The Private National Efficient Price (reimagined) may be a vehicle to promote value in elective care.
I recently drafted a submission to the inquiry on access to specialist medical care. This got me thinking again about the Private National Efficient Price (PNEP).
Remember the PNEP – the proposed benchmark pricing model for private hospitals, based on the model used to price Australian public hospital care? It was put on ice in June.
The PNEP was promoted by some private hospital providers, most notably Catholic Health Australia, but opposed by the sector’s biggest player, Ramsay Health Care. Ramsay presumably does better under the current insurer-by-insurer contracting model than it expected to do under a PNEP. The Australian Private Hospitals Association fell into line, and that was the end of it … for now.
Pragmatism over idealism
You couldn’t come up with a better admission that health care is incompatible with the free market than the PNEP. (Can anyone imagine governments setting take-away food prices?)
A PNEP would explicitly remove price discovery from private acute care. Price discovery is a fundamental mechanism that underpins how goods and services are exchanged in a market. (I’ve previously written about this topic here.)
But we need to be real. Private healthcare is baked in. It’s not going anywhere. So it’s in everyone’s best interest for it to function effectively and efficiently, for better or worse.
And most would agree that the sector is a mess. The fact that a PNEP is even being suggested is, in itself, telling. The repercussions are felt across the entire healthcare system.
So, from a pragmatic perspective, I think the PNEP is not a bad idea – even if implementation would present considerable technical challenges. Done right, I think it could be a useful vehicle for providing more stability and predictability, and for getting better value out of the private sector.
But to achieve that, two major modifications are needed.
Professional services and the PNEP
I must admit that my ears pricked up when I heard calls for a PNEP last year. But that’s because I thought – somewhat naïvely – that it would include all inputs of a private hospital admission.
Alas, the proposed model covered only hospital charges – accommodation, theatre, nursing, devices, medicines and other facility costs – but excluded the most consequential parts: fees charged by surgeons, anaesthetists, pathology, imaging and other specialities.
That’s where PNEP departs from the public model. The latter encompasses all inputs –medical and non-medical – from admission to discharge.
It’s like setting a price for an airline seat while leaving the pilot, baggage handling and landing fee to be billed separately. The seat price may be ‘efficient’, but the passenger still doesn’t know what the trip costs. (Or if you prefer the restaurant analogy, it’s like pricing the restaurant table and pretending you’ve priced the meal.)
From the patient’s perspective it’s all a bit meaningless, especially given the growth in specialist fees — fees that vary considerably across the country and within specific procedures (see charts).
A proper PNEP would encompass everything that occurs during an episode of care.
The major technical challenge would be unscrambling the funding streams that feed into private hospital episodes: health insurers, which cover part or all of the hospital charge and contribute to some in-hospital medical fees; taxpayers, who fund most of the Medicare schedule fee for medical services; and patients, who cover the gaps between what insurers and Medicare pay and what providers charge.
The political challenge — convincing specialists to participate — would be even greater.
From efficiency to value
Medically, a hospital admission isn’t just the procedure. It includes a string of other medical inputs: pathology, x-rays and other diagnostics. Under the PNEP proposed last year these would continue to be reimbursed on a fee-for-service basis.
That creates an incentive to do more of them.
A PNEP that encompasses all services would provide an incentive to do only what is clinically necessary and appropriate – i.e. to be more efficient.
That’s because the NEP is built around the relationship between average cost and marginal cost. The price for, say, a knee replacement reflects the average cost of performing knee replacements across comparable hospitals. Once fixed costs are in place, an additional procedure will almost always cost less than the average. That creates an incentive for hospitals to increase volume. This can promote efficiency … but only if the activity is clinically necessary.
But there’s a catch. The entire NEP concept is based on a narrow, technical idea of efficiency. Its main concern is whether hospital care is delivered at the lowest reasonable cost without compromising safety or outcomes.
In simple terms, the price for a knee replacement reflects the average cost of performing knee replacements, with adjustments for casemix, remoteness and other factors. The aim is to stop hospitals being rewarded simply because they cost more to run.
That’s useful but it’s not enough. To avoid cherry-picking the easiest patients, the public NEP is adjusted for factors such as patient age, complexity and underlying health. Any PNEP would need similar safeguards. Otherwise, private hospitals would have an incentive to avoid patients who are older, sicker, poorer, more complex or less profitable.
But there’s a bigger problem. Technical efficiency is indifferent to whether the admission was necessary in the first place.
This is key in elective procedures, the majority of which occur in the private sector. A knee replacement may be performed efficiently. But if the same outcome could have been achieved through conservative management, at lower cost and lower risk to the patient, then it wasn’t efficient at all. It wasted scarce resources.
For a PNEP to deal with this problem, two things would be needed.
First, strict admission and procedure criteria based on the best available evidence. Private hospitals should be funded to provide care that is clinically necessary and benefits the patient.
Second, routine collection of outcomes. That means risk-adjusted complication rates, readmissions, revisions and, crucially, patient-reported outcome measures (PROMs). We should know whether patients got better, not just that they received the treatment.
Over time, outcomes could be incorporated into pricing. Hospitals that deliver better outcomes for comparable patients could be recognised. Hospitals that perform high volumes of low-value care, or produce poor outcomes, should not be rewarded simply because they are busy.
This would theoretically encourage better clinical governance – or at least reduce the risk of it coming second to profits.
A PNEP that excludes major parts of a hospital episode may help hospitals argue more precisely about hospital charges. But it won’t tell patients what private care will cost them, it won’t protect them from bill shock, and it won’t reassure them that they (and the taxpayer) are buying care that adds value.
I may be mistaken, but isn’t that the whole point of health care?
Luke Slawomirski is a health economist. He’s the senior postdoctoral research fellow at The Australia Institute, consultant to the OECD Health Program, and a visiting lecturer in public health at Imperial College London.
This article was first published on Dr Slawomirski’s LinkedIn feed. Read the original article here.