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Plans by Bupa to significantly change the way it provides private health benefits have many doctors and analysts fearing Australian health care is heading towards an American model.

By Andrea Booth and Martin McKenzie-Murray.

Bupa’s play for radical health cover changes

Recently, Bupa dipped its toe in some very different waters. The giant private health insurer had announced, effective shortly, significant reductions in cover and the removal of their payment of the gap fee to patients treated in hospitals with which it was not aligned. Days later, after media attention, strident criticism from the Australian Medical Association, and the referral of complaints to the Private Health Insurance Ombudsman by the federal health minister, Bupa withdrew. Somewhat. Many doctors, analysts and health groups remain gravely concerned that this was an ambitious foray into American-style “managed care” and a significant alteration to health care in Australia.

Bupa was founded in 1947, under the name British United Provident Association, and it has since grown into a major international provider of health insurance and care. By the early 1990s, it was operating in 170 countries. It has bought and sold hospitals, and in Australia and New Zealand – which today yields almost half of its global profits – it runs more than 70 aged-care homes and more than 140 dental clinics. Last year, it eclipsed Medibank as Australia’s largest provider of private health insurance, with some four million customers.

In late February, Bupa informed health-care professionals of major changes. From July 1, for customers on basic cover, a suite of procedures would no longer be available. These included hip and knee replacements, kidney dialysis, and IVF treatment. But more alarming to the AMA and a number of surgeons and health analysts to whom The Saturday Paper has spoken was Bupa’s decision to cease no-gap cover for customers seeking treatment in hospitals not contracted to the insurance company. This includes all public hospitals, 37 per cent of day hospitals, and 8 per cent of private overnight hospitals, according to Day Hospitals Australia’s calculations. The change will take effect from August 1.

Amid a chorus of complaint, Bupa’s managing director of health insurance, Dr Dwayne Crombie, announced in a Facebook video that Bupa intended to reverse its decision to cease no-gap cover for elective surgery in public hospitals. But Bupa did not retreat from its intention to remove no-gap cover for members who enter public emergency departments.

“Health is uncertain, it’s unpredictable, when illness strikes it can be terrifying and at those times, the one thing that can help you get through it is choice and control over how you’re managed,” Dr Peter Sumich, an eye surgeon and president of the Australian Society of Ophthalmologists, told The Saturday Paper. “The Australian tradition of health care has been about choice, whether you’re talking about universal health care with Medicare or universal health care with private care, we’ve always had choice.”

“No-gap cover” means that patients will not be left with out-of-pocket expenses. Through Australia’s universal health care system, 75 per cent of the Medicare Benefits Schedule (MBS) would be billed to the federal government. The private health insurer would pay the remaining 25 per cent, plus a portion towards the recommended doctor’s fee, which is not the same as the no-gap cover. The recommended doctor’s fee is set by the AMA to help doctors determine their charge, and the portion paid by the insurer to the doctor is what Bupa calls a “higher gap scheme benefit”. But no more, Bupa had said. Unless a customer chose a Bupa-affiliated hospital, they would only pay the 25 per cent of the MBS – the minimum legally required of them.

The doctors interviewed for this article say this could play out in a couple of ways, but ultimately to patients’ disadvantage. Dr Michael Gannon, national president of the AMA, says doctors will usually vary their fees to accommodate no-gap schedules, “because we collectively recognise that out-of-pocket expenses tend to represent a barrier of care to many Australians … When the insurers try to blame doctors, they’re either deliberately misleading or showing how out of touch they are.”

Bupa argued that the changes were necessary to keep their costs – and subsequently premiums – down and to encourage greater transparency of doctor’s fees. The AMA rejected this. They saw an improper coercion of patients to Bupa-contracted facilities, and subsequently a move to American-style managed care, where customers are effectively forced into their insurers’ preferred system – a system that may not offer the expertise the patient needs. The AMA described the changes as “punitive” and, weeks after the government approved a 3.95 per cent premium increase, “unconscionable”.

Adam Longshaw, director of health and benefits for Bupa Australia and New Zealand, told The Saturday Paper that claims by the AMA and others that their changes foreshadowed managed care are false. “In Australia the doctor decides with the patient where they go to get treatment and what treatment they receive,” Longshaw said. “There is no pre-approval or pre-authorisation, which is the tenet of ‘US-style managed care’, and in the case of public hospitals, in many cases the treatment has already been conducted before any insurance company is aware it is occurring.”

