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Perestrojka in the Dutch health care system
European Economic Review 35 (1991) 430440. North-Holland
Perestrojka in the Dutch health care system A demonstration project for other European countries Wynand P.M.M. van de Ven* Erasmus University
Rotterdam, 3000 DR Rotterdatn, the Netherlands
The Dutch government and parliament have recently decided to radically reform the Dutch health care system. Direct government control over prices and productive capacities will have to make way for regulated competition among insurers and among providers. There appear to be some similarities between economic problems associated with the perestrojka in Eastern Europe and the perestrojka that is taking place in the Dutch health care system. In both cases serious problems may arise as the result of the absence of consumer information, the absence of costrelated prices, the absence of antitrust policy, and the absence of market-oriented management. Each of these issues will be discussed. It will be concluded that other - Western or Eastern European countries can learn interesting lessons from the demonstration project that is taking place in the Netherlands.
1. Introduction The Dutch government and parliament have recently deci2d to radically reform the Dutch health care system. The present health care system in the Netherlands is characterized by a high degree of detailed direct government regulation on volume, planning and prices, and by a mixture of several health insurance systems. A major reason for reforming the system is that the detailed government regulation has turned out to be unworkable. Furthermore there are several problems with the present health insurance systems and there is a lack of incentives for efficiency. The intended system can be best characterized as a compulsory national health insurance based on regulated competition. Direct government control over prices and productive capacities will have to make way for regulated competition among insurers and among health care providers. Price cartels and regional cartels that have *The author would like t3 thank Maurice Marchand and an anonymous referee for their valuable comments on a previous version. Only the author is responsible for any remaining error. 00142921/91/$03.50 0 1991---Elsevier Science Publishers B.V. (North-Holland)
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originated as the result of anticompetitive government regulation and self-regulation, will be broken down. The benefits package of the compulsory health insurance will be quite broad and will cover about 96 percent of all acute care (hospital, physician, drugs, physiotherapy and some dental care), long term care (nursing home care, care for mentally and physically handicapped persons) and health care related social welfare (old people’s homes). According to the government’s proposals, l all individuals will receive a subsidy to help them buy their compulsory health insurance from one of the competing insurers.2 The subsidy will come from a Central Fund which will be filled with mandatory income-dependent premiums, to be paid to the tax-collector. From the Central Fund the subsidy will go directly to the qualified insurer chosen by the insured. Qualified insurers are obliged to have an open enrolment period once every two years and to obey other procompetitive regulation. The subsidy per individual is independent of the chosen insurer and will be equal to the expected per capita costs of the covered benefits within the risk group which the insured belongs to, minus a fixed amount. The fixed amount is equal for all individuals and will be about 11 percent of the average per capita costs of the covered benefits. The deficit created by this deducted fixed amount is met by a flat premium to be paid by the insured directly to the insurer of his or her choice. An insurer is obliged to quote the same flat rate premium to all of his insureds who choose the same insurance option. So the insurers will receive a risk-adjusted per capita budget from the Central Fund, supplemented by a flat rate premium to be paid by the insureds. The difference between the actual costs and the budget will not be the same for all insurers and will be reflected in the flat rate premium that the competing insurers will quote. This creates the incentive for insurers to be efficient. The insurers are expected to function as an intermediary between the consumer and the provider of care. To a high degree, insurers and providers will be free to negotiate conditions of contracts. The benefits package of the compulsory health insurance will not be described in terms of institutions like hospitals or nursing homes, but rather in terms of functions of care. Any supplier meeting certain quality standards is allowed to provide these services. This will greatly increase the possibilities for substitution of care. Insurers will be allowed to selectively contract with providers and to offer different insurance options as do, for instance, health maintenance organiza‘Ministry of Welfare, Health and Cultural Affairs, the Netherlands. Changing health care in the Netherlands, Sept. 1988; and Werken aan zorgvemieuwing, Tweede Kamer, 1989-1990, 21545, no. 2, May 1990. See also Van de Ven, W.P.M.M., 1990, From regulated cartel to regulated competition in the Dutch health care system, European Economic Review 34,632645. ‘Besides the c ompulsory health insurance people are free to buy supplemental health insurance (e.g. for a single-bed room). The premium for this voluntary supplemental insurance will be risk-related and will not be subsidized.
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tions, preferred provider organizations or traditional health insurers, as long as the insurance conditions are in accordance with the functionally described legal insurance rights. Consumers will be free to choose among different insurers, picking the insurance policy they like the most. The premium paid will reflect the efficiency and cost-generating behavior of the contracted health care providers. This creates the incentive for providers to be efficient. In theory the proposals for reforming the Dutch health care system offer good perspective for both solidarity and efficiency. In practice, however, several problems have to be solved. There appear to be some similarities between economic problems associated with the perestrojka in Eastern Europe and the perestrojka that is taking place in the Dutch health care system. In both cases serious problems arise as the result of the absence of consumer information, the absence of cost-related prices, the absence of antitrust policy and the absence of market-oriented management. In this paper these and other problems associated with the transition from a central planned health care system to a market oriented system will be discussed.
