Competition and Regulation

Dutch Health Care Markets

Finnish delegation Amsterdam, November 6, 2009

dr. Rein Halbersma

Economic Expert, unit for Economic Analysis

Introduction

2

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

expenses health care and life expectancy in the Netherlands

70

72

74

76

78

80

821953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

0

2

4

6

8

10

12

14

levensverwachting

uitgaven als %BNP

Bron: CBS en OECD Health Data

5

An overview of the framework

HierarchyDecentralization

Competition 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)

6

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,...)

7

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 contracting

competition policy

++

Selective contractingcompetition policy

+

Freedom of choice++ - - ++

Adverse

selection/access++ -- + +

Moral hazard--

RationingGate keepingCo-payments

-

RationingGate keepingCo-payments

-

RationingGate keepingCo-payments

++

Transaction costHealth care

providers/governmentProviders/Third party

payer/patientProviders/Third party

payer/patientPatient

Dutch Healthcare Authority (NZa) and the Regulatory Landscape

8

99

The Dutch Healthcare Authority

Legal 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

Organizational structure of the NZa

• Exezcutive Board

• supported by legal & communication staff

• Cure and Care departments

• budget and price regulation

• Supervisory department

• market power assessment

• Research & Development department

• design, advocacy and implementation of reforms

1010

Mission of the NZa

“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.”

1111

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

1212

The Dutch regulatory landscape: health insurers

The NZa

• ex ante: misleading policies, 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

1313

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

1. power to impose general obligations (all market parties)

2. power to impose specific obligations on individual parties

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)

1414

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

1515

Creating effective competition

Systematic effort to deregulate primary care

• 2005: experiment with physiotherapists

• 2007: NZa consulted its deregulation framework

• 2008: proposal to deregulate psychologists, dieticians

• 2010: experiment with dental care

For secondary care, barriers of entry obstruct effective competition

• highly regulated labor markets

• restricted capacity at universities

• 2008: overhaul of capacity planning of specialists

• restricted access to capital markets

• for-profit goal is forbidden, hence equity is scarce

• 2009: proposal to experiment with for-profit goal

16

Insurance -Hospital Market

1. Overview

2. Insurance Market

3. The B-segment

4. The A-segment

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

1818

Health care financing in the Netherlands in the second

compartment

• Public insurance for exceptional medical expenses

• mandatory for all citizens

• home care, nursing homes, care for the handicapped

• 20 G€ annually (1.25 k€ per capita)

• Private basic insurance

• mandatory for all citizens

• general practicioner, hospital care, pharmaceutical care

• 2008: also mental care (moved from public insurance)

• 32 G€ annually (2 k€ per capita)

• Private supplementary insurance

• dental, paramedic (physiotherapy) and cosmetic care

• Total expenditures: 12.4% of GDP (including daycare, public health etc.)

• annual increase of 7.7% since 1998

19

The idea behind competitive health care markets

Health care providers

Insurers can selectively contract hospitals

Insurers

Consumers choose between competing insurers

Negotiations between insurers and hospital

20

Economic characteristics of competition

• Consumers have free choice of health insurance company,

• no risk selection, no lock-in

• incentives for prevention?

• Competition between health insurance companies leads to

downward pressure on costs:

• Selective contracting with health care providers

• Directing consumers toward more efficient choices

• Utilization review by insurers:

• Crosschecking need for treatment received

• Best practice benchmarking

21

Characteristics of the Dutch health insurance market

• 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

• 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)

22

Risk adjustment system

• 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

• 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?)

• 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

2323

Insurer supervision: selective contracting

Health Insurance Act

• 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

24

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 10 11

2006

2007

2008

25

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

26

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

27

Collective contracts are popular

-

10

20

30

40

50

60

70

80

2005 2006 2007 2008

Collective insurance

Individual insurance

28

Price reductions collective contracts

0,

1,

2,

3,

4,

5,

6,

7,

8,

9,

collective contract patient

organizations

other collective contracts

(banks, labor unions etc)

collective contract

employers

2006

2008

2007

29

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.

30

B-segment: the introduction of competition for hospitals

31

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.

32

2005: introduction of competition

Competitive segment is 8% of total hospital revenue

Revenue of major diagnoses in the competitive

segment

Other

26%

Knee

replacement

12%

Tonsillectomy

6%

Incontinentence

operation

5%

Groin rupture

8%

Hip replacement

20%

Cataract

11%

Diabetes Mellitus

12%

145 products (27 diagnoses) of elective outpatient care

33

Increase of the B-segment in 2008 and 2009

2008

• Chronic heart diseases

• Pregnancy (pregnancy, delivery, after birth control and miscarriage)

• Knee operations (meniscus and cruciate ligament leasie)

• Some cancer treatments (breast and prostate)

• Umbilical hernia

• Sterilization (men and women)

2009

• 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.

34

Recent increase in hospital concentration

85

90

95

100

105

110

115

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Voor fusietoezicht Na fusietoezicht

Average HHI hospitals in local market: 2,350

Average HHI insurers in corresponding market: 5,300

Average number of beds per hospital

Price development in the B-segment and A-segment

• The price increase in the A-segment is approx. lower than the price

increase in the B-Slice 2005.

