Competition and Regulation:Accessibility, Affordability and Quality in Dutch Health care system

Sander koopman, MSc. LL.B. Senior staff member, directorate for long term care, Dutch Healthcare Authority

2

Overview

1. Introduction2. Overview of Dutch healthcare financing3. Dutch Healthcare Authority4. Insurance market5. the introduction of competition for hospitals6. Long term Care7. Concluding remarks

Appendix: market definition

2

3

1. Introduction

4

Reform and public policy objectives

• Cutler (2002): successive waves of healthcare reform aiming at– Ensuring universal access to medical care– Centralised regulation-based cost containment by various rationing

mechanisms– Decentralised market- and incentive-based systems

• Promoting effective competition is not a goal in itself, but is seen as the best way to deliver the key public policy objectives of:

– Accessibility– Affordability– Quality

5Source: CBS en OECD Health Data

Zorguitgaven (% BBP) en levensverwachting bij geboorte

70.0

72.0

74.0

76.0

78.0

80.0

82.0

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 20050%

2%

4%

6%

8%

10%

12%

14%

levensverwachting % BBP zorg

Open einde (tot en met 1983)

Harde budgettering (1983-2000)

Boter bij de vis (vanaf 2001)

Healthcare expenditures and life expectancy

life expectancy Expenditures as % of GDP

Focus on cost containment

Focus on access

Focus on market based approach

Healthcare expenditures and life expectancy

6

An overview of the framework

HierarchyDecentralizationCompetition Auctions Regulation State

provision

CoordinationMotivation

Transaction costs

Market failures(market power, externalities, information problems, hold up etc)

Government failures (information problems, incentive problems, regulatory uncertainty etc)

7

General economic objectives

• Coordination– Ensure that the right services are produced at the right time and

place. (includes financial risk, quality and access)

• Motivation– Ensure that the parties have individual incentives to make

coordinated decisions.

• Transaction costs– Ensure that coordination and motivation are provided at the lowest

possible cost (production, search, transportation, contracting,...)

8

Scorecard for health care delivery systems

Hierarchy(public integrated model)

Private insurers/provider(no mandatory

insurance)

Private insurers/provider

(mandatory insurance)

Self insurance(health savings

accounts)

Coordination of risk

++ - + --

Motivating health care providers

-public contracting

yardstick competition

++selective contractingcompetition policy

++ Selective

contractingcompetition policy

+

Freedom of choice ++ - - ++

Adverse selection/access

++ -- + +

Moral hazard --Rationing

Gate keepingCo-payments

-Rationing

Gate keepingCo-payments

-Rationing

Gate keepingCo-payments

++

Transaction cost Health care providers/government

Providers/Third party payer/patient

Providers/Third party payer/patient

Patient

9

2. Dutch healthcare financing

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Characteristics of The Dutch Healthcare system

• Private (for profit) health insurers for primary (e.g. GP’s) and secondary care (e.g. hospital care)

• Public Health Care Insurer for long term care

• Private (mostly not-for-profit) healthcare providers

• Extensive government regulation: availability, affordability and quality

11

Overview of the health care system in the Netherlands

Supplementary Health Insurance (voluntary)

Third Compartment Mandatory Health Insurance

(compulsory for the entire population) Second Compartment

National Health Insurance for Exceptional Medical Expenses (compulsory for the entire population)

First Compartment

1212

Health care financing in the Netherlands

1. Public insurance for exceptional medical expenses– mandatory for all citizens– home care, nursing homes, care for the disabled– € 22 billion in 2010 (estimate), € 1,400 k per capita

2. Private basic insurance - mandatory for all citizens- general practitioner, hospital care, pharmaceutical care- 2008: also mental short term care (moved from public insurance)- € 33 billion in 2010 (estimate), € 2,100 per capita

3. Private supplementary insurance- dental, physiotherapy, cosmetic care, alternative medicine- € 4 billion in 2010 (estimate), € 250 per capita

13

3. Dutch Healthcare Authority

1414

Mission of the Healthcare Authority

“The NZa creates and monitors properly functioning healthcare markets. The interests of the consumers are central in the performance of these tasks. Efficiency, both in the short and long term, market transparency, freedom of choice, access to healthcare and quality are guaranteed. This gives the consumer the best value for his or her healthcare euros.”