2 Consumer information
In Eastern Europe there was not enough (right to provide) public information. The new policy now is glasnost. In the Dutch health care sector there is a serious shortage of information especially about the quality of care, but also about prices, waiting lists, etc. For example, what does a patient know when he is looking for a new physician? The only thing he knows is that in the past the physician has successfully passed his medical qualifying examination. But generally the patient doesn’t know anything about the quality of the care delivered or whether the physician has taken refresher courses and has read the literature during the last decades. Although good consumer information is also important in the present Dutch health care system, it will be even more important in the proposed market-oriented system. Then the consumer is supposed to make choices among the competing insurers and the competing health care providers. So - unlike in the present system - the consumer will have to make a trade-off between quality and price. Also insurers, who will be allowed - unlike in the present system - to selectively contract with health care providers, will need more information on quality and price. So the demand for information can be expected to increase. It will be the government’s task to make sure that the consumers and insurers are able to get the right information. Good consumer information can be expected to be quite advantageous to the consumer. In several studies it has been shown that consumer infor-
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mation lowers the price of medical care. Pauly and Satterthwa.i& showed that the prices that primary care physicians charge, tended to low in areas where information about competing prima appeared to be fairly good. Benham’ found that in states whe of eyeglasses was legally prohibited, prices were almost do states where advertising was least restricted. Benham and Benham that advertising restrictions on eyeglasses lead to both lower uti higher prices. Feldman and Begun6 showed that prices were higher in states that banned optometric and optician price quality was held constant. Although it has been shown that more consumer information on prices leads to lower prices, the welfare effects of price information without any information on quality are unclear. Pauly’ (p. 233) provides a theoretical example that providing information on price only to totally ignorant consumers might increase the probability of use of low-quality physicians_ A high priority should therefore be given to the dissemination of reliable and for the consumer - understandable information on the quality of care. There are several ways to do this.* Firstly, independent institutes of certification could be established. These institutes could periodically control several aspects of the quality of care. Providers of care will only be certified if certain minimum standards of quality are met. Insurers will then prefer to contract only with certified providers. Secondly, providers of care themselves could provide their consumers with information. Also insurers could provide their insureds with relevant information concerning the providers they have contracted with. However, the problem then is that the consumer cannot verify the information. In order to overcome this problem one could think of ethical codes concerning advertising. Violation of these codes, for example by the dissemination of misleading or untruthful information, could be a punishable offence and could be made public by an independent agency. Thirdly, independent consumer organizations, universities or governmental ‘Pauly M V and M A. Satterthwaite, 1981, The pricing of primary care physicians services: A test of thk roiebf consumer information, The Bell Journal of Economics 12,488-X)6. 4Benham, L., 1972, The effects of advertising on the price of eyeglasses, The Journal of Law and Economics 15,337-352. ‘Benham, L. and A. Benham, 1975, Regulating through the professions: A perspective on information control, The Journal of Law and Economics l&421-448. 6Feldman, R. and J. Begun, 1978, The effects of advertising restrictions - lessons from optometry, Journal of Human Resources 13, Supplement, 247-262. ‘Pauly, M-V., 1988, Is medical care different? Old questions, new answers, Journal of Health Politics, Policy and Law 13, 227-237. *For a review of relevant consumer information on quality of care, see e.g.: U.S. Congress, O&e of Technology Assessment, 1988, The quality of medical care: Information for consumers, OTA-H-386 (U.S. Government Printing Office, Washington, DC.), June; Vamer, T. and J. Christy, 1986, Consumer information needs in a competitive health care environment, Health Care Financing Review 7, 99-104, Supplement: Ginsburg, P.B. and G.T. Hammons, 1988, Competition and the quality of care: The importance of information, Inquiry 25, 108-l 15.
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agencies can collect and publish relevant information, such as case-mix adjusted mortality rates. The government could make it mandatory for providers of care to supply some specified data. For example, in several states in the U.S.A. hospitals must provide an abstract report of every hospital case to the state, including information such as age, sex, principal diagnosis, other diagnoses, principal procedure, secondary procedures and discharge status (alive or dead).g These data are available to anyone who wants it, So a few years ago the Los AHgeles~IRWSreported for each of eight diagnosis the ten best and the ten worst hospitals in California. In the Wall Street Journal of 24 May 1990 an article was published with information on the price and quality of 55 common hospital procedures performed in 37 Pittsburg area hospitals. The data were released by the Pennsylvania HcJth Care Cost Containment Council. The differences in price and quality for the same procedure appeared to be quite large. The Health Care Lnancing Administration annually publishes data on mortality for Medicare patients by hospital. i0 It is clear that such information, subject to sufficient standardization for relevant factors like age, case-mix and severity of illness, can be of great use for insurers and insureds. Insurers could stimulate their insureds to choose cost-effective providers of care. As Ginsburg and Hammon” (p. f 13) state, not only does better information about quality have the potential to protect quality from competitive pressures to contain costs; it could permit a significant movement toward the cost-quality frontier - containing costs and increasing quality at the same time. Greenbergi (p. 100) provides an example drawn from cardiac surgery that illustrates how the dissemination of information might indeed lower costs and improve quality in the hospital sector. Glasnost in health care can be very healthy! 3. Wrong price-signals In Eastern Europe most prices are administrative prices and are not related to (marginal) costs. So prices send wrong signals to both consumers and producers. This also holds in the Dutch health care system, where prices and fees are mainly the result of government regulation and partly the result of negotiations between the representative organizations of health care providers and insurers, subject to governmental approval. A problem with ‘Enthoven, AC., Lecture 17 September 1987, in: F.T. Schut and W.P.M.M. van de Ven, eds., Proceedings of the conference on regulated competition in the Dutch health care system, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, 10408.8003. “U.S. Department of Human Services, Health Care Financing Administration, Medicare hospital mortality information (Baltimore, MD) 21207. “Ginsburg, P.B. and G.T. Hammons, 1988, op cit. ‘2Greenberg, W., 1985, Demand, supply, and information in health care and other industries, in: J.A. Meyer, ed., Incentives vs. controls in health (American Enterprise Institute, Washington, D.C.), 96 106.
