Hello. In the previous video, you've learned the 10 specific preconditions must be fulfilled to achieve efficiency and affordability in competitive health care markets. After having watched this video, you will be able to understand and describe five of them. In another video, the other five preconditions will be discussed. To understand how important they are, think about what could happen if a specific precondition is not fulfilled. What could be the consequences? Let start doing so with the first precondition. A first precondition for efficiency is that it should be free consumer choice of insurer. Each consumer should have a free periodic choice of insurer and insurance products. Insurer should not be allowed to refuse applicants. Consumers should be able to switch insurer without facing high transaction costs such as charge costs or filling out forms. Without such a free choice, the insurers will have no incentive to be responsive to the consumer preferences and to offer insurance products that compete on price and quality. However, a completely unrestricted choice is not optimal. For instance, if consumers would be able to switch every day, insurers who'd have high administrative costs and high cost for purchasing care because of frequent enrollment and disenrollment. By contrast, if the consumer could switch only once per decade, insurers would have insufficient incentives to satisfy consumer preferences. Therefore, a minimum and a maximum contract periods may be useful. Many countries have one year contracts. A second precondition for efficiency is consumer information and market transparency. Otherwise, a value for price comparison is impossible. For effective competition, there must be sufficient public information on the price, the quality, and other relevant aspects of both the health insurance products and the medical products. This information must be relevant, valid, reliable, objective, transparent, and easily understandable. It is not necessary that all consumers are equally well informed. Think about the last time that you bought a smartphone or a car. How much information did you have about all the technical specifications? Probably not so much. That's not a problem as long as the well informed consumers sufficiently discipline the markets. The poorly informed consumers can then benefit from the shopping behavior of the well informed consumers. Effective competition also requires transparency. For instance, a manageable number of products to choose from. For example, a manageable number of standardized insurance products. Otherwise, a value for price comparison is impossible. Experience shows that more choices compared to fewer choices can make consumers less satisfied and more regretful. This may result in avoiding any choice decision at all. Maybe you've had such an experience yourself, for instance, in large supermarkets. So a choice overload should be avoided. A third precondition for efficiency is that the buyers and sellers are risk bearing. That is, they should be price and cost sensitive both on the insurance markets and on the healthcare delivery markets. If not, there are no financial incentives for efficiency. Although in most markets, the fulfillment of this precondition is straightforward, in healthcare, this is often not the case. Healthcare providers should bear the full risk of running their practices. Variations in the cost should be fully reflected in the prices or financial reserves. The same holds for insurers who should individually not collectively bear the financial responsibility. Subsidies to consumers should be such that the cost differences between products are fully reflected in the prices that the consumers pay. A fourth precondition for efficiency is that the provider and insurer markets are contestable as much as possible. That is, there ought to be no unnecessary barriers to enter or exit the market. Although in healthcare markets, some barriers are necessary, for instance, the requirements of a professional license, unnecessary barriers should be avoided. Unnecessary barriers to enter the market would reduce efficiency because they reduce the competitive advantage of efficient firms that might otherwise have entered the market. Barriers to leave the markets also reduce competition. An example is financial support by governments to failing hospitals. These barriers reduce the competitive advantage of efficient firms that might otherwise have increased their market share. A fifth precondition for efficiency is freedom to contract and integrate. The rationality of regulated competition in healthcare is that individual insurers have the primary responsibility for delivering or purchasing the care. Therefore, the insurers and providers of care should have sufficient freedom to individually negotiate the content of their contracts. Both parties should also be free not to contract. Selective contracting is an effective tool for insurers to purchase efficient care. In addition, insurers and providers of care should have sufficient freedom to reduce their contracting costs by integrating the roles of insurer and health care provider. This is called vertical integration. Vertically integrated organizations assume the medical and financial responsibility to deliver a defined package of care to defined population in return for defined payments. Examples of such organizations are the so-called health maintenance organizations in the United States of America. In this video, you have learned about five preconditions for achieving efficiency in competitive healthcare markets, there should be free consumer choice of insurer, there should be sufficient consumer information and market transparency, the buyers and sellers of healthcare and health insurance should be risk-bearing, the markets should be contestable, and there should be freedom to contract and integrate. In the following video, we will discuss five other preconditions. See you there.