15

The Dutch Healthcare AuthorityLegal tasks of the Nza

• NZa established by the Healthcare Market Design Act (2006)• Roughly three complementary tasks

– regulating providers and insurers– mitigating dominant market positions– initiating market-based reforms where feasible

Organisational structure of the NZa

• Executive Board – supported by legal & communication staff

• Cure and Care departments– budget and price regulation and liberalization

• Supervisory department– market power assessment

• Research & Development department– design, advocacy and implementation of reforms

16

Dutch healthcare policy landscape

Government & Parlement

Ministry of Health (VWS)Ministry of economic

affairs (EZ)

Dutch Healthcare Authority (Nza)

Dutch National Health Insurance

Board (CVZ)

Netherlands Competition

Authority (Nma)

Health Care Inspectorate

17

The Dutch regulatory landscape: competition and quality• The NZa

– ex ante regulation of dominant market positions– advisory role in merger control– transparency role in quality control

• The NMa (Netherlands Competition Authority) – ex post regulation of dominant market positions– decisive role in merger control– enforcing cartel prohibitions

• The IGZ (Healthcare Inspection Agency)– standard setting and enforcement role in quality control

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The Dutch regulatory landscape: health insurers

• The NZa – ex ante: misleading policies, misleading marketing, consumer targeting– ex post: legality of reimbursements

• The DNB (Dutch Central bank) – compliance with solvency requirements (Basel II)

• The AFM (Authority Financial Markets)– supervises behaviour of financial institutions

• The CBP (Data Protection Authority)- ensures privacy of patient and client records

19

The regulatory toolbox (I)

• Regulatory environment for the NZa- absence of EU level framework (contrast: telecom, energy)- legal tools endowed by the Healthcare Market Design Act

- power to impose general obligations (all market parties)- power to impose specific obligations on individual parties

1. General obligations- law contains no specific criteria for application

- policy objectives: universal access, affordability, quality- promoting effective competition as a means to this end

- examples:- transparency requirements (quality, marketing)- terms of agreements (response time, exclusivitiy)- price regulation (e.g. general price cap)

20

The regulatory toolbox (II)

• Specific obligations for individual market parties- key criterion: Significant Market Power (SMP) = dominance

- relevant market definition on case by case basis- dominance analysis: market share, structure, effects

- proportional ex ante obligations- transparency and non-discrimination- obligation to deal and reference offer- cost accounting principles and price regulation

- proposed priorization for application of SMP- exclusion over exploitation- selling power over buying power- predatory prices and discrimination:

- only intervene if clearcut foreclosure effects

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4. Insurance market

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The idea behind competitive health care markets

Healthcare providers

Insurers can selectively contract hospitals

Consumers choose between competing insurers

Negotiations between insurers and hospital

Insurer Insurer Insurer Insurer

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Economic characteristics of competition

1. Consumers have free choice of health insurance company, - no risk selection, no lock-in- incentives for prevention?

2. Competition between health insurance companies leads to downward pressure on costs:

- Selective contracting with health care providers- Directing consumers toward more efficient choices

3. Utilization review by insurers:- Best practice benchmarking

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Characteristics of the Dutch health insurance market

1. New 2005/2006 legal framework provides for:- Mandatory health insurance for all Dutch citizens- Uniform comprehensive benefits package- Obligation for all health insurers to provide services to all

consumers without:- risk selection- premium differentiation

2. Funding regime:- 50% of the premium is a nominal premium (differentiated per

insurer not per consumer) and collected by insurers- 50% of the premium is income dependent and collected by the

state (this part of the premium is redistributed to insurers based on a risk adjustment system)

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Risk adjustment system1. Remove financial incentives for risk selection

- Compensates insurers for predictable losses- Insurers will make an effort to efficiency instead of risk selection- Fair competition among insurers

2. Ex-ante risk adjustment- Age, sex, source of income (e.g. salary, subsidy)- Region (classification of postcode areas based on socio-economic,

demographic and healthcare related characteristics of the postcode area)

- Recent outpatient drug consumption (chronic diseases)- Diagnose (was the patient treated in hospital last year, and does this

predict further high cost treatments/ drugs?)3. Ex-post risk adjustment

- Correction of the ex-ante adjustment. Necessary e.g. because of the changes in case mix from one year to the next, general cost increase, unexpected high costs

- Net yearly risk per enrolled consumer 35 Euro

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Insurer supervision: selective contracting

• In theory, health insurers- do not have to contract every provider, BUT- do have to contract SUFFICIENT amount of care- can differentiate payments per provider- can differentiate deductibles for consumer, depending on the

chosen provider• In practice:

- every health insurer contracts every provider- payments are differentiated, BUT- there is no differentiation in deductibles

• Explanation:- quality differences between providers not transparent - consumers value choice more than lower deductible- we expect this to be a long-run equilibrium

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Market share largest health insurers

Market Shares 2006-2008

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

1 2 3 4 5 6 7 8 9

2006

2007

2008

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Switching behavior

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

45,0%

50,0%

2005 2006 2007 2008

Sw itching

Consideration

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Premium dispersion

€ 900,00

€ 950,00

€ 1.000,00

€ 1.050,00

€ 1.100,00

€ 1.150,00

€ 1.200,00

€ 1.250,00

2006 2007 2008

1 quartile

minimum

median

maximum

3 quartile

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Collective contracts are popular

-

10

20

30

40

50

60

70

80

2005 2006 2007 2008

Collective insurance

Individual insurance

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Price reductions collective contracts

0,

1,

2,

3,

4,

5,

6,

7,

8,

9,

collective contract patientorganizations

other collective contracts(banks, labor unions etc)

collective contractemployers

200620082007

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Some conclusions on the insurance market

• The average premium 2006 (1.028 Euro) is below expected premium(1.106 Euro). The average premium 2007 is 1.103 Euro and 2008 1.049.

