Social Service Futures: The Marketisation of Healthcare Services: when political mantras win out over evidence and patients’ needs

Lesley Russel, Adjunct Associate Professor, Menzies Centre for Health Policy

In its November 2015 response to the Harper Competition Policy Review (CPR), the Australian Government stated its intention to commission a Productivity Commission review to explore how competition principles can be applied in practice to the human services sector. This further review has not yet been implemented – it’s not clear if there has even been any consultation with the states and territories on the terms of reference – and it’s unlikely to be put forward as a Liberal National Party (LNP) campaign issue in the looming federal election, but if the Turnbull Government is returned, we can expect to see the topic of the marketisation of healthcare services reappear.

To investigate what the Government might ask the Productivity Commission to do, we should look first at the recommendations made by the Competition Policy Review.

The CPR panel did take on some sacred cows – pharmacy, health insurance and aged care – but it also largely accepted the standard arguments for privatisation and for market-based commissioning and procurement. Key among these are that lowering barriers to entry can stimulate a diversity of providers which expands user choice, and competition will drive gains in productivity in the healthcare sector.

Some examples of what might be achieved through public-private partnerships to run hospitals and commissioning as operated by the UK National Health Service are cited without any recognition of their failures. Certain statements simply fly in the face of reality; for example, the report finds that for-profit providers of healthcare services such as medical and dental professionals are “likely to face stronger incentives to minimise cost, including through adopting new technologies and innovative methods of service delivery”. Some key areas of healthcare policy are simply ignored. The most obvious of these is the “closed shop” that operates in specialist medical care, eating into government budgets, reducing patients’ access and adding to out-of-pocket costs.

The over-arching premise of the review is that more competition, by giving greater choice, will help people meet their individual healthcare and aged-care needs. The report does include some discussion about what consumer / patient choice really means in health and human services but offers no effective solutions for what should be done when people are unable or unwilling to exercise choice and to protect people from the consequences of making the wrong choice. However - importantly - the CPR does recognise that choice is not the only key objective to be achieved in the provision of healthcare services: equity of access, quality, and a focus on outcomes and value rather than outputs and costs are also critical.

There is clearly room for considerable debate on this approach to healthcare, but to date this is an issue that is almost always argued on the basis of political philosophy (often disguised in phrasing about choice and personal responsibility) rather than evidence and public demands and needs. The failure to engender a thoughtful and substantive public discussion about the role of markets and competition in healthcare inevitably means that such proposals as are put forward are short-sighted, lead to unintended consequences, and lack full stakeholder support.

The financing and provision of healthcare services in Australia has always involved both the public and private sectors, but no government has ever properly articulated the rationale for this and how these sectors are to work together or compete against each other - a situation which makes developing a competition framework fraught with conflict and difficulty. The conservative side of politics has undermined public confidence in its genuine support for a universal public healthcare system with talk about budget unsustainability, efforts to reduce Medicare to a safety net for the less well-off, and push for private health insurance. Much of the shift from public to private that has taken place in recent years has been done surreptitiously via efforts such as increased co-payments, the abolition of bulk billing incentives, and the freezing of Medicare fees to doctors. Out-of-pocket costs are the fastest rising part of the healthcare budget. But despite the growing evidence that costs for care in both the public and private sectors are an increasing barrier to care for many Australians, nothing is done to address these, and indeed thresholds to access safety nets for Medicare and the Pharmaceutical Benefits System continue to rise.

To date, the Abbott / Turnbull Government has done little to implement even the most modest of the CPR recommended changes. As part of the Sixth Community Pharmacy Agreement, an enquiry into the archaic pharmacy location rules has been established, although there is no guarantee that these will be overturned and no changes can be made before 2020. The Government is also engaged in consultations focused on the value of private health insurance for consumers and its long-term sustainability, but that has not stopped the approval of substantial premium increases for 2016. There’s a boast in the CPR that the Australian Government Hearing Services Program has introduced a website and portal to allow people to search a directory of contracted providers and to enable Voucher Program clients to lodge applications electronically. 

A distinguishing feature of the Primary Health Networks (PHNs) introduced by the Abbott Government is that they will adopt a commissioning approach to procuring healthcare services. There are legitimate questions which will not be answered for some time about the capacity of PHNs to develop and organise care in a range of areas – mental health, Indigenous health and chronic disease management - using a contestability model and concerns that these new commissioning requirements will add to administrative costs in programs with capped budgets. Moreover, as the CPR report warns, commissioning decisions are generally structured to achieve best value rather than best outcomes, and the decisions are not made by consumers. It’s all too easy for commissioned providers to keep down their costs by limiting access or services in ways that deliver short-term financial savings but longer-term costs elsewhere in the system. Little is currently known about what “effective commissioning” is and how it can be achieved in practice, especially in the Australian context.

And finally a grim story is slowly emerging about the consequences of introducing contestability into the way Non-Government Organisations (NGOs) that deliver healthcare and related services are funded. In particular, Indigenous NGOs have been defunded or funding has been given to mainstream services, with severe impacts on the provision of culturally safe and acceptable services to Aboriginal and Torres Strait Islander peoples.


An important aspect of the funding and delivery of healthcare services is to ensure these are effective, efficient, represent value for money, are responsive to consumer / patient needs and take account of social inequalities and inequities. The first three of these issues can potentially be delivered through the market place, the fourth is often posited as a rationale for increased competition although the evidence to support this is poor, and the final issue is one which always suffers if this approach to healthcare services is instigated. 