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these mainly administratively determined prices is that they often do not reflect the real costs and therefore provide misleading information with respect to efficiency improving efforts. For example the fee for the last day of a hospital admission is based on the average cost per hospital day. This may result in the substitution of relatively costly alternative forms of care for relatively cheap (in terms of real costs) hospital care because the fee for the former care is lower than the misleading hospital fee. Substitution resulting from more competition therefore can have counterproductive effects. A crucial question therefore is: Should we wait, with introducing more competition until price signals have been modified in order to let them function as reliable information sources about the relative scarcity of goods and services within the health care system, or not? According to Enthoven13 (p. 33) we should not wait ‘because nobody will generate the needed price and cost information until they have to. Generating cost information is a costly process. It does not come free, and it will not be worth it to the managers in hospitals for example, to develop good cost accounting systems until they have to do so. And you need competition to motivate that. When they are so motivated, providers will estimate their costs and quote prices when insurers start seeking quotes for selective contracts’. 4. Antitrust policy In Eastern Europe there is no antitrust legislation and no antitrust policy. Because perestrojka can be considered as a transition from state monopoly to regulated competition, anticompetitive behavior can be a serious problem. This also applies to the Dutch health care sector, where we have many price cartels (e.g., physicians, dentists, physiotherapists and pharmacies) and many regional cartels (e.g., sickness funds and general practitioners). However, we do not have any experience of antitrust policy in health care. Schut14 has recently reviewed the strong and weak aspects of the Dutch antitust legislation and antitrust policy, especially with respect to health care. He concluded that an important weakness of the government proposals for health care reform is the missing link between structure and conduct. He stated that the hidden presupposition seems to be that an altering of the market structure compels the desired conduct and performance. However, the same incentives which are supposed to result in competition may also induce collusion with adverse effects on performance. Therefore Schut concluded that the creation of the necessary conditions for workable competition in health care not only requires a reshape of the structure of the 13Enthoven, A.C., 1987, op cit. 14Schut FT . 1990 Prospects for workable competition in health care: Dutch design and American ‘expe:ence, ‘Paper presented at the Second World Congress on Health Economics, Ziirich, IO-14 Sept.
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health care market, but also a dramatic change in conduct of all participants. Given the historically determined structure of the Dutch health care industry and the long-standing tradition of anticompetitive self-regulation, the proposed structural reforms will clerly not automatically induce the intended conduct. Hence, an effective antitrust policy is an important precondition for the creation and maintenance of a competitive health care system.” Schut, however, has serious doubts whether current Dutch antitrust policy will be able to counteract the predicted anticompetitive behavior. In the U.S.A. antitrust enforcement in health care has been given much attention since 1975. Much of the antitrust cases have focused on boycotts by health care providers of insurer cost-containment programs, on price fixing by physicians, on restraints against innovative forms of health care delivery, on restraints on truthful dissemination of information and on restraints against allied health care providers. l6 Lessons from antitrust policy in the United States over the last I5 years may be helpful in making the Dutch health care industry more competitive? A high priority should be given to the ranking of expected benefits and costs of bringing legal cases in various sectors of the health care market.18 The space that will be offered by the reduction of government regulation on volume and price has to benefit the consumer in health care and should not be used by the providers of care and by the insurers just for their own benefit. 5. Management
In Eastern Europe there is a tremendous shortage of good market- and client-oriented management. This is also true for the Dutch health care system. For several reasons top entrepreneurial managers have not been attracted to management functions in health care. Firstly, during the last 20 years increasingly more detailed government regulation came about with respect to investment decisions concerning productive capacity in health care and with respect to control over volume and prices. Therefore, managers in lSFor an explanation why antitrust is an essential element in any serious attempt to make the health care market more competitive. see Pollard, M.R., 1981, The essential role of antitrust in a competitive market for hea!th services, Millbank Memorial Fund Quarterly 59, 256-268. ‘6Costillo, L.L..B., 1985, Antitrust enforcement in health care; ten years after the AMA suit, New England Journal of Medicine 3 14, 901-904; Lerner, A.N., 1984, Federal trade commission antitrust activities in the health care services field, The Antitrust Bulletin, Summer, 205224. “See Schut, F-T., W. Greenberg and W.P.M.M. van de Ven, 1990, Antitrust policy Jn the Dutch health care system and the relevance of EEC competition policy and U.S. antitrust practice, Health Policy (forthcoming). ‘*For an agenda for antitrust enforcement activities, see Havighurst, C.C., 1983, The contributions of antitrust law to a procompetitive health policy, in: J.A. Meyer, ed., Market reforms in health care: Current issues, new direction, strategic decisions (American Enterprise Institute, Washington, D.C.) 295-322.
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health care have hardly any discretion with respect to major managers’ decisions. Secondly, entrepreneurial risk in health care is quite low, because the risk of going bankrupt is nearly nonexistent. This reduces the challenge for top entrepreneurial managers to work in the health care sector. Thirdly, the hierarchical relation with respect to those who take the major decisions in the primary process, i.e. the physicians, is often wanting. For example, most specialists are working as self-employed for profit entrepreneurs within the hospital. The possibility of influencing the primary process is also lacking because of the professional autonomy of physicians. Fourthly, the objectives for managers in health care are quite vague. Clear objectives such as maximizing profit or returns are lacking. For example, the target for hospital managers looks something like: control the budget, prevent internal conflicts and maintain external relations. Finally, the salary of managers in the health care sector is relatively low compared to other branches. Thus there is little to attract top management to the health care sector. In addition the board of directors of hospitals, nursing homes or sickness funds have no need to attract market and client oriented managers. This is the result of the lack of real consumer choices in health care and the protected position of sickness funds and providers of care, which often takes the form of a cartel regulated by government. However, good market- and client-oriented management is a necessary condition to enable the consumer to benefit from regulated competition. Therefore, a campaign to give publicity to the challenging role of management in a competitive health care system deserves a high priority. 6. Risk-adjusted budget for competing insurers A major technical problem related to the perestrojka in the Dutch health care system is the development of the budget formula to calculate the insurers’ budgets. The budget that an insurer receives per insured, is dependent on the risk category to which the insured belongs and provides the insurer with an incentive for efficiency. However, if the risk groups are rather heterogeneous, cream skimming may be very advantageous to the insurers. By cream skimming (or preferred risk selection) we understand selection by the insurer of so-called preferred risks, i.e. those insureds for whom the insurer considers the risk-adjusted per capita budget to be (far) above the expected cost level. The adverse effects of cream skimming are threefold. Firstly, for the (chronically) sick the access to good health care may be hindered. Insurers will try to attract the preferred risks and deter the non-preferred risks. If the budget system does not adequately compensate for health status, insurers will prefer not to contract with providers of care who have a good reputation of treating patients with cancer, diabetes or high blood pressure, for instance,
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because the insurers do not want the patients who are attracted by these providers to be their insureds. Secondly, in the case of an insuficiently sophisticated budget system eficient insurers might be driven out of the market by ineficient insurers who are successful in cream skimming. Thirdly, whilst individual insurers can gain by cream skimming, they only shift the costs to others, so there is no social gain. In fact, because of the costs involved in the process of cream skimming, there are only social welfare losses. In sum, if cream skimming takes place, it is counterproductive with respect to three supposedly positive effects of competition, i.e. improving the quality and efficiency of care and becoming more responsive to the consumers’ preferences. The best way to prevent cream skimming is to let the budgets for the competing insurers be fully adjusted to the insureds’ risks. Therefore a high priority should be given to the development of such a formula.1g 7. Other problems Besides the above-mentioned issues there are several other transition problems associated with the perestrojka in the Dutch health care system, e.g.: - How should new legislation be implemented while simultaneously withdrawing the old legislation without losing control over the health care system? How should new innovative projects be dealt with that are in the spirit of the proposed system, while the old legislation is still in force? - How should a benefits package be defined which is based on functions of care instead of types of care? - H )w should the complex EC-regulation be dealt with, that does not take into account the option of a market-oriented public health insurance system? Several of the above-mentioned issues and problems could each take many years to be fully dealt with. Therefore, it cannot be expected that the proposals for health care reform will be fully implemented at short notice. 8. Conclusion
In this paper some similarities have been mentioned between economic problems associated wmiththe perestrojka in Eastern Europe and the peres19See Van de Ven, W.P.M.M. and R.C.J.A. van Vliet, 1990, How can we prevent cream skimming in a competitive health insurance market? Paper presented at the Second World Congress on Health Economics, Zurich, 10-14 Sept.; and Van Vliet, R.C.J.A. and W.P.M.M. van de Ven, 1990, Towards a budget formula for competing health insurers, Paper presented at the Second World Congress on Health Economics, Zurich, IO-14 Sept.