• Premiums are difficult to compare as a consequence of adjustments in 2007 (share of the government) and 2008 (law change for deductibles).

• 18% of the enrollees switched in 2006 (year of policy change). Switching in 2007 and 2007 is below 5%

• Elderly people and enrollees with a bad health switch significantly less.

• Collective contracts are important. Price reductions up to 7,5%.

• 93% of enrollees buy a supplementary insurance.

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5. B-segment: the introduction of competition for hospitals

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Conditions for competition

• Stable system of invoicing:- Clear product description.- Administration performs well.

• Supply side conditions:- Lower barriers to entry.- Risk on investment and bankruptcy rules.- Profit possible.- Liberalization of contracts between doctors and hospitals.

• Demand side conditions:- Selective contracting and steering of enrollees. - Risk adjustment is adjusted to new institutional design.

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2005: introduction of competition

Competitive segment is 8% of total hospital revenue

Revenue of major diagnoses in the competitive segment

Other26%

Knee replacement

12%

Tonsillectomy6%

Incontinentence operation

5%

Groin rupture8%

Hip replacement20%

Cataract11%

Diabetes Mellitus12%

145 products (27 diagnoses) of elective outpatient care

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Increase of the B-segment in 2008 and 2009

1. 20082. Chronic heart diseases 3. Pregnancy (pregnancy, delivery, after birth control and

miscarriage)4. Knee operations (meniscus and cruciate ligament leasie)5. Some cancer treatments (breast and prostate)6. Umbilical hernia7. Sterilization (men and women)

8. 20099. Treatments in ophthalmology, surgery, orthopedics, urology,

gynecology, neurosurgery, dermatology, internal medicine, cardiology and anesthesiology.Competitive segment 2008 and 2009 are an

estimated 20% and 31% of total hospital revenue, respectively.

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Price development in the B-segment

PriceDevelopment

B-Slice 2005 B-Slice 2008 B-Slice 2009

`05-`06 `06-`07 `07-`08 `08-`09 `08 `08-`09 `09Nominal 0.0% 2.1% 1.1% 0.8% - 0.7%Real -1.2% 0.5% -1.4% -0.2% - -0,3%

Mark-up on cost - - - - 2.0% - -0.3%

• For each B-Slice, there is mostly a decline in the real prices.• In 2008 (2009), we can only calculate the mark-up of B-Slice 2008

(2009) on the estimated cost.• The estimated cost is already corrected for inflation.

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Price development in the B-segment and A-segment

1. The price increase in the A-segment is approx. lower than the price increase in the B-Slice 2005.

2. In 2008-2009, the price increase in the B-slice 2008 was 0.7%.3. Overall, the price development in the competitive sector is more favorable

than the price development in the regulated sector.

Percentage price increase/decrease (nominal prices)

0

0,5

1

1,5

2

2,5

2005-2006 2006-2007 2007-2008 2008-2009

A-segment B-Slice 2005

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6. Long term Care

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How is the AWBZ market organized?

• The AWBZ market is divided into:- EXTRAMURAL CARE: Health care services delivered outside a medical

institution (hospital, nursing home, psychiatric clinics, etc). - INTRAMURAL CARE: Health care services delivered in a medical

institution.

• In the extramural care there are two different actors:- PGB clients: These people have a voucher at disposal and they can

organize their care provision themselves. They are free to receive services from providers that are not contracted by the care office.

- In kind clients: These people receive services from a provider who has entered into a contract with the care office.

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Structure of the extramural AWBZ market

• The Netherlands is divided in 32 regions; each region has a care office which goals are to:- Purchase care for their in kind clients. A change in legislation in 2003

made it possible to selectively contract care providers (for all the functions of the extramural care).

- Inform clients about the contents of a care service that is provided.- They are accountable for spending financial means for the AWBZ.- They have a regional budget, which caps the expenditure

• Prices of providers are regulated; maximum tariffs are set by the NZa. • Providers of care and care offices negotiate on prices. Some services have

a price which is equal to the maximum tariff, but some price variability is also observed.

