Ian Morrison

Well, it’s health reform season again. Every 10 years or so we get geared up to reform health care. We never actually do anything, but we have a great old time talking about it at conferences.

At some point in the debate, maybe soon, we start casting around for solutions from abroad. Somebody must be doing it right, we start to think. Well, actually, every system around the world is an ugly compromise among cost, quality, access and security of benefits, and almost all systems are in crisis according to the local news media. We in the United States have a bad bargain, maybe the worst: high costs, uneven quality, poor access and no security of benefits except for those over age 65.

Looking around the world, there are lots of things to learn from the United Kingdom, France, Germany, Canada and others. The place that has my attention these days is Australia. I like Australia for the people, the wine and the weather-but it has a lot to teach us about health care, too.

Australia is a big country (bigger than the continental United States), but it has only 20 million people. Aussies are a no-nonsense, sarcastic, fun-loving and friendly people who have a very low tolerance for pretentiousness-my kind of people. On a recent visit, I had a chance to meet with the nation’s top CEOs of health plans and learn a little about what Australia is doing. Australia can teach us some important lessons to fuel the U.S. health reform debate.

The Aussie Health Plan

All health care systems are difficult to describe, and all reflect the culture and values of the country. Here is a very brief and simplistic overview of Australia’s health care system.

Imagine the Canadian system as a base (a national health system funded through taxes that provides all ambulatory care and has public hospitals where care is effectively free to residents, although their choice of specialists and amenities in the hospital would be somewhat limited). This is what Australians call Medicare.

Add to that a private insurance system that supports hospital care in private hospitals and in higher-amenity environments in public hospitals for people with private health insurance. The private system is not dissimilar to the United Kingdom’s. The big difference is that, while less than 10 percent of Brits have private insurance, nearly 50 percent of Australians have some form of private coverage that was purchased directly by families and individuals. And unlike the United Kingdom, where the private sector has historically been characterized as queue jumping for minor procedures like varicose vein removal, the Australian private system covers about half or more of chemotherapy, joint replacement and other high-tech care.

Private insurance in Australia is relatively cheap by our standards, with cost depending on the type of coverage purchased from a few hundred dollars a year up to about $3,000 (Australian) for “Rolls Royce” coverage. Experiments are under way to fund health services through private insurance “outside the hospital gate,” as they say down under, meaning in the ambulatory environment.

Overall, the nation spends about 10 percent of its GDP on health, compared with 16 percent in the United States. The people seem as happy as anyone else, based on international surveys, and they live longer and seemingly better than we do. I think it’s the beer, the beaches and the barbie that does it, not the health care, but that’s another story.

Incentives

How do Australians manage to get people signed up for a two-tiered system and deliver what seems a pretty decent value to all Australians? Here are some clues that we might learn from:

An explicit choice/cost trade-off. Australians face a clear and seemingly socially acceptable choice: You can have free care, paid by you and your fellow taxpayers, but you will have no choice of provider for specialty hospital-based care, and you will not get the fancy private room unless you are devastatingly ill. Or you can buy a private insurance policy and have complete choice of provider, no waiting and higher amenities. If you buy the private insurance (as in the United Kingdom), you still have to pay your taxes to the Australian Medicare system, and all Australians get pretty much the same primary care and ambulatory public services. Private patients care about the public system because they are subsidized by the public system while in the hospital, in that Medicare is paying for a significant portion of the private patient’s stay. That is one reason the private insurance system accounts for only 11 percent of overall funding for health, despite its 50 percent penetration of the population. Overall, Australia is a very interesting example of what the Europeans call social solidarity, blended with and supplemented by private insurance. It will be interesting to see as the private sector grows outside the hospital gate whether the solidarity remains so solid, but to date, the Aussies seem to have broad buy-in for the system, with the exception perhaps of trade unions and the political left.

