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Road map for Australian health care reform - Part I

By Fred Hansen - posted Tuesday, 5 August 2008


To be sure, the complexity of cases in private hospitals is 15 per cent lower compared to the 755 public hospitals. Funding of hospital care, private or public, is increasingly based on case-mix (661 Australian Refined Diagnose Related Groups) which has the benefit of extremely low transaction costs.

All hospitals nowadays are computerised to process data - diagnosis and procedure coding and bills. Professor S.J. Duckett of Melbourne University expects: “In the long term, it may be possible to adjust hospital payment rates on the basis of their outcomes: the extent to which they contribute to improving health status. However, the technology to do this does not currently exist” (The Australian Health Care System, 3rd edition, Oxford 2007).

If we want to set up Australian health care providers on a winning course we need to lower cost for collaboration between providers. With the advent of IT this is now possible. That is the new business model, it is not just an option, rather it is already an imperative. For hospitals it has become critical to do only what you do best, and to eliminate or minimise your backroom activity by teaming up with other health care providers and streamlining your operations. Hospitals need to develop a shared platform for benchmarking their performance. The next step could then be a form of collaboration where everybody carves out a niche or a procedure which it performs best and outsource other services to their neighbours.

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Once full price and quality transparency of the heath care markets is established, the consumer-driven market reform will take off. Informed health care customers in many different areas will drive change. This will trigger the emergence of other innovative health delivery solutions like nurse led walk-in-clinics, new forms of medical tourism, online purchase of pharmaceuticals and other services. It will also hugely improve convenience for customers.

To sum it all up: this type of health care system is already working in different parts of the world - different elements of it being implemented in Switzerland, the Netherlands, Singapore, South Africa and the United States. One outstanding example is Bumrungrad Hospital in Bangkok, that treated 1.2 million customers from 190 countries in 2006. Their management is so supreme that Bill Gates just purchased their software in order to sell it to hospitals worldwide.

Competition between providers and health funds

Private hospitals are already embracing Kaizen or continuous improvement, one of the major Toyota quality management strategies. The future belongs to specialised hospitals and focused health care outlets. Both will initiate quality and price competition. Examples of this are the Cleveland Clinic in Ohio, the Austin-based Anderson Cancer Center, Boston’s Back Clinic or Toronto’s famous hernia-clinic. Value-driven competition will bring about excellence in catering for just one special medical condition. Remote control or tele-medicine and health-IT will help those new focused health care outlets to compete regionally, nationally and globally.

The best performing public hospitals should be allowed to earn independence as non-profit foundations. True competition means that the competent doctors are not rewarded (as at present) by higher fees (driving costs) but by more patients. This also offers gains in efficiency once doctors have to compete on price. Biotechnology is already driving medicine to new levels of personalised medical care offering more choices, based on the individual’s genetic outfit.

It is important to note, that future bespoke pharmaceuticals will be much more expensive than the previous one-size-fits-all drugs, like antibiotics, that served almost everyone in the population. Future drugs are designed for much smaller populations and that increases their cost.

The current disparate government programs are inflexible with regard to shared care and efficient use of resources. A key problem concerns product definition in health care. Health care should not be treated as a commodity but rather a value-adding service. Cannon and Tanner from the Cato Institute found that “every additional dollar spent on treating heart attacks yielded the equivalent of $7 worth of increased longevity and quality of life”. Frank R. Lichtenburg from Columbia Business School argues: “The inflation and quality-adjusted price of treating heart attacks declined at a rate of just over 1 per cent each year from 1983 to 1994. Other studies have found similar effects with prices for cataract surgery and depression” (Bedkober, IPA Review, March 2007).

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Medical innovation, until recently only revolving around new drugs and medical devices, will in the future also revolve around the organisation of health care delivery. With surging workforce participation of women, looking after your health becomes squeezed very much among other chores and time is more precious that ever. Therefore rationing health care by waiting for doctors will become utterly unacceptable and convenience will command a greater premium. In addition, customers’ increasing role in tailoring their services and preferred products will influence perceived value. This fundamental shift in customer value has to be factored into health care delivery.

The required new skills mix might gradually transform the medical training system. This scenario of innovation reflects reforms due to the people’s economy, reflecting the shift from capital to people as the staple of economy growth.

In order to increase the productivity of knowledge workers, Peter Drucker stresses, we need to grant them autonomy and see them as an assets rather than costs. The fee-for-service remuneration of doctors has to be phased out because it drives health care inflation through maximising symptomatic treatment in repetitive episodes. Its place will be taken by service packages or bundled medical procedures, labeled in the USA as “boutique medicine”. It simply boils down to just one bill for the whole care cycle or a long term care contract which will insure commitment of health professionals to deliver value for money.

This forms a strong incentive for replacing short-term fixes or episodic treatments in health care delivery with long-term commitment over the full care cycle.

This may create focused medical outlets with dedicated multi professional teams. We have learned from the Toyota total quality management the best way to improve quality is to accumulate experience through endless repetition. This requires doctors, like artist and athletes, to perform the same procedures hundreds of times per year. In the same manner better accountability based on transparency of prizes and quality gives incentives for surgeries and hospitals to specialise and often focus on just one medical condition like asthma, diabetes, heart failure and so on.

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About the Author

Dr Fred Hansen is a science writer having published mostly in Germany and the UK. He came to Melbourne a year ago and has published some articles in the IPA Review. He also has a regular blog at the Adam Smith Institute in London. Dr Hansen was a green MP in the state parliament of Hamburg in Germany in the mid-1990s and chaired the science select committee there.

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