Integrating insurance with health service provision cannot cut both ways

It is unusual for a large provider of medical services to assume control of a health insurance company. On 18^th September, just such an event occurred in Australia when Primary Health Care - a publicly-listed provider of medical and laboratory services, with a market capitalisation of some $2 billion - acquired Transport Health for a consideration of $18 million.

Transport Health is a Melbourne-based demutualised friendly society. Its 5,000 members benefited directly from the takeover. While Transport Health has traditionally provided health insurance exclusively for employees of the transport industry and their dependants, since the takeover it has applied to the Private Health Insurance Administration Council to convert to an open-access fund.

Primary claims that members of Transport Health "will benefit from access to Primary's extensive network of health care providers including dentists, specialists and physiotherapists". It wants to use its suite of healthcare services "to establish an extended provider network for existing and future Transport Health members". It claims that its takeover will "empower patients to take greater control of their own healthcare" and create "a strong platform from which it can build a leading private health insurance business that gives all Australians access to an extensive range of affordable healthcare benefits".

In short, it appears a major corporate health provider has assumed control of a health insurer as a deliberate strategy for underwriting and expanding the demand for the services it delivers through its medical, allied health and dental businesses. Although the Health Insurance Act seeks to prevent private insurers from writing private medical cover, this has not inhibited Medibank Private from trialling an insurance model that is designed to guarantee 'priority' access to out-of-hospital GP services at zero price in south-east Queensland at medical practices owned by Sonic, a major publicly-listed competitor to Primary.

To the extent that competitive offerings of this type of gap cover have potential to neutralise the impact of Government attempts to introduce a GP co-payment or any form of patient cost sharing, they could encourage the demand for medical services and prove a burden to health fund contributors by virtue of increases in their premiums required to pay for incremental front end medical costs.

Therein lies the dilemma for Primary: it can profitably underwrite expansion of its health services that will prove costly to its insurance division and its contributors; alternatively, it can attract contributors to low-cost insurance offerings that incorporate cost sharing and encourage patients to make rational decisions about the care they use. It cannot have it both ways.

Asymmetry between the welfare of fund members on the one hand, and providers and users of services on the other, has been a principal reason to have discouraged major providers of services from taking over insurers. Such marriages have the potential to wreak maximum damage where providers are remunerated in a fee-for-service setting that is characteristic of Australia, and where patients make little or no contribution to the cost. This maximises the opportunities for providers to drive demand for health care that may not always be clinically supportable. It is noteworthy that Australia's major private hospital operators have avoided the risk of conflict in taking over insurers, notwithstanding their superior market power and capitalisation. Instead they have maintained arms-length relationships and concentrated simply on efficient, quality service provision.

To be sure, there are examples of successful vertically-integrated health insurance and health service provision. But these occur when insurance companies have initiated a takeover or have established their own service businesses. Providers have resisted them because, to protect their financial integrity, insurers have sought to influence the quality and content of services they underwrite.

Doctors interpret this as 'managed care' and an intrusion into their professional realm. In 1988, a major health fund established a 12-chair dental centre in central Sydney that has since grown into a dental network. This was fiercely opposed by dentists. The fund had acquired for the first time the right to comprehensively audit and benchmark work of the profession, who in turn interpreted this as a threat to their autonomy and independence.

Wherever insurers have capacity to monitor the services they underwrite and to calibrate price signals and provider remuneration to encourage doctors to keep patients well and out of hospital, there is greatest scope for vertical integration. There could be a message here for corporate health providers in Australia: where conventional fee-for-service prevails without cost-sharing, it is risky to conflate investment criteria for mutually opposed service objectives.