And Legislative Issues Relating to the Reform of Public Health Care Providers
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FINAL REPORT FOR U Department of the Prime Minister and Cabinet National Interim Provider Board i h STRUCTURAL, ORGANISATIONAL I AND LEGISLATIVE ISSUES RELATING TO THE REFORM OF PUBLIC HEALTH CARE PROVIDERS L I May 1992 1-! .I I CS FIRSTBOSTON L. -- - - I (fiknti ( _) FI ISJ 1()i( )\ I [ 1 IMPORTANT NOTE This report has been prepared at the request of the National Interim Provider Board by CS First Boston NZ Limited. Whereas all reasonable steps have been taken to ensure that the information in the report is true and correct in every respect, CS First Boston NZ Limited neither warrants the accuracy of the said information nor is any responsibility accepted whatsoever for any loss which may be suffered by any party as a result of any error or omission in the said information or any conclusion that may be drawn from it. I ( )Ilf i(t(flt iI (L Ill,.¼i l().I)\ TABLE OF CONTEN rs Page No 1.0 EXECUTIVE SUMMARY 1 1.1 Introduction 2 1.2 Acknowledgements 2 1.3 Alternative Forms of Health Care Organisation 2 1.3.1 International Experience 3 1.3.2 Organisational Model for CHEs 4 1.3.3 Community Trusts 5 1.4 I Criteria and Principles for Reconfiguration 5 1.4.1 Competition Issues 1.4.2 Organisational Issues 6 1.4.3 Suggested Commerce Act Changes 7 1.5 Potential Impediments to the Development of Efficient, Market-Driven Health Care Providers 8 1.5.1 1 Competitive Neutrality 8 1.5.2 Policy Uncertainty 8 1.5.3 Competitive Funding 9 1.5.4 Contracting Issues 9 1.5.5 Surplus Property 9 1.6 Reconfiguration and Management Process 10 1.6.1 Critical Issues 10 1.6.2 Suggested Approach 11 1.6.3 Supervisory Board 11 1.6.4 Crown HealthEnterprise Transition Boards 12 1.6.5 Crown Health Enterprises I.)0 1.6.6 Ministerial Monitoring Unit 14 1.6.7 Relationship to the Role of the NIPB 1.7 14 Timetable and Legislation 15 2.0 BACKGROUND TO THE STUDY 2.1 Introduction 17 2.2 The Governments Proposed Reforms 17 2.3 Terms of Reference for the Current Study 19 2.4 Approach 20 2.5 Outline of Sections 3.0 to 6.0 21 3.0 ALTERNATIVE FORMS FOR HEALTH CARE PROVIDERS 23 3.1 Introduction 23 3.2 Theoretical Analysis of For-Profits and Not-For-Profits 24 ( .( )1 II(t(tI i;t! r Gi Fii.sr BosioN 3.2.1 Ownership and Incentives in For-Profits and Not-For-Profits 24 3.2.1.1 Characteristics of Not-For-Profit Corporations 25 3.2.1.2 The Profit Motive 26 3.2.1.3 Who Gets Control? 27 3.2.1.4 Implications for Managerial Performance 28 3.2.2 Theoretical Arguments for the Not-For-Profit Form 30 3.2.2.1 Information Problems 31 3.2.2.2 The Provision of Local Collective Goods 33 3.2.3 Experience with For-Profits and Not-For-Profits in the US 34 3.2.4 Reasons for the Dominant Position of Not-For-Profits 37 3.2.5 Application to the Health Sector in New Zealand 40 3.3 The SOE Framework and Experience 43 3.3.1 The SOE Framework 44 3.3.2 Review of SOE Experience 46 3.3.2.1 SOEs 46 3.3.2.2 Ports 47 3.3.2.3 Airports 50 3.3.2.4 Local Authority Trading Enterprises 51 3.3.2.5 Crown Research Institutes 52 3:3.2.6 Electricity Supply Authorities 54 3.3.3 Flexibility of the SOE Approach 55 3.3.4 Relevance of the SOE Model to Health Reform 60 3.3.4.1 Health Care Institutions as Businesses 60 3.3.4.2 The Robustness of the SOE Model 62 3.4 Implications for Crown Health Enterprises 63 3.4.1 The "Default" Option 63 I 3.4.2 Community Trusts 65 3.4.2.1 Key Elements of the Community Trust Model 65 3.4.2.2 Principles for Establishment of Community Trusts 66 3.4.2.3 Community Trusts vs. Direct Subsidisation 68 4.0 CRITERIA AND PRINCIPLES FOR RECONFIGURATION 71 4.1 Introduction 71 4.2 Criterion 72 4.3 Competition Issues 75 4.3.1 International Experience with Health Care Competition and Antitrust 79 -- 4.3.1.1 Empirical Evidence on Competition in in the US Health Sector 80 4.3.1.2 Retrospective Repayment Systems 80 4.3.1.3 Prospective Payment Systems (PPS) 81 4.3.1.4 Selective Discounting 81 4.3.2 US Antitrust Experience 81 4.3.2.1 Antitrust and Innovation in US Health Care Markets 82 4.3.2.2 Market Definition in US Antitrust Cases 84 4.3.3 Competition Law in New Zealand 85 4.4 Competition Considerations in the