On March 6, federal Health Minister Greg Hunt said he was referring the matter to the Private Health Insurance Ombudsman. The office of the ombudsman told The Saturday Paper that: “Bupa’s decision to cease no-gap payments at non-contract facilities appears to be within regulations, provided sufficient notification has been given to affected members. It is not mandatory for insurers to offer no-gap cover, or to do business with every willing provider. We note that patients may choose to change health insurers and they should be eligible for no-gap benefits at their new insurer without needing to wait again, provided they have completed the waiting period for the actual treatment.”

The health minister’s office did not respond to questions before deadline.

While complaints were referred to the ombudsman, The Saturday Paper also understands that a number of medical associations have written to the Australian Competition and Consumer Commission about their concerns that the changes may breach consumer law. A number of senior surgeons and health analysts also expressed concerns about Bupa’s larger strategy for health care in Australia. These concerns were reflected in a 2017 submission to a Senate committee inquiry on private health insurance, where Day Hospitals Australia noted that it “continues to receive reports that some of the major health funds are advising their members to go to another hospital rather than attend where their doctor has organised their admission, advising the member that the particular hospital does not have a contract and therefore they will not be covered for their scheduled treatment at that hospital”.

 

Private health insurance in Australia has a long and complicated history. The Hawke government introduced Medicare in 1984, a sort of reboot of the controversial, Whitlam-devised Medibank – a system that was scrapped by the Fraser government. Today, Medicare is an almost sacrosanct feature of public policy.

Following Medicare’s introduction, the number of Australians purchasing private cover began, predictably, to decline. So much so that in the mid to late ’90s, under the Howard government, there were concerns for the solvency of private health insurers. In 1996, coverage had dropped to 34 per cent – a fall of 14 percentage points since Medicare’s introduction. By law, private health insurers can’t cherrypick customers, or charge different fees for the same cover, so their solvency is partially dependent on diffusing its risk through the community. That is, it requires young, healthy customers to offset the costs of its older ones. On average, it’s not until an Australian turns 55 that their claims will start to eclipse their premium.

Howard believed private health insurance offered greater choice to patients, but more crucially relieved the burden on public hospitals. The problem he faced was how to encourage younger Australians to purchase private cover when they already enjoyed universal health care. The government did this with three consecutive policies. Each subsequent policy was required after the previous one failed to increase membership. The first was introduced in 1997, in the form of a surcharge to those without private cover earning above a certain salary threshold. The stick didn’t work, so a carrot was added two years later – all Australians were offered a 30 per cent subsidy on private insurance. This also failed to realise a substantial increase in membership, so in 2000 the Howard government reverted to another stick. The Lifetime Health Cover scheme would penalise people for each year after the age of 30 that they failed to purchase private insurance. This heavy market intrusion finally got the desired result – since 2000, health cover has remained constant at just under 50 per cent.

But while membership levels have enjoyed constancy for almost 20 years, those numbers require parsing. A Senate committee report on the affordability of private health insurance was released in December last year. It found significant yearly increases to premiums: significant in that they far eclipse the consumer price index and wage growth. This has meant that customers are downgrading their policies. Additionally, the number of exclusions to “lower” policies are increasing. Australians, in other words, are paying more for less.

There is an economic perversity to the Howard-era incentives. For many Australians with otherwise little incentive to purchase private health care, the tax penalties exceed the cost of insurance. So they purchase so-called cheap “junk” policies – policies that add little, if anything, to their Medicare cover. “They’re not worth the paper they’re printed on,” the AMA says. But these junk policies have the benefit of enlarging the pool of healthier customers for health funds.

Most pain is felt by low-income earners – those beneath the salary threshold – who, for whatever reason, require private cover. Private health insurers argue that the premium increases simply reflect rising costs – and what’s more, their increases must be evaluated and approved by the federal government. Longshaw, of Bupa, told The Saturday Paper: “Firstly, it is important to state that Bupa’s margins have remained consistent over many years and on this measure have not fluctuated. Relative to other industries, all health funds operate on relatively small margins with Bupa paying out 85 cents in the dollar back to customers and having an operating margin of approximately 8 per cent. Whilst much of the focus is on the increase in the cost of health insurance, these increases are really a direct reflection of the cost of delivering health care.

“Australians have among the highest life expectancy in the world and access to world-class health-care services, things that the community strongly values. However, this does come at a cost. With Australians living longer they are needing significantly more health care and this is a key driver of why health inflation in both the private and public systems is at a higher rate than general inflation.”

Meanwhile, the Private Health Insurance Ombudsman is receiving a record number of complaints from the public. In its most recent reporting year, it received 5750 – an increase of more than 1300 from the previous year.