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trojka that is taking place in the Dutch health care sector. In both cases great importance has to be attached to: - the presence of truthful information in order to let the consumer make a well-founded choice among the alternatives offered to him; - prices that reflect relative scarcity; - an effective antitrust policy in order to prevent the undesired effects of anticompeti tive behavior; - the presence of entrepreneurial, market- and client-oriented mqnagement. Furthermore, a major technical problem to be solved in the Dutch health
care system is the development of a sufficiently refined budget formula for competing health insurers. The changing health policy also changes the priorities on the agenda of future research in health economics. High on this agenda should be issues such as antitrust policy in health care and the application of industrial organization to health care (e.g. what is the relevant geographical market of a hospital?), cost-eflectiveness analyses, consumer information, the deveiopment of a risk-adjusted budget formula and empirical research into the effects of competition on the quality and price of health care. What developments are to be expected in the Dutch health care system in the next years? Because the government is seriously convinced of the failure of the previous strategy for cost containment and because of the broad political support for a market-oriented health care system,2o it is to be expected that in the next years changes will be made in the proposed direction. As far as the pace is concerned, it will not be a Polish revolution, but rather a step-by-step process, each step having, however, a revolut.ionary character. The pace and the ultimate success of the proposed reforms will depend on both the drive with which the above-mentioned problems will be tackled and the ‘willingness to change’ of all parties involved. Do those who it is assumed will get more responsibility really want it? What will be the reaction of those whose interests might be thwarted by the proposed reforms? It is not impossible that the political ‘willingness to change’ will meet a lot of opposition from the many parties involved. Of course, with respect to the political decision process the most important question is whether the proposed changes are in the interest of the insured consumers, i.e. the Dutch population. One could state that in theory the proposed reforms form an idea1 balance of market and regulation, of solidarity and efficiency. For this reason alone the proposed perestrojka in the Dutch health care system deserves every chance to succeed. Nowadays in many European countries major changes in the health cafe 20The health care reform was proposed in 1988 by the then ‘centre-right’ Dutch coalition government. In the spring of 1990 these proposals were also accepted by the ‘centre-left’ coalition government, which came into office in November
1989.
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system are under way or are being discussed.21 In the United Kingdom the most far-reaching reform of the National Health Service in its do-year history is being prepared.22 Major elements that are expected to be implemented in 1991 are self-governing hospitals and the possibility for large GP-practices to become budget-holders. The result of this should be more competition among health care providers. In Germany there is a lively political and academic debate about a structural reform of the German statutory health insurance system.’ 3 In Switzerland a committee, which was set up by Parliament and which consisted of representatives of sickness funds, private health insurers, physicians, hospitals, employers and employees, made proposals for heal-h reforms which showed a clear resemblance to the Dutch proposals. In France and Sweden academics came up with proposals for regulated competition in health care. 24 In most Eastern European countries there are lively discussions on how to transform the state health care monopoly into a market oriented system. It will be clear that the develo;Jments that are taking place in the Netherlands can be considered to be a demonstration project from which other European countries can learn interesting lessons. “See, e.g., Hurst, J., 1990, The reform of the health care systems in seven OECD countries, Paper presented at the Second World Congress on Health Economics, Zurich, IO-14 Sept. “Working for patients, White Paper presented to Parliament, 31 January 1989. %ee. e.g.: Gitter, W., H. Hauser, K.D. Henke, E. Knappe, L. Manner, G. Neubauer, P. Oberender and G. Sieben. 1989, Structural reform of the statutory health insurance system (Scientific Study Group ‘Health Insurance’, Universitat Bayreuth), June; Fisinger, J.. K. Kraft and M.V. Pauly. 1986, Some observations on greater competition in the West German healthinsurance system from a U.S. perspective. Managerial and Decision Economics 7, 151-161; 2z@obs, K., 1989. Elements of competition in the Statutory Health Insurance: The case of the Fedel-:a1 Republic of Germany, Paper presented to the First European Conference on Health EconomrLK. Barcelona, Sept.; Henke, K.B., 1989, What can Americans learn from Europeans? Response. HifaIth Care Financing Review, Annual supplement, pp. 93-96. ‘%aunois, K . B. Majnoni d’brtignano, J. Stephan and V. Rodwin, 1935, Les Reseaux de Soins Coordonnes (RX): Propositions pour une Reforme Profonde du Systeme de Sante, Revue Francaise des Affaires Sociales 39, no. 1, janvier-mars, 37-62; Saltman, R.B. and C. von Otter, t987, Revitalizing puNic health care systems: A proposal for public competition in Sweden, Health Policy 7, 21-60.
