and tertiary care in New Zealand although the ACC and private insurance also play a role. However, the Health and Disability Services Act 1993 continues to allow for multiple funders, effectively maintaining a competitive purchasing environment. Section 20(a) and (b) of the Act defines a funder as a HFA; or "any person that has agreed to be, and that has been declared by the Minister by notice in the Gazette to be, a funder for the purposes of this Act". Further, in s5(2)(a) and (b) the funder is referred to in the plural sense.
Managed care models that emphasise competition are already present in New Zealand. They are described as 1) delegated purchasing(36); 2) an integrated care proposal by the PrimeHealth IPA, who the United States HMO Aetna has a 50 percent interest in; and 3) a health plan in the Capital Coast Health draft Business Plan.
Delegated Purchasing
The Health Funding Authority previously employed Lynn McKenzie and James Webster in senior positions. Now engaged as contracted consultants, one of their projects was to inform the Authority of the likely policy directions of Labour, National, Alliance and Act, inclusive of outlining any potential issues associated with the policy directions(36).
Discussion in their report refers to delegated purchasing with respect to the current government's Medium Term Strategy (p10). They advocated the creation of delegated purchasers that would act as agents of the Health Funding Authority to purchase publicly funded health and disability support services for a defined population, similar to an HMO. Delegated purchasing would help, according to the scenario, to create a competitive market amongst purchasers.
The following points regarding delegated purchasing were mentioned in the report. First, delegated purchasers were referred to as a Plan. Second, 'consumers' would have to enrol. The labour market would have to be deregulated by removing registration requirements. Natural monopolies exist where hospital economies of scale will not support competition; for instance major metropolitan areas do not have a natural monopoly as they can support more than one hospital. Where natural monopolies do not exist, the report suggests that these hospitals should be released from government ownership. This would affect Auckland, Wellington, Christchurch, Hamilton and Dunedin. The report states that in areas with a natural monopoly other options including private ownership with price regulation should be considered. Plans are meant to compete on services not price. Risk sharing between Plans and the Health Funding Authority was also mentioned.
Despite the Mackenzie Webster report, delegated purchasing was not directly referred to in the recently released Government's Medium-Term Strategy for Health and Disability Support Services(37). This publication outlines the Government's twelve medium-term goals, which are expressed as building certainty, providing equity, and maximising the benefits of early intervention, integration, health promotion and community involvement. Although generalised these are contrary to the delegated purchasing model.
However, delegated purchasing may remain an option in a less uncertain political environment. Further, the draft Capital Coast Health draft business plan is a form of delegated purchasing. Despite not being supported by the government parts of it are being implemented regardless.
'Integrated Care' and Delegated Purchasing
The joint PrimeHealth-Aetna proposed 'integrated care' venture in Tauranga was also similar to "delegated purchasing". The venture proposed to operate as a health plan between the Authority and Western Bay Health. With an enrolled population, the Plan would offer purported improved integrated services and negotiated risk sharing.
It was expected to generate a rate of return budgeted at 16%. This profit was to be risk-shared among health providers and its investors effectively acting as a financial incentive to make doctors more fiscally focused.
Finally it conceived itself as acting as a Health Plan because it would not provide health services, rather it would contract with specific health providers. The PrimeHealth/Aetna proposal eventually was not accepted by the Health Funding Authority, largely because of strong opposition from both the public and specialists employed at Tauranga Hospital as well as concerns about fiscal risk to the crown. Proximity to the forthcoming general election may have also been a factor.
There is a historical policy link between 'integrated care' and delegated purchasing. A previous Transitional Health Authority Discussion Paper on Integrated Care, November 1997 referred to "facilitated integration" and "bundling services" together. Facilitated integration refers to small integrated care projects where providers are encouraged to link services using referral protocols and other similar tools.
"Bundling services", on the other hand, appears to be renamed delegated purchasing. Once the services are bundled they are then passed onto a provider who becomes responsible for determining the service levels, the trade-offs between services, and developing clinical protocols and services management systems. The purpose is to give providers more control, autonomy and latitude than the current contracts provide and is accompanied with financial incentives and risks. Associated monopoly issues and 'consumer enrolment' were also identified in this report.
Capital Coast Health Draft Business Plan
What are the lessons to be learned for New Zealand? The issue is not with managed care as a definition but its intent, purpose and application. The United States experience demonstrates that managed care that relies heavily on commercial imperatives, cost containment, and multiple purchasers leads only to fragmented health delivery with controversial results.
