The rising cost of health insurance

By JAN CORBETT

London has Harley St, Auckland has the Newmarket end of Remuera Rd. Here and in the surrounding streets, medical specialists congregate in state-of-the art premises, with waiting rooms as luxurious as the lobbies of five-star hotels.

St Mark's Breast Centre even has a swimming pool. It came with the house that was converted into the surgery, breast surgeon John Harman is quick to explain, adding that the patients are soothed by it.

John Harman has built a thriving practice around breast cancer surgery and has been a strong advocate for quality care for women dealing with this cruel malignancy.

He might be the archetypal working-class kid made good, but makes no excuses about working at the expensive end of medicine. He wants to do excellent work in an excellent environment, which means spending more on his practice and having to cover higher overheads. But lately he has seen a document that he thinks could put an end to those ambitions.

"Southern Cross," he says darkly, "will destroy this place."

While Southern Cross members were this week digesting the news that premiums are bound to rise next year, the country's medical specialists and private hospitals were coming to terms with their own piece of bad news from the health insurer.

They call it an RFP - request for proposal. Essentially it is a blunt, legal document from Southern Cross "inviting" them to bid to become affiliated providers by contracting to carry out medical procedures at a single total price. "We expect price to reflect both potential for volume and agreed quality," it states.

The doctors read it with increasing alarm, fearing this was the start of the sort of funding arrangement doctors abhor in the public sector and never expected to see in the private one. They fear a US-style situation, where the insurance company decides what sort of operation you have and how long you stay in hospital.

Doctors say this type of managed care provides financial incentives to under-treat and takes no account of unexpected complications. In health, they say, one size will never fit all.

Richard Fisher, fertility specialist and chairman of Ascot Hospital, says his colleagues read the document and fell four steps backwards. The historically good relationship between doctors and Southern Cross was suddenly in tatters.

Not that Fisher believes it to be irreparable. He had breakfast with Southern Cross chief executive Roger Bowie, and hopes they can work something out. "We know we have to help Southern Cross solve its problem," he says. "We're getting into a position of working with them."

Southern Cross is the dominant player in the medical insurance industry. With just under 70 per cent of the market, the Commerce Commission considers it slightly too dominant and this week was in the Court of Appeal trying for the third time to force it to surrender the Aetna policy holders it absorbed when that company was sold.

As a friendly society begun in 1960 by a group of medical specialists, Southern Cross' raison d'etre is to fund private medicine, which is essentially where specialists make their money. As a not-for-profit insurer, it occupies the moral high ground, immune from accusations it exists to make its owners rich.

The early years of medical insurance were straightforward for doctor and patient. The private sector was limited in what it could perform, so the complex and expensive procedures were still done in the public system. That kept premiums affordable. And before the advent of fringe-benefit tax, companies might offer medical insurance in their employment packages. By the 1980s half of New Zealanders had private health insurance.

But as medical advances surged ahead and the public system began to crumble under stampeding costs, something funny happened.

Rather than the new reality terrifying people into buying medical insurance, the opposite occurred - probably because insurance companies realised they, too, were struggling to meet costs and so raised their premiums. At the same time employer-subsidised schemes were hit by fringe-benefit tax and became less common.

Around 15 per cent of people with insurance cancelled their policies and today only 33 per cent of households have medical insurance. Those who kept their cover began making more claims for more expensive procedures, which were no longer available in the public system.

Added to this was the drift of disgruntled specialists away from the public system. As they began devoting themselves fulltime to private medicine, its capabilities increased.

Private specialists bought more advanced equipment. The advent of laparoscopic surgery meant more operations could be done in private hospitals without the need for the intensive-care recovery facilities, unique to public hospitals.

So while the public health system has been drowning before our eyes, the private system has also been drifting towards the rocks of increasing supply and never-ending demand.

No longer is the observation that medicine will deliver only what people can afford confined to the public health system - it is beginning also to be the mantra in the private medical sector.

For the financial year ending in June, Southern Cross took in only slightly more in premiums ($346.3 million) than it paid out in claims ($324.2 million). With operating expenses of $44 million it would have finished $22 million in the red, had it not been for a $24 million injection from investment income. In the same year, the value of claims increased by 7.1 per cent.

But both the doctors and Southern Cross agree those increases are not driven by the doctors' fees - their 2 per cent rise is consistent with inflation. Rather, they blame the rise on the increasing cost of technology, exacerbated by the weak dollar.

Consider how medical insurance works at the moment. Most people with insurance have policies under which, in theory, the insurer pays around 80 per cent of the cost. But that cost is determined by the doctor.

How the doctor arrives at the fee is mysterious, and inconsistent. One specialist might charge $250 for an initial consultation, another $170. The superiority of one specialist over another is not always reflected in the price. Doctors will be the first to tell you that, in medicine, quality is hard to measure.

Southern Cross will not unquestioningly refund 80 per cent of whatever the doctor decides to charge, but of what it thinks the cost should be. For instance it will refund only 80 per cent of $32 for a GP's visit, even though GPs are charging as much as $49 a visit. The most it will pay for a specialist's initial consultation is $200. If the specialist charges $300, the policyholder won't have true 80 per cent coverage after all.