Perestrojka in the Dutch health care system A demonstration project for other European countries Wynand P.M.M. van de Ven* Erasmus University
Rotterdam, 3000 DR Rotterdatn, the Netherlands
The Dutch government and parliament have recently decided to radically reform the Dutch health care system. Direct government control over prices and productive capacities will have to make way for regulated competition among insurers and among providers. There appear to be some similarities between economic problems associated with the perestrojka in Eastern Europe and the perestrojka that is taking place in the Dutch health care system. In both cases serious problems may arise as the result of the absence of consumer information, the absence of costrelated prices, the absence of antitrust policy, and the absence of market-oriented management. Each of these issues will be discussed. It will be concluded that other - Western or Eastern European countries can learn interesting lessons from the demonstration project that is taking place in the Netherlands.
1. Introduction The Dutch government and parliament have recently deci2d to radically reform the Dutch health care system. The present health care system in the Netherlands is characterized by a high degree of detailed direct government regulation on volume, planning and prices, and by a mixture of several health insurance systems. A major reason for reforming the system is that the detailed government regulation has turned out to be unworkable. Furthermore there are several problems with the present health insurance systems and there is a lack of incentives for efficiency. The intended system can be best characterized as a compulsory national health insurance based on regulated competition. Direct government control over prices and productive capacities will have to make way for regulated competition among insurers and among health care providers. Price cartels and regional cartels that have *The author would like t3 thank Maurice Marchand and an anonymous referee for their valuable comments on a previous version. Only the author is responsible for any remaining error. 00142921/91/$03.50 0 1991---Elsevier Science Publishers B.V. (North-Holland)
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originated as the result of anticompetitive government regulation and self-regulation, will be broken down. The benefits package of the compulsory health insurance will be quite broad and will cover about 96 percent of all acute care (hospital, physician, drugs, physiotherapy and some dental care), long term care (nursing home care, care for mentally and physically handicapped persons) and health care related social welfare (old people’s homes). According to the government’s proposals, l all individuals will receive a subsidy to help them buy their compulsory health insurance from one of the competing insurers.2 The subsidy will come from a Central Fund which will be filled with mandatory income-dependent premiums, to be paid to the tax-collector. From the Central Fund the subsidy will go directly to the qualified insurer chosen by the insured. Qualified insurers are obliged to have an open enrolment period once every two years and to obey other procompetitive regulation. The subsidy per individual is independent of the chosen insurer and will be equal to the expected per capita costs of the covered benefits within the risk group which the insured belongs to, minus a fixed amount. The fixed amount is equal for all individuals and will be about 11 percent of the average per capita costs of the covered benefits. The deficit created by this deducted fixed amount is met by a flat premium to be paid by the insured directly to the insurer of his or her choice. An insurer is obliged to quote the same flat rate premium to all of his insureds who choose the same insurance option. So the insurers will receive a risk-adjusted per capita budget from the Central Fund, supplemented by a flat rate premium to be paid by the insureds. The difference between the actual costs and the budget will not be the same for all insurers and will be reflected in the flat rate premium that the competing insurers will quote. This creates the incentive for insurers to be efficient. The insurers are expected to function as an intermediary between the consumer and the provider of care. To a high degree, insurers and providers will be free to negotiate conditions of contracts. The benefits package of the compulsory health insurance will not be described in terms of institutions like hospitals or nursing homes, but rather in terms of functions of care. Any supplier meeting certain quality standards is allowed to provide these services. This will greatly increase the possibilities for substitution of care. Insurers will be allowed to selectively contract with providers and to offer different insurance options as do, for instance, health maintenance organiza‘Ministry of Welfare, Health and Cultural Affairs, the Netherlands. Changing health care in the Netherlands, Sept. 1988; and Werken aan zorgvemieuwing, Tweede Kamer, 1989-1990, 21545, no. 2, May 1990. See also Van de Ven, W.P.M.M., 1990, From regulated cartel to regulated competition in the Dutch health care system, European Economic Review 34,632645. ‘Besides the c ompulsory health insurance people are free to buy supplemental health insurance (e.g. for a single-bed room). The premium for this voluntary supplemental insurance will be risk-related and will not be subsidized.
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tions, preferred provider organizations or traditional health insurers, as long as the insurance conditions are in accordance with the functionally described legal insurance rights. Consumers will be free to choose among different insurers, picking the insurance policy they like the most. The premium paid will reflect the efficiency and cost-generating behavior of the contracted health care providers. This creates the incentive for providers to be efficient. In theory the proposals for reforming the Dutch health care system offer good perspective for both solidarity and efficiency. In practice, however, several problems have to be solved. There appear to be some similarities between economic problems associated with the perestrojka in Eastern Europe and the perestrojka that is taking place in the Dutch health care system. In both cases serious problems arise as the result of the absence of consumer information, the absence of cost-related prices, the absence of antitrust policy and the absence of market-oriented management. In this paper these and other problems associated with the transition from a central planned health care system to a market oriented system will be discussed.