The Capital Coast Health Draft Business Plan, 1998-1999
This section discusses the Capital Coast Health draft business plan for the 1998-99 financial year including the expressed justifications and rationale. Throughout the draft plan, however, there is an overwhelming lack of evidence to support its claims. Rather it is more an assumption driven proposal. For example, the draft plan cites supporting evidence from the United States (p109). This evidence is based on the unique experience of over-servicing from direct specialist access to under-servicing through managed care physician gate-keeping. It would have been more appropriate to use OECD data trends that may have had more relevance to the New Zealand health system.
Elsewhere it is observed that primary healthcare providers managing access to secondary services led to a dramatic 20% fall in hospital admissions in markets such as the United States (p115). However, New Zealand already uses primary care gatekeeping, suggesting that the "evidence" does not apply to New Zealand.
The key issues of the draft plan are:
- To become a health plan
- To contract or "carve out" services
- Risk sharing
- To expand information technology
Capital Coast Health describe its draft Business Plan as being "developed to address the efficiency, organisational, information and resource issues" that are supposedly preventing Capital Coast Health from reaching its potential and overcoming previous fiscal failures. According to the draft Business Plan there was a potential operating deficit of almost $60m with the Statement of Intent objective of a $17.6m deficit. The final result was a deficit of $22.8m. While Capital Coast Health did not attain their financial objective their so-called fiscal failure still resulted in an overall improvement of $37m.
Mercer(38) contends that the Plan has no ideological intentions and that the Plan is designed to achieve the objectives listed below. But it has strong similarities to commercial market driven managed care as experienced in the United States and with the delegated purchaser model proposed by the Health Funding Authority's contracted consultants, McKenzie Webster.
Key Objectives of the draft Business Plan:
- improve the health care of the people of our region
- improve the effectiveness of the public money spent on health
- improve the sustainability of Capital Coast Health as a publicly owned health provider
Health Care Plan and Contracting-Out
Central to the draft Business Plan is the intention over a three-year period for Capital Coast Health "...being reconfigured as a Health Care Plan and Health Service Provider (for tertiary and acute trauma services) by the year 2001" (p11). A firm intent of the draft Business Plan is to identify the services that could be subcontracted to and delivered by other healthcare providers. The fundamental role of Capital Coast Health would change from a provider to a provider and purchaser. For all intents and purposes this describes "delegated purchasing" in the MacKenzie Webster report.
Capital Coast Health would become a New Zealand version of an HMO providing some services internally and contracting other services to alternative providers in a commercial market environment. It would continue to provide "high complexity, high cost and low volume" services while those described as "low complexity, low cost and high volume" and support services could be taken over by alternative providers contracting to CCH through the "health plan".
| low cost, low complexity and high volume | Dental, some plastics, general surgery, urology, elderly, general medicine, gynaecology, rehabilitation, ophthalmology, ENT and gastroenterology. |
| Support services | Include anaesthesia, theatre, intensive care, laboratories, pathology, pharmacy, community health and biomedical technical |
The process of separating core from non-core services would allow Capital Coast Health to identify the services that should be prioritised for investment and those services for whom investment should be made by other providers (p46). The purpose is for "low complexity, low cost and high volume" to:
- Be managed by "preferred providers".
- Allow CCH to "concentrate on providing its core business".
- Be "managed on an ongoing basis under contract" to CCH.
Elsewhere this contracting out process is described as delegating "low complexity, low cost and high volume to preferred providers ... delivered from a range of public and private facilities throughout the region". This would lead to Capital Coast Health's Health Plan possessing the "potential to be the regional contracting arm of the Health Funding Authority, ACC and other major funders" (p39). "Competition with other systems" is envisaged to develop by 2000 with a managed care penetration of the wider health sector of over 60% (p40). The number of members will determine the size of the Health Plan.
As well as the health plan in a competitive context, the managed care definitions in the glossary also need to be considered - specifically "carve-out" and "risk sharing".
| Carve-Out | Services contracted to an exclusive independent provider by a managed care plan. |
| Risk Sharing | Sharing the opportunity for reward or loss, usually among the physicians, the health plan and the hospital. |
Carve-Out
Carve-out is more recent managed care terminology. It is a form of contracting that occurs when a portion of capitated funding is separated out and used for a specific purpose, most commonly mental health and disease management. One example in the draft Business Plan is the reported decision to devolve the mental health service to a distinct and separate entity through the investigation of "governance issues". This "service realignment" was to occur by 30 June 1999. However, no justification or evidence of patient outcomes, efficiency or quality of care and access benefits was provided.