Yet patients' ability to shop around on price is limited by the referral system from GP to specialist. At no time in that discussion is price considered. Patients usually find out what a specialist costs only when they are leaving the surgery or the bill arrives in the mail.

Southern Cross is clear it cannot continue to sustain itself by dipping into investment income. So now it is trying to extend its affiliated provider network at fixed, up-front prices. Hence the collective gasp that resounded from the nation's medical specialists when they read of Southern Cross' plans.

With such a dominant position in the market, Southern Cross could stare the doctors down. But that would underestimate their collective power. "They have to find doctors to do it for them," says Fisher.

Experience suggests they will find some. Two years ago the angiography unit at Mercy Hospital became one of Southern Cross' affiliated providers. Chairman David Benson-Cooper says the motivation was to give heart patients one bill, rather than several, as they moved from diagnosis to treatment. The only players who are not affiliated are the surgeons.

With angiograms costing around $3000 and angioplasty around $10,000, the price of mending a broken heart is high. Not many people are easily able to write a cheque for $13,000 and then wait for the refund. It is clearly easier and less stressful if they simply pay their 20 per cent, or so, and have the insurance company pay the doctor the remainder.

Benson-Cooper says his non-affiliated peers are convinced it is all about price. But that was not his experience in negotiations with Southern Cross. Rather it centred more on certainty of cost, meaning Mercy absorbs the cost of unexpected extra procedures, such as needing a second operation because the first one went wrong. But that had been the hospital's policy anyway. As a non-profit organisation, Benson-Cooper believes Southern Cross is dedicated to the best interests of its members.

The Auckland Eye Clinic had a less happy experience. Four years ago it signed up to become the first Southern Cross affiliated provider, only to leave the scheme last year.

Practice manager Gillian Harrison says the clinic enjoyed the ease of administration that went with being an affiliated provider, but when the cost of surgical materials soared as the dollar fell, coupled with normal inflation, Southern Cross would not move on price. The decision to pull out was not taken lightly, she says.

Southern Cross' Bowie agrees there was a price issue, but says it was more because the public sector was mopping up its ophthalmology waiting lists, leaving less demand for private care, and the Auckland Eye clinic wondered where its increased business in return for price certainty was coming from.

"We didn't think the price should go up because volume went down," says Bowie.

He uses this as an example of providers being able to leave the scheme if they don't like it, but he wonders what it has done for their business. The clinic, of course, is not saying.

It does say that when it wanted to rejoin the scheme, it wasn't allowed to. But Bowie disputes that, saying Southern Cross is considering a proposal from the clinic.

The one thing the specialists and Southern Cross agree on is that they need each other. Without medical insurance there would be no private medicine and without private medicine there would be no medical insurance industry.

Rather than a brandishing of weapons, Bowie sees the RFP as an invitation to talk. "We've said to the surgeons and hospitals, 'Work with us and we'll help you and you help us'."

Bowie insists that apart from the need to contain costs, the affiliated provider programme was initiated in response to complaints from members that the system of sending in all invoices from hospital, anaesthetist and surgeon to make a claim was too complicated and that they resented not knowing how much they would have to pay themselves.

He rejects the suggestion that the doctors were universally horrified. Those who are complaining, he says, do so out of concern that "we're trying to pass the risk over" by declining to cover returns to surgery when things go wrong. "Some doctors are comfortable with managing risk."

"A lot of people like it," he says. But he declines to say how many proposals Southern Cross has received. "We're negotiating with a whole range of people, we're not backing away from it."

Bowie acknowledges that not every doctor is going to want to become an affiliated provider, and not every Southern Cross member is going to want to go to one. The latter will still be covered up to the limits of their policy, but will pay to cover a larger gap between that and what the doctor or hospital charges.

The advantage of becoming an affiliated provider, says Bowie, is that doctors can claim directly, they have happy patients and more business - which means, of course, that non-affiliated providers will have less business.

Hence the unhappiness among specialists such as Harman. He says he spends a lot of money on continual professional development, new equipment and quality accreditation. And now Southern Cross comes along and, as he sees it, wants him to be a high-quality breast surgeon, at the cheapest price.

Worse, he thinks patients who are shopping around on price have no means by which to judge quality.

All this begs the question about the size of a specialist's take-home pay. Harman says average surgeons make from $150,000 to $300,000 annually, whereas mature surgeons at the top of their game could be making from $500,000 to $700,000.

Harman adds that surgeons' top earning years are shorter than a normal working life - they can be 35 by the time they are fully trained and start burning out at around 55. And, as Fisher points out, their incomes are commensurate with leading lawyers and business magnates and that is how it should be.

Where Harman and Southern Cross do see eye to eye is over the solution - the industry needs more people to take out medical insurance, providing they don't all use it.

Southern Cross claims the 30 per cent tax break on health insurance policies in Australia has lifted that country's health insurance rate from 31 per cent to 45 per cent of the population. The health insurance industry has lobbied heavily for New Zealand to offer similar tax breaks, so far to no avail.

So it's higher premiums and cost-controlled doctors for now.

Bowie doubts the affiliated provider programme will put the elite practitioners out of business. "We'll always offer a plan that allows access [to anybody] by anybody."

But he doesn't say at what price.