2 Consumer information
In Eastern Europe there was not enough (right to provide) public information. The new policy now is glasnost. In the Dutch health care sector there is a serious shortage of information especially about the quality of care, but also about prices, waiting lists, etc. For example, what does a patient know when he is looking for a new physician? The only thing he knows is that in the past the physician has successfully passed his medical qualifying examination. But generally the patient doesn’t know anything about the quality of the care delivered or whether the physician has taken refresher courses and has read the literature during the last decades. Although good consumer information is also important in the present Dutch health care system, it will be even more important in the proposed market-oriented system. Then the consumer is supposed to make choices among the competing insurers and the competing health care providers. So - unlike in the present system - the consumer will have to make a trade-off between quality and price. Also insurers, who will be allowed - unlike in the present system - to selectively contract with health care providers, will need more information on quality and price. So the demand for information can be expected to increase. It will be the government’s task to make sure that the consumers and insurers are able to get the right information. Good consumer information can be expected to be quite advantageous to the consumer. In several studies it has been shown that consumer infor-
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mation lowers the price of medical care. Pauly and Satterthwa.i& showed that the prices that primary care physicians charge, tended to low in areas where information about competing prima appeared to be fairly good. Benham’ found that in states whe of eyeglasses was legally prohibited, prices were almost do states where advertising was least restricted. Benham and Benham that advertising restrictions on eyeglasses lead to both lower uti higher prices. Feldman and Begun6 showed that prices were higher in states that banned optometric and optician price quality was held constant. Although it has been shown that more consumer information on prices leads to lower prices, the welfare effects of price information without any information on quality are unclear. Pauly’ (p. 233) provides a theoretical example that providing information on price only to totally ignorant consumers might increase the probability of use of low-quality physicians_ A high priority should therefore be given to the dissemination of reliable and for the consumer - understandable information on the quality of care. There are several ways to do this.* Firstly, independent institutes of certification could be established. These institutes could periodically control several aspects of the quality of care. Providers of care will only be certified if certain minimum standards of quality are met. Insurers will then prefer to contract only with certified providers. Secondly, providers of care themselves could provide their consumers with information. Also insurers could provide their insureds with relevant information concerning the providers they have contracted with. However, the problem then is that the consumer cannot verify the information. In order to overcome this problem one could think of ethical codes concerning advertising. Violation of these codes, for example by the dissemination of misleading or untruthful information, could be a punishable offence and could be made public by an independent agency. Thirdly, independent consumer organizations, universities or governmental ‘Pauly M V and M A. Satterthwaite, 1981, The pricing of primary care physicians services: A test of thk roiebf consumer information, The Bell Journal of Economics 12,488-X)6. 4Benham, L., 1972, The effects of advertising on the price of eyeglasses, The Journal of Law and Economics 15,337-352. ‘Benham, L. and A. Benham, 1975, Regulating through the professions: A perspective on information control, The Journal of Law and Economics l&421-448. 6Feldman, R. and J. Begun, 1978, The effects of advertising restrictions - lessons from optometry, Journal of Human Resources 13, Supplement, 247-262. ‘Pauly, M-V., 1988, Is medical care different? Old questions, new answers, Journal of Health Politics, Policy and Law 13, 227-237. *For a review of relevant consumer information on quality of care, see e.g.: U.S. Congress, O&e of Technology Assessment, 1988, The quality of medical care: Information for consumers, OTA-H-386 (U.S. Government Printing Office, Washington, DC.), June; Vamer, T. and J. Christy, 1986, Consumer information needs in a competitive health care environment, Health Care Financing Review 7, 99-104, Supplement: Ginsburg, P.B. and G.T. Hammons, 1988, Competition and the quality of care: The importance of information, Inquiry 25, 108-l 15.
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agencies can collect and publish relevant information, such as case-mix adjusted mortality rates. The government could make it mandatory for providers of care to supply some specified data. For example, in several states in the U.S.A. hospitals must provide an abstract report of every hospital case to the state, including information such as age, sex, principal diagnosis, other diagnoses, principal procedure, secondary procedures and discharge status (alive or dead).g These data are available to anyone who wants it, So a few years ago the Los AHgeles~IRWSreported for each of eight diagnosis the ten best and the ten worst hospitals in California. In the Wall Street Journal of 24 May 1990 an article was published with information on the price and quality of 55 common hospital procedures performed in 37 Pittsburg area hospitals. The data were released by the Pennsylvania HcJth Care Cost Containment Council. The differences in price and quality for the same procedure appeared to be quite large. The Health Care Lnancing Administration annually publishes data on mortality for Medicare patients by hospital. i0 It is clear that such information, subject to sufficient standardization for relevant factors like age, case-mix and severity of illness, can be of great use for insurers and insureds. Insurers could stimulate their insureds to choose cost-effective providers of care. As Ginsburg and Hammon” (p. f 13) state, not only does better information about quality have the potential to protect quality from competitive pressures to contain costs; it could permit a significant movement toward the cost-quality frontier - containing costs and increasing quality at the same time. Greenbergi (p. 100) provides an example drawn from cardiac surgery that illustrates how the dissemination of information might indeed lower costs and improve quality in the hospital sector. Glasnost in health care can be very healthy! 3. Wrong price-signals In Eastern Europe most prices are administrative prices and are not related to (marginal) costs. So prices send wrong signals to both consumers and producers. This also holds in the Dutch health care system, where prices and fees are mainly the result of government regulation and partly the result of negotiations between the representative organizations of health care providers and insurers, subject to governmental approval. A problem with ‘Enthoven, AC., Lecture 17 September 1987, in: F.T. Schut and W.P.M.M. van de Ven, eds., Proceedings of the conference on regulated competition in the Dutch health care system, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, 10408.8003. “U.S. Department of Human Services, Health Care Financing Administration, Medicare hospital mortality information (Baltimore, MD) 21207. “Ginsburg, P.B. and G.T. Hammons, 1988, op cit. ‘2Greenberg, W., 1985, Demand, supply, and information in health care and other industries, in: J.A. Meyer, ed., Incentives vs. controls in health (American Enterprise Institute, Washington, D.C.), 96 106.
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these mainly administratively determined prices is that they often do not reflect the real costs and therefore provide misleading information with respect to efficiency improving efforts. For example the fee for the last day of a hospital admission is based on the average cost per hospital day. This may result in the substitution of relatively costly alternative forms of care for relatively cheap (in terms of real costs) hospital care because the fee for the former care is lower than the misleading hospital fee. Substitution resulting from more competition therefore can have counterproductive effects. A crucial question therefore is: Should we wait, with introducing more competition until price signals have been modified in order to let them function as reliable information sources about the relative scarcity of goods and services within the health care system, or not? According to Enthoven13 (p. 33) we should not wait ‘because nobody will generate the needed price and cost information until they have to. Generating cost information is a costly process. It does not come free, and it will not be worth it to the managers in hospitals for example, to develop good cost accounting systems until they have to do so. And you need competition to motivate that. When they are so motivated, providers will estimate their costs and quote prices when insurers start seeking quotes for selective contracts’. 4. Antitrust policy In Eastern Europe there is no antitrust legislation and no antitrust policy. Because perestrojka can be considered as a transition from state monopoly to regulated competition, anticompetitive behavior can be a serious problem. This also applies to the Dutch health care sector, where we have many price cartels (e.g., physicians, dentists, physiotherapists and pharmacies) and many regional cartels (e.g., sickness funds and general practitioners). However, we do not have any experience of antitrust policy in health care. Schut14 has recently reviewed the strong and weak aspects of the Dutch antitust legislation and antitrust policy, especially with respect to health care. He concluded that an important weakness of the government proposals for health care reform is the missing link between structure and conduct. He stated that the hidden presupposition seems to be that an altering of the market structure compels the desired conduct and performance. However, the same incentives which are supposed to result in competition may also induce collusion with adverse effects on performance. Therefore Schut concluded that the creation of the necessary conditions for workable competition in health care not only requires a reshape of the structure of the 13Enthoven, A.C., 1987, op cit. 14Schut FT . 1990 Prospects for workable competition in health care: Dutch design and American ‘expe:ence, ‘Paper presented at the Second World Congress on Health Economics, Ziirich, IO-14 Sept.