The Senate report said: “The committee is concerned that private health insurers will place limitations on benefits in an attempt to keep costs down. As noted … private health insurers have placed restrictions on benefits that may be claimed and … this delivers poor outcomes for patients who either incur greater out-of-pocket costs or are forced to delay treatment.”

Bupa’s recent announcements appeared to confirm those fears. “At the moment, if you’ve got private health cover, you can take that health care to any surgeon, anywhere, and you can still see the surgeon you choose,” a surgeon, who wishes to remain unnamed, tells The Saturday Paper. “And what [Bupa’s] proposing is to remove that choice down to what they have chosen – the only surgeons that they’ll provide an insurance benefit for. If you look at America, they’ve got networks of care where if you’re in the wrong network you just won’t get the top surgeon unless you go outside of your Health Maintenance Organisation (HMO). In America, you don’t get your private health insurance through your own pocket, you get it through your employer where you get a health plan. Now this is exactly what Bupa are proposing – they’re saying that the only way you can work through their insurance system is if your surgeon is using one of their contracted hospitals. With your health insurance, you can still see him, but you will have no insurance coverage for it.

“Believe me, the other funds are watching. If [Bupa] gets this through, the other funds will follow suit. A doctor may not be covered for a health fund or go to the right place, so someone who’s desperate to see that doctor may not be able to. So you’ve lost the universality of the private health system. Insurers seem to want it all ways. They want to take the private health-care rebate, they want to put up their member policy fees every year, they want to cut down on the benefits they give their patients, and now they want to restrict the choices of their patients – and they want to make profits every year.”

Complicating matters is the Medicare rebate freeze. In 2013, the Labor government decided to freeze the amount it refunded doctors as a “temporary” budget measure. This meant the rebate would not be indexed – as the years proceeded, doctors would continue to be paid the same amount as they were in 2014, when the policy came into effect. Although begun as a temporary measure, the Coalition government continued it, and has pledged to maintain the freeze until at least 2020.

“I think both sides of politics have to share the blame for the Medicare freeze,” Michael Gannon said. “Labor for introducing it and then one-and-a-half terms of Liberal–National government for continuing it. I think it has permanently scarred the landscape of the health system … and has had the effect of increasing health inequity.”

 

For centuries, health policy has vexed societies. What should governments pay for – and how should they pay for it? While Medicare is ensconced in Australian life, its origins were rancorous. Malcolm Fraser, initially ideologically ambivalent about universal health care, realised its popularity and tried, unsuccessfully, to retain it. Many of his colleagues believed Australians should assume greater responsibility for their health care.

Today, there remains an irresolvable tension between the private and public aspects of our system – although there was a uniformity of opinion among the health specialists we spoke to for this piece that the public/private mix in Australia was largely effective and complementary.

“The practical solution that Australians have come up with is a balance between public and private and the freedom of Australians to choose and purchase those services and products
that they themselves value,” Stephen Milgate, executive director of the Australian Doctors Federation, says.

“Australia’s health care is a national treasure and it’s a perfect hybrid of public and private,” Peter Sumich said. “There are some things that the public [sector] does very well, such as chronic care and emergency care and critical care, and there are some things it does very badly, such as efficient elective surgery. But fortunately you’ve got this private system which is very efficient at providing surgery, and that’s where it really shines.”

In Australia, the predominant payment model for health care is fee-for-service (FFS). It’s a model for commercialising the provision of health care, one that permits an unbundled service, free from the intervention or coercion of a third party. “The advantages of FFS medicine are access to care, greater service provision and productivity,” Milgate says. “It offers the patient opportunity to choose and to determine the value of the service to their particular needs. The FFS system is widely used by governments to provide a whole range of services. In health care, it places the doctor–patient relationship at the centre of decision-making in regard to health treatment for patients.”

Sumich puts it this way: “I work to an individualised treatment. A doctor wouldn’t say, ‘How little can I get away with doing for this person?’ He’s going to go, ‘I need to do this, this, this – this is going to give the patient the best result.’ ”

No payment model is perfect. As a model that rewards volume over quality, FFS can incentivise overservicing, arguably incentivise reactive care over preventive, and contribute to fragmented care. The British National Health Service uses the model of capitation – a system where the government funds health providers for the number of patients assigned them, regardless of whether they seek care. Milgate debates the model’s value.