The financial incentives of a carve-out model cause health programmes to have a short term focus on the smaller high risk populations because that is where the most savings can be made even though the larger low risk population generates more savings in the long-term(39). The carve-out model also poses risks to the skills of primary care physicians because they have less regular experience at managing chronic disease.(39) In the United States much of the funding goes to drug companies who are providing this service in order to link it to their own products.(39)
The carve-out model increases fragmentation, as care becomes less comprehensive and increasingly specialised and focused on disease rather than people(39). Proposals by Capital Coast Health to contract out secondary care is managed care carve-out that will result in greater fragmentation of the hospital system. In this context the draft plan will lead to the disintegration and privatisation of "low complexity, low cost and high volume" and "support services". This outcome threatens all of the key objectives described by Mercer above.
Ironically, the following quote from the draft Business Plan is a contradictory yet powerful argument against the carve-out proposals:
Risk Sharing
Risk sharing and widening "risk management to all providers", reducing the "capital requirements" of Capital Coast Health are managed care techniques that change doctor and provider behaviours using financial incentives. This creates serious ethical issues for doctors as quality of care can be compromised in the face of strong financial incentives.
According to the draft Business Plan alternative providers will be sufficiently small to require 'risk management' assistance and leadership. In the United States this is variously described as a "Management Services Organisation" and "Physician Practice Management Company" (PPMC). The recent failure of these companies in the United States is discussed above. Multi-national Aetna also promoted this model for New Zealand in the now failed PrimeHealth proposal in Tauranga.
Transaction Costs
Increasing transaction costs, inclusive of managerial personnel and absorption of time and resources are inevitable in the multi-purchaser environment that Capital Coast Health is proposing. In order for the health care plan to position itself the following "competencies" are required - "care management", "risk management", "information management" and "relationship management" (p41-42).
These are defined as:
| Care management | an intensified focus on establishing care protocols and guidelines, provider credentialling and case review. |
| Risk management | evaluating and managing the financial risk associated with risk sharing arrangements such as capitation.... measuring the cost of care provided in multiple settings, aligning performance incentives to manage within fixed budgets based on capital payments... |
| Information management | information systems are required to provide the clinical and administrative information to effectively support efforts in operations, care management and risk management.... Interconnectivity [sic], facilitating communication between all parties. |
| Relationship management | member attraction and retention and to the development of strategic alliances with payers and providers. Marketing plans must be developed based on an understanding of member motivations and expectations |
Compared with cleaning and catering services, contracting out health services is difficult because of the lack of provider infrastructures. This is recognised in the draft Business Plan where carve-out services will have to be devolved progressively because management arrangements will need to improve and provider development will need to occur.
Further work and expense is necessary to implement the "competencies" the new contracting environment requires. This includes establishing a new management team within the "Health Plan Office" with skills such as contract evaluation and negotiation, marketing, financial management, operations management, and provider, payer and patient relations. Despite the already "large investment in information technology", expenditure on information technology systems and telecommunication is projected to increase by from $6.1m (1996/97) to $9.4m in 2000/01 (p90).
The need to expand the information technology is consistent with the evolution of Capital Coast Health into a regional purchaser. However, Capital Coast Health's recently imported computer system Shared Medical Systems is currently the subject of an Auditor-General's enquiry in response to controversy over its purchase, implementation and performance. Shared Medical Systems is based in the United States and consequently its operational focus is on a multi-purchaser environment with high transaction costs.
"Overservicing" Versus Underfunding
The draft plan is highly critical of the performance of Capital Coast Health Ltd over the past five years concluding that it:
The draft plan notes that the past five years have seen a marked reduction in total bed occupancy similar to those in other Hospital and Health Services and their predecessor crown health enterprises. However, average daily occupancy of medical and surgical beds has remained constant despite a significant reduction in average length of stay. The draft plan concludes that this is "over-servicing" when it could also be viewed as improved performance because bed-stay reductions have been taken up by increased activity (p17).
The plan neglects to identify the contributing role of inadequate government funding as the significant source of the fiscal failure. Instead it blames over-optimistic and unrealistic expectations, inadequate information and poor performance. One of the proposed solutions to the "over-servicing" is to decrease the number of acute medical admissions (p133) potentially compromising patient safety. Subsequently, business consultants Third Sight were engaged to implement this solution. Their attempts have been severely criticised in the submissions made by affected specialists as threatening standards of care and patient safety.
Real per capita funding for area health boards/crown health enterprises was significantly reduced in 1989/90 by 4.1%. According to the Ministry of Health's analysis(40) real per capita funding declined further in 1991/92 and 1992/93, resulting in a 6.2% real per capita funding decline from the period 1989/90-1992/93. For the first time since the initial funding cut in 1989/90, real per capita funding in 1996/97 finally reached the previous 1988/89 funding levels.