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health care market, but also a dramatic change in conduct of all participants. Given the historically determined structure of the Dutch health care industry and the long-standing tradition of anticompetitive self-regulation, the proposed structural reforms will clerly not automatically induce the intended conduct. Hence, an effective antitrust policy is an important precondition for the creation and maintenance of a competitive health care system.” Schut, however, has serious doubts whether current Dutch antitrust policy will be able to counteract the predicted anticompetitive behavior. In the U.S.A. antitrust enforcement in health care has been given much attention since 1975. Much of the antitrust cases have focused on boycotts by health care providers of insurer cost-containment programs, on price fixing by physicians, on restraints against innovative forms of health care delivery, on restraints on truthful dissemination of information and on restraints against allied health care providers. l6 Lessons from antitrust policy in the United States over the last I5 years may be helpful in making the Dutch health care industry more competitive? A high priority should be given to the ranking of expected benefits and costs of bringing legal cases in various sectors of the health care market.18 The space that will be offered by the reduction of government regulation on volume and price has to benefit the consumer in health care and should not be used by the providers of care and by the insurers just for their own benefit. 5. Management
In Eastern Europe there is a tremendous shortage of good market- and client-oriented management. This is also true for the Dutch health care system. For several reasons top entrepreneurial managers have not been attracted to management functions in health care. Firstly, during the last 20 years increasingly more detailed government regulation came about with respect to investment decisions concerning productive capacity in health care and with respect to control over volume and prices. Therefore, managers in lSFor an explanation why antitrust is an essential element in any serious attempt to make the health care market more competitive. see Pollard, M.R., 1981, The essential role of antitrust in a competitive market for hea!th services, Millbank Memorial Fund Quarterly 59, 256-268. ‘6Costillo, L.L..B., 1985, Antitrust enforcement in health care; ten years after the AMA suit, New England Journal of Medicine 3 14, 901-904; Lerner, A.N., 1984, Federal trade commission antitrust activities in the health care services field, The Antitrust Bulletin, Summer, 205224. “See Schut, F-T., W. Greenberg and W.P.M.M. van de Ven, 1990, Antitrust policy Jn the Dutch health care system and the relevance of EEC competition policy and U.S. antitrust practice, Health Policy (forthcoming). ‘*For an agenda for antitrust enforcement activities, see Havighurst, C.C., 1983, The contributions of antitrust law to a procompetitive health policy, in: J.A. Meyer, ed., Market reforms in health care: Current issues, new direction, strategic decisions (American Enterprise Institute, Washington, D.C.) 295-322.
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health care have hardly any discretion with respect to major managers’ decisions. Secondly, entrepreneurial risk in health care is quite low, because the risk of going bankrupt is nearly nonexistent. This reduces the challenge for top entrepreneurial managers to work in the health care sector. Thirdly, the hierarchical relation with respect to those who take the major decisions in the primary process, i.e. the physicians, is often wanting. For example, most specialists are working as self-employed for profit entrepreneurs within the hospital. The possibility of influencing the primary process is also lacking because of the professional autonomy of physicians. Fourthly, the objectives for managers in health care are quite vague. Clear objectives such as maximizing profit or returns are lacking. For example, the target for hospital managers looks something like: control the budget, prevent internal conflicts and maintain external relations. Finally, the salary of managers in the health care sector is relatively low compared to other branches. Thus there is little to attract top management to the health care sector. In addition the board of directors of hospitals, nursing homes or sickness funds have no need to attract market and client oriented managers. This is the result of the lack of real consumer choices in health care and the protected position of sickness funds and providers of care, which often takes the form of a cartel regulated by government. However, good market- and client-oriented management is a necessary condition to enable the consumer to benefit from regulated competition. Therefore, a campaign to give publicity to the challenging role of management in a competitive health care system deserves a high priority. 6. Risk-adjusted budget for competing insurers A major technical problem related to the perestrojka in the Dutch health care system is the development of the budget formula to calculate the insurers’ budgets. The budget that an insurer receives per insured, is dependent on the risk category to which the insured belongs and provides the insurer with an incentive for efficiency. However, if the risk groups are rather heterogeneous, cream skimming may be very advantageous to the insurers. By cream skimming (or preferred risk selection) we understand selection by the insurer of so-called preferred risks, i.e. those insureds for whom the insurer considers the risk-adjusted per capita budget to be (far) above the expected cost level. The adverse effects of cream skimming are threefold. Firstly, for the (chronically) sick the access to good health care may be hindered. Insurers will try to attract the preferred risks and deter the non-preferred risks. If the budget system does not adequately compensate for health status, insurers will prefer not to contract with providers of care who have a good reputation of treating patients with cancer, diabetes or high blood pressure, for instance,
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because the insurers do not want the patients who are attracted by these providers to be their insureds. Secondly, in the case of an insuficiently sophisticated budget system eficient insurers might be driven out of the market by ineficient insurers who are successful in cream skimming. Thirdly, whilst individual insurers can gain by cream skimming, they only shift the costs to others, so there is no social gain. In fact, because of the costs involved in the process of cream skimming, there are only social welfare losses. In sum, if cream skimming takes place, it is counterproductive with respect to three supposedly positive effects of competition, i.e. improving the quality and efficiency of care and becoming more responsive to the consumers’ preferences. The best way to prevent cream skimming is to let the budgets for the competing insurers be fully adjusted to the insureds’ risks. Therefore a high priority should be given to the development of such a formula.1g 7. Other problems Besides the above-mentioned issues there are several other transition problems associated with the perestrojka in the Dutch health care system, e.g.: - How should new legislation be implemented while simultaneously withdrawing the old legislation without losing control over the health care system? How should new innovative projects be dealt with that are in the spirit of the proposed system, while the old legislation is still in force? - How should a benefits package be defined which is based on functions of care instead of types of care? - H )w should the complex EC-regulation be dealt with, that does not take into account the option of a market-oriented public health insurance system? Several of the above-mentioned issues and problems could each take many years to be fully dealt with. Therefore, it cannot be expected that the proposals for health care reform will be fully implemented at short notice. 8. Conclusion
In this paper some similarities have been mentioned between economic problems associated wmiththe perestrojka in Eastern Europe and the peres19See Van de Ven, W.P.M.M. and R.C.J.A. van Vliet, 1990, How can we prevent cream skimming in a competitive health insurance market? Paper presented at the Second World Congress on Health Economics, Zurich, 10-14 Sept.; and Van Vliet, R.C.J.A. and W.P.M.M. van de Ven, 1990, Towards a budget formula for competing health insurers, Paper presented at the Second World Congress on Health Economics, Zurich, IO-14 Sept.