New Zealand Health Care Market 88 4.4.1 Identification of Relevant Markets 89 4.4.1.1 Acute Services 89 4.4.1.2 Non-Acute Hospital Services 93 4.4.1.3 Primary Health Services 95 ( t f I(l1t itI ( .S IH-;• I l()-l( )\ 4.4.2 Market Constraints 96 4.4.2.1 Acute Services 96 44.2.2 Non-Acute Hospital Services 98 4.4.2.3 Primary Health Services 101 4.4.3 Countervailing Power of RI-lAs 101 4.4.4 Political and Regulatory Constraints 104 4.4.5 Summary of Market and Political Constraints 4.5 105 Integration Economies and Restructuring Costs 106 4.5.1 Behavioural Versus Structural Regulations 107 4.5.2 Insights from the US 107 4.5.3 Economies of Scale and Scope 109 4.5.4 Financial Viability 112 4.5.5 Community of Interest Considerations 114 4.5.6 Managerial Resource Constraints 115 4.5.7 Process Considerations 118 4.5.8 Summary of Integration Economies and Restructuring Costs 120 4.6 Conclusions 121 U 5.0 POTENTIAL IMPEDIMENTS TO THE DEVELOPMENT OF EFFICIENT, MARKET-DRIVEN HEALTH CARE PROVIDERS 125 5.1 Introduction 125 5.2 Barriers to Competition and Restructuring 125 5.2.1 Regulatory and Political Barriers to Entry 125 5.2.2 Competitive Neutrality 126 5.2.2.1 Treatment of Competing Providers by RHAs 126 5.2.2.2 Valuation and Cost of Capital for CI-lEs 126 5.2.2.3 Ability of CHEs to Fail 128 5.2.2.4 Political Involvement in CHEs 129 5.2.2.5 Tax Exempt Status of Not-For-Profits 130 5.2.2.6 Planning Controls 130 5.2.2.7 Compensation of Specialists 130 5.2.3 Risks for New Entrants 132 5.2.4 Importance of Competing Insurers 133 5.2.5 Power of Medical Practitioners 135 5.2.5.1 Regulatory Barriers 135 5.2.5.2 Medical Ethics and Etiquette 138 5.2.5.3 Antitrust Issues Involving Medical Practitioners 139 5.2.6 Industrial Relations 5.3 Contracting Issues 140 141 5.3.1 Coordination of Funder and Provider Reform 141 5.3.1.1 Development of Contracting Arrangements 141 5.3.1.2 Impact of Reforming Providers Ahead of Funders 142 5.3.1.3 Cost and Quality Control 142 5.3.2 Transitional Arrangements for Contract Development 5.4 Structure of CHEs 144 146 5.4.1 Current Configuration of Public Assets 146 5.4.2 Incentives for Divestment of Assets, Mergers and Takeovers and Contracting Out of Management 147 5.4.3 Availability of Skilled Directors and Management 150 5.4.4 Duplication of Expensive Services 5.5 150 Conclusions 150 ( .oiif1ctir it! (;s Ii Rs1 Bas-I-().\ 6.0 RECONFIGURATION AND MANAGEMENT PROCESS 153 6.1 Introduction 153 6.2 Critical Issues 153 153 6.2.1 The Need for a Decentralised Process 6.2.2 The Need to Provide for Diversity 154 155 6.23 The Need for a Commercial Framework 6.2.4 Non-Commercial Issues 156 6.2.5 Monitoring Issues 157 159 6.2.6 Competition Considerations Coordination with Health Care Funding Reform 159 6.2.7 6.2.8 Business Valuations 162 162 6.3 Recommended Approach 6.3.1 Crown Health Enterprise Supervisory Board 162 Crown Health Enterprise Transition Boards 168 6.3.2 6.3.3 Crown Health Enterprises 170 6.3.4 Ministerial Monitoring Unit 171 6.3.5 Relationship to Role of NIPB 172 Auditing 174 6.3.6 6.3.7 Legislative Constraints 174 6.4 Timetable and Sequencing Issues 175 6.5 Strengths and Weaknesses of Proposed Approach 178 6.5.1 Strengths 178 6.5.2 Weaknesses 179 6.5.3 Overall Assessment 179 _1 ( : , i( I(I II il .s i•I . lo-i- Li TABLE OF CONTENTS - APPENDICES - - I APPENDIX A: Overview of New Zealand Health Care Services APPENDIX B: Profile of a Competitive Provider Market APPENDIX C: Market Definition, Market Concentration and Entry Barriers APPENDIX D: Examination of the Effect of Competition on Hospital Efficiency APPENDIX E: Bell Gully Buddle Weir Report on Competition Law and Health Care in New Zealand APPENDIX F: Economies of Scale, Scope and "Chain .3 APPENDIX C: UK Reform Experience APPENDIX 1-I: Chapman Tripp Sheffield Young Letter Reporting on Legislative Issues APPENDIX I: Legislation Administered by the Department of Health 1 ' I 0)] 1 hdc^l I 1 III (;S BOSTON SECTION 1.0: EXECUTIVE SUMMARY / 1.1 Introduction CS First Boston NZ Limited ("CS First Boston") has pleasure in presenting this report on structural, organisational and legislative issues relating to the reform of public health care providers, to the National Interim Provider Board ("NIPB").