“In Australia we have rejected the notion that patients should be treated to a fixed budget, particularly the chronically ill,” he says. “You cannot contain each patient’s treatment to a predetermined formula or budget without rationing their treatment (underservicing) of some patients. The patients who suffer mostly in capitation are the chronically ill and the mentally ill who have complex health needs. Capitation is not the magic answer to the cost of treating the chronically ill. The NHS headlines show that the cost of health care even under capitation are not contained and NHS budgets are regularly overspent.”

A recent client report written by the Deutsche Bank for the private health insurance industry, and acquired by The Saturday Paper, asked the question: Could capitation work in Australia? The report said: “We believe one of the more successful models that has been applied offshore is capitation … We believe a capitation model results in a more informed buyer of health-care services and results in fewer unnecessary procedures and better overall outcomes than the current fee-for-service model that is predominant in Australia.

“Moving to the new model would open up the $55 billion Primary Care industry to the PHI operators. Using offshore peers as a benchmark implies a significant new profit pool that is potentially available to the local PHI industry if Australia can transition to a new funding model.”

This, doctors say, would be a landmark alteration to our current health-care system.

One senior surgeon says such a system – similar to how Medibank’s Garrison Health Services division provides for the Australian Defence Force – would allow private health insurers to collect Medicare revenue, set a limit on health care per patient, and put the remainder towards their profit.

Another describes the model proposed in the Deutsche Bank analysis as “simply health care on the cheap, and in its current form a hybrid type of managed care which could readily morph into complete managed care … Interestingly the analyst states that [the] capitation model would result in fewer unnecessary procedures. For procedural specialist care in [the] Medibank model, one could argue that perversely this could actually have the opposite effect in that surgeons may recommend more procedures to compensate for decreased fee for service.”

Michael Gannon says he believes we are close to the right balance between public and private systems. “There are certain elements of our system that need improvement – we need to spend more money on prevention, we need to spend more money on mental health – but when the health insurers seek to introduce policy settings that threaten that balance it could ill effect our health care system.”

One surgeon The Saturday Paper spoke with was much more sceptical: “You’ve got to ask the question, why is Bupa specifically isolating the [hospitals that do not have contracts with them]? The only reason they’re doing it is to put the pressure on the non-contracted hospitals to either take up a contract or alternatively make them go broke so they go out of business so they potentially can buy that hospital and make it their own hospital. Then you’ve got vertical integration where they direct a patient to a preferred provider who works at their own hospital, and that’s what managed care is.”

Bupa has strongly denied a push for vertical integration. However, referring to the lobby group Private Healthcare Australia’s submission to the federal government’s 2015 series of public consultations, Stephen Milgate argues that it’s evident in the industry’s own words. “The default benefit allows patients to be admitted to a non-contracted hospital and their health fund still has to pay a ‘default benefit’,” Milgate says. “The submission shows that the PHA wants this gone, albeit it understands that it can’t get rid of it in rural hospitals. When you are pursuing managed care, you want to build a closed network. You want to dominate the market. The contracts between private hospitals and health funds are also commercial in confidence, no one has access to them except both parties.”

In surveying senior doctors and health analysts, frustration was expressed with innuendo that doctor’s fees were inflated – contributing to patient out-of-pocket expenses – and that, generally, doctor’s cost were poorly understood. One specialist broke it down this way: “The average cost of running an ophthalmology practice is $700,000. If we didn’t charge a gap, we would not be able to purchase the equipment, infrastructure we need to be able to provide our service. We have to charge gaps to survive in business, in the private sector. I’ve got seven employees. I’ve got to pay their salaries, I’ve got a million dollars' worth of equipment, so my personal overheads are closer to $800,000 or $900,000 per year.”

He says his IT costs go up every year, too. “So you couldn’t do that on bulk billing and you couldn’t do that without charging gaps.”

What this means practically is that if a private fund won’t pay that higher gap scheme benefit to the doctor because they practise at a hospital that doesn’t have a contract with that fund, it will either be forfeited or passed on to the patient. Alternatively, the case may be given to a registrar – a capable professional, but someone who may not offer the expertise desired. Which returns us to the fear among health practitioners: eroding patient autonomy. 

 

Premiums are rising, private patient cover is diminishing, and the private insurers are contemplating ways to “remediate the regulation”, in the words of one expert. An ageing population and increasing chronic disease burdens a system still fraught by federalism. It remains an enviable system – but the government has a Gordian knot to unravel.

 

By Andrea Booth with Martin McKenzie-Murray.

This article was first published in the print edition of The Saturday Paper on Mar 17, 2018 as "Done for cover". Subscribe here.

Andrea Booth
is a Sydney-based journalist.


Martin McKenzie-Murray
is The Saturday Paper’s chief correspondent.

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