• In 2008-2009, the price increase in the B-slice 2008 was 0.7%.

• 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

Price development in the B-segment

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

-0,3%--0.2%-1.4%0.5%-1.2%Real

0.7%-0.8%1.1%2.1%0.0%Nominal

`09`08-`09`08`08-`09`07-`08`06-`07`05-`06

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

• 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.

38

A-segment: the regulated segment for hospitals

Current budgets

FreeFree= TRFBRevenue

FreeFreeFreeVolume

Free≤ pCTG= pCTGPrice

ZBCHospital

B-segmentA-segment

‘Functional Budget’ Model (1)

• Cost- Operational Cost- Interest and depreciation

B-C= change in reserves

• Budget = max allowed Revenue set by NZa

B-R=change in tariff for nursing days

• (actual) Revenue earned through billing of - Tariff for treatments- Tariff for nursing days

‘Functional Budget’ Model (2)

16 (16)Depreciation/

interest

Location Cost

43 (37)inpatient visits

outpatient visits

nursing days

Variable cost

24 (23)per bed and per doctorSemi-Fixed Cost

8(10)per capitaFixed Cost

Share in Budget

2004

‘price’Component

Care

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.

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.

Overview of the extramural care market

Some results from research on the homecare market

1. Positive and significant effect of market share on contracted prices

2. Decreasing relative contracted prices over time.

3. Significant differences in the relative contracted prices across regions

4. No support to the argument of superior quality of large providers (based on

subjective data)

47

Analysis NZa of problems in the current regulation

• Indication: independent indication, but delegation of indication determination to

providers and no clear standard

• No incentives for buying agencies to buy the right health care. No proper health

insurance market.

• No transparency for consumers, waiting lists, low perception of quality and low

efficiency

Yardstick competition

Yardstick competition is a dynamically updated price-cap, that follows the development of the average unit costs.

Firms have a strong incentive to improve their unit costs, hence the average will drop over time.

When the market consists of regionally fragmentedmonopolies (or oligopolies), a yardstick based on national average costs can create effective competition.

Yardstick competition is applied to Dutch energy companies.

What is needed for yardstick competition

Yardstick competition needs homogenous products that can be accurately measured.

Dutch hospitals have 30.000 products (“DBCs”) that are classified by diagnosis and treatment.

In 2006, the NZa proposed yardstick competition for Dutch hospitals, that consists of a price-cap on the average price per product, adjusted for their patient mix.

Owing to bad data registration, this plan has been cancelled.

50

Long term perspective: Market definition

1. Distinction between the market for basic care and the market for complex and

highly specialized care

2. Within the market for complex care, a number of submarkets exist.

3. Housing and care are separate markets, except when living is an integral part of

the provision of care (e.g. 24 hour supervision in mental health care).

51

Long term perspective

• Market for basic care

• No price regulation necessary, if the purchasing is carried out by risk

taking insurers (risk adjustment should be possible)

• Combination with normal health insurance, to solve externalities

• Government monitors market behaviour and quality.

• Market for complex/specialistic care

• Risk adjustment is not possible. Therefore a competitive health

insurance market cannot be established.

• Price regulation is necessary, due to monopolized markets.

Transition proposals by NZa

Long term model

Complex care

Yardstick competition/

benchmarking

Basic Care

Liberalization

Purchased by local

communities and

health insurers (if

risk adjustment is

possible)

Extramural Care

Liberalization, possibly

with reverse auctions

Intramural Care

Yardstick competition

/benchmarking

Short term model

53

Market Definition

54

Recent increase in hospital concentration

85

90

95

100

105

110

115

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Voor fusietoezicht Na fusietoezicht

Background

• Concerns and discussion about mergers in healthcare

• Mergers have to be assessed by NMa and NZa

• 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)

• 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

How do we define markets for antitrust purposes?

• The smallest area or group of products for which there are no close

substitutes 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 definition

• 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

Presumption of anticompetitive effects if there is a large

increase in concentration in this area

57

Product market versus geographic market (I)

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

58

Product market versus geographic market (II)

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

59

Patient flow versus patient choice (I)

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

60

Patient flow versus patient choice (II)

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

61

Gains from (horizontal) mergers

Based on work with P. Bogetoft (NZa, 2008)

System Model

PROCESSPROCESS

Exogenous factors

(Non-discretionary resources or products)

Resources

(Inputs)

Products

(Outputs)

Management

(Effort/Ability)

A

B

x1 x1+x2 Inputx2 E∗(x1+x2)

Output

O

F∗(y1+y2)

y1+y2

y2

y1

CA+B

D

Scale (Size)

O Doctors

Nurses

A

B

Scope (Harmony)

64

L(y) = resources

necessary to produce

given output

A borrows nurses

and lends doctors

Individual learning

x inputs

P(x)

y outputs

65

Interpretations and remedies

Effect Remedy Horizontal

Learning Learn, incentives, change event

Scope / Mix Exchange/trade inputs and outputs

Scale Merge

66

Average number of beds per hospital

Questions?

I am available for further questions at rhalbersma@nza.nl

68

Thank you!

69