The wish to contain costs is an important driver of change. However only in very sophisticated systems is it recognised that healthcare costs and benefits are spread more broadly and access to healthcare affects employment, productivity, and rates of utilisation of the justice and social welfare systems. In Australia this siloed approach to the health budget means that efforts to address the disparities and inequalities experienced by our most vulnerable citizens are floundering.

The United States is unique among first world countries in the extent to which it has relied on the market place to determine the allocation of healthcare services. But these services are not simply commodities, and the failure to deliver them equitably has consequences for individuals, communities and the nation. It was the growing cost of this marketplace failure that drove Barack Obama’s healthcare reforms. Here in Australia this push to competition could well lead to the very situation the United States is working to undo.

There is no example of a free market in healthcare and there is no fixed set of conditions that will ensure that competition improves health system performance. A European Commission report that looked at examples from different European countries found that the introduction of (or an increase in) competition in healthcare provision will not always be the best instrument to achieve health system goals, it will not solve all health system problems and it may have adverse effects.

Kenneth Arrow, who is credited with inventing health economics, wrote that “the laissez-faire solution for medicine is intolerable”. He and others have listed the major market distortions for healthcare services and products:

1.     The need for healthcare services and the type of services needed is unpredictable. This means that in an unregulated market, healthy people don’t buy insurance until they are sick, setting up an economically unsustainable situation for insurers who make a loss when someone needs to use their insurance.

2.     There are necessary barriers and constraints to entry to the healthcare market place (eg safety and efficacy requirements for prescription medicines, on-going training requirements for healthcare professionals).

3.     The importance of trust and ethics in the patient –doctor relationships. Healthcare is complicated and it is very difficult for patients to engage in comparison shopping. Informed intermediaries are needed.

4.     There is a huge asymmetry in the information available to patients, providers and payers. This means that there is little transparency in terms of patient need vs making a profit.

5.     Access to care is too often contingent on ability to pay rather than need, and usually those with the least access have the greatest need.

6.     People often fail to understand and value the consequences of their actions around their health, especially when it comes to making decisions with impacts well into the future. This particularly applies to preventive health initiatives such as smoking, exercise and cancer screening.

7.     There are idiosyncrasies in the way healthcare is paid for: this is generally done after care has been received and often after emergencies that did not permit any patient decisions or choice.

In Australia the situation is complicated further by the control the Federal Government exerts over the prescription pharmaceutical market, its investment in the Private Health Insurance Rebate, and the fact that government funds are the major source of innovation in healthcare services. The Australian Government must retain a market stewardship function because of the substantial investment of taxpayers’ funds and to oversee the impact of policies on users. As the CPR noted, “Governments cannot distance themselves from the quality of services delivered to Australians”.

The private sector is keen to invest in healthcare, but in a very limited way. They see healthcare as immune from the up-and-down cycles of business with consistent demand for services and, for at least some segments of the population, an area where people are willing to spend large sums, even money they don’t have, for what they perceive as the best care. However the private sector is much less willing to accept the risks inherent in financing such services. Hence their risk management strategies are usually based around dollars, not patients’ needs. The largest risks and costs such as those for long-term high-intensity care, the indigent and the geographically isolated are consistently left to the public sector.  

There is little guidance as to how competition can improve poor system performance and enhance integration rather than leading to balkanisation. Addressing this issue is imperative as there are already serious problems caused by the silos of physical health, mental health and substance abuse services. It is not clear how increased competition in these areas, or even the commissioning of services, will lead to better integration and care coordination across sectors. Those Australians who have the greatest need for health care (and usually the fewest resources to obtain this) have complex and ongoing care needs and they need the right mix of services to meet these needs. Their needs usually include issues beyond treatment and care such as education and employment, housing, post imprisonment services, domestic violence and poor nutrition.

It is interesting that the Government has shown little interest in the one area of competition that could be quickly and inexpensively implemented and would really empower consumers / patients – the provision of more information about healthcare providers. Although the CPR acknowledges that “markets work well when consumers are engaged, empowering them to make informed decisions”, it places little emphasis on the role informed healthcare consumers can play in driving competition and efficiency. A greater availability of healthcare data would help drive informed decision-making and enhance competition. Efforts in this regard are more advanced in aged-care and disability services, but much more needs to be done in healthcare. If patients know that the top 10 per cent of some specialist doctors charge half again more than the next 10 per cent, for example, and there’s no evidence that they are delivering better care, it’s likely that some excessive charging practices – and the huge out-of-pocket costs that patients bear as a consequence – would diminish. That has certainly been the case in the United States.

In conclusion, it is clear that markets and competition are not easily installed in social services in ways that do not undermine healthcare as a social good and the core social commitments that a society like Australia should have. Some cautions from private consultants with expertise in this area should help to set the tone for future efforts. A 2012 review from McKinsey found that the level of provider competition that is healthy varies depending on the clinical setting. A recent Australian Deloitte report Contestability in Human Services is supportive of the ways in which contestability can be used to improve service delivery but cautions that there is much more sophisticated work to be done, especially by governments, in terms of agreeing the right outcomes, appropriate measures, and realistic timeframes.

Most critically, there is a significant difference between introducing greater consumer / patient choice and increasing the patient-centredness of healthcare and expanding healthcare markets and driving greater privatisation. At the heart of the problem is one simple fact - the commodification of healthcare is never about the patient, regardless of the fine words invoked. The Australian Government should proceed with caution.

Dr Lesley Russell is an Adjunct Associate Professor at the Menzies Centre for Health Policy at the University of Sydney.

This piece has been written as part of the Power to Persuade Social Service Futures Dialogue