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trojka that is taking place in the Dutch health care sector. In both cases great importance has to be attached to: - the presence of truthful information in order to let the consumer make a well-founded choice among the alternatives offered to him; - prices that reflect relative scarcity; - an effective antitrust policy in order to prevent the undesired effects of anticompeti tive behavior; - the presence of entrepreneurial, market- and client-oriented mqnagement. Furthermore, a major technical problem to be solved in the Dutch health
care system is the development of a sufficiently refined budget formula for competing health insurers. The changing health policy also changes the priorities on the agenda of future research in health economics. High on this agenda should be issues such as antitrust policy in health care and the application of industrial organization to health care (e.g. what is the relevant geographical market of a hospital?), cost-eflectiveness analyses, consumer information, the deveiopment of a risk-adjusted budget formula and empirical research into the effects of competition on the quality and price of health care. What developments are to be expected in the Dutch health care system in the next years? Because the government is seriously convinced of the failure of the previous strategy for cost containment and because of the broad political support for a market-oriented health care system,2o it is to be expected that in the next years changes will be made in the proposed direction. As far as the pace is concerned, it will not be a Polish revolution, but rather a step-by-step process, each step having, however, a revolut.ionary character. The pace and the ultimate success of the proposed reforms will depend on both the drive with which the above-mentioned problems will be tackled and the ‘willingness to change’ of all parties involved. Do those who it is assumed will get more responsibility really want it? What will be the reaction of those whose interests might be thwarted by the proposed reforms? It is not impossible that the political ‘willingness to change’ will meet a lot of opposition from the many parties involved. Of course, with respect to the political decision process the most important question is whether the proposed changes are in the interest of the insured consumers, i.e. the Dutch population. One could state that in theory the proposed reforms form an idea1 balance of market and regulation, of solidarity and efficiency. For this reason alone the proposed perestrojka in the Dutch health care system deserves every chance to succeed. Nowadays in many European countries major changes in the health cafe 20The health care reform was proposed in 1988 by the then ‘centre-right’ Dutch coalition government. In the spring of 1990 these proposals were also accepted by the ‘centre-left’ coalition government, which came into office in November
1989.
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system are under way or are being discussed.21 In the United Kingdom the most far-reaching reform of the National Health Service in its do-year history is being prepared.22 Major elements that are expected to be implemented in 1991 are self-governing hospitals and the possibility for large GP-practices to become budget-holders. The result of this should be more competition among health care providers. In Germany there is a lively political and academic debate about a structural reform of the German statutory health insurance system.’ 3 In Switzerland a committee, which was set up by Parliament and which consisted of representatives of sickness funds, private health insurers, physicians, hospitals, employers and employees, made proposals for heal-h reforms which showed a clear resemblance to the Dutch proposals. In France and Sweden academics came up with proposals for regulated competition in health care. 24 In most Eastern European countries there are lively discussions on how to transform the state health care monopoly into a market oriented system. It will be clear that the develo;Jments that are taking place in the Netherlands can be considered to be a demonstration project from which other European countries can learn interesting lessons. “See, e.g., Hurst, J., 1990, The reform of the health care systems in seven OECD countries, Paper presented at the Second World Congress on Health Economics, Zurich, IO-14 Sept. “Working for patients, White Paper presented to Parliament, 31 January 1989. %ee. e.g.: Gitter, W., H. Hauser, K.D. Henke, E. Knappe, L. Manner, G. Neubauer, P. Oberender and G. Sieben. 1989, Structural reform of the statutory health insurance system (Scientific Study Group ‘Health Insurance’, Universitat Bayreuth), June; Fisinger, J.. K. Kraft and M.V. Pauly. 1986, Some observations on greater competition in the West German healthinsurance system from a U.S. perspective. Managerial and Decision Economics 7, 151-161; 2z@obs, K., 1989. Elements of competition in the Statutory Health Insurance: The case of the Fedel-:a1 Republic of Germany, Paper presented to the First European Conference on Health EconomrLK. Barcelona, Sept.; Henke, K.B., 1989, What can Americans learn from Europeans? Response. HifaIth Care Financing Review, Annual supplement, pp. 93-96. ‘%aunois, K . B. Majnoni d’brtignano, J. Stephan and V. Rodwin, 1935, Les Reseaux de Soins Coordonnes (RX): Propositions pour une Reforme Profonde du Systeme de Sante, Revue Francaise des Affaires Sociales 39, no. 1, janvier-mars, 37-62; Saltman, R.B. and C. von Otter, t987, Revitalizing puNic health care systems: A proposal for public competition in Sweden, Health Policy 7, 21-60.