Assumptions of the Draft Business Plan
The draft claim is to a significant extent premised on changes in the funding environment (p21-22). It bases these assumptions at least in part on what it describes as a "very good working relationship" with the Health Funding Authority. The draft Business Plan rests on the relationship between the Chief Executives, who were employed on fixed-term employment contracts, one of whom has subsequently departed while the other has recently submitted his resignation.
The draft Business Plan assumes that the Health Funding Authority will downsize "...its contracting and monitoring arm, thereby seeking other providers to manage the contracting and monitoring functions" (p22-23). Elsewhere it is alleged that the Health Funding Authority:
This assumed radical change of direction by the Health Funding Authority provides the 'window of opportunity' for Capital Coast Health to develop its Health Plan to "capture" and "trap" funding. However, this is a simplistic assumption in an uncertain political environment. The draft Business Plan is dependent on the long-term continuation of a government being more 'pro-market' in the health system than the current regime is.
The draft Business Plan seeks to reduce its reliance on the Health Funding Authority by increasing the revenue it receives from other purchasers (p22). However, the solution enhances rather than reduces vulnerability. If Capital Coast Health is able to obtain funding from alternative revenue streams the incentive becomes greater for the Health Funding Authority to reduce funding further.
Figures summarising expected financial performance (p33) are described in Table 1. Capital Coast Health's own estimates contradict the above arguments for a multiple purchasing strategy. Despite anticipating funding from purchasers other than the Health Funding Authority, these figures project a 12.4% increase in Health Funding Authority funding and a 14.2% decrease in revenue from other streams.
| Table 1. Revenue Sources ($000) | ||
| 1997/98 (actual) | 2000/01 (projection) | |
| HFA | 195,753 | 219,963 |
| Other | 26,497 | 22,739 |
An alternative funding source is identified as "large companies [will] enter into healthcare schemes for employees with healthcare providers" (p22). The large majority of waged and salaried New Zealanders are employed in small businesses. One justification for this employer based approach appears to be the decision to open up ACC to competition with employers being able to self-insure (p104). However, there is no evaluation of how this process will increase funding to Capital Coast Health as one proposed purpose of the new legislation is to reduce health spending.
While employer funding occurs in the United States, potentially it is not the majority of funding. In 1996 only 47% of health insurance was employer based,(41) less than the usual official figures cited at 61%.(42) Traditional methods have overstated employer-based contributions through double counting(41).
However, both the critical masses and histories are fundamentally different. New Zealand's traditional universal, single payer and publicly provided system has contributed to much lower comparative levels of private health insurance. Ironically the 'health reforms' have contributed to a decrease in private health insurance and this is acknowledged in the draft Business Plan (p106). The conditions that enable companies to play a significant funding role in the United States may be overstated and do not apply in this country.
Despite advocating for a diversity of funders, the draft plan acknowledges current difficulties with the contracting environment (p23) especially ACC and the Waiting Times Fund. Issues include identifying patients for treatment, attracting potential patients, collecting information required for invoicing, and other relevant contractual obligations. These difficulties are indicative of the immense transaction difficulties of the multi-purchaser environment under managed care in the United States. It is reasonable to expect that a greater diversity of funders will expand and intensify these difficulties and increase transaction costs and management systems. Despite this the draft Business Plan continues to focus on this as the way forward.
Conclusion
Dr Mercer maintained that managed care is already in New Zealand and that we have the worst feature of it. By this he means that the New Zealand government controls and funds the health system, but does not carry the risk. New Zealand's system remains distinct from managed care as New Zealand has a single funder system and the lacks the financial and competitive incentives typically associated with managed care.
Dr Mercer maintains that the draft Business Plan does not have an ideological thrust to it. Nonetheless, a persuasive argument can be made with little difficulty that the Capital Coast Health draft business plan:
- is radical restructuring
- is a model for managed care techniques
- facilitates widespread disintegration and privatisation
The most significant feature of the plan is to fragment and contract essential services that Capital Coast Health already provides. This is supported by the use of managed care terms such as "carve-out", "Health Maintenance Organisation" and "risk sharing" which have real meaning and significance within the context of the plan.
Changing Capital Coast Health into a funder and health care plan will inevitably increase its transaction costs thus reducing Capital Coast Health's ability to effectively spend public health money. It is difficult to see how health care will improve under managed care techniques or how short-term managed care initiatives will improve the long-term sustainability of Capital Coast Health. It is also consistent with the promotion of delegated purchasing by the Health Funding Authority's contracted business consultants. Given the above this draft Business Plan should not be adopted as a possible model for New Zealand.
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