A simple tax subsidy. In the last decade, Australia has experimented with tax-based inducements for individuals to purchase insurance. They tried means-tested subsidies, but those did not seem to work, and Aussies have now hit on a 30 percent flat rebate as a way to stimulate growth in the private system. It seems to be working like a charm. Since the introduction in 1999 of the rebate and lifetime health coverage guarantees (I’ll say more about the latter below), enrollment in private insurance, which was dwindling at around a third of the Australian population prior to the reform, jumped dramatically to now almost exactly half of all Australians being covered by some form of private insurance (with 43 percent having coverage for hospital care). It’s not just the richest half who signs up. A quarter of those with private insurance have annual household incomes of less than $33,000 Australian (about $27,000 in U.S. dollars), and half of all privately insured Australians have household incomes of less than $70,000 (Australian), which is about $58,000 U.S. and pretty close to the U.S. median household income. My impression from the Sydney news media and local ads for coverage is that buying health insurance is viewed as a no-brainer for the middle class, largely because of the tax subsidy.

Incentives to sign up young and stay in. Critics of private insurance point to the classic sources of market failure: cream skimming, adverse selection and moral hazard. True, Australia has to be wary of all of these. But it has developed a sensible inducement to sign up when you are young and healthy and stay in for life. Most importantly, private health insurance in Australia is community rated, and a reinsurance pool handles the risk adjustment that could face insurers who get disproportionate enrollment from the elderly or the sick. (What a radical idea! I am still mystified that we in the United States abandoned community rating over the last 20 years with seemingly no public or political debate about the consequences of the shift.) In addition, as part of the 1999 reform, Australians 30 years old or under who sign up for private insurance pay a lower premium throughout their lifetime than those who postpone enrollment. People over the age of 30 will face a 2 percent increase in premium over the base rate for every year they postpone joining an insurance plan. Brilliant. (Recent legislative changes remove this penalty after people have paid the increased premiums for 10 years because research showed that it was a reason people abandoned private health insurance. Again, this latest move is targeted to keep the younger people enrolled.)

The employer has no role. The Australian system is about government, private insurers and consumers figuring out how to get along. Employers are out of the picture. There is almost no group insurance, and almost no employer sponsorship of health insurance. Who needs it if you have community rating and risk adjustment? Australian businessmen do not have to fret about how health care costs are eating their earnings per share. They just have to pay their taxes and let their employees figure out on their own if they like the value proposition of private health insurance.

Marketing and administration costs are low. The traditional rap against individual insurance markets is that they have astonishingly high administrative costs to pay brokers, do underwriting and so forth. It appears that this is not the case in Australia. Total administrative costs of private insurance (including profit) are around 9.5 percent, way less than in the United States. This is partly because the products seem to sell themselves as a result of the tax subsidy, partly because they are simple and not overly expensive products, and partly because the industry is efficient and seems to operate in a form of collegial competition through regional oligopolies rather than through an advertising and marketing arms race.

Containing costs through the pharmacy benefit scheme. The private sector CEOs of health plans in Australia love the nation’s pharmacy benefit scheme, a universal system of coverage paid by the Commonwealth (the federal government), which covers most medications through a very tight price-controlled, reference-price-based system. It is a system that is detested by every global drug company, but is enthusiastically embraced by the health plans (or health funds, as the Aussies call them).

Where do they go from here? I gave a little talk in Sydney to a group of health fund leaders about what we are doing in America about value purchasing, transparency, pay for performance and so on, and the Aussies seem interested in embarking on many of these initiatives. Indeed, my mate Dr. Michael Armitage, a former health minister of South Australia and current CEO of the Australian Health Insurance Association, is pursuing many of these initiatives with his members. In other areas, like health IT, the Aussies are way ahead of us.

There is no such thing as a perfect health care system. But Australia has wrestled, I think successfully, with big issues such as the balance between public and private coverage, the role of employers, the value of tax subsidy, simplicity of insurance product design and coordination of public and private controls for new technology. Australia is worth a visit for a whole host of reasons, including some ideas about health care. So as the Australian tourist board ad says: “Where the bloody hell are you?”

Ian Morrison is an author, consultant and futurist based in Menlo Park, California. This article first appeared on July 9, 2007 in HHN Magazine online site.