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Some results from research on the homecare market

• Positive and significant effect of market share on contracted prices

• Decreasing relative contracted prices over time

• Significant differences in the relative contracted prices across regions

• No support to the argument of superior quality of large providers (based on subjective data)

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Analysis NZa of problems in the current regulation

1. Indication: independent indication, but delegation of indication determination to providers and no clear standard

2. No incentives for buying agencies to buy the right health care. No proper health insurance market.

3. No transparency for consumers, waiting lists, low perception of quality and low efficiency

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Ideas about changing financing of long term care

1. Add (parts?) of long term care to insurance by private, risk bearing insurers (like 2nd compartment)

- Prerequisite: the possibility for sufficient risk adjustment- Makes overlap with other healthcare easier to manage- Can cost be contained?

2. Add (parts) of long term care to social welfare tasks of local government- Prerequisite: a good budget allocation system for local governments- Makes overlap with social welfare easier to manage- Can lead to regional differences in level of care

3. Increase the amount of care that is consumed through vouchers- Prerequisite: a good system for deciding value of vouchers- Maximum empowerment of patient/consumer- Lays much of the risk at the feet of patients

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7. Concluding remarks

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Current state of Dutch healthcare

• The healthcare system in the Netherlands is still in transition:- Not anymore a fully top down regulated system- Not yet a fully demand oriented system

• Challenges for transition:- Regulatory inertia- Barriers to entry- Need for cost containment- During transition, you need both old and new style regulation, which

eats up regulatory capacity

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Appendix: market definition

48

Recent increase in hospital concentration

85

90

95

100

105

110

115

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

before merger supervision After merger supervision

Average HHI hospitals in local market: 2,350Average HHI insurers in corresponding market: 5,300

49

Average number of beds per hospital

50

Background

1. Concerns and discussion about mergers in healthcare- Mergers have to be assessed by NMa and NZa

2. Mergers have negative and positive welfare effects (in case of horizontal merger):- Reduction of competitive constraints- Easier coordination (e.g. keeping prices higher)- Larger size- Different input and output mix (potentially)

3. Merger assessment process- Predicting the market developments with and without the merger- Weighing the positive and negative effects against each other- This project: focus on positive effects- Idea: measure the potential efficiency gains

51

How do we define markets for antitrust purposes?

1. The smallest area or group of products for which there are no closesubstitutes outside the group- The market established using this criterion determines the

measure of market concentration- Pre-merger and post-merger competitive effects rest upon this

definition2. SSNIP Test (EU Merger Guidelines)

- Area or group of products in which a hypothetical monopolist, could impose a “small but significant and non-transitory increase in price,” (SSNIP) holding constant the terms of sale for all products produced elsewhere

3. Presumption of anticompetitive effects if there is a large increase in concentration in this area

52

Product market versus geographic market (I)

1. What is a Product Market?- Group of products with few outside substitutes- Smallest sensible segment with Dutch data: Medical specialty

- Total of 24 (e.g. cardiology, neurology)- Similar to ICD coding of “Major Diagnostic Category”- Other segmentations:

- Specialties with same complexity/volume (Varkevisser)- Care type with the same resource requirements (e.g.

primary/secondary tertiary)- Inpatient versus outpatient

53

Product market versus geographic market (II)

1. What is a Geographic market?- Geographic area with few outside substitutes outside the area- Smallest sensible area: zip code- Look for smallest group of zip codes that make up market- Supplement markets with additional areas, defining “active

competitors” as hospitals with significant market (>1%) share in that zip code area

54

Patient flow versus patient choice (I)

1. Patient flow methods- Assumption: Existing travel pattern is indication of future preference- Elzinga-Hogarty method: find zip code area where:

- Few outflows from the area (imports of care) indicates demand self-sufficiency

- Few inflows to the area (exports of care) indicates supply self-sufficiency

- Intuitive and easy to compute (and often used in court)- Problems with EH-method:

- What is “few”? (usually 10% to 25%)- Sensitive to starting point, expansion method- Elzinga’s testimony in US court:

- method not suitable for hospital mergers

55

Patient flow versus patient choice (II)1. Patient choice methods

- Analyze choice conditional on characteristics (distance)- When characteristics change, choice will change- Can directly simulate effect of merger on prices

- Methods based on patient choice- Critical Loss (can also be used with patient flow analysis)

- Uses willingness to travel as proxy for willingness to pay- BUT: needs to be validated using consumer surveys

- Option Demand - Uses hospital profits as proxy for willingness to pay- BUT: for-profit not allowed in the Netherlands

- Logit Competition Index (LOCI)- Computes price equilibrium for Bertrand competition- BUT: neglects structure of the insurance market

- NZa has recently implemented all these methods- Each method has challengeable assumptions, BUT- Predictions are strongly correlated for all 3 patient choice methods